Present: All the Justices
THOMAS W. DANA, ET AL.
OPINION BY
v. Record No. 030450 JUSTICE LAWRENCE L. KOONTZ, JR.
October 31, 2003
313 FREEMASON, A CONDOMINIUM
ASSOCIATION, INC.
FROM THE CIRCUIT COURT OF THE CITY OF NORFOLK
John C. Morrison, Jr., Judge
In this appeal, we consider whether the trial court erred
in piercing the corporate veil of a close corporation to assess
liability for a judgment against the corporation upon its
stockholders.
BACKGROUND
This case originated with a motion for judgment filed in
the Circuit Court of the City of Norfolk (the trial court) on
June 14, 2000, by 313 Freemason, a Condominium Association, Inc.
(the Association) and the owners of four individual units of the
condominium against Freemason Associates, Inc. (Freemason), and
Thomas W. Dana and Conley J. Hall, the corporation’s sole
stockholders. The motion for judgment alleged that the roof,
chimneys, fireplaces, and flues of the condominium building were
defective when the building was sold by Freemason to the
individual unit owners or their grantors. Asserting theories of
actual fraud, fraudulent misrepresentation, constructive fraud,
false advertising under Code § 59.1-68.3, breach of contract,
and breach of the statutory warranty provided by Code § 55-79.79
of the Condominium Act, the Association and the individual unit
owners sought compensatory damages of “no less than $200,000” in
addition to punitive damages, costs, and attorney’s fees.
By an order dated April 18, 2001, the trial court severed
the claims of the Association and the individual unit owners and
directed that each action thereafter proceed independently,
except for purposes of conducting discovery. 1 On June 2, 2001,
the Association filed an amended motion for judgment asserting
as its separate claims only the claim for breach of the
statutory warranty provided by Code § 55-79.79 and a new claim
for a violation of Code § 55-79.90, relating to the failure of a
public offering statement to “disclose fully and accurately the
characteristics of the condominium.” The amount of compensatory
damages sought was $380,000 along with punitive damages, costs,
and attorney’s fees.
Subsequently, the trial court limited the issues to be
resolved by the impending jury trial on the Association’s
claims. The trial court ruled that the Association would not be
permitted to assert a claim for the alleged defects in the
1
Appeals of two of the individual unit owners are also
today decided. Our resolution of those appeals, however, has no
direct bearing upon our resolution of this appeal. See Klaiber
v. Freemason Associates, Inc., 266 Va. ___, ___ S.E.2d ___,
(2003).
2
chimneys, fireplaces, and flues. These claims were reserved to
the individual unit owners upon the court’s conclusion that
these structures were not common elements of the condominium.
The court further ruled that Dana and Hall could not be held
directly liable for a breach of the Condominium Act by Freemason
in its corporate capacity because only that corporation was the
declarant for the registration of the condominium. However, the
court also ruled that the Association would be permitted to
present evidence in support of its assertion that, in the event
it obtained a judgment against Freemason, the corporate veil of
Freemason should be pierced in order to impose personal
liability upon Dana and Hall.
On September 9, 2002, immediately prior to the commencement
of the jury trial, the trial court entered an order in accord
with its prior rulings. The court also dismissed the
Association’s claim for punitive damages. Accordingly, the
trial proceeded only on the issue of Freemason’s liability for
the alleged defective roof of the condominium. At the
conclusion of that trial, the jury returned a verdict in favor
of the Association in the amount of $37,054.75, without
designating the count or counts in the motion for judgment upon
which the verdict was founded.
After the jury returned its verdict, the Association filed
a motion to pierce the corporate veil of Freemason and for an
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award of attorney’s fees under Code § 55-79.53. 2 After receiving
briefs from the parties, the trial court, sitting without the
jury, held an evidentiary hearing on November 6, 2002 on this
motion. In an opinion letter dated November 22, 2002, the court
first concluded that an award of attorney’s fees against
Freemason in the amount of $61,213.17 was appropriate under the
statute. The court then concluded that the evidence from the
trial and the evidentiary hearing was sufficient to permit
piercing the corporate veil of Freemason and to hold Dana and
Hall liable for the judgment and award of attorney’s fees
against Freemason.
For reasons that will become apparent, we need not recount
in detail the evidence or other incidents of the trial relevant
to all the assignments of error in this case. For purposes of
the resolution of this appeal, our focus is on the post-verdict
determination by the trial court to pierce the corporate veil of
Freemason. Accordingly, we will recite only the evidence from
the trial and the post-verdict hearing relevant to that
determination.
