Opinion ID: 1280875
Heading Depth: 2
Heading Rank: 4

Heading: Richardson, P.C.

Text: Shortly after the entrance of the federal judgment against Gary, the Richardsons set up Richardson, P.C. Richardson, P.C. issued one share of stock to Gary and ninety-nine shares to Phyllis. Gary then entered into an employment agreement with Richardson, P.C. which provided that he would ultimately receive a monthly salary of $4150. Gary then substituted Richardson, P.C. for himself in the employment agreements he had entered into with Associates in Surgery, Floyd County Hospital, and St. Joseph's Hospital. Under this scheme, the excess of Gary's earnings as a surgeon would then flow to Phyllis in the form of dividends paid on her 99% ownership of Richardson, P.C. The trial court entered a judgment against Phyllis for $267,300 in dividends Richardson, P.C. paid to her from July of 1991 through August of 1992. The court held the dividends actually constituted a fraudulent conveyance of property by Gary to Phyllis. The court, however, refused to enter a judgment against Richardson, P.C. in favor of the plaintiffs even though it held the formation of the corporation was fraudulent. The legal treatment of a corporation as an entity entirely separate from its stockholders serves the goals of convenience and justice. Kline v. Kline, 104 Mich.App. 700, 305 N.W.2d 297, 298-99 (1981). When the corporate form is invoked to subvert the ends of justice, it should be and is disregarded by the courts. Id. 305 N.W.2d at 299. Where a corporation is merely an instrumentality or device set up to ensure the avoidance of the legal obligations of shareholders, courts may ignore the corporate form. Id. A court may look through the corporate veil to avoid fraud or injustice. Id. As the Michigan Court of Appeals has noted: When the notion of a corporation as a legal entity is used to defeat public convenience, justify a wrong, protect fraud or defend crime, that notion must be set aside and the corporation treated as the individuals who own it. Id. We will set aside the corporate fiction if there is such unity of interest and ownership that the individuality of the corporation and its owners have ceased and the facts demonstrate observance of the fiction of separate existence would, under the circumstances, sanction a fraud or promote injustice. Minich v. Gem State Developers, Inc., 99 Idaho 911, 917, 591 P.2d 1078, 1084 (1979). Though typically employed to reach the assets of corporate owners to satisfy corporate liability, the alter ego doctrine is also a tool by which courts may satisfy the liabilities of individual owners with corporate assets. Central Nat'l Bank & Trust Co. v. Wagener, 183 N.W.2d 678, 682 (Iowa 1971); Central Fibre, 246 Iowa at 389, 66 N.W.2d at 33; Minich, 99 Idaho at 917, 591 P.2d at 1084. The record contains clear and convincing evidence to demonstrate the Richardsons established Richardson, P.C. in order to fraudulently shield Gary's earnings from his creditors and to allow Gary to accumulate assets beyond the reach of the creditors. The plaintiffs' accounting expert testified the value of Richardson, P.C. was approximately 3.3 million dollars at the time of trial. Gary essentially transferred this value to the corporation in return for an annual salary of approximately $50,000 and a 1% ownership interest. The Richardsons assert an Iowa case, Shircliffe v. Casebeer, 122 Iowa 618, 98 N.W. 486 (1904), sanctions the operation of Richardson, P.C. for the purpose of shielding Gary's earnings from his creditors. While it is true a husband may validly work for a bona fide corporation owned by his wife as occurred in Shircliffe, and the corporate assets will remain beyond the reach of the husband's creditors, we noted in Shircliffe where a wife holds title to property as a mere trustee for the use of the husband, or as mere device by which property secretly owned by the husband may be placed beyond the reach of process at the suit of his creditors, equity will decree its subjection to their claims. Id., 122 Iowa at 621, 98 N.W. at 487. In Shircliffe, we noted the record clearly demonstrated the wife was always considered the owner of the business in question and the wife invested money of her own in the startup of the corporation. Id. In the case before us, the Richardsons provided us with no credible purpose for the establishment of Richardson, P.C. other than to maintain the Richardsons' lavish lifestyle and shield Gary's substantial earnings from satisfaction of his obligations. Richardson, P.C. is truly Gary's alter ego. It stands in his place with regard to his former employment arrangements and serves no independent purpose other than to provide for the day-to-day comfort of himself and his family. Fraudulent concealment of earnings is not a valid purpose for a corporation. We therefore hold the trial court erred in denying the plaintiffs' 179(b) motion, and we direct entry of judgment against Richardson, P.C. for the full amount of the federal district court judgment rendered against Gary. Where equity requires us to examine the purposes of a corporation, we are not bound by forms, fiction, or technical rules, but will seek to determine the true situation. Central Fibre, 246 Iowa at 389, 66 N.W.2d at 33. Clear and convincing evidence demonstrates the $267,000 in dividends merely constitute a fraudulent conveyance by Gary of his earnings to Phyllis as part of the couple's attempt to shelter funds from the plaintiffs. Gary's transfer of his earnings to Richardson, P.C. and the corporation's subsequent payment of those funds to Phyllis, all in furtherance of a fraudulent scheme, constituted a change in form of Gary's earnings sufficient to cause them to entirely lose any exempt character they once had. See Midamerica Sav. Bank v. Miehe, 438 N.W.2d 837, 838 (Iowa 1989); Iowa Methodist Hosp. v. Long, 234 Iowa 843, 852, 12 N.W.2d 171, 175 (1944). The purposes of the garnishment exemption statutes would by no means be furthered by rewarding individuals for engaging in such schemes. We therefore affirm the district court's judgment against Phyllis for the $267,000 in Richardson, P.C. dividends.