Opinion ID: 1395914
Heading Depth: 2
Heading Rank: 1

Heading: Jury Instructions on Disregarding TSF's Corporate Form

Text: We review de novo matters of law, including jury instructions interpreting state statutes. See Minn. Supply Co. v. Raymond Corp., 472 F.3d 524, 537 (8th Cir.2006); Archer Daniels Midland Co. v. Aon Risk Servs., Inc. of Minn., 356 F.3d 850, 855 (8th Cir.2004). Because the federal courts have diversity jurisdiction over the instant dispute pursuant to 28 U.S.C. § 1332, we apply the law of the State of Iowa. See Doe v. Baxter Healthcare Corp., 380 F.3d 399, 407 (8th Cir.2004). In applying Iowa law, we must accept the decisions of the Iowa Supreme Court as the controlling precedent. See St. Paul Fire & Marine Ins. Co. v. Schrum, 149 F.3d 878, 880 (8th Cir.1998). The Iowa Supreme Court, however, has not expressly considered the issues presented in this dispute. To predict how the Iowa Supreme Court would resolve the issues, Lindsay Mfg. Co. v. Hartford Accident & Indemn. Co., 118 F.3d 1263, 1267-68 (8th Cir.1997), we will consider relevant state precedent, analogous decisions, considered dicta, and any other reliable data. Riordan v. Church of Jesus Christ of Latter-Day Saints, 416 F.3d 825, 829 n. 2 (8th Cir.2005) (quotation and ellipsis omitted). Under Iowa law, an entity's corporate form can be disregarded either by applying the alter ego doctrine or by piercing the corporate veil. See Team Cent., Inc. v. Teamco, Inc., 271 N.W.2d 914, 923 (Iowa 1978) (en banc). Typically, a corporate entity and its owners are separate and distinct. This arrangement encourages investment by limiting the owners' exposure to the amount invested. See Briggs Transp. Co. v. Starr Sales Co., 262 N.W.2d 805, 809 (Iowa 1978). Nonetheless, [w]here equity requires us to examine the purposes of a corporation, we are not bound by forms, fiction, or technical rules, we want the truth. Benson v. Richardson, 537 N.W.2d 748, 762 (Iowa 1995). Disregarding the entity's corporate form under either the alter ego doctrine or the remedy of piercing the corporate veil is an extraordinary measure that should be reserved for exceptional circumstances, see In re Ballstaedt, 606 N.W.2d 345, 349 (Iowa 2000); Grand Lodge of Iowa of the Indep. Order of Odd Fellows v. Osceola Lodge No. 18, 178 N.W.2d 362, 368 (Iowa 1970), and the party seeking to do so bears the burden of proof, see C. Mac. Chambers Co. v. Iowa Tae Kwon Do Acad., Inc., 412 N.W.2d 593, 598 (Iowa 1987) (en banc). To further the public convenience, cure wrongs, protect against fraud, and advance the ends of justice, the alter ego doctrine disregards an entity's corporate form if the entity is merely an instrumentality or device set up to ensure the avoidance of the legal obligations. Benson, 537 N.W.2d at 761 (citing Kline v. Kline, 104 Mich.App. 700, 305 N.W.2d 297, 299 (1981) (per curiam)). A corporate entity is the alter ego of a person if (1) the person influences and governs the entity; (2) a unity of interest and ownership exists such that the corporate entity and the person cannot be separated; and (3) giving legal effect to the fictional separation between the corporate entity and the person would sanction a fraud or promote injustice. [4] Frank McCleary Cattle Co. v. C.A. Sewell, 73 Nev. 279, 317 P.2d 957, 959 (1957), cited with approval in Odd Fellows, 178 N.W.2d at 368; accord Benson, 537 N.W.2d at 761. The alter ego doctrine applies to nonprofit corporations to the same extent it applies to for-profit corporations. E.g., Odd Fellows, 178 N.W.2d at 364, 368. Piercing the corporate veil is a common-law equitable remedy whereby an entity's corporate form is disregarded to prevent an injustice. See id. at 368; see also United States v. Bestfoods, 524 U.S. 51, 62, 118 S.Ct. 1876, 141 L.Ed.2d 43 (1998). Under Iowa law, disregarding an entity's corporate form by piercing the corporate veil is appropriate if `the corporation is a mere shell, serving no legitimate business purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.' In re Ballstaedt, 606 N.W.2d at 349 (quoting C. Mac. Chambers, 412 N.W.2d at 597 (quoting Briggs Transp., 262 N.W.2d at 810)). [M]ere identity of . . . ownership and corporate management is not alone sufficient to permit a piercing of the corporate veil. Team Cent., 271 N.W.2d at 923. An abuse of the corporate privilege may justify piercing the corporate veil as to persons who actively participate in the conduct of corporate affairs and have provided inadequate capitalization. Briggs