This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2004).
IN COURT OF APPEALS
Tammy S. Markegard,
Denise Von Ruden,
Filed January 24, 2006
Rice County District Court
File No. CX-01-1797
Ronald L. Moersch, Mary L. Hahn, Hvistendahl, Moersch & Dorsey, P.A., 311 South Water Street, P.O. Box 651, Northfield, MN 55057-0651 (for respondent)
Adam J. Dowd, Schmitz, Ophaug & Dowd, L.L.P., 220 Division Street, P.O. Box 651, Northfield, MN 55057 (for appellant)
Considered and decided by Wright, Presiding Judge; Dietzen, Judge; and Crippen, Judge.*
In this dispute between two shareholders of a closely held corporation, appellant challenges the district court’s judgment awarding respondent $50,000 in punitive damages following the second phase of a bifurcated bench trial, arguing that the punitive damage award is not supported by clear and convincing evidence. Because we conclude that only the amount of punitive damages is properly before us, and the punitive damage award is supported by clear and convincing evidence, we affirm.
Appellant Denise Von Ruden and respondent Tammy S. Markegard were equal shareholders in a closely held corporation engaged in the mortgage business. In August 2000, the parties formed a subchapter-S corporation known as Innovative Mortgages and Financial of Faribault, Inc. (IMFF). Each was issued 100 of the 200 total shares in the corporation. Appellant contributed a few items of furniture to the business, and respondent agreed that she would contribute approximately $27,000, in the form of commissions to be withheld.
The parties agreed that appellant would manage the business operation, while each party sought to acquire and close mortgage loans. The parties further agreed that the person closing the loan would receive either 75% of the net proceeds if the “closer” of the loan had acquired the loan customer, or 50% if the other party acquired the customer. In either case, the remainder of the proceeds was to be paid to the corporation. Appellant claimed that the parties agreed that she would receive $10,000 per month in additional salary.
The business was very successful. In the last four months of 2000, the company had total net receipts of $212,000. Of this amount, respondent received roughly $13,000 in payments and left $27,000 in the company as a capital contribution. Appellant received commissions and salary of $65,000. An additional $70,000 was paid to appellant for property and services she provided to the company, but that amount significantly exaggerated the value of the property and services she provided. For example, $17,000 was claimed for office furniture and $12,000 for office pictures, even though these amounts exceeded the fair market value of those items.
In late December 2000 or early January 2001, at the suggestion of appellant, the parties met in the office of the corporation’s accountant (who was also appellant’s accountant) to discuss their year 2000 tax situation. The accountant explained to respondent that as shareholders in a subchapter S corporation, each party had tax liability based on the corporation’s yearly profit. He also indicated that the corporation had no current funds available to assist in paying the taxes, and that each party would be responsible for an additional $11,000 in taxes for the year 2000.
Respondent was very upset and asked where all the money had gone. The accountant explained that there was $64,000 in capital expenditures that could only be depreciated, not expensed. As respondent tried to question the accountant further, appellant told her: “We are paying him by the hour. I talked to him earlier; I understand; I will explain it to you later.” Appellant offered to take 80 of respondent’s 100 shares and assume the tax liability for those shares, telling respondent that this was the only way to protect her from tax liability for the year 2000. Appellant told respondent she would return the shares. Respondent agreed and signed over 80 shares, leaving appellant with 90% of the shares and respondent with 10%.
In 2001, the business was again very successful. It had net receipts of nearly $1,000,000. Of this amount, respondent received commissions of almost $100,000, plus additional distributions of approximately $1,500. Appellant received commissions, salary, and distributions of $340,000, including $250,000 in charges appellant initially claimed as business expenses. Appellant later admitted that the claimed business expenses were actually distributions for her own personal use. For example, the corporation paid $30,000 to All American Recreation for an in-ground swimming pool at appellant’s residence.
In August 2001, upon discovering accounting irregularities, respondent resigned as an officer and employee of IMFF. Respondent sued appellant, alleging appellant willfully manipulated the corporate books with the specific intent to defraud respondent. Respondent sought both compensatory and punitive damages. Prior to trial the district court determined that it would bifurcate the trial into two phases, i.e., a compensatory damage phase and a punitive damage phase.
The first phase of the bench trial was held in late August through early September, 2003. Following the trial, the district court found by clear and convincing evidence that (a) appellant misappropriated $41,000 and $70,000 in business funds for her own personal expenses in 2000 and 2001, respectively; (b) appellant manipulated the corporate books in a manner that was willful and dishonest, and she had the specific intent to defraud respondent; and (c) the effect of appellant’s activity was to fraudulently induce respondent to turn over 80% of her shares of stock to appellant in order to cover their tax liability, which could have been otherwise paid with corporate funds, in the absence of appellant’s misappropriation.
