DOCUMENT REDACTED –
ORIGINAL AVAILABLE BY APPEARING IN PERSON AT OFFICE OF ADMINISTRATIVE HEARINGS
4-1700-10650-2
STATE OF
OFFICE OF ADMINISTRATIVE HEARINGS
FOR THE MINNESOTA DEPARTMENT OF HUMAN RIGHTS
|
Brennan H.,
Complainant,
v.
Old Mexico, Inc. and Margarita Murphy's of Woodbury, Inc. and Wayne Belisle and Mark Peterson individually,
Respondents. |
ORDER ON MOTION FOR PARTIAL SUMMARY DISPOSITION |
This matter came on for hearing before Administrative Law Judge Bruce H. Johnson on July 21, 1997, on a Motion for Summary Disposition filed by the Respondents, Margarita Murphy's and Wayne Belisle. Dennis B. Johnson, Chestnut & Brooks P.A., 204 North Star Bank Building, 4661 Highway 61, White Bear Lake, Minnesota 55110, appeared on behalf of the Respondents, Margarita Murphy's of Woodbury, Inc., and Wayne Belisle (hereinafter “Margarita Murphy’s” and “Mr. Belisle," respectively). The Respondent, Mark Peterson (hereinafter “Mr. Peterson”), appeared pro se. William A. Celebrezze, Horton and Associates, 4930 West 77th Street, Suite 210, Minneapolis, Minnesota 55435-4804, appeared on behalf of Complainant, Brennan H. (hereinafter “Mr. H.”). The record closed on this motion on August 8, 1997, at the end of the period during which post-hearing reply briefs, if any, were due.
ORDER
Based upon all the files, records, and proceedings herein, and for the reasons set forth in the accompanying Memorandum, IT IS HEREBY ORDERED:
1. Mr. H.’s motion to amend the complaint herein is hereby GRANTED;
2. That the motion for a summary disposition dismissing all claims against the Respondent Margarita Murphy’s is hereby GRANTED;
3. That the motion for a summary disposition dismissing all claims against the Respondent Mr. Belisle is hereby GRANTED; and
4. That the motion for a summary disposition dismissing all claims based on acts occurring prior to June 5, 1994, is hereby DENIED.
Dated this ____ day of September, 1997.
___________________________
BRUCE JOHNSON
Administrative Law Judge
NOTICE
Pursuant to Minn. Stat. § 363.071, subd. 2, this Order is the final decision in this case with respect to Margarita Murphy's and Wayne Belisle and under Minn. Stat. § 363.072, the Commissioner of the Department of Human Rights or any other person aggrieved by this decision may seek judicial review pursuant to Minn. Stat. §§ 14.63 through 14.69.
MEMORANDUM
I. Prior Proceedings
Mr. H., the Complainant in this matter, filed a discrimination charge against Margarita Murphy’s, Messrs. Belisle and Peterson, and Old Mexico, Inc. (hereinafter “Old Mexico”) with the Minnesota Department of Human Rights on or about June 5, 1995. In his charge, Mr. H. alleged that the Respondents subjected him to discriminatory treatment with regard to the terms and conditions of his employment and ultimately terminated his employment, all on the basis of his sexual orientation and in violation of Minn. Stat. § 363.03, subd. 1(2)(b) and (c)(1994). Before the Department of Human Rights concluded its investigation, Mr. H. requested that the matter be scheduled for hearing before an administrative law judge pursuant to Minn. Stat. § 363.071, subd. 1a (1994), and a Notice of and Order for Hearing was issued requiring Mr. H. to file a complaint and the Respondents to answer the same. After the complaint and answers were filed in this matter, the parties engaged in discovery. Following discovery, Mr. H. filed a motion for leave to file an amended complaint in which he essentially alleges that Mr. Belisle’s operated Old Mexico as his alter ego and is therefore personally liable for the acts complained of. On the other hand, Mr. Belisle and Margarita Murphy’s have filed a motion for summary judgment in which they argue that there is no legal basis for Mr. H.’s claims against them, including the allegations that were added in the amended complaint.
II. Contentions of the Parties
Although the Respondents indicated during oral argument that they oppose Mr. H.’s motion to amend the complaint, none of them have raised specific arguments in support of that position. It appears that Mr. H.’s attempt in the amended complaint to establish personal liability on Mr. Belisle’s part, on a theory of piercing the corporate veil, is based on evidence that came to light during the course of discovery. Mr. H.’s motion to amend the complaint should therefore be granted.