Transp., 262 N.W.2d at 810. The corporate form can be disregarded if (1) the corporation is undercapitalized, (2) without separate books, (3) its finances are not kept separate from individual finances, individual obligations are paid by the corporation, (4) the corporation is used to promote fraud or illegality, (5) corporate formalities are not followed[,] or (6) the corporation is merely a sham. Lakota Girl Scout Council, Inc. v. Havey Fund-Raising Mgmt., Inc., 519 F.2d 634, 638 (8th Cir.1975), cited with approval by C. Mac Chambers, 412 N.W.2d at 598. A party seeking to pierce the corporate veil need not prove all six factors, but it must prove at least one of the factors. See Fazio v. Brotman, 371 N.W.2d 842, 846 (Iowa Ct.App.1985). For example, fraud is a sufficient, but not necessary, condition for piercing the corporate veil. See Adam v. Mount Pleasant Bank & Trust Co., 355 N.W.2d 868, 872 (Iowa 1984) (Fraud is not a prerequisite for piercing the corporate veil.); State ex rel. Miller v. Internal Energy Mgmt. Corp., 324 N.W.2d 707, 715 (Iowa 1982) ([F]raud constitutes a sufficient basis for piercing the corporate veil.); see also Team Cent., 271 N.W.2d at 923. For the same equitable reasons, courts apply the remedy of piercing the corporate veil to both for-profit and nonprofit corporations. See William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations § 41.75 (2006).
Krause argues the alter ego doctrine and the remedy of piercing the corporate veil are inapplicable to nonprofit corporations because Iowa Code § 504A.101 (2003) [5] is the exclusive means to impose personal liability on the directors of nonprofit corporations. Unless the language of a statute directly negates the common law, the statute must be interpreted in conformity with the common law. Rieff v. Evans, 630 N.W.2d 278, 285 (Iowa 2001) (en banc). If, however, the statute has preempted common-law rights, the common law must recede. Id. at 285-86. [S]tatutes will not be construed as taking away common law rights existing at the time of enactment unless that result is `imperatively' required by the language of the statute. Collins v. King, 545 N.W.2d 310, 312 (Iowa 1996); accord Bestfoods, 524 U.S. at 63, 118 S.Ct. 1876 (stating `to abrogate a common-law principle, the statute must speak directly to the question addressed by the common law' (quoting United States v. Texas, 507 U.S. 529, 534, 113 S.Ct. 1631, 123 L.Ed.2d 245 (1993))). Section 504A.101 had three parts. First, it extended the common-law rule that stockholders generally are not liable for a corporation's debts, see Hampson v. Weare, 4 Iowa 13, 15 (Iowa 1857), to the directors, officers, employees, and members of nonprofit corporations. Second, it exculpated the directors, officers, members, and other volunteers of nonprofit corporations of personal liability, based solely on their status with the nonprofit corporation, for torts committed by the nonprofit corporation. Cf. Estate of Countryman v. Farmers Coop. Ass'n, 679 N.W.2d 598, 603-05 (Iowa 2004) (en banc) (concluding Iowa Code § 490A.603(1), an analogous statute governing the personal liability of members and managers of limited liability companies, exculpated members and managers for company torts `solely by reason of being a member or manager' of an LLC (quoting Iowa Code § 490A.603(1))). [6] Third, it held the directors, officers, employees, members, and other volunteers of nonprofit corporations personally liable to the same extent the directors of corporations typically are held personally liable. See Iowa Code § 490.832 (1999); id. § 496A.49(13) (1989). The language of section 504A.101 does not indicate the Iowa legislature intended to preempt common-law rights. Cf. Cookies Food Prods., Inc. v. Lakes Warehouse Distrib., 430 N.W.2d 447, 452-53 (Iowa 1988) (concluding a director owed the corporation the additional duties of good faith, honesty, and fairness, although Iowa Code § 496A.34 (1989) only provided self-dealing transactions involving the corporation and director were not void or voidable assuming either complete disclosure and ratification or a fair and reasonable transaction). The preface to section 504A.101 is insufficiently precise to negate common-law rights. The defendants' interpretation of section 504A.101 is not imperatively required by the statutory language. [7] Forecasting the Iowa Supreme Court's opinion, we hold section 504A.101 preempted neither the alter ego doctrine nor the remedy of piercing the corporate veil.