In January 2004, after considering the evidence, the district court concluded that appellant committed fraud, and it awarded respondent $204,500 in compensatory damages. The court also held that respondent was entitled to pursue punitive damages and attorney fees in the second phase of the bifurcated trial. But the court directed that a final partial judgment be entered, “notwithstanding the remaining issues of punitive damages and attorney fees.”
In August 2004, the second phase of the bench trial was held to determine the issues of punitive damages and attorney fees. Following the trial, the district court incorporated by reference its findings of fact from the first phase of the trial and made findings regarding all the relevant factors for awarding punitive damages set forth in Minn. Stat. § 549.20, subd. 3 (2004). The district court found by clear and convincing evidence that (a) appellant’s misconduct continued through the first phase of the trial; (b) “it appears [appellant] has sought to conceal her post-trial earnings”; (c) appellant filed a bankruptcy petition after the first phase of the trial and her debts substantially exceeded her assets; and (d) “[i]t is unlikely that [appellant] will face any punishment other than an award of punitive damages for her misconduct against [respondent,]” but that it is possible “[appellant] may face civil sanctions or even criminal punishment for tax misconduct that accompanied her fraud against [respondent].” The district court reiterated the finding that appellant committed fraud, and also found that she acted with deliberate disregard for respondent’s rights. The court ordered appellant to pay $90,000 in attorney fees and costs and $50,000 in punitive damages.
Following the second phase of the trial, appellant moved for a new trial and the district court denied this motion. This appeal follows.
D E C I S I O N
appeal, we decide only the issues that are properly before us. Appellant concedes her culpability for fraud and
that the only issue is whether the record supports the amount of the award for
punitive damages, i.e., the $50,000 award.
Thus, the issue before us is the award of punitive damages which are
governed by statute. See
But appellant has not
provided this court with the transcript from the first phase of the bifurcated trial. Absent a transcript, we have no record to
review appellant’s challenge to the findings of fact or conclusions of the district
court in the first phase. Appellant
bears the burden of providing an adequate record. Mesenbourg
v. Mesenbourg, 538 N.W.2d 489, 494 (
Appellant raises two issues on appeal. First, appellant contends that punitive damages must be based solely on misconduct that occurred before the first (compensatory damage) phase of the bifurcated trial. Appellant asserts that the district court did not have the statutory authority to consider conduct occurring after the first phase of the trial and up to the date of the second phase of the trial. Thus, appellant seeks to exclude evidence of her filing for bankruptcy following the first phase of trial. But appellant concedes that her bankruptcy petition impeded the collection of this judgment. Here, the district court found that (a) appellant’s misconduct continued through the first phase of the trial; (b) “it appears [appellant] has sought to conceal her post-trial earnings”; and (c) appellant filed a bankruptcy petition after the first phase of the trial.
Section 549.20 governs punitive damage awards. Statutory construction is a question of law,
which this court reviews de novo.
Minn. Stat. § 549.20, subd. 4 (2004) states:
Separate proceeding. In a civil action in which punitive damages are sought, the trier of fact shall, if requested by any of the parties, first determine whether compensatory damages are to be awarded. Evidence of the financial condition of the defendant and other evidence relevant only to punitive damages is not admissible in that proceeding. After a determination has been made, the trier of fact shall, in a separate proceeding, determine whether and in what amount punitive damages will be awarded.
The plain language of the statute mandates a second proceeding,
which implies the authority to make separate and additional findings of fact
based on facts that occur after the initial proceeding. See
Minn. Stat. § 645.08(1) (2004) (statutory language is generally to be
interpreted according to its plain and ordinary meaning). The
statute does not expressly limit the district court’s findings on punitive
damages to misconduct occurring before the first phase of the trial.
Here, the district court considered appellant’s bankruptcy petition when it determined that appellant was likely to escape “other punishment.” This consideration was authorized by statute. Nothing in the statute precludes the district court from considering all available evidence as it weighs the nine factors prescribed by law. If the district court can consider the future implications of appellant’s behavior, findings regarding appellant’s conduct before the second phase of the trial are equally appropriate. Therefore, we believe that the plain language of the statute supports the conclusion that the district court can consider all facts that occur before the second, or punitive damage phase of the trial.
The underlying purpose of the statute also supports our
interpretation. See Minn.
Stat. § 645.16 (2004) (“The object of all
interpretation and construction of laws is to ascertain and effectuate the
intention of the legislature.”). The purpose of punitive damages
is to deter future wrongful conduct. Jensen v. Walsh, 623 N.W.2d 247,
challenges the amount of the punitive damages award, arguing that the district
court’s findings do not support the award.