The bases for the motion of Mr. Belisle and Margarita Murphy’s for summary judgment are more complex. Starting with the less complex issues, they claim that certain acts of discrimination which occurred prior to June 5, 1994, cannot be the basis for liability because they are time-barred by the statute of limitations. Second, Mr. Belisle contends that Mr. H. has neither sufficiently alleged nor produced any evidence tending to prove that Mr. Belisle is a person, within the meaning of Minn. Stat. § 353.03, subd. 6(1) (1996), who intentionally aided or abetted a person who engaged in prohibited discriminatory practices. Third, Mr. H.’s employer was Old Mexico. Margarita Murphy’s contends that it is a separate and independent legal entity that came into existence after the occurrence of the acts forming the basis for the complaint, and that there is no theory of corporate successor liability under which Margarita Murphy’s can be held liable for any illegal actions of Old Mexico. Finally, Mr. Belisle essentially contends that the material facts that bear on the issue of whether Old Mexico should legally be considered to be his alter ego are uncontroverted, and those facts fail to establish a basis for piercing the corporate veil of Old Mexico in order to impose personal liability on Mr. Belisle for any illegal acts of the corporation.
In response, Mr. H. first argues that under the continuing violation doctrine, the Respondents may be held liable for any discriminatory acts that may have occurred prior to June 5, 1994. With regard to the Respondents’ second contention, Mr. H. has not attempted to establish a prima facie showing of Mr. Belisle’s liability as an aider and abettor under Minn. Stat. § 353.03, subd. 6(1) (1996). Third, Mr. H. contends that genuine issues of material fact exist as to whether Margarita Murphy’s can be held liable for the acts complained of as the successor corporation of Old Mexico. Finally and similarly, Mr. H. contends that there is evidence in the record which, if believed, is sufficient to pierce the corporate veil of Old Mexico and to impose personal liability on Mr. Belisle for any illegal acts of that corporation. In support of their respective positions, both parties have offered affidavits and excerpts from depositions taken during discovery.
III. The Respondents’ Burden
Although framed as a motion for summary judgment, the Respondents’ motion will
be taken as a motion for summary disposition, which is the administrative
equivalent of a motion for summary judgment in district court. Like
summary judgment, summary disposition is appropriate “where there is no genuine
issue as to any material fact.” Minn. Rules, pt. 1400.5500(K) (1995);
compare Minn. R. Civ. P. 56.03; Sauter v. Sauter, 70 N.W.2d 351, 353 (
Where the nonmoving party has the
burden of persuasion at trial, the moving party’s burden on summary judgment is
to produce “credible evidence -- using any of the materials specified in Rule
56[.03] -- that would entitle it to a directed verdict if not controverted at
trial.” Thiele, supra, 425 N.W.2d at 583 n. 1 (quoting Celotex
v. Catrett, 477
In order to establish a genuine issue of material fact, the nonmoving party
must produce evidence that controverts the evidence produced by the moving
party in support of its motion. The existence of a genuine issue of material
fact must be established by the nonmoving party by substantial evidence;
general averments are not enough to meet the nonmoving party’s burden under
Minn. R. Civ. P. 56.05.
Summary judgment may be entered against the party who has the burden of proof
at the hearing if that party fails to make a sufficient showing of the
existence of an essential element of its case after adequate time to complete
discovery.
IV. Underlying Facts
For purposes of the pending motion for partial summary disposition, it may be assumed that the specific discriminatory acts that form the basis for Mr. H.’s claims did, in fact, occur as alleged. Based upon the pleadings, affidavits, depositions and other evidence submitted by the parties, and viewing the evidence in the light most favorable to Mr. H., the following are facts about which no genuine dispute exists:
Mr. Belisle and Gerald Landreville
incorporated and organized Old Mexico, Inc. in 1978 for the purpose of owning
and operating restaurants in the Twin Cities metropolitan area. Both Mr.
Belisle and Mr. Landreville were shareholders. Old
With the closing of the downtown
Mr. Belisle took no part in the
day-to-day operation of Old Mexico. Rather, he hired a general manager to
run the restaurant. (Belisle deposition, pp. 12, 25, and 26) Mr.
Belisle paid himself a salary and received the use of a leased vehicle.
Other than the salary and vehicle, Belisle did not take any funds, profits or
dividends out of the corporation. (Belisle deposition, pp. 28, 29, and
37) No formal board meetings were conducted after Belisle became the sole
shareholder. But corporate formalities, such as board meetings, were
observed when they were needed to conduct transactions with third parties, such
as lenders. (Belisle deposition, pp. 16, 18, and 35) Mr. Belisle
believed that minutes of corporate meetings and other similar corporate documents
had been prepared but was unable to locate them. (Belisle deposition, p.
