Case Title: GASSTOP TWO, LLC V. SEATWO, LLC and LAWRENCE N. SMALL and JILL SMALL

Citation: 

Docket Number: S-09-0052

State: wyoming

Court: Wyoming Supreme Court

Date: 2010-03-04T00:00:00Z

Document:
GASSTOP TWO, LLC V. SEATWO, LLC and LAWRENCE N. SMALL and JILL SMALL2010 WY 24225 P.3d 1072Case Number: S-09-0052Decided: 03/04/2010
OCTOBER 
TERM, A.D. 2009

 
 
GASSTOP 
TWO, LLC,Appellant(Plaintiff),v.SEATWO, LLC, 
and LAWRENCE N. SMALL and JILL 
SMALL,Appellees(Defendants).

 
 
Appeal 
from the District Court of Sheridan County

The 
Honorable John G. Fenn, Judge

 
 

Representing 
Appellant:

Thomas 
E. Lubnau II and Ryan W. McGrath of Lubnau Law Office, Gillette, Wyoming.  Argument by Mr. 
Lubnau.

 
 

Representing 
Appellees:

Rex 
O. Arney and Orintha E. Karns, of Brown, Drew & Massey, LLP, Casper, 
Wyoming.   Argument by Ms. 
Karns.

 
 
Before 
VOIGT, C.J., and GOLDEN, HILL, KITE, and BURKE, 
JJ.

 
 

HILL, 
Justice.

 
 
[¶1]      Gasstop Two, LLC 
(Gasstop) challenges the Judgment and Order of the district court.  One of the principal owners of Gasstop 
was Joel Kurtenbach (Kurtenbach).  
After a trial to the court sitting without a jury, Gasstop prevailed and 
the district court awarded a judgment to Gasstop in the amount of 
$236,672.12.  The judgment was 
against Seatwo, LLC (Seatwo).  
However, Seatwo was essentially insolvent and the district court 
dismissed Gasstop's claims against Lawrence N. Small and Jill A. Small 
(Smalls).  Gasstop asserted that the 
district court should have "pierced the LLC veil" so as to make the Smalls 
liable for the judgment.  Kurtenbach 
and the Smalls had had previous business dealings that had been successful.  In June of 2000, they entered into 
another separate agreement whereby Gasstop would build and operate a convenience 
store in a location along a major highway that runs south from Gillette to 
Douglas.  Seatwo agreed to lease 
space from Gasstop to operate a Burger King franchise at that location.  This appeal is concerned with only the 
specific transaction described above, although the course of dealings between 
these parties plays some role in the resolution of this case.  The essence of Gasstop's appeal is that 
the district court erred in denying Gasstop's demand that the "LLC veil" be 
pierced so that the Smalls could be held personally liable for the judgment 
against Seatwo.  We will 
affirm.

 
 
ISSUES

 
 
[¶2]      Gasstop raises 
these issues:

 
 
A.  The 
district court erred by refusing to hold Small personally liable for the rent 
due to Gasstop when Small signed the lease on June 2, 2000, purportedly on 
behalf of Seatwo, a company which was not formed or organized until August 17, 
2000.

 
 
B.  The 
district court erred by considering factors for piercing the company veil of 
Seatwo, which are not relevant to piercing the company veil and by failing to 
consider factors which are relevant under Wyoming law.

 
 
C.  The 
district court erred when it misstated the undercapitalization factor in Wyoming 
and failed to properly apply it to the facts of this case.

 
 
D.  Even 
if the district court considered the appropriate factors in LLC piercing, its 
findings of fact are clearly erroneous.

 
 
Seatwo 
and Small raise these issues in response:

 
 
A.  In 
the trial court, Gasstop failed to raise the argument that Small was personally 
liable as a promoter who signed a pre-incorporation lease, and, therefore, is 
now foreclosed from raising this issue.

