Opinion ID: 3030314
Heading Depth: 4
Heading Rank: 1

Heading: The shareholder must have controlled the cor-

Text: poration; (2) the shareholder must have engaged in improper conduct in his exercise of control over the corporation; and (3) the shareholder’s improper conduct must have caused plaintiff’s inability to obtain an adequate remedy from the corporation. Rice v. Oriental Fireworks Co., 707 P.2d 1250, 1255 (Or. Ct. App. 1985); see also Amfac, 654 P.2d at 1101-02. [8] A genuine issue of material fact exists regarding the first element: It is unclear if Ballinger had control of Balkin during the time when Hambleton Brothers alleges improper conduct occurred. Ballinger arguably did have control of Balkin until the end of 1994. At that time Ballinger alleges that he relinquished control of Balkin entirely to Kinsey, despite the fact that neither man took any official steps to dissolve Balkin, or record Ballinger’s resignation in any formal manner. Moreover, James Hambleton also testified that Ballinger spoke with him on the phone in 1996 or 1997 about the 1730 HAMBLETON BROTHERS LUMBER v. BALKIN ENT. Fruitland property and never mentioned that he had ceased control over Balkin. Shareholder control is necessary, but not alone sufficient to pierce the corporate veil. Amfac, 654 P.2d at 1100-01. Even if the first element of shareholder control is met, to proceed to trial Hambleton Brothers must still demonstrate that there is a genuine issue of material fact regarding the remaining two elements: that Ballinger engaged in “improper conduct” while in control of Balkin and that Ballinger’s “improper conduct” caused Hambleton Brothers’s inability to obtain an adequate remedy from Balkin. Id. at 1101. “Improper conduct” can include gross undercapitalization, milking or draining of corporate funds, misrepresentation, commingling of funds, holding out, and the failure to observe corporate formalities. Id. at 1102-03; Salem Tent & Awning Co. v. Schmidt, 719 P.2d 899, 903 (Or. Ct. App. 1986). Even if improper conduct of a shareholder is shown, a “causal connection” must be shown: The plaintiff must “demonstrate a relationship between the misconduct and the plaintiff’s injury.” Amfac, 654 P.2d at 1103. Hambleton Brothers’s alleges that Ballinger engaged in three types of “improper conduct”: 1) the sale of the Fruitland property and subsequent breach of the timber contract; 2) the “gross undercapitalization” of Balkin; and 3) the improper “milking” or draining of corporate funds. We address each in turn.10 10 Oregon courts have declined to decide whether all allegations of improper conduct should be analyzed together or as separate and independently sufficient bases for imposing shareholder liability. Or. Pub. Employees’ Ret. Bd. ex. rel. Or. Pub. Employees’ Ret. Fund v. Simat, Helliesen & Eichner, 83 P.3d 350, 363 n.17, 367 (Or. Ct. App. 2004) (examining improper conduct allegations separately and holding that improper “milking” was a sufficient basis upon which to pierce the veil). HAMBLETON BROTHERS LUMBER v. BALKIN ENT. 1731 1 Hambleton Brothers’s first “improper conduct” allegation is that Ballinger was in cahoots with Abraczinskas. Hambleton Brothers contends: 1) that Ballinger was the “prime mover” in the Fruitland Timber Agreement; and 2) that Ballinger “knew and assisted” in the fraudulent sale of the Fruitland property by Abraczinskas. [9] The record does not support Hambleton Brothers’s allegations. First, there is no evidence Ballinger was the “prime mover” in the Fruitland timber contract negotiations. While Ballinger interacted with James Hambleton on past deals, the two men did not speak regarding the timber contract except, according to Hambleton Brothers, during one telephone conversation after the contract breach. James Hambleton acknowledged that he did not rely on any representation by Ballinger in entering the timber agreement with Balkin. And, while Hambleton Brothers offers evidence that Ballinger and Abraczinskas had associated in the past, there is nothing in the record to refute Ballinger’s deposition testimony that he did not know of Abraczinskas’s unauthorized representation of Balkin and the transfer of the Fruitland property. Hambleton Brothers’s conjecture of Ballinger’s possible involvement with Abraczinkskas is insufficient to create a genuine issue of material fact regarding this type of “improper conduct.” 