Opinion ID: 537185
Heading Depth: 2
Heading Rank: 1

Heading: issues raised by weston entities

Text: 46
47 The district court held that the Joint Operating Agreement between the Associates and Cascade did not require the Associates to make any cash capital contributions for development and production costs beyond the initial $800,000 development loan. We agree. 48 Paragraph 13(c) of the Agreement specifically limited the Associates' liability for additional payments to each Associate's share of the minerals that were actually produced and removed from the mine: 49 Notwithstanding anything to the contrary contained herein, the Operating Manager [Cascade] shall have no authority, express or implied, to enter into any commitment or obligation on behalf of the Purchasers [that is, the Associates] or otherwise do anything which would subject the Purchasers, or any of them, to any liability in excess of the Purchasers' respective interests in the minerals mined, milled and removed from the Property and their interest in any proceeds from the sale of said minerals. 50 (Emphasis added.) In other words, pursuant to paragraph 13(c), the Associates could not be required to make additional cash contributions to the enterprise when no gold was produced. 51 However, Weston argues that the Agreement's prior paragraph, paragraph 13(b), which provided that the Associates were liable for all costs of the mine, obligated the Associates to make additional cash contributions: 52 All costs and liabilities incurred in the exploration and development of the Property and the mining, milling and removal of ore therefrom shall be borne and paid for by the Purchasers in proportion to their interests. 53 In our view, paragraphs 13(b) and 13(c), when read together, provided that the Associates were required to pay additional development and production costs out of their share of the contemplated gold production. Under the plain language of paragraph 13(c)--which begins Notwithstanding anything to the contrary contained herein--the Associates are not responsible for additional payments beyond each Associate's share of the minerals that were actually produced and removed from the mine. 54 That interpretation of the Agreement is confirmed by parole evidence heard by the district court. Although Weston testified that he thought cash assessments were proper under paragraph 13(c) (see, e.g., Tr. 415-20), the lawyer who drafted the Agreement (who had been hired by Weston to handle the legal work for the transaction) testified that paragraph 13(c) was intended to mean what it said: the Associates could not be assessed under the Agreement for additional cash contributions beyond the value of the minerals produced. (Williams Dep. at 64-66.) Thus, as the district court held, Weston's assertion that the project collapsed because the Associate Defendants wrongly failed to pay the additional cash assessments, is without merit. The Associate Defendants were under no obligation to do so under the express terms of the Agreement. 55
56 The district court held that Weston and Cascade breached their fiduciary duties to the Associate Defendants by quickly learning early on that the mine could not be put into production for $800,000, concealing that fact, and then attempting to assess the Associate Defendants for additional capital. (Findings 100-01.) In particular, the district court held that Weston (as Cascade's president) acted in bad faith by trying to squeeze additional money from the Associate Defendants for a project that Weston knew was not economically feasible. The district court found that Weston did not start out with fraudulent intentions, but that by at least July 1981, Weston knew that the project could not be successful without more cash beyond the $800,000 development loan, and he embarked upon a scheme to get it: 57 Adhering to my interlocutory findings concerning the good faith of Weston in connection with the original offering in reliance upon the existing reports of geologists and his analysis of and projections from them as to underground operations, I am now clearly convinced that Weston's bad-faith conduct had its inception on or prior to the writing of July 28, 1981, and that a breach of Cascade's implied covenant of fair and honest dealing as a fiduciary toward the Associates continued from that time to and including the institution of the present action.... 58 (Accounting Findings 14-15.) 59 Our standard for reviewing the district court's factual findings in an action tried without a jury is whether the findings are clearly erroneous. Fed.R.Civ.P. 52(a). In applying that standard, we are required to give due regard ... to the opportunity of the trial court to judge ... the credibility of the witnesses. Id. After reviewing the record here, we cannot say that the district court's finding that Weston and Cascade breached their fiduciary duties to the Associate Defendants is clearly erroneous. 60 The following evidence supports the district court's finding that Weston and Cascade acted in bad faith in trying to assess the Associate Defendants. 