This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2000).
STATE OF MINNESOTA
IN COURT OF APPEALS
Emerald Green International, Inc.,
Blue Earth County District Court
File No. C9971633
Paul A. Sortland, Sortland Law Office, 33 South Sixth Street, Suite 4100, Minneapolis, MN 55402-3601 (for appellant)
Steven J. Vatndal, Gislason & Hunter, LLP, 424 North Riverfront Drive, Suite 250, Mankato, MN 56002-4157 (for respondent)
Considered and decided by Harten, Presiding Judge, Kalitowski, Judge, and Peterson, Judge.
U N P U B L I S H E D O P I N I O N
Appellant Daniel Schilling sued Emerald Green International, Inc., and respondent Mike Miller, individually, for breach of contract. Schilling sought to pierce the corporate veil that would protect Miller, Emerald Green’s primary shareholder. After a trial, the district court awarded judgment against Emerald Green in favor of Schilling but denied his attempt to pierce the corporate veil. On appeal, Schilling challenges the denial of his attempt to pierce the corporate veil. We affirm.
Schilling developed a method of manufacturing and marketing a soybean-based fertilizer and formed a corporation, Spring Green Enterprises, Inc., to market the product. After Spring Green defaulted on a bank loan, James Murray obtained its assets and used them in Emerald Green, a corporation he had formed previously. After Murray obtained Spring Green’s assets, Schilling worked for Emerald Green, and the record contains evidence that Schilling was actively involved in management activities during Murray’s ownership of the corporation.
In December 1995, Murray decided to sell his majority interest in Emerald Green. He sent out a notice to Emerald Green’s minority shareholders offering to sell his interest in the corporation for $139,471.80. The notice stated and Murray testified that Murray had loaned $139,471.80 to Emerald Green to cover operating costs and invested an additional $86,000 in Spring Green.
In December 1995, Miller entered into an agreement to purchase Murray’s interest in Emerald Green. The agreement provided that Miller agreed to purchase for $143,043 all debt owed by Emerald Green to Murray. The agreement also provided:
Murray shall, upon execution of this agreement, sell to Miller all of his stock, consisting of 1,000,000 shares, in Emerald Green * * * for a consideration of $1.00 in cash and an undertaking by Miller to pay all currently outstanding legal and accounting bills incurred by Murray on behalf of Emerald Green * * *.
Finally, under the agreement, Miller acquired from Murray, for no additional consideration, MegaTrends International, Inc., a corporation intended to be used to market Emerald Green’s products.
Schilling entered into a five-year employment agreement with Emerald Green. The agreement provided that Emerald Green would pay Schilling $5,000 per month plus an incentive bonus of one-half of one percent of the employer’s net product sales. The agreement provided for a $5,000 signing bonus and prohibited Schilling from competing with Emerald Green for a period of 24 months following termination of his employment. The agreement also provided that Schilling would transfer product formulas and intellectual property rights to Emerald Green.
In January 1996, Miller obtained a personal loan from Norwest Bank in the amount of $150,000 for the purpose of purchasing Emerald Green’s assets. Emerald Green was listed as a guarantor of the loan, and Norwest was given a security interest in Emerald Green’s inventory and equipment. Also, Action Realty, a company owned by Miller, agreed to guarantee $50,000 of the loan and provided Norwest with a mortgage against its property.
Miller used corporate funds to make payments on the Norwest loan. Costs for obtaining the loan, which amounted to $384.50, were paid out of Emerald Green’s checking account. Emerald Green’s check register shows that on January 31, 1996, a $15,043 payment was made to Miller for “loan repayment (Murray).” Emerald Green paid Miller $7,500 in April 1996 and $41,424 in July 1996 for loan repayment. Emerald Green also paid $16,272.29 in interest to Norwest Bank in 1996.
In the summer of 1997, Miller decided to liquidate Emerald Green. Emerald Green received $32,800 from a sale of some of its assets and an additional $11,000 from a liquidation auction conducted by Miller Auction Services, a company owned by Miller. The proceeds of the asset sale and liquidation were used to pay the Norwest loan. A report prepared by Timothy Harder, a certified public accountant, showed that from December 1995 through July 1997, net cash flow to Emerald Green from MegaTrends, Mike Miller, Miller Auction, and Action Realty was $495,534.74.
The district court made the following findings supporting its denial of Schilling’s attempt to pierce the corporate veil:
Unusual factors are present in this case: The corporation is a successor to Spring Green International, a corporation formed by [Schilling]; the corporation was originally formed utilizing assets obtained from [Schilling’s] predecessor corporation, and also “secret” formulas held by [Schilling].
In considering the factors to pierce a corporate veil, the Court also must determine if there is an element of injustice or fundamental unfairness. In this case, contrary to [Schilling’s] claim, there was evidence of substantial investment by Mr. Miller in Emerald Green International. [Schilling] was well aware of the precarious financial situation of the company. He entered into the contract with the corporation, not Mr. Miller, and there is no evidence that Schilling was led to believe that * * * Miller was personally guaranteeing the employment contract.
Piercing the corporate veil is an equitable remedy. Roepke v. Western Nat’l Mut. Ins. Co., 302 N.W.2d 350, 352 (Minn. 1981). The district court has discretion to grant or deny equitable relief, and its decision will be reversed only upon a clear showing of an abuse of discretion. Regents of Univ. of Minn. v. Raygor, 620 N.W.2d 680, 687 (Minn. 2001).