 
 
B.  The 
district court applied the correct factors to determine that the Seatwo veil 
could not be pierced.

 
 
C.  The 
district court correctly stated and applied the undercapitalization factor to 
the facts of this case.

 
 
D.  The 
district court's findings of fact are not clearly 
erroneous.

 
 
In 
its reply brief, Gasstop contends:

 
 
A.  Gasstop 
should not be foreclosed from asserting that Small is personally liable to 
Gasstop on the theory of promoter liability. 

            
1.  Promoter liability is not a fact-specific inquiry as argued 
by Small and Seatwo when the pre-incorporation or organization agreement is in 
writing and the writing is clear and unambiguous.

 
 
B.  Gasstop 
is not asking this court to implement a bright line rule with regard to 
undercapitalization in the LLC piercing context.

 
 
C.  If 
an LLC allegedly passes the test for corporate piercing it does not 
automatically pass the test for LLC piercing as the tests contain different 
factors.

 
 
FACTS 
AND PROCEEDINGS

 
 
[¶3]      This matter was 
tried to the district court in a one day proceeding.  The principals in both Gasstop and 
Seatwo gave testimony and the district court admitted a substantial number of 
documentary exhibits during the course of the testimony.  After the trial was completed, the 
parties submitted written arguments which the district court utilized in 
preparing a Decision Letter which was then incorporated into the judgment.  

 
 
[¶4]      Kurtenbach is one 
of the principal owners of Gasstop.  
On June 2, 2000, Kurtenbach (on behalf of Gasstop) and Lawrence Small (on 
behalf of Seatwo) entered into a lease agreement to operate the business at 
issue in this case.  Those same 
parties were involved in other business ventures and intended to collaborate in 
future additional such business relationships.

 
 
[¶5]      In this 
particular business relationship, Gasstop was to have a piece of real estate 
developed and, upon completion of the development, Seatwo was to be a tenant 
leasing space from Gasstop to operate a Burger King restaurant, which did in 
fact come to pass.  Gasstop contends 
that Mr. Small signed the lease on June 1, 2000, before Seatwo was formed.  The record substantiates that Seatwo was 
formed on August 17, 2000.  Seatwo 
was capitalized by a $250.00 contribution by Mr. Small, and Mrs. Small and one 
of the Smalls' children each contributed $125.00, for a total capitalization of 
$500.00.  Gasstop makes much of 
these "insubstantial" capital contributions in its efforts to pierce the LLC 
veil, because the lease Small signed obligated Seatwo to make lease payments of 
just under one million dollars over the term of the lease.  Mr. Small obtained a franchise for the 
Burger King operation in dispute here in his own name, because such a franchise 
must be held by an individual(s) and not by a business entity.  The cost of the franchise was 
$50,000.00.  Gasstop claimed not to 
be aware of that circumstance and basically assumed the "franchise" was an asset 
of Seatwo.  Seatwo also borrowed 
$350,000.00 to obtain furniture and equipment for the new Burger King operation, 
and Seatwo also had a line of credit in the amount of $15,000.00 to pay 
suppliers.  Seatwo never turned a 
profit and eventually it ceased operations on October 31, 2003.  Gasstop first obtained a judgment 
against Seatwo in an uncontested proceeding in the Campbell County Circuit 
Court.  The instant proceedings were 
initiated by Gasstop's complaint filed herein on September 9, 
2004.

 
 
DISCUSSION

 
 
Standard 
of Review

 
 
[¶6]      The standard of 
review we apply where trial is to the court sitting without a jury is 
this:

 
 
The 
factual findings of a judge are not entitled to the limited review afforded a 
jury verdict.  While the findings 
are presumptively correct, the appellate court may examine all of the properly 
admissible evidence in the record.  
Due regard is given to the opportunity of the trial judge to assess the 
credibility of the witnesses, and our review does not entail re-weighing 
disputed evidence.  Findings of fact 
will not be set aside unless they are clearly erroneous.  A finding is clearly erroneous when, 
although there is evidence to support it, the reviewing court on the entire 
evidence is left with the definite and firm conviction that a mistake has been 
committed.