18) Old
Mr. H. began work for Old Mexico bussing tables in December, 1987. He was promoted to server in 1992. (H. deposition, p. 6) He alleges that the following events occurred while he was employed there: that his supervisor, Mark Peterson, made derogatory comments regarding H.’s sexual orientation in December, 1993; April, 1994; and August, 1994; that when he returned from a leave and solicited information from other coworkers about available work, Mr. Peterson expressed a desire to terminate his employment at Old Mexico; that on December 5, 1994, he met with the general manager of the restaurant and complained of Mr. Peterson's discriminatory actions on the basis of sexual orientation; and that on December 7, 1994, he was terminated by the general manager as being "high maintenance."[1] (H. deposition) The only direct contact Mr. H. ever had with Mr. Belisle was an innocuous and casual conversation in the summer of 1994. (H. deposition, pp. 9-12) The record contains no evidence tending to prove that Mr. Belisle had personal knowledge of any of the discriminatory occurrences that Mr. H. alleges happened to him while in Old Mexico’s employ. Mr. H. has never been employed by Margarita Murphy’s. (Affidavit of Alan B. Demmer)
In 1994, Mr. Belisle had engaged in
discussions with lenders to capitalize a new restaurant operation at the Old
Mexico location in Woodbury. The lenders believed that a sports bar
concept similar to Champps (a successful sports bar chain) would be profitable
in the Woodbury location. Before lending any money, however, the bank
required that several conditions be met. One such condition was that the
operation of Old
Margarita Murphy's was formed on December 1, 1994. The corporation had two shareholders, Belisle with 25% of the shares and Alden Landreville with 75% of the shares.[2] Belisle capitalized the corporation with the proceeds of the sale of Belisle’s interest in Champps and a loan using his shares of Margarita Murphy’s as collateral.[3] Landreville provided the management team modeled on the Champps business plan. No debts incurred by Old Mexico were assumed by Margarita Murphy’s. As sole shareholder and director of Eurbco, Mr. Belisle released Old Mexico from its lease of the Woodbury premises. Then on January 1, 1995, Eurbco leased the same premises to Margarita Murphy’s, which made substantial renovations on the property. (Belisle deposition, pp. 55-59; Affidavit of Alan B. Demmer) In January of 1995, Margarita Murphy's conducted a hiring process to staff the new restaurant. Anyone who worked for Old Mexico and wanted to work for Margarita Murphy's was required to submit an application and be interviewed. (Peterson deposition, pp. 47-53; H. deposition, p.65)
On June 5, 1995, Complainant filed a charge with the Minnesota Department of Human Rights. (Affidavit of William A. Celebrezze, Exhibit 6) The Department referred the charge to the Office of Administrative Hearings because no determination of probable cause had been made within 180 days. This matter ensued.
V. Statute of Limitations Defense
Margarita Murphy’s and Mr. Belisle seek a partial summary disposition dismissing any of Mr. H.’s claims that are based on alleged acts of discrimination occurring prior to June 5, 1994. (Amended Complaint, paragraph 12) Mr. H. first filed charges of discrimination with the Minnesota Department of Human Rights on June 5, 1995. (Affidavit of William A. Celebrezze, Exhibit 6). Minn. Stat. § 363,06, subd. 3 (1996) provides in part that:
A claim of an unfair discriminatory practice must be brought as a civil action pursuant to section 363.14, subdivision 1, clause (a), filed in a charge with a local commission pursuant to section 363.116, or filed in a charge with the commissioner within one year after the occurrence of the practice. [Emphasis supplied.]
Mr. Belisle and Margarita Murphy’s argue that application of the plain language of the statute to the facts of this case require dismissal of any claims based on occurrences that happened prior to June 5, 1994. Mr. H. contends, however, that the statute of limitations is tolled in this matter through operation of the “continuing violation” doctrine. In reply, the Respondents argue that the continuing violation doctrine is inapplicable in this matter.
In Hubbard v. United Press International, Inc., 330 N.W.2d 428, 441 n.
11 (
The continuing violation doctrine has been applied by courts to toll the statute of limitations in employment discrimination actions when the discriminatory acts of an employer over a period of time indicate a systematic repetition of the same policy and constitute a sufficiently integrated pattern, in effect, a single discriminatory act.