2
During trial, it was argued that because the award of
attorney’s fees was a matter of statute, the Association should
have been required to present evidence on that issue during its
case-in-chief. The trial court ruled that as an award of
attorney’s fees would not be appropriate in the absence of a
finding of liability, the issue would be resolved by the trial
court in the event of a verdict in favor of the Association.
4
During trial, it was shown that in April 1997 Dana acquired
the property located at 313 Freemason Street, a lot and an
abandoned residential structure that had last been used as an
apartment building, with the intent to renovate the building as
a four-unit condominium. Dana encumbered the property with a
deed of trust securing a $316,880 personal line of credit.
Although he had no direct ownership in the property, Hall
testified that “Dana handled the financing and [Hall] handled
the renovation” of the building by hiring contractors and
overseeing their work. Dana and Hall had previously worked
together on similar renovation projects and had several other
ongoing projects during the time the 313 Freemason building was
being renovated.
Hall, indicating that he was the “manager,” filed an
application for registration of the condominium. The declarant
on the application was listed as Freemason Associates, L.L.C.
The application stated that Hall owned approximately fifty
percent of the declarant. The application further stated that
Freemason Associates, L.L.C. had no assets other than the 313
Freemason property.
In February 1998, Hall contacted the roofing contractor who
had installed and subsequently made repairs to the roof of the
condominium. Hall advised the contractor that the roof
continued to leak and requested that it be replaced. The
5
following month, although they did not advise him of the ongoing
problem with the roof, Dana and Hall sought the advice of an
attorney who advised them that “they would have decreased
liability if they formed a corporation.” Shortly thereafter,
Dana and Hall incorporated Freemason. On May 12, 1998, Hall
filed a revised application for registration of the condominium
substituting Freemason as the declarant in place of Freemason
Associates, L.L.C. In April 2000, an attorney representing Dana
and Hall, wrote to the same roofing contractor requesting that
the roof be repaired because it “continues to leak since its
installation” and “the roof contains major structural defects
which have caused extensive damage.”
In the November 22, 2002 opinion letter, the trial court
summarized its findings of the pertinent facts established by
the evidence introduced during the post-verdict hearing. Giving
due deference to the trial court’s findings of fact, it was
established that Freemason had maintained all the proper indicia
and records for a corporation: articles of incorporation, by-
laws, minutes of shareholder meetings, annual reports, and tax
returns. However, the business of the corporation was actually
conducted by Dana and Hall “entirely outside the corporation.”
When Freemason acquired the 313 Freemason property from Dana,
allegedly in exchange for assuming his personal debt on the
property, the corporation never actually assumed the debt.
6
Although the property was encumbered by the lien of a deed of
trust to secure the payment of Dana’s indebtedness, the deed
conveying the property from Dana to Freemason did not recite the
existence of that indebtedness nor was Freemason ever
contractually liable for the payment of it.
Dana maintained a personal checking account designated by
him as the “Rehab” account, which served as the deposit and
payment account for the 313 Freemason property as well as
several other properties Dana and Hall were renovating. 3 None of
these other renovation projects were owned by corporations, but
were directly controlled by Dana. Dana maintained separate
check registers for each project for which funds were deposited
and disbursed from his personal account, but made no other
effort to segregate the funds within the account. Freemason had
no bank account of its own, and all funds received from the sale
of its individual condominium units were deposited into Dana’s
“Rehab” account. As a result, Freemason never had any liquid
3
During oral argument of this appeal, counsel for Dana and
Hall attempted to characterize this account as being a personal
account in name only, contending that because it was used only
for Dana’s business interests, it was somehow distinct from a
personal checking account. There is not the slightest
suggestion that Dana used the funds deposited into this account
for improper purposes. However, the fact remains that this
account was established solely in Dana’s name in his capacity as
a private person, and the corporation had no access to or
control over the deposits to that account.
7
assets, and a warranty reserve fund, which was to have been
established following incorporation under the terms of the
condominium declaration, was never funded.
Based upon these facts and relying primarily upon O’Hazza
v. Executive Credit Corp., 246 Va. 111, 431 S.E.2d 318 (1993),
the trial court concluded that Freemason was “formed to evade
any personal liability that Dana and Hall would have for the
problems with the roof.” The court further concluded that there
was an identity of interest and ownership between Freemason and
Dana and Hall and that “the unity of interest and ownership is
such that the separate personalities of the corporation and the
individuals no longer exists, and to adhere to that separateness
would work an injustice.” Accordingly, the trial court ruled
that the corporate veil of Freemason would be pierced, and that
Dana and Hall could be held personally liable for the amount of
the jury verdict and the award of attorney’s fees and costs
against the corporation.