 
 

Harber 
v. Jensen, 
2004 WY 104, ¶ 7, 97 P.3d 57, 60 (Wyo.2004) quoting, Life Care Centers of America, Inc. v. 
Dexter, 2003 WY 38, ¶ 7, 65 P.3d 385, 389 (Wyo.2003).  See also Powder River Ranch, Inc. v. 
Michelena, 2005 WY 1, ¶ 8, 103 P.3d 876, 879-80 (Wyo.2005).  Further, with regard to the trial 
court's findings of fact,

 
 
[W]e 
assume that the evidence of the prevailing party below is true and give that 
party every reasonable inference that can fairly and reasonably be drawn from 
it.  We do not substitute ourselves 
for the trial court as a finder of facts; instead, we defer to those findings 
unless they are unsupported by the record or erroneous as a matter of 
law.

 
 

Harber, 
¶ 7, 97 P.3d  at 60.  The district 
court's conclusions of law are, however, subject to our de novo standard of review.  Powder River Ranch, ¶ 8, 103 P.3d at 
879-80;  Double Eagle Petroleum & Mining Corp. v. 
Questar Exploration & Production Co., 2003 WY 139, ¶ 6, 78 P.3d 679, 
680-81 (Wyo.2003).

 
 

Mullinnix 
LLC v. HKB Royalty Trust, 
2006 WY 14, ¶ 12, 126 P.3d 909, 916 (Wyo. 2006).

 
 
Was 
Small a "Promoter" Who Can Be Held Liable Personally

 
 
[¶7]      The lease 
Kurtenbach and Small executed on June 1, 2000, specified that the agreement was 
between Gasstop and Seatwo and each signed the lease as representatives of those 
entities.  Gasstop contends that 
Small was a "promoter" at that point in time because Seatwo did not come into 
being until August 17, 2000.  This 
issue was not called to the attention of the district court at the proceedings 
below, and the district court made no findings or rulings in that regard.  We have held:

 
 
This 
Court does not review issues that were not properly developed below.  

 
 
We 
have stated that " [w]e strongly adhere to the rule forbidding us to "consider 
for the first time on appeal issues that were neither raised in, nor argued to, 
the trial court," except for those issues which are jurisdictional or are 
fundamental in nature.' "  Hronek v. St. Joseph's Children's Home, 
866 P.2d 1305, 1309 (Wyo.1994) (quoting Bredthauer v. TSP, 864 P.2d 442, 446-47 
(Wyo.1993) and Oatts v. Jorgenson, 
821 P.2d 108, 111 (Wyo.1991)).  " 
We follow this rule because "it is unfair to reverse a ruling of a trial court 
for reasons that were not presented to it, whether it be legal theories or 
issues never formally raised in the pleadings nor argued to the trial court." ' 
"  Hronek, 866 P.2d  at 1309 (quoting 
Bredthauer, 864 P.2d  at 446-47 and Oatts, 821 P.2d at 111); see also 5 
Am.Jur.2d Appellate Review § 690 
(1995).  "We of course must not 
judge the matter of abuse of discretion on the basis of showings made to us on 
appeal.  We must judge on the basis 
of showings made to the trial court...."  Holly Sugar Corp. v. Perez, 508 P.2d 595, 599 (Wyo.1973).  We have 
articulated and followed this principle on numerous occasions [Citations 
omitted.]. 

 
 

Yates 
v. Yates, 
2003 WY 161, ¶ 13, 81 P.3d 184 (Wyo.2003).  Amoco does not contend that this issue 
is either jurisdictional or fundamental.  
This Court does not consider the imposition of penalties under the 
circumstances of this case to be so fundamental as to require our review when 
Amoco failed to present its current argument against the imposition of such 
penalties before the Board.

 
 

Amoco 
Production Co. v. Department of Revenue, State of Wyo., 
2004 WY 89, ¶ 53, 94 P.3d 430, 449 (Wyo. 2004).

 
 
[¶8]      We will apply 
that rule here because the issue was not raised below.  Our decision to do so is fortified by 
the testimony of Messrs. Kurtenbach and Small that described the course of 
dealings between them and their business entities.  In context, the discrepancy complained 
of could not have served to prejudice Kurtenbach or Gasstop, nor has any 
suggestion been made by Gasstop that a jurisdictional or fundamental error is in 
play here.