Based on the Minnesota Supreme Court’s description, the question of whether the continuing violation doctrine applies in a particular case is a mixed question of law and fact, and there is still a genuine dispute over material facts pertaining to the application of that doctrine here. The Respondents’ statute of limitations defense is therefore not susceptible of adjudication by summary disposition.
VI. Aiding and Abetting Claim Against Mr. Belisle
Minn. Stat. § 363.03, subd. 6(1) (1996) provides:
Subd. 6. Aiding and abetting and obstruction. It is an unfair discriminatory practice for any person:
(1) Intentionally to aid, abet, incite, compel, or coerce a person to engage in any of the practices forbidden by this chapter;
Mr. H. claims that Mr. Belisle’s conduct during the course of Mr. H.’s employment constitutes aiding and abetting unlawful discrimination within the meaning of that statute. (Amended Complaint, paragraph 25) As previously noted, summary disposition may be entered against the party who has the burden of proof at the hearing if that party fails to make a sufficient showing of the existence of an essential element of its case after adequate time to complete discovery. Carlisle v. City of Minneapolis, supra, 437 N.W.2d at 715. Here, proof that Mr. Belisle possessed an intent to aid and abet in discriminatory acts aimed at Mr. H. is an essential element of Mr. H.’s claim. Despite the substantial discovery efforts that have been put forward by all of the parties, Mr. H. has been unable to come forward with any evidence from which a discriminatory intent on Mr. Belisle’s part can be shown or inferred. Mr. H.’s deposition testimony established that the only contact he ever had with Mr. Belisle was a single casual conversation in the summer 1994 in which nothing of substance was discussed. (H. deposition, pp. 9-11) Mr. H. did not use that opportunity to advise Mr. Belisle of the discriminatory acts which Mr. H. alleges had already occurred, nor did he ever complain to Mr. Belisle about discriminatory acts. (H. deposition, p 12) Mr. H. had no reason to believe that Mr. Belisle had personal knowledge of any discriminatory acts that may have been committed by Old Mexico employees (id.), nor has Mr. H. adduced other evidence of such knowledge on Mr. Belisle’s part. In view of this failure to produce any evidence to support an essential element of Mr. H.’s claim that Mr. Belisle aided and abetted discrimination, Mr. Belisle is entitled to a summary disposition dismissing the claim against him based on Minn. Stat. § 363.03, subd. 6(1) (1996).
VII. Margarita Murphy’s Liability as a Corporate Successor
A. Absence of Asset Transfer
Margarita Murphy’s seeks a summary disposition holding that as a corporation separate and distinct from Old Mexico, it bears no liability for the acts complained of and is not a proper party to this proceeding. There is no dispute over the fact that Mr. H.’s employer was Old Mexico, and his employment with Old Mexico was terminated before Margarita Murphy’s began hiring staff or conducting business. Margarita Murphy’s, therefore, can only be a proper party in this proceeding and potentially liable for the acts complained if liability can be predicated on some theory of corporate successor liability. The traditional dimensions of the theory of corporate successor liability were considered by the Minnesota Supreme Court in J. F. Anderson Lumber Co. v. Myers, 296 Minn. 33, 37-38, 206 N.W.2d 365, 368-69 (Minn. 1973), where it described the governing principles as follows:
Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except: (1) where the [296 MINN 38] purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the corporation; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts. [Citations omitted.]
As expressed above, in order for a corporation to be held
liable for the debts of another corporation as a successor, a two-part test
must be met. First, one corporation must sell or otherwise transfer “all
of its assets to another corporation.” Second, one of the four specified
circumstances must also exist. With regard to the first prerequisite,
there is no authority in
B. Continuation Theory of Successor Liability
Even if a transfer of assets is not required or could be shown, Mr. H. must show that one or more of the four circumstances described in Anderson Lumber Co., supra, exists in order to impose liability on Margarita Murphy’s for the acts of discrimination allegedly committed by employees of Old Mexico. There is no evidence of an agreement, express or implied, on the part of Margarita Murphy’s to assume the liabilities of Old Mexico, and there is no evidence that Margarita Murphy’s was organized for the fraudulent purpose of escaping liability for Old Mexico’s debts.[6] Mr. H., however, argues that this matter involves a situation “where the purchasing corporation is merely a continuation of the selling corporation.” 206 N.W.2d at 368-69. Alternatively, he argues that the winding up of Old Mexico’s affairs and subsequent start-up of Margarita Murphy’s constituted a de facto merger.