A punitive damages award is reviewed on an abuse-of-discretion
standard. Ray v. Miller Meester Adver.,
Inc., 664 N.W.2d 355, 371 (Minn. App. 2003), aff'd, 684
N.W.2d 404 (
the profitability of the misconduct to the defendant, the duration of the misconduct and any concealment of it, the degree of the defendant’s awareness of the hazard and of its excessiveness, . . . the financial condition of the defendant, and the total effect of other punishment likely to be imposed upon the defendant as a result of the misconduct, including compensatory and punitive damage awards to the plaintiff and other similarly situated persons, and the severity of any criminal penalty to which the defendant may be subject.
Profitability of Misconduct
Appellant advances several arguments to reverse or remit the punitive damages awarded by the district court. First, appellant argues that the district court overstated the profitability of appellant’s misconduct. The district court found in phase one by clear and convincing evidence that appellant misappropriated $41,000 and $70,000 in business funds for her personal expenses in 2000 and 2001, respectively. And the district court further found that the effect of this conduct and appellant’s representations, was to fraudulently induce respondent to turn over 80% of her shares of stock to appellant in order to cover their tax liability, which could have been otherwise have been paid for with corporate funds. Because appellant has failed to provide a transcript for us to review the adequacy of the evidence to support the findings in phase one, we must assume that evidence supports the findings of the district court. Noruk, 528 N.W.2d at 925.
that the district court ignored the fact that respondent received a benefit
from transferring her stock shares, i.e., a reduction in tax liability, and
that it could not have been willful misconduct for appellant to create this
legitimate tax liability. But in phase
one the district court considered and rejected appellant’s argument, finding
that “there would have been ample funds in the corporation to fund a further
distribution to cover tax liability if [appellant] had not misappropriated
business funds for her personal expenses.”
The district court did not assume that appellant created the tax
liability itself; rather, it concluded that the misconduct was the fraudulent
misappropriation of respondent’s stock, not the tax liability itself.
Appellant also argues that the district court did not find fraud with respect to $30,500, or one-half of the $61,000 found to have been misappropriated in 2000. In effect, this argument focuses on the January 2004 award of compensatory damages, from which no appeal was taken. But the district court clearly found that appellant engaged in fraud and that she acted with deliberate disregard for respondent. Because no record for appellate review is before us, we must assume that the evidence supports the findings.
Duration of Misconduct
Appellant next argues that the district court improperly considered her conduct after the initial first phase in which she was found guilty of fraud. Because the district court properly considered appellant’s conduct up to the second phase of the trial, we conclude that it did not abuse its discretion in finding that appellant sought to conceal her post-trial earnings. Appellant’s conduct in filing a bankruptcy petition for the purpose of avoiding or impeding the payment of this judgment was proper for the district court to consider under the statute.
Degree of Appellant’s Awareness of the Hazard and of Its Excessiveness
Appellant argues that the district court made no specific finding with regard to the fourth factor, the degree of appellant’s awareness of the hazard and excessiveness of her conduct. But after phase one the district court found by clear and convincing evidence that appellant’s “manipulation of the corporate books was willful, dishonest, and made with the specific intent to defraud [respondent].” With regard to the excessiveness of appellant’s conduct, the district court found, for example, that the most egregious example of appellant’s misappropriation of funds was that appellant appropriated $30,000 in funds for an in-ground swimming pool at her residence and sought to claim these funds as legitimate business expenses. Absent a record to review, we conclude that the district court’s findings are supported by the record. See Noruk, 528 N.W.2d at 925.
Appellant’s Financial Condition
Appellant argues that because the district court found in phase two that her financial condition was dire by the time of the trial, this factor weighs against any award of punitive damages. But the district court concluded in light of all of its numerous other findings that it was fair and reasonable for appellant to pay $50,000 in punitive damages. The record supports the district court’s conclusion. The other phase two findings related to the profitability of appellant’s misconduct, the probability that appellant will not be subject to further civil or criminal liability, and the total effect of the other equitable and monetary sanctions, reasonably support the district court’s conclusions, and we will not disturb credibility determinations on appeal. Therefore, appellant’s financial condition does not render the district court’s award an abuse of discretion.
The Effect of Other Punishment Likely to Be Imposed upon Appellant
Appellant argues that because the district court after phase two found that appellant could face sanctions for tax misconduct, punitive damages were inappropriate. But the district court also found that “[i]t is unlikely that [appellant] will face any punishment other than an award of punitive damages . . . .” Based on this record, the findings of the district court are reasonably supported by the record, and weigh in favor of granting punitive damages.
Because the district court properly considered the nine-factor test set forth in Minn. Stat. § 549.20, and the findings of the district court following phase one amply support the district court’s analysis of the factors, we affirm.
* Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.