2 “Improper conduct” sufficient to pierce the corporate veil can also include the “gross undercapitalization” of a corporation. Amfac Foods, 654 P.2d at 1101; Stirling-Wanner v. Pocket Novels, Inc., 879 P.2d 210, 213 (Or. Ct. App. 1994). Hambleton Brothers argues that Ballinger’s initial capitalization of Balkin Enterprises with only $2,500, when compared to the later Fruitland timber contract with Hambleton Brothers for $170,000 worth of timber, was gross undercapitalization. 1732 HAMBLETON BROTHERS LUMBER v. BALKIN ENT. [10] Oregon courts have elaborated on “gross undercapitalization,” emphasizing that “a corporation must have sufficient capital to cover its reasonably anticipated liabilities, measured by the nature and magnitude of its undertaking, the risks attendant to the particular enterprise and normal operating costs associated with its business.” Gardner v. First Escrow Corp., 696 P.2d 1172, 1177-78 (Or. Ct. App. 1985) (emphases added); see also Rice, 707 P.2d at 1256 (“A corporation is inadequately capitalized when its assets are insufficient to cover its potential liabilities, which are reasonably foreseeable from the nature of the corporation’s business.”) (emphasis added). Abraczinskas’s unauthorized fraudulent sale of the Fruitland timber was not a “reasonably foreseeable” liability, nor a risk associated with the “normal operating costs” of business. Hambleton Brothers relies upon Vuylsteke v. Broan, 17 P.3d 1072, 1074 (Or. Ct. App. 2001), in which the Oregon Court of Appeals held a corporation’s sole shareholder liable for the corporation’s default on an employment contract because the corporation was inadequately capitalized and disregarded corporate formalities. Vuylsteke is inapposite: In that case, the capitalization of the corporation had failed adequately to cover the foreseeable employment salary and projected annual costs of the defendant corporation. Id. In sharp contrast, there is no showing that when Ballinger and Kinsey formed Balkin Enterprises, they did so without due regard for projected internal costs. Instead, the loss to Balkin caused by Abraczinskas, with his complex and covert scheme of fraudulent land transfers, cannot be viewed as reasonably foreseeable by the incorporators of Balkin. This unexpected liability stemming from a fraud is not at all akin to a liability for projected internal costs that were not adequately covered by capitalization. Moreover, unlike in Vuylsteke, the record shows that Ballinger and Kinsey did not disregard statutorily required corporate formalities. For these reasons, Vuylsteke does not control this case and our application of Oregon law. HAMBLETON BROTHERS LUMBER v. BALKIN ENT. 1733 [11] Hambleton Brothers also points to Balkin’s default as evidence of its undercapitalization. While Balkin was devoid of any funds when administratively dissolved, “the fact[ ] that the defendant corporation[ ] [is] now out of business and cannot pay plaintiff’s judgment [is] not a sufficient basis on which to conclude that [it was] undercapitalized.” Aero Planning Int’l., Inc. v. Air Assocs., Inc., 764 P.2d 610, 612 (Or. Ct. App. 1988). The mere fact that the two entrepreneurs began their corporation with a small amount of capital is, without more, insufficient to justify the “extraordinary remedy” of piercing the veil. Amfac, 654 P.2d at 1098. 