Although the Minnesota Supreme Court has not fashioned a formal test for determining when the continuation theory of corporate successor liability may be applied, it has consistently indicated that the theory should be viewed narrowly:
Under the traditional rule mere
continuation "refers principally to a 'reorganization' of the original
corporation" under federal bankruptcy law or through state statutory
devices. J.F. Anderson, 296
Niccum v. Hydra Tool Corp., supra, 438 N.W.2d at 99. In Soo Line R. Co. v. B.J. Carney & Co., 797 F. Supp. 1472, 1483 (D. Minn. 1992), the court indicated that some of the factors suggesting mere continuation include an identity of officers and shareholders, continuity of control, and the adequacy of consideration in the transfer of assets. In Carstedt v. Grindeland, 406 N.W.2d 39, 40 (Minn. App. 1987), the Minnesota Court of Appeals affirmed a summary judgment denying corporate successor liability under the continuation theory. Summary judgment was deemed appropriate despite a record that established the following connections between the two corporations:
Carstedt's first claim was for breach of contract. He alleged that CPI was the same business and a mere continuation of CPS because CPI manufactured and sold decurlers under the same trademark, used substantially the same trade name, used the same business assets, and employed substantially the same persons as CPS. He alleged neither Steven Grindeland nor CPI paid any compensation to Gordon Grindeland or CPS for use of the "Automagic" trademark, the "Clear Print" trade name, or the good will associated with those business properties and that no compensation was paid for other business assets.
Here, many of the connections that
were present in Carstedt are absent. There is no continuation of
the stock of Old Mexico. There is a non-identity of shareholdings, except
to the limited extent that the sole shareholder in Old Mexico became a minority
shareholder in Margarita Murphy’s. There is also a non-identity of
directors. There was no continuity of control or any transfer of assets
between the two corporations. Margarita Murphy’s did not use
substantially the same trade name or the same business assets as Old Mexico.[7] Although Margarita Murphy’s
may have employed some of the same persons employed by Old Mexico,
that was simply a matter of Margarita Murphy’s using the labor pool that
Old Mexico had created. Old
C. De Facto Merger Theory of Successor Liability
Finally, Mr. H. asserts that there
was a de facto merger between Old Mexico and Margarita Murphy’s
which supports holding the latter liable for any award against Old
Mexico.
(1) There is a continuation of the enterprise of the seller corporation, so that there is a continuity of management, personnel, physical location, assets, and general business operations.
(2) There is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation.
(3) The seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible.
(4) The purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.
The same facts that make the “mere
continuation of business” theory inapplicable also operate to defeat a claim of
a de facto merger here. In January of 1995, the business
enterprise that had been Old Mexico was replaced by an entirely new business
enterprise. The menu, management, and general business operation all
changed. The location of the business enterprise was the same, but that
location was rented from a third corporation. There was no purchase of
Old Mexico stock or transfer of assets from Old Mexico to Margarita
Murphy’s. The sole shareholder of Old Mexico became a minority
shareholder of Margarita Murphy’s. There was a cessation of Old
VIII. Piercing the Corporate Veil
Finally, Mr. H. seeks to pierce Old
Mexico’s corporate veil and hold Mr. Belisle personally liable for any award
against Old Mexico. In appropriate circumstances, an administrative law
judge may pierce the corporate veil and hold a shareholder liable for the
discriminatory practices of a corporation and its employees. See, e.g.,
State by McClure v. Sports and Health Club, 370 N.W.2d 844 (
The standard for determining when a corporation should be treated as the alter ego of one of its shareholders was set out in Victoria Elevator Co. v. Meriden Grain Co. Inc., 283 N.W.2d 509 (Minn. 1979). There, the Minnesota Supreme Court established the following test:
Although we have previously relied on findings that the corporate form was used to accomplish a fraudulent purpose to impose personal liability, we have never explicitly held that fraud is a necessary element. As noted recently by the Fourth Circuit Court of Appeals, fraud may often be cited as a ground for disregarding the corporate entity, but it is not the only ground for such a finding. Courts have also relied upon the "alter ego" or "instrumentality" theory to impose liability on an individual shareholder. [Citation omitted] In their application of this theory, "courts are concerned with reality and not form, with how the corporation operated and the individual defendant's relationship to that operation." [Citation omitted] Factors considered significant in the determination include: insufficient capitalization for purposes of corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation at time of transaction in question, siphoning of funds by dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and existence of corporation as merely facade for individual dealings. [Citation omitted]
Disregard of the corporate entity requires not only that a number of these factors be present, but also that there be an element of injustice or fundamental unfairness. [Citation omitted] Where the above factors are present, to allow an individual to escape liability because he does his business under a corporate form is to allow him an advantage he does not deserve. Doing business in a corporate form in order to limit individual liability is not wrong; it is, in fact, one purpose for incorporating. But where the formalities of corporate existence are disregarded by one seeking to use it, corporate existence cannot be allowed to shield the individual from liability for damages incurred by those dealing with the corporation.
