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Taszarek v. Lakeview Excavating, Inc.

Supreme Court of North Dakota

August 31, 2016

Eugene E. Taszarek, Marlys J. Taszarek, Trina F. Schilling, Steven E. Taszarek, and Michael E. Taszarek, Plaintiffs and Appellees
v.
Lakeview Excavating, Inc., Brian Welken, German Township and Dickey County, Defendants Brian Welken, Appellant

         Appeal from the District Court of Dickey County, Southeast Judicial District, the Honorable Daniel D. Narum, Judge.

          Peter Gifford (argued) and Steven J. Lies (appeared), for plaintiffs and appellees.

          Douglas W. Gigler, for appellant.

          OPINION

          McEvers, Justice.

         [¶ 1] Brian Welken appeals from a judgment entered after a jury returned a verdict in favor of Eugene Taszarek, Marlys Taszarek, Trina Schilling, Steven Taszarek, and Michael Taszarek ("Taszareks") and against Lakeview Excavating, Inc., ("Lakeview") and Welken. We conclude Welken failed to preserve whether the district court misapplied the law by allowing the jury to resolve whether Lakeview was the alter ego of Welken. We further conclude, however, that the court erred as a matter of law in inadequately instructing the jury regarding the alter ego doctrine. We reverse the judgment and remand for a new trial.

         I

         [¶ 2] At the times relevant to this action, Lakeview was a corporation primarily involved in flood control projects, and Welken was Lakeview's president and sole shareholder. In the spring of 2012, German Township in Dickey County solicited bids for road construction projects to repair and raise the grade of a road near the Taszareks' property. Lakeview, acting through Welken, successfully bid and was selected as the contractor for the road projects.

         [¶ 3] As part of the projects, Lakeview was responsible for obtaining construction materials, including field rock. Lakeview obtained most of its field rock for the German Township project from area farmers and ranchers with rock piles on their properties. Lakeview arranged with landowners to harvest rocks from their fields and reclaim the ground so it could again be farmed, and landowners allowed Lakeview to remove rock piles. Herb Buerkley owns land in Dickey County adjacent to land owned by the Taszareks, and Buerkley permitted Lakeview to enter his family's property to harvest field rock.

         [¶ 4] During the project, Welken directed Lakeview's employees to enter property to take the materials for the road project. While harvesting the rock piles from Buerkley's land, Lakeview's employees crossed into the Taszareks' land and harvested field rock. Both the Buerkley land and the adjacent Taszareks' land were in the Conservation Reserve Program without a fence separating the land. The field rock taken from the Taszareks' property was ultimately used for the German Township road projects.

         [¶ 5] The Taszareks brought an action against both Lakeview and Welken, asserting claims of intentional trespass, conversion, and unjust enrichment arising from Lakeview's work on the German Township road-raising project. The district court held a jury trial on the Taszareks' trespass and conversion claims against Lakeview and Welken. During trial, the Taszareks' attorney asked the court to instruct the jury on the theory that Lakeview was the "alter ego" of Welken and that Welken should therefore be personally liable for any judgment. Over the objection of Welken's attorney, the court gave an instruction regarding the alter ego doctrine.

         [¶ 6] The jury subsequently returned a verdict in favor of the Taszareks, finding Lakeview was the alter ego of Welken and holding both Lakeview and Welken liable for damages.

         II

         [¶ 7] Welken raises two issues on appeal. He argues: 1) the district court erred by giving the jury the alter ego instruction, allowing the jury to pierce the corporate veil to impose personal liability on him for Lakeview's debts; and 2) even if the jury instruction was appropriate, there were insufficient facts presented at trial to pierce Lakeview's corporate veil and hold him personally liable.

         [¶ 8] Organizing a corporation to avoid personal liability is a legitimate goal and a primary advantage of doing business in the corporate form. Hanewald v. Bryan's Inc., 429 N.W.2d 414, 415 (N.D. 1988). Generally, in a properly formed and appropriately maintained corporation, a shareholder's liability will be limited to the shareholder's investment in the corporation. Id. at 416. Further, "[a] corporation's officers and directors generally are not liable for the corporation's ordinary debts." Watts v. Magic 2 x 52 Mgmt., Inc., 2012 ND 99, ¶ 12, 816 N.W.2d 770; see also Coughlin Constr. Co. v. Nu-Tec Indus., Inc., 2008 ND 163, ¶ 19, 755 N.W.2d 867; Axtmann v. Chillemi, 2007 ND 179, ¶ 12, 740 N.W.2d 838.