3 [12] “Improper conduct” sufficient to pierce the corporate veil can include the improper “milking” of a corporation. Id. at 1102.11 With regard to “milking” as an example of improper conduct, the Amfac court stated: “Milking: Shareholders have been held liable for a corporation’s debt because they have milked a corporation by payment of excessive dividends, by the sale of products to the shareholders at a reduced price, or by exacting unreasonable management charges.” Id. (internal citations to other states’ law and federal bankruptcy law omitted). Hambleton Brothers alleges that Ballinger improperly drained Balkin’s assets by making distributions, 11 “Milking” has been defined as: “To deprive or defraud (a person, etc.) (from, of money, etc.), esp. by taking regular amounts over a period of time; to exploit, turn into a source of (freq. illicit) profit, advantage, information, etc.; to extract all possible advantage from.” IX Oxford English Dictionary 772 (2d ed. 2001). A similar concept is the “siphoning” or “draining” of corporate assets, which are considered in some jurisdictions to justify piercing the corporate veil under either state or federal law. See, e.g., Trs. of the Nat’l Elevator Indus. Pension, Health Benefit & Educ. Funds v. Lutyk, 332 F.3d 188, 194-99 (3d Cir. 2003); Birbara v. Locke, 99 F.3d 1233, 1240 n.7 (1st Cir. 1996); Minn. Power v. Armco, Inc., 937 F.2d 1363, 1367 (8th Cir. 1991); Gibraltar Sav. v. LDBrinkman Corp., 860 F.2d 1275, 1293-94 (5th Cir. 1988); Wegerer v. First Commodity Corp. of Boston, 744 F.2d 719, 729 (10th Cir. 1984); Edwards Co. v. Monogram Indus., Inc., 700 F.2d 994, 998 (5th Cir. 1983). 1734 HAMBLETON BROTHERS LUMBER v. BALKIN ENT. loans, racehorse purchases, and payments to Adams. Ballinger counters by pointing to $18,469 he paid Kinsey on July 28, 1995, allegedly to pay his share of Balkin’s wind-up costs. [13] Hambleton Brothers offers no specific facts in support of its general “milking” assertions. There is nothing in the record indicating that any racehorse purchases or payments to Adams were improper milking, or indicating a general course of improper distributions or loans to any insiders, including Ballinger. [14] However, the record includes several 1995 documents obtained from Balkin’s accountant purporting to show distributions and/or loans from Balkin to Ballinger before or during the spring of 1995.12 We construe Hambleton Brothers’s argument to be that these documents are evidence of Ballinger “milking” of “excessive dividends” from Balkin.13 Even when this evidence is viewed in the best light for Hambleton Brothers, as we must view it in this summary judgment context, the Balkin accounting documents, alone and with nothing more, are an insufficient basis upon which to pierce the corporate veil, because the quantity and character of the entries are not sufficient to meet a traditional definition of “milking” of a corporation.14 12 Hambleton Brothers alleges that these documents show a $15,513 draw to Ballinger, entries of $10,232.18 and $11,440.33 in Ballinger’s “AAA” account, distributions of $15,513 and $4,072.97, and a loan to Ballinger from Balkin of $15,513. The first document is dated for the “period ending 01/31/95.” The others are dated “as of 5/31/95,” “1/1/9505/31/95,” or simply “5/31/95.” 13 The is no evidence of the other two examples of “milking” noted by the Amfac court—the sale of products to shareholders at a reduced price and the exacting of unreasonable management charges. See 654 P.2d at 1102. 14 Piercing a corporate veil based on “milking” of “excessive dividends” makes sense in cases of corporate manipulation where corporate assets are systematically and extensively removed from the corporation. See, e.g., Stephen B. Presser, Piercing the Corporate Veil § 1:8, at 1-49 (2004) HAMBLETON BROTHERS LUMBER v. BALKIN ENT. 1735 Moreover, these alleged 1995 distributions did not cause Balkin’s default on the timber contract with Hambleton Brothers; Abraczinskas’s fraudulent scheme of land transfers did. See Amfac, 654 P.2d at 1103 (holding that, to show a “causal connection,” the plaintiff must “demonstrate a relationship between the misconduct and the plaintiff’s injury”). The documents pre-date Abraczinskas’s unauthorized July 5, 1995 sale of the Fruitland property and thus Balkin’s subsequent contract breach. In fact, at the time of the alleged “milking,” Balkin had no outstanding debts, to Hambleton Brothers or