As indicated above, determining whether to pierce a corporate veil and hold a
shareholder liable for liabilities of his or her corporation involves a
two-part inquiry. The objective in the first stage of inquiry is to
determine whether the shareholder has treated the corporation as an alter
ego. It involves analyzing the relative presence or absence of
eight factors which shed light on the extent to which a shareholder has blurred
the distinction between his or her own affairs and those of the
corporation. The second stage involves an inquiry into whether a
shareholder’s disregard of the corporate form has resulted in “an element of
injustice or fundamental unfairness.”
The facts which are material to an analysis under Victoria Elevator are not genuinely in dispute here. What remains is application of the law to the facts. In other words, the issue of whether Mr. Belisle is personally liable for the acts complained of is susceptible of summary disposition.
A. Sufficiency of Capitalization
The first factor which Victoria
Elevator indicates is germane to determining whether Mr. Belisle
disregarded the corporate form of Old
The Snyder case is not unlike
this one. In Snyder, the corporation, a sheet metal company, had
stated capital at all times of $5000.
Almac, supra, 391 N.W.2d at 923. The circumstances surrounding the capitalization of Old Mexico are essentially indistinguishable from the circumstances that were considered in Almac.
B. Observation of Corporate Formalities, Absence of
Corporate Records and Inactivity of Directors and Officers
Three closely-related factors used to determine whether a corporation is the alter ego of a shareholder are the extent to which corporate formalities have been observed, whether there is an absence of corporate records, and whether directors and officers are inactive in corporate affairs.
After Mr. Belisle became the sole
shareholder in Old Mexico, he became the only director of the corporation, and
he did not conduct formal board meetings. The only times when corporate
formalities, such as board meetings, were observed was when they were required
to conduct transactions with third parties, such as lenders. Mr. Belisle
was unable to locate minutes of shareholder and director meetings and other
corporate records. Old
The fact the board of directors never met does not mean the directors are not abiding by corporate formalities. See Minn. Stat. § 302A.231, subd. 1 (1984) (board of directors may meet from time to time, as required by the corporation's bylaws). The fact appellant acted without benefit of sanction from the corporation's directors is not determinative, especially in the case involving a closely-held corporation where the only directors are a husband and wife. See Snyder, 305 N.W.2d at 868 (directors in a closely-held corporation may be passive).
Mr. Belisle testified that minutes of meetings and other corporate documents were prepared but that he has been unable to locate them.[8] Finally, the evidence establishes that Mr. Belisle has been extremely active in the affairs of the corporation, and there have been no other officers or board members since he became Old Mexico’s sole shareholder. The factor of inactivity by other officers or board members is inapplicable here.
In summary, Mr. Belisle actively functioned as Old Mexico’s sole director and officer. On the other hand, corporate formalities were not strictly observed, and it must be assumed that corporate records were poorly kept. However, since Old Mexico was a closely-held corporation with a single shareholder, inattention to corporate formalities and record keeping is not determinative of whether Mr. Belisle treated Old Mexico as his alter ego. The degree of his inattention to formality and record keeping is simply a factor to be weighed in the balance with the other factors described in Victoria Elevator.
C. Insolvency of Old
Two other factors mentioned by the Minnesota Supreme Court in Victoria Elevator are whether the corporation was insolvent at the time of the acts in question and whether it failed to pay dividends. The two factors are related here.
There is no question that Old Mexico
was insolvent in 1994. A corporation’s insolvency, however, only acquires
importance in the analysis when the corporation has induced someone to do some
act with regard to the corporation that would not have been done if the insolvency
was known. Snyder Elec. Co. v. Fleming, 305
N.W.2d 863, 868 (
The presence of insolvency before a
corporate closing, however, is too common to give the factor much weight in
this context. See, e.g., Snyder Elec. Co. v.
Fleming, 305 N.W.2d 863, 867 (
Barzen, at 450.