         [¶ 9] We have held, however, that "the corporate veil may be pierced when the legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime." Coughlin Constr., 2008 ND 163, ¶ 19, 755 N.W.2d 867. This Court has described specific factors (" Hilzendager-Jablonsky factors") for a district court to consider in deciding whether to pierce the corporate veil:

[F]actors considered significant in determining whether or not to disregard the corporate entity include: insufficient capitalization for the purposes of the corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of the debtor corporation at the time of the transaction in question, siphoning of funds by the dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and the existence of the corporation as merely a facade for individual dealings.

Coughlin Constr., at ¶ 20 (quoting Hilzendager v. Skwarok, 335 N.W.2d 768, 774-75 (N.D. 1983)); see also Jablonsky v. Klemm, 377 N.W.2d 560, 563-67 (N.D. 1985). Additionally, "an element of injustice, inequity or fundamental unfairness" must be present before a court may properly pierce a corporation's corporate veil. Coughlin Constr., at ¶ 20 (quoting Jablonsky, 377 N.W.2d at 564).

         [¶ 10] We have also described an "alter ego" approach to piercing the corporate veil:

To apply the alter ego doctrine, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist, and there must be an inequitable result if the acts in question are treated as those of the corporation alone.

Red River Wings, Inc. v. Hoot, Inc., 2008 ND 117, ¶ 34, 751 N.W.2d 206 (internal quotation marks omitted) (citing Axtmann, 2007 ND 179, ¶¶ 12-15, 740 N.W.2d 838; Jablonsky, 377 N.W.2d at 563-67; Hilzendager, 335 N.W.2d at 774-75). This approach to veil piercing simply recognizes there may be instances when a corporation is in fact a mere instrumentality or alter ego of its owner. Cf. Solid Comfort, Inc. v. Hatchett Hosp., Inc., 2013 ND 152, ¶¶ 14-17, 836 N.W.2d 415; Mahana v. Westland Oil Co., 107 N.W.2d 353, 361-62 (N.D. 1960).

         [¶ 11] In deciding whether an alter ego claim has been established, courts examine various factors "which reveal how the corporation operates and the particular defendant's relationship to that operation." NetJets Aviation, Inc. v. LHC Commc'ns, 537 F.3d 168, 176-77 (2d Cir. 2008) (applying Delaware law). These factors include those similar to our Hilzendager-Jablonsky factors. See, e.g., NetJets Aviation, 537 F.3d at 177; Estate of Raleigh v. Mitchell, 947 A.2d 464, 470-71 (D.C. 2008); Hoyt Props., Inc. v. Prod. Res. Grp., 736 N.W.2d 313, 318-19 (Minn. 2007); T & R Trucking, Inc. v. Maynard, 655 S.E.2d 193, 198 ( W.Va. 2007); In re Phillips, 139 P.3d 639, 644 (Colo. 2006); Hildreth v. Tidewater Equip. Co., Inc., 838 A.2d 1204, 1210-11 (Md. 2003); Meridian Minerals Co. v. Nicor Minerals, Inc., 742 P.2d 456, 462-63 (Mont. 1987); see also 1 William Meade Fletcher, Fletcher Cyc. of the Law of Corp. §§ 41.10, 41.30 (2015 rev. vol.).

         [¶ 12] To the extent our case law may be unclear, we require an examination of the Hilzendager-Jablonsky factors as part of the analysis for deciding whether to pierce the corporate veil under the alter ego doctrine. In addition to those factors, an overall element of "injustice, inequity, or fundamental unfairness" must also be established before veil piercing is appropriate. Jablonsky, 377 N.W.2d at 564. Moreover, "[c]ourts generally apply the alter ego rule with great caution and reluctance." 1 Fletcher Cyc. Corp. § 41.10, at 188.

         [¶ 13] "The burden of proving the requirements for piercing the corporate veil is on the party asserting the claim." Watts, 2012 ND 99, ¶ 13, 816 N.W.2d 770. We have explained that "[r]esolving the issue is heavily fact-specific and, therefore, ...


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