The defendants argue the district court erred by instructing the jury that TSF's corporate form could be disregarded if TSF were undercapitalized. The defendants assert nonprofit corporations cannot be adequately capitalized because the Iowa Nonprofit Corporation Act prohibited the investment of equity capital in nonprofit corporations. See generally Iowa Code § 504A.26 (2003) (A [nonprofit] corporation shall not have or issue shares of stock.). In support, the defendants cited Macaluso v. Jenkins, 95 Ill.App.3d 461, 50 Ill.Dec. 934, 420 N.E.2d 251, 257 (1981), for the proposition [p]laintiffs, who consented to contract with [a nonprofit corporation], knowingly assumed the risk that the [nonprofit corporation] was thinly capitalized. Id. In Macaluso, the Appellate Court of Illinois, Second Division, affirmed the jury verdict and trial court's decision to pierce the veil of a nonprofit corporation as to the person who exercised ownership control over, made most or all of the decisions, was the sole representative for, and intended to profit from the nonprofit corporation. Id. at 255. The appellate court also affirmed the trial court's decision to dismiss the case against a part-time clerical volunteer of the nonprofit corporation. Id. at 257. In doing so, the appellate court noted, in dicta, nonprofit corporations had no duty to be capitalized under Illinois law and the plaintiffs had assumed the risk of nonpayment by dealing with a thinly capitalized nonprofit corporation. Id. We disagree with the dicta in Macaluso. In the context of a for-profit corporation, the Iowa Supreme Court stated: If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of the law that shareholders should in good faith put at the risk of the business unencumbered capital reasonably adequate for its prospective liabilities. If capital is illusory or trifling compared with the business to be done and the risks of loss, this is a ground for denying the separate entity privilege. Briggs Transp., 262 N.W.2d at 810 (quoting Henry W. Ballantine, Ballantine on Corporations, § 129 (rev. ed.1946)). The reasoning of the Iowa Supreme Court in Briggs Transportation can logically be extended to nonprofit corporations. A corporation may be undercapitalized due to either an insufficient contribution of equity capital or an insufficient amount of capital available to satisfy the corporation's liabilities. See C. Mac Chambers, 412 N.W.2d at 598; see also Fletcher Cyclopedia of the Law of Corporations § 41.33 (`Inadequate capitalization' generally means capitalization very small in relation to the nature of the business of the corporation and the risks attendant to such businesses.). Although a nonprofit corporation cannot be financed with equity capital, nonprofit corporations typically receive donations and have other sources of funding, such as earned income. See Heather Gottry, Profit or Perish: Non-Profit Social Service Organizations & Social Entrepreneurship, 6 Geo. J. on Poverty L. & Pol'y 249, 261 (1999). Donations, a form of capital, are to a nonprofit corporation what equity capital is to a for-profit corporation. A nonprofit corporation's veil may be pierced only if it is undercapitalized in the context of the business that it conducts. Many nonprofit corporations begin operating with very little capital, yet are not necessarily undercapitalized, if the nonprofit corporation assumes only small liabilities and the nature of its business is not particularly risky. Cf. United States v. McGough, 510 F.2d 598, 603 (5th Cir.1975) (noting nonprofit corporations are often thinly capitalized). Alternatively, if a nonprofit corporation engages in commercial transactions and operates as a sophisticated business entity in an area of commerce typically frequented by for-profit businesses, the nonprofit corporation may need to be capitalized to approximately the same extent that a for-profit corporation should be capitalized. See Medlock v. Medlock, 263 Neb. 666, 642 N.W.2d 113, 127-28 (2002) (holding a nonprofit corporation is subject to the equitable remedy of piercing the corporate veil and explaining many of the legal changes now applicable to nonprofits reflect logical extensions of settled law to the altered reality of nonprofits. Such extensions are based on a fundamental jurisprudential tenet: Similar factual situations dictate similar legal treatment. (quoting Evelyn Alicia Lewis, When Entrepreneurs of Commercial Nonprofits Divorce: Is it Anybody's Business? A Perspective on Individual Property Rights in Nonprofits, 73 N.C. L.Rev. 1761, 1773 (1995))). We hold, anticipating the result under Iowa law, the veil of a nonprofit corporation may be pierced on grounds the nonprofit corporation was undercapitalized if the nonprofit corporation has operated in a fashion similar to a for-profit business without being sufficiently capitalized. To hold otherwise would be to focus myopically on the entities involved in the transaction rather than the actual substance of the transaction, see Benson, 537 N.W.2d at 762, and would encourage the unscrupulous to take advantage of others by shifting liabilities and risks to nonprofit corporations.