In a final order dated November 27, 2002, the trial court
confirmed the jury verdict in favor of the Association and
granted judgment against Freemason in the principal amount of
$37,054.75, and under Code § 55-79.53 awarded attorney’s fees
and costs to the Association in the amount of $61,213.17 against
Freemason. Additionally, the trial court pierced the corporate
veil of Freemason and granted judgment in favor of the
8
Association against Dana and Hall, jointly and severally, in the
principal amount of $37,054.75 in addition to attorney’s fees
and costs of $61,213.17. This appeal followed.
DISCUSSION
Initially, we note that the procedural posture of this
appeal bars our consideration of a number of assignments of
error asserted by Dana and Hall. Dana and Hall filed their
notice of appeal jointly. Freemason did not join in that notice
and did not file a separate notice of appeal. In their petition
for appeal, Dana and Hall assigned error challenging the trial
court’s failure to strike the evidence as insufficient to
support either claim in the Association’s motion for judgment,
the trial court’s failure to grant an instruction regarding the
reasonable opportunity to repair, and the trial court’s decision
to disallow testimony during the trial regarding an award of
attorney’s fees and costs and instead to decide that issue in a
post-trial proceeding without a jury. All the actions
complained of in these assignments of error relate to the
judgment and the award of attorney’s fees and costs against
Freemason. As to that corporation, however, both the judgment
and the award are final and beyond appellate review.
During oral argument of this appeal, Dana and Hall
contended that because the trial court pierced the corporate
veil of Freemason and imposed liability upon them, they have
9
standing to appeal the judgment and award against the
corporation. We disagree.
“The proposition is elementary that a corporation is a
legal entity separate and distinct from the stockholders or
members who compose it.” Cheatle v. Rudd’s Swimming Pool Supply
Co., Inc., 234 Va. 207, 212, 360 S.E.2d 828, 831 (1987). The
whole corporate concept would be meaningless if such were not
the case. Thus, it is also axiomatic that when a corporation
causes injury as a result of an unlawful action, it is the
corporation that is directly liable for any judgment obtained
against it by the injured party. Although under appropriate
circumstances, the injured party may seek to pierce the veil of
the corporation to impose liability against its stockholders,
such action is dependant upon first obtaining a judgment against
the corporation. And it follows from this that it is the
corporation, and not the stockholders, which has standing to
challenge the judgment against the corporation on appeal.
Accordingly, only Freemason has standing to challenge the merits
of the judgment and award of attorney’s fees and costs rendered
against it in the present case. For these reasons, we will not
consider the assignments of error raised by Dana and Hall with
respect to those issues despite the ultimate determination by
the trial court to hold them liable for the corporation’s
judgment debt under a piercing theory. See Prospect Development
10
Co. v. Bershader, 258 Va. 75, 94, 515 S.E.2d 291, 302 (1999)
(defendants held jointly and severally liable did not have
standing to appeal issues that were relevant only to one
defendant who did not join in the appeal). In short, the
validity of the judgment and award of attorney’s fees and costs
against Freemason in favor of the Association is binding on Dana
and Hall in this appeal.
We now turn to the question whether the trial court
properly pierced the corporate veil of Freemason and assessed
liability on Dana and Hall personally. Although the underlying
judgment against Freemason arises from a jury verdict, the trial
court’s judgment to pierce the veil of the corporation was made
post-trial by the trial court. 4 Whether to allow piercing the
veil of a corporation is a mixed question of law and fact and,
accordingly, we review the trial court’s application of the law
de novo while giving deference to the trial court’s factual
findings. Caplan v. Bogard, 264 Va. 219, 225, 563 S.E.2d 719,
722 (2002).
Stockholder immunity “is a basic provision of statutory and
common law and supports a vital economic policy underlying the
whole corporate concept.” Cheatle, 234 Va. at 212, 360 S.E.2d
4
The parties agreed that the issue of piercing the
corporate veil would be decided by the trial court without a
jury.
11
at 831 (1987); accord Beale v. Kappa Alpha Order, 192 Va. 382,
397, 64 S.E.2d 789, 797 (1951). “The decision to ignore the
separate existence of a corporate entity and impose personal
liability upon shareholders for debts of the corporation is an
extraordinary act to be taken only when necessary to promote
justice.” C.F. Trust, Inc. v. First Flight Limited Partnership,
266 Va. 3, 10, 580 S.E.2d 806, 809 (2003); see also O’Hazza, 246
Va. at 115, 431 S.E.2d at 320; Cheatle, 234 Va. at 212, 360
S.E.2d at 831.
We have recognized that “no single rule or criterion . . .
can be applied to determine whether piercing the corporate veil
is justified.” O’Hazza, 246 Va. at 115, 431 S.E.2d at 320.