Here, the evidence establishes that Old Mexico was insolvent for most of its corporate existence but rather than using that insolvency as a trap for the unwary, Mr. Belisle dealt with it until December of 1994 by pouring more of his own money into the business. Mr. H. was never unfairly induced to rely on an appearance of Old Mexico’s solvency; he never missed a paycheck because of the corporation’s insolvency. If the mere fact of insolvency were a significant factor in determining whether a corporation was a shareholder’s alter ego, then the shareholders of any failed or failing closely-held corporation would routinely be liable for corporate debts, and doing business in the corporate form would become meaningless. In short, Old Mexico’s insolvency does not lend support here for the proposition that Mr. Belisle treated Old Mexico as his alter ego.
The evidence also establishes that
Old Mexico never paid a dividend on its stock. But as the Minnesota
Supreme Court observed in Snyder Electric Co. v. Fleming, 305
N.W.2d 863, 868 (
Dividends were never paid, but this should be no complaint where the sole shareholder put all earnings back into the business.
Moreover, it would likely have been viewed as an injustice to, or even as a fraud upon, creditors if Mr. Belisle had been paying himself dividends while the corporation was insolvent. When a corporation becomes insolvent, its directors and officers become fiduciaries. “As fiduciaries, they cannot by reason of their special position treat themselves to a preference over other creditors.” Snyder, supra, 305 N.W.2d at 869.
D. Siphoning of Funds by Dominant Shareholder
Evidence that a dominant shareholder has siphoned funds out of a corporation should weigh heavily in establishing that the shareholder treated the corporation as an alter ego. But there is no evidence of that having happened here. Although Mr. Belisle received a salary from Old Mexico and the use of a leased automobile, there is no evidence that such compensation was excessive or unrelated to the value of the services he was providing the corporation. The corporation paid no dividends to Mr. Belisle, and there is no evidence that he ever withdrew funds from the corporate checking account for his own benefit or for the benefit of other entities he controlled.[9] On the other hand, the record on this motion does establish that rather than siphoning funds out of Old Mexico, Mr. Belisle infused operating capital into the corporation on a number of occasions. When his holdings, including Old Mexico, were reorganized in 1987, Belisle kept the business functioning by incurring substantial debt and arranging for the personal guarantee of that debt by another. These cash infusions and guarantees all inured to the benefit of Old Mexico’s creditors.
Rather than siphoning cash, Mr. H.
suggests that Mr. Belisle may have appropriated assets of Old Mexico -– first,
by allowing Margarita Murphy’s to acquire Old Mexico’s “good will” and, second,
by having Eurbco shift the leasehold interest in the restaurant premises from
Old Mexico to Margarita Murphy’s. Good will is monetary expression of a
business’ value as a going concern. In late December of 1994, Old Mexico
was not only insolvent, it was no longer even a going
concern. Old
Mr. H. also suggests that Eurbco’s
release of Old
E. Using the Corporation as a Facade for Individual Dealings
Using a corporation as merely a facade for individual dealings is the final factor to be considered in the first stage of the Victoria Elevator analysis. The record on this motion fails to establish that Mr. Belisle used the corporation in any fashion inconsistent with its business purpose or that he personally intruded inappropriately into the day-to-day affairs of the corporation. He hired managers to operate the business for him. When arranging financial transactions with lenders, board resolutions were made. Unlike Walden Brothers Lumber, Inc. v. Wiggin, 408 N.W.2d 675 (Minn. App. 1987), there is no evidence here that Mr. Belisle transferred money freely between his corporations and his personal accounts. The record is devoid of evidence that Old Mexico was a mere facade for Belisle’s personal dealings.
On balance, the factors set out in Victoria Elevator tending to show a blurring of the distinction between Mr. Belisle’s affairs and Old Mexico’s are all formal factors -- e.g., an inattention on Mr. Belisle’s part to corporate formalities and records. The factors relating to substance –- money and assets -– all tend to suggest a lack of blurring of that distinction. In summary, the record on this motion supports a finding that Mr. Belisle did not treat Old Mexico as his alter ego and that the first prong of the Victoria Elevator test has not been met here.
F. Lack of Injustice or Fundamental Unfairness
In addition to presenting evidence
of the factors in the first prong of the Victoria Elevator test,
a party seeking to pierce a corporate veil must also demonstrate that the
second prong of that test has been met by showing that “an element of injustice
or fundamental unfairness” is present.
Disregard of the corporate entity requires not only that a number of these factors be present, but also that there be an element of injustice or fundamental unfairness.