 
 
Piercing 
the LLC Veil

 
 
[¶9]      Limited Liability 
Companies are creatures of statute.  
§§ 17-15-101 through 17-15-147.  
It is evident from the district court's decision letter that its judgment 
was guided by our decision in Kaycee Land 
and Livestock v. Flahive, 2002 WY 73, 46 P.3d 323 (Wyo. 2002) and the 
authorities cited therein.  Also see 
Rivermeadows, Inc. v. Zwaanshoek 
Holding, 761 P.2d 662, 666-67 (Wyo. 1988); Phillip L. Jelsma and Pamela 
Everett Nollkamper (Phillip P. Whynott), The Limited Liability Company, §§ 11-130 
and 11-140 (2009) (noting that every state that has enacted LLC piercing 
legislation has chosen to follow corporate law standards and not develop a 
separate LLC standard); David M. Hastings, Annotation, Construction and Application of Limited 
Liability Company Acts, 79 A.L.R. 5th 689, § 5 (limited liability 
company acts interpreted as analogous to business corporation law) (2000 and 
Supp. 2008).  We also take note here 
that the Whynott treatise notes that,

 
 
The 
LLC veil piercing factors used from the corporate arena can be reduced to four 
categories:

 
 
1.  Fraud;

2.  Inadequate 
capitalization;

3.  Failure 
to observe company formalities; and

4.  Intermingling 
the business and finances of the company and the member to such an extent that 
there is no distinction between them[.]

 
 

Id., 
at § 11:130.  We are satisfied from 
the discussion we have set out above, as well as from a very similar discussion 
set down in the district court's decision letter, that the district court 
faithfully applied the correct law to the factual disputes that arose in this 
case.  Gasstop contends that the 
district court failed to consider factors "relevant" in the LLC context, and 
also considered factors from the corporate context that are not relevant to an 
LLC.  Our review of the more 
persuasive authorities counsels us to reject this 
contention.

 
 
[¶10]   The district court made detailed 
findings of fact as to the damages claimed by Gasstop.  However, we will not set them out in 
detail because the amount of the damages is not contested by Seatwo or 
Small.  It suffices to note that 
Gasstop asserted the damages owed by Seatwo and/or Small totaled 
$236,672.12.  It also suffices to 
note that the district court found that Seatwo breached the lease/contract and 
that Gasstop was damaged in the amount set out above.  The real issue was who was to pay any 
such damages, Seatwo or the Smalls.

 
 
[¶11]   Having ascertained the damages at 
issue, the district court proceeded to address the issue of piercing the LLC 
veil  i.e., whether or not to hold the Smalls liable for the damages rather 
than the defunct Seatwo, LLC.  The 
district court set out the law applicable to that issue, and it was in all 
respects consistent with the law we have summarized above.  After having done so, the district court 
reached these conclusions about the factors that go into a consideration of 
whether the piercing of the LLC veil is permissible:

 
 

a.    
Undercapitalization 
 Evidence was presented that the Smalls had operated other Burger King business 
ventures successfully.  The failure 
of [the instant] business was not due to the undercapitalization, but was rather 
due to the poor location, lack of customers and poor traffic count.  The testimony showed that the issue of 
capitalization was not the reason for the loss of money for both parties in the 
business, but rather the lack of the success of the business.  At no time did the testimony purport to 
show that the lack of capital was a reason for the failure of the business or 
the inability to pay rent.  Rather, 
the business operated for approximately two years at a loss and was still, 
although struggling, making the rental payments.  Regardless, undercapitalization by 
itself is not grounds to pierce an LLC veil.  Where all corporate formalities were 
followed, undercapitalization was not the only pertinent factor to be considered 
in piercing the corporate veil.  Amfac Mechanical Supply Co. v. Federer, 
645 P.2d 73, 82 (Wyo. 1982) (citing Fisser v. International Bank, 282 F.2d 231, 240 (2nd Cir. 1960) (footnote 
omitted).