Each case must be considered in the context of its own specific
circumstances. In the present case, the trial court properly
recognized that disregarding the corporate entity is usually
warranted only under the extraordinary circumstances where
the shareholder[s] sought to be held personally liable
[have] controlled or used the corporation to evade a
personal obligation, to perpetrate fraud or a crime,
to commit an injustice, or to gain an unfair
advantage. Piercing the corporate veil is justified
when the unity of interest and ownership is such that
the separate personalities of the corporation and the
individual[s] no longer exist and to adhere to that
separateness would work an injustice.
Id. at 115, 431 S.E.2d at 320-21 (citations omitted).
The trial court determined as a matter of fact that the
formation of Freemason as a corporate entity in 1998 was “to
12
evade any personal liability that Dana and Hall would have for
the problems with the roof.” The evidence in the record
supports that finding. Both parties were aware that the roof
continually leaked from the time it was installed and that the
roof contained “major structural defects” which had caused
damage to the condominium. Dana and Hall did not obtain their
requested replacement or repair of the roof. Rather, the
evidence supports the conclusion that they simply determined to
form Freemason and, ultimately, to use that corporation to evade
personal liability while the condominium continued to be
marketed with a known defective roof.
Similarly, the evidence amply supports the trial court’s
findings of fact that the unity of interest and ownership was
such that the separate personalities of Freemason, Dana, and
Hall did not exist. The absolute control of Freemason by Dana
and Hall is beyond question. But for the corporate existence of
Freemason, Dana and Hall treated and conducted the 313 Freemason
renovation just as they did all of their other renovation
projects. There is no evidence in the record that Freemason
ever conducted the business of a corporation independently from
that of its shareholders. The trial court correctly determined
that under those circumstances “[Freemason] was the . . .
stooge, or dummy” of Dana and Hall. See Lewis Trucking Corp. v.
Commonwealth, 207 Va. 23, 31, 147 S.E.2d 747, 753 (1966).
13
It then only remains to be resolved whether the trial court
properly concluded that as a matter of law piercing the veil of
the corporation was necessary to avoid an injustice. One of the
principal factors we look to in resolving the issue of piercing
the veil of a corporation, and pertinent here, is whether the
inability of the corporation to satisfy the judgment against it
is the result of the deliberate undercapitalization by the
incorporating stockholders. “If, from its inception, a
corporation is unable to pay its costs of doing business because
of grossly inadequate capitalization, its legitimacy is suspect.
Under such circumstances, stockholders may not be entitled to
the corporate shield.” O’Hazza, 246 Va. at 116, 431 S.E.2d at
321.
In O’Hazza, we held that an initial capitalization of
$10,000 was not, as a matter of law, inadequate to capitalize
the close corporation involved in that case. Here, however, the
record shows that Freemason was never capitalized even in a de
minimis amount. The apparent inability of Freemason to satisfy
the judgment against it in this case was not the result of poor
business decisions, mismanagement, or unexpected liabilities
such that an expected profit never materialized. Rather,
because of the deliberate acts of the incorporating
stockholders, Freemason suffered from nonexistent capitalization
from its inception. Despite an obligation to do so, Dana and
14
Hall never took any steps to establish the corporation’s
warranty reserve. Moreover, the corporation never had any
liquid assets because it had no bank accounts and Dana deposited
all funds that were properly the corporation’s into his personal
checking account. As a result, the corporation had no funds
from which it could replace or repair the defective roof.
Indeed, upon the conveyances to the various purchasers of
individual units of the corporation’s only capital asset, the
corporation ceased to have any function other than to serve as a
shield for Dana and Hall against the civil suits which followed.
This Court has been very reluctant to permit corporate veil
piercing. We have made it clear that only an extraordinary
exception justifies disregarding the corporate entity in order
to hold individual stockholders personally liable for a judgment
against the corporation. See, e.g., Greenberg v. Commonwealth,
255 Va. 594, 604, 499 S.E.2d 266, 272 (1998). The conduct of
Dana and Hall in clearly calculating to use the corporate entity
of Freemason for an unjust purpose is just such an extraordinary
exception. On this record, no other conclusion can be reached
except that Dana and Hall formed a corporation not to operate a
corporate business, but rather merely to avail themselves of a
shield against their potential liability for the known defects
in the roof. Accordingly, we hold, as a matter of law, that the
trial court did not err in piercing the corporate veil of
15
Freemason and concluding that to permit Dana and Hall to assert
the protection of the corporate shield of Freemason would work
an injustice in this case.
CONCLUSION
For these reasons, the judgment of the circuit court will
be affirmed.
Affirmed.
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