A two-prong test is applied to determine when a creditor will be allowed to pierce the corporate veil of protection from personal liability and hold a shareholder liable for corporate obligations. Victoria Elevator Co. v. Meriden Grain Co., 283 N.W.2d 509, 512 (Minn. 1979). The first prong focuses on the shareholder’s relationship to the corporation to determine whether the corporation was formed as the shareholder’s alter ego or mere instrumentality. Barton v. Moore, 558 N.W.2d 746, 749 (Minn. 1997); Almac, Inc. v. JRH Dev., Inc., 391 N.W.2d 919, 922 (Minn. App. 1986), review denied (Minn. Oct. 17, 1986).
Factors that are significant to the assessment of this relationship include whether there is insufficient capitalization for purposes of corporate undertaking, a 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 the corporation as merely a facade for individual dealings.
Barton, 558 N.W.2d at 749 (citation omitted). “If a number of these factors are present,” the first prong is met. Almac, 391 N.W.2d at 922 (citation and quotation omitted).
“The second prong requires showing that piercing the corporate veil is necessary to avoid injustice or fundamental unfairness.” Barton, 558 N.W.2d at 749. To establish the second prong, evidence must be presented showing that the corporate entity 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 (Minn. 1981). If both prongs are met, the creditor will be allowed to pierce the corporate veil and hold the shareholder personally liable. Almac, 391 N.W.2d at 922.
Corporation as a façade
Citing Chergosky v. Crosstown Bell, Inc., 454 N.W.2d 654, 658 (Minn. App. 1990), rev’d on other grounds, 463 N.W.2d 522 (Minn. 1990), Schilling argues that Miller improperly used corporate funds to pay a personal loan with Norwest. In Chergosky, the shareholder did not maintain a separate corporate checking account, but rather placed all corporate funds in his personal checking account, and the facts do not indicate that the personal expenses the shareholder used corporate funds to pay were related to corporate business.
In this case, the undisputed evidence shows that Miller agreed to pay $143,043 for corporate debt owed by Emerald Green to Murray and that Miller obtained the Norwest loan to pay for the purchase of Emerald Green. Thus, although the Norwest loan was labeled a personal loan, the purpose of the loan in reality was to refinance the corporate debt owed by Emerald Green to Murray, and the payments made on the loan were payments of corporate debt. Under these circumstances, although Miller may have failed to comply with technical requirements for obtaining a corporate loan, his use of corporate funds to pay the Norwest loan does not support Schilling’s contention that Miller operated Emerald Green as a façade.
Schilling argues that Miller improperly applied liquidation proceeds solely to the Norwest loan. Norwest had a security interest in Emerald Green’s assets and inventory. Although Schilling suggests that Miller granted the bank the security interest without obtaining proper corporate authorization, he cites no evidence or authority supporting that position. We cannot conclude that Miller acted improperly in applying the liquidation proceeds to the Norwest loan. See Association of Mill & Elevator Mut. Ins. Co. v. Barzen Int’l, Inc., 553 N.W.2d 446, 450-51 (Minn. App. 1996) (concluding that a parent corporation properly applied a subsidiary’s liquidation proceeds to a bank loan that was secured by the subsidiary’s assets and guaranteed by the parent corporation because the bank had priority over unsecured creditors), review denied (Minn. Nov. 20, 1996).
Schilling also argues that Miller’s lending money from his other corporations to Emerald Green and using one of his other corporations to guarantee the Norwest loan shows intermingling of corporate and personal funds. The argument is not persuasive in light of the evidence of the net cash flow, $495,534.74 before liquidation and $450,000 after liquidation, from Miller and his other corporations to Emerald Green.
Without stating any basis for his opinion, Joe Galli, whom Miller hired as Emerald Green’s general manager, estimated that $2 million for advertising was necessary for adequate capitalization. The net cash flow from Miller and his other corporations to Emerald Green was almost $500,000 before liquidation, and Schilling admitted that the financing greatly improved after Miller purchased Emerald Green. In determining whether capitalization was adequate, the court looks to the corporation’s financial condition and future outlook at the time of purchase. See Barzen, 553 N.W.2d at 450 (in reversing district court’s piercing of corporate veil, this court noted that given the corporation’s condition at the time of purchase and its optimistic outlook and predictions for future performance, there was no indication that level of capitalization provided by purchaser would necessarily be insufficient). Schilling cites no evidence that at the time of Miller’s purchase, it was known that $500,000 would be inadequate capital.
The district court considered the second prong of the Victoria Elevator test significant in deciding not to pierce the corporate veil. As the district court noted, Emerald Green was a successor in interest to a corporation originally formed by Schilling. The evidence supports the district court’s finding that Schilling was aware of Emerald Green’s precarious financial situation at the time of Miller’s purchase. The district court also cited the absence of evidence that Schilling was led to believe that Miller was personally guaranteeing the employment contract. On the contrary, Schilling admitted that Miller did not personally guarantee the employment contract and that he understood that a personal guarantee was necessary to make a shareholder personally liable. Finally, Schilling cites no evidence that he entered into or continued in the employment relationship based on any understanding that Miller would provide capital to Emerald Green beyond what he did or based on any other promise or guarantee by Miller. The district court did not err in finding that neither justice nor fundamental fairness required piercing the corporate veil.
Schilling has failed to show that the district court abused its discretion in declining to pierce the corporate veil against Miller.