b.    
The 
Smalls as the Holders of the Franchise  
As the testimony indicated, Burger King required individuals to hold the 
franchise in their own names; the LLC could not hold the franchise.  The Smalls used the franchise consistent 
with the needs and organization of SEATWO, and received no benefit when they 
lost the franchise.  The Smalls 
never received any compensation when Burger King withdrew the franchise because 
the business was no longer able to operate.  The franchise was fixed to the 
location.  Therefore, the argument 
that the franchise was an asset that should have been in SEATWO for the benefit 
of creditors is unpersuasive.  There 
was no evidence presented at trial that the Smalls, in any way, were commingling 
funds or misusing the franchise, but rather it was for the sole purpose of the 
operation of the restaurant by SEATWO.  
The Court finds the evidence of holding the franchise in their own names 
was not sufficient to show a lack of conformity to the formalities of operating 
an LLC.  Although there was question 
about the terms in the lease stating the tenants needed to hold the franchise, 
this language is not a persuasive argument when it was impossible for SEATWO to 
actually hold the franchise.

c.    
Furniture 
Fixtures and Equipment 
-  All testimony regarding these 
items showed that First Interstate Bank had a prior lien on any equipment, and 
the Court finds that SEATWO made good faith efforts in liquidating the 
equipment, but were unable to do so.  
SEATWO was forced to donate the equipment for a tax credit for 
SEATWO.  The testimony indicated the 
bank knew that Mr. and Mrs. Small were trying to sell the equipment on behalf of 
SEATWO in an effort to liquidate damages, but were unsuccessful.  These actions were approved by the bank, 
and were within the capacity of the members of SEATWO in trying to satisfy the 
first priority creditor.

d.    
The 
Company was used as an Alter Ego and to Defraud 
-  There is no indication that the 
company, SEATWO, was used to defraud anyone, or that it was simply being used as 
an alter ego for the personal business ventures of Mr. and Mrs. Small.  The Wyoming Supreme Court has addressed 
the piercing of a corporate veil under the "alter ego" or the non-existence of 
an actual separate entity issue.  
This Court will follow their [holding].  When "there is such a unity of interest 
and ownership that the individuality, or separateness, of [such] person and 
corporation has ceased; [and] that the facts are such that an adherence to the 
fiction of the separate existence of the corporation would, under the particular 
circumstances, sanction a fraud or promote injustice" then the veil may be 
pierced.  Jackson Hole Traders, Inc. v. Joseph, 
931 P.2d 244, 251 (Wyo. 1997) (citing Minifie v. Rowley, 187 Cal. 481, 202 P. 673, 676 (1921) (other citations omitted).  
The evidence did not support an assertion that SEATWO was an alter ego 
for the Smalls.  Quite the contrary, 
the Smalls had used a legal business entity as a liability shield.  SEATWO entered into a contract with 
GASSTOP to further a business objective of operating a Burger King on property 
owned by GASSTOP.  The testimony 
showed that the same owners of these two entities had done business together 
before in substantially the same manner, and it had been profitable.  The Smalls used SEATWO as an operating 
and accounting business for the Burger King restaurant.  They followed the formalities required 
and were not attempting to sanction a fraud or promote injustice.  To the contrary, both entities were 
entering into a business agreement in an effort to [perpetuate] a profitable 
business to benefit both parties.  
Testimony indicated that SEATWO kept separate accounting statements, 
filed all proper paperwork with the Secretary of State, filed separate tax 
returns, only made small contributions to the Smalls on two occasions as 
employees of the business entity SEATWO, and followed all relevant formalities 
under the law.

 
 
The 
Smalls operated SEATWO in substantial conformity with the rules set forth to 
operate an LLC.  They kept all 
personal and business assets separate.  
They filed the appropriate paperwork with the Secretary of State, and 
operated as a prudent LLC.  This 
Court finds no evidence to pierce the LLC veil.

 
 
CONCLUSION

 
 
[¶12]   We conclude that none of the 
district court's findings of fact were clearly erroneous and that the district 
court correctly applied the applicable law.  Thus, we affirm the district court's 
judgment.