More recently, in Miller & Schroeder, Inc. v. Gearman, 413 N.W.2d 194, 196 (Minn. App. 1987), the Minnesota Court of Appeals confirmed the necessity of meeting the second prong of the test:
However, there is a second, and more important prong to the test. In
order to justify piercing the corporate veil the court must find "an
element of injustice or fundamental unfairness." Victoria
Elevator Co., 283 N.W.2d at 512. Usually,
this means that the corporation "has been operated as a constructive fraud
or in an unjust manner." West Concord
Conservation Club, Inc. v. Chilson, 306 N.W.2d 893, 898 n. 3 (
Mr. H. relies upon Chergosky v. Crosstown Bell, Inc., 454 N.W.2d 654, (Minn. App. 1990), to support his contention that the second prong of the Victoria Elevator test is less important than the factors to be considered in the first prong. After evaluating the factors in the first prong and determining that the shareholder treated the corporation as his alter ego, the Court of Appeals arrived at the following specific holding regarding the second prong:
Teien also operated Crosstown in an
unjust manner. The trial court said "[a]fter this history of blurred
distinctions between Teien and the corporation, it is not fair to allow Teien
to now use the corporate structure as a shield against claims Crosstown cannot
satisfy." Because
Chergosky, 454 N.W.2d at 658.
Mr. H.’s main contention of
injustice and fundamental unfairness is that Old Mexico, which was Mr. H.’s
employer, is no longer in business and has no assets so it would be unable to
pay an award if Mr. H. prevails on the merits.[11] It is neither
unjust or fundamentally unfair for a person to organize a corporation
for the purpose of insulating himself from the fixed and contingent liabilities
that may arise from operating a business. That is one of the primary
purposes for which corporate law exists. As in Almac, this
“corporation was formed for bona fide purposes and fulfilled those
purposes while it existed,” and “[t]he transaction
between the parties was conducted openly in the name of . . . [the]
corporation.” 391 N.W.2d at 924. Also as
with the shareholder in Almac, Mr. Belisle “pumped his own money into
the corporation to keep it afloat.”
In view of the foregoing, no legal bases remain for imposing liability for the acts complained of on either Margarita Murphy’s or Mr. Belisle, and they are entitled to a summary disposition dismissing all claims against them in this proceeding.
B.H.J.
[1] A genuine dispute still exists over the truth of Mr. H.’s version of these facts. Since, however, the issues raised by this motion for partial summary disposition do not pertain to whether violations of the Minnesota Human Rights Act occurred, but rather to the legal bases for holding certain Respondents liable if such violations did occur, the Administrative Law Judge will assume that Mr. H.’s allegations are true only for purposes of this motion.
[2] The affidavit of Alan B. Demmer suggests that there may have been a third, unidentified shareholder.
[3] The record contains no evidence of any transfer of assets from Old Mexico to Margarita Murphy’s.
[4] The test articulated in J.
F. Anderson Lumber Co. v. Myers, supra, 206 N.W.2d at 368-69, expressly
states that there must be a sale or transfer of all of the transferring
corporation’s assets. In State Bank of Young America v. Vidmar Iron
Works, Inc., 292 N.W.2d 244 (
[5] In a Supplemental Memorandum of law, counsel for Mr. H. suggested that Margarita Murphy’s had acquired “good will” from Old Mexico. First, there is no evidence of an assignment, either express or implied, of good will from Old Mexico to Margarita Murphy’s. Second, at the time Old Mexico ceased doing business, it was insolvent. Rather than initiating bankruptcy proceedings, Old Mexico compromised its known liabilities for a fraction of the amounts owed. (Belisle deposition, pp. 58-59) This negates the idea that in December of 1994 Old Mexico had any “good will” to transfer.
[6] As previously
indicated, in December of 1994 the claims of Old
[7] The evidence indicates that three to four hundred thousand dollars were spent on building rennovations and new trade fixtures for Margarita Murphy’s. (Belisle deposition, p. 51)
[8] An issue of fact may therefore exist as to the extent to which corporate records were maintained. For purposes of this motion, the Administrative Law Judge must assume that corporate records were poorly maintained.
[9] See Exhibits 1 and 2 to the Affidavit of Becky L. Erickson.
[10] Mr. H. suggests that the suitability of the Woodbury location as a restaurant location constitutes good will. Since the premises were owned by Eurbco, not Old Mexico, any such good will inured to the benefit of the former rather than of the latter corporation.
[11] In his Supplemental Memorandum of Law, Mr. H. also argues tht Mr. Belisle unjustly transferred Old Mexico’s good will to Margarita Murphy’s and thereby deprived creditors of recourse to the value of that asset. As noted in Part VII-D, supra, when Old Mexico, then insolvent, ceased to be a going concern, it ceased to have any good will value under any accepted method of appraisal. Moreover, there is no evidence of an assignment or transfer of good will.