to anyone else. Cf. Stephen B. Presser, Piercing the Corporate Veil, § 1:8, at 1-49 n.10 (2004) (describing the “classic” milking situation as one where a shareholder “transfers funds or resources to himself at a time when debts are outstanding to outsider creditors”). Hambleton Brothers does not argue otherwise; it notes only that, but for these alleged 1994-1995 dividends to Ballinger, Balkin would have at least some capital with which to pay a part of its debt. This in and of itself is insufficient to show the necessary “causal connection” between the alleged “milking” of distributions and Hambleton Brothers’s injury. Id. at 1103. (describing “milking cases” as cases “where shareholders systematically withdraw capital from their corporations without regard to the needs of the business”) (emphasis added). For example, the case cited in Amfac to represent this type of “milking” concerned over nine million dollars in dividends “milked” over the course of two years. 654 P.2d at 1102 (citing Burton v. Roos, 20 F. Supp. 75 (W.D. Tex. 1937), aff’d sub nom. Texas Co. v. Roos, 93 F.2d 380 (5th Cir. 1937)). Similarly, the only case in which an Oregon court has pierced the veil based on the improper conduct of “milking” concerned the “milking” of two million dollars in corporate assets, which materially affected the corporation’s prospect of attracting ten million dollars in investment, and consequently caused the corporation to default on a contractual obligation. Or. Pub. Employees’ Ret. Bd. ex. rel. Or. Pub. Employees’ Ret. Fund, 83 P.2d at 365-67. The modest number of alleged distributions or loans challenged as “milking” in this case, even if these are assumed to be wrongful and not merely an accounting reclassification of past shareholder loans to Ballinger, are not of a sufficient amount or frequency to be considered a “milking” of the corporation. 1736 HAMBLETON BROTHERS LUMBER v. BALKIN ENT. [15] Finally, even if the accounting documents were sufficient evidence of “milking” and Hambleton Brothers could satisfy the causation element required to create a genuine issue of material fact, Hambleton Brothers has another statutory remedy available, and one entirely congruent with the alleged wrong. The adequate statutory remedy is reflected in Hambleton Brothers’s claim under Or. Rev. Stat. § 60.645, which allows for the enforcement of the default judgment that Hambleton Brothers obtained against Balkin by potentially recouping any shareholder distributions made to Ballinger during liquidation. See Section III.C. infra.15 The Oregon courts explicitly have held that the “extraordinary remedy” of piercing the corporate veil is only to be granted as “a last resort, where there is no other adequate and available remedy to repair the plaintiff’s injury.” Amfac, 654 P.2d at 1098 (emphasis added).16 In this case, as we discuss further below, there is another available remedy under which Hambleton Brothers may recover the alleged dividends to Ballinger. 4 [16] In sum, we hold that Hambleton Brothers has not shown a genuine issue of material fact on the element of improper conduct by shareholders. Hambleton Brothers has also failed to show a fact issue on the element that improper conduct of shareholders caused the injury for which Hambleton Brothers seeks to establish shareholder Ballinger’s liability for Balkin’s corporate debt. We affirm the district court’s summary judgment defeating Hambleton Brothers’s attempt to pierce the corporate veil. 15 As we discuss in more detail in Section III.C below, the 1995 accounting documents are sufficient to raise a genuine issue of material fact on Hambleton Brothers’s claim under Or. Rev. Stat. § 60.645. 16 Specifically with regard to “milking” as a form of possible improper conduct, the Amfac court advised that: “Insofar as milking is concerned, in many instances readily effective independent theories of recovery may exist, such as a creditor’s bill, a derivative suit, or a direct claim against directors.” 654 P.2d at 1102 n. 16. HAMBLETON BROTHERS LUMBER v. BALKIN ENT. 1737