The defendants argue the district court erred by instructing the jury that TSF's corporate form could be disregarded if TSF failed to follow corporate formalities. [8] The Iowa Limited Liability Company Act of 1992, Iowa Code §§ 490A.100-490A.1601, limits the extent of the personal liability of members of limited liability companies to the personal liability of shareholders of corporations, except that the failure to hold meetings . . . or the failure to observe formalities pertaining to the calling or conduct of meetings shall not be considered a factor tending to establish that the members have personal liability for any debt, obligation, or liability of the limited liability company. Iowa Code § 490A.603(2). Compared to the factors that support piercing the veil of a corporation, section 490A.603(2) eliminated the failure to hold meetings as a factor that could support piercing the veil of a limited liability company. See Estate of Countryman, 679 N.W.2d at 602-03. The elimination of the failure to hold meetings factor for limited liability companies is rational because the managers or members of limited liability companies may exercise corporate power without making decisions by voting at formal meetings. See Iowa Code § 490A.702(1), 490A.705(1); see also Steven C. Bahls, Application of Corporate Common Law Doctrines to Limited Liability Companies, 55 Mont. L.Rev. 43, 63 n. 116 (1994); cf. Iowa Code § 490A.701(2), (3) (requiring a majority vote of the limited liability company members only to dissolve and wind up, to sell or pledge all or substantially all of the assets, or to merge, and, unless agreed otherwise, a unanimous vote to amend the articles of organization or operating agreement). In contrast, a corporation's board of directors exercise corporate power by voting on decisions at formal meetings. See id. § 490.801(2), 490.820-.824. Because, in contrast to a corporation, a limited liability company can be managed without holding formal meetings, the failure to hold meetings is not an extraordinary occurrence that supports disregarding its corporate form. This distinction is important, because the question here is whether nonprofit corporations should be treated as limited liability companies or as corporations for purposes of piercing the corporate veil based on a failure to hold meetings. We hold, again anticipating Iowa law, the corporate form of nonprofit corporations can be disregarded based on a failure to hold meetings for two reasons. First, the Iowa legislature understood how to modify the common-law factors that support piercing the corporate veil, as the Iowa legislature did in the Iowa Limited Liability Company Act modifying these common-law factors for limited liability companies. See Iowa Code § 490A.603(2). Because the Iowa legislature modified the common-law factors that support piercing the veil of a limited liability company (yet the legislature did not do so for nonprofit corporations) to give effect to the legislature's decision not to modify the common-law factors that support piercing the veil of a nonprofit corporation, we conclude the factors that support piercing the veil of a corporation also support piercing the veil of a nonprofit corporation. See generally 2B Norman J. Singer, Statutes and Statutory Construction § 53.03 (6th ed. 2000) (By referring to other similar legislation, a court is able to learn the purpose and course of legislation in general, and by transposing the clear intent expressed in one or several statutes to a similar statute of doubtful meaning, the court not only is able to give effect to the probable intent of the legislature, but also to establish a more uniform and harmonious system of law.). Second, this holding is consistent with the notion that nonprofit corporations operate in a manner similar to corporations. For example, the nonprofit corporation's board of directors exercises corporate power by making decisions at formal meetings. See Iowa Code § 504A.17, 504A.20, 504A.22 (2003). Treating a nonprofit corporation as a corporation for purposes of piercing the veil based on the failure to hold meetings is consistent with the Code of Iowa. See generally Fleur de Lis Motor Inns, Inc. v. Bair, 301 N.W.2d 685, 689 (Iowa 1981) (The objective of statutory construction is to give effect to the intention of the General Assembly.). The district court did not err in instructing the jury on these issues.