61 First, the Joint Operating Agreement is clear on its face. See Part I.A above. Cascade had no power to subject the Associates to any liability in excess of their respective interests in the minerals mined, milled and removed from the Property. (Agreement p 13(c); emphasis added.) If no minerals were removed from the property, then the Associate Defendants could have no additional liability. 62 Second, Weston filed suit seeking the assessments knowing that the lawyer who principally drafted the Agreement and who was responsible for the basic structure of the transaction, Lawrence Williams, had stated that the Agreement prohibited any cash assessment of the Associates. On December 2, 1982, before the lawsuit was filed, one of the Associates wrote a letter to Weston's attorney and to Weston stating that Williams had confirmed in no uncertain terms that the agreements do not--repeat--do not give Cascade or anyone else the right to demand assessments from the Associates. (Exh. 131.04.) Weston filed suit nonetheless. 63 Third, the breach of fiduciary duty by Weston and Cascade also was evidenced by their failure to reveal promptly and candidly that the $800,000 development loan was not sufficient to get the mine into production. Sometime before the $800,000 was exhausted, Weston and Cascade were obligated to step forward and tell the Associate Defendants that: (1) the Offering Memorandum's projection that $800,000 was sufficient to sink a 400 foot mine shaft and to get the mine into production was wrong; (2) additional capital was required to make the project succeed; and (3) the Associates had various options, such as borrowing money, selling additional working interests, making additional capital contributions, or terminating the project. Weston and Cascade revealed none of those things, but instead sought to impose upon the Associate Defendants their mandatory-assessment theory--which happened to be the solution that was most favorable to Weston and Cascade--while continuing to mouth the increasingly frail hope that gold production was just around the corner. 64 Fourth, as the district court held, Weston's bad faith was shown by the fact that as early as July 1981, Weston was recharacterizing certain key definitions in a way that would support his later argument that the offering documents contemplated a gap between the mine's development phase and the production phase, during which time the Associates assumed unlimited cash liability. In particular, although the offering documents consistently described the $800,000 loan as a Development Loan, Weston's July 1981 correspondence with the Associates started calling it a pre-development loan. See Exh. 39, July 28, 1989 letter to Associates. Moreover, although the offering memorandum's financial projections defined Preproduction Expenses to be all funds necessary to place the Telegraph Mine at Production Phase, and stated that those expenses were to total $800,000 (see Financial Projections, Note D), Weston's July 1981 pro forma divorced preproduction expenses from the $800,000 figure and showed them continuing long after production was to begin. See Exh. 46. 65 Fifth, when Weston first suggested that the Associates should contribute additional cash to the project, he portrayed the requests not as mandatory assessments, but rather as voluntary, short-term loans to be repaid quickly from gold production. On April 15, 1982, Weston wrote a letter to the Associates notifying them that the pre-development loan funds plus the interest accrued thereon has now been expended in the work of pre-development. (Exh. 41.03.) The letter stated that the Associates would be invoiced directly for future production expenses, and that each Associate's share of the expected gold production would be sold to pay the billings if the invoices were not paid in cash: 66 [U]nless arrangements are made to pay for the costs of mining and processing, royalties, taxes, and such other expenses as are incurred in the operation, the costs of mining will be billed to [the Associates] directly on a quarterly basis and sufficient ounces of the production necessary to cover these costs will be sold. 67 Id. 68 Thus, as the district court held, the first mention of assessability for the cost of production was not grounded on the mandatory nature of the assessments, but rather on the theory that if not paid, deficiencies would be taken care of out of the sale of the gold. (Findings 54.) Weston was still proffering that view as late as August 1982 when, at an Associates meeting, Weston displayed some small souvenir bars of gold from the first production of the mine and stated that they would be distributed to those Associates who paid their second quarter assessment billing. Weston did not resort to his view that the assessments were mandatory, in late 1982, until his attempts at coaxing largely failed. Those facts indicate that Weston did not really think that the assessments were mandatory when Cascade sued the Associate Defendants for payment. 69 In summary, we by no means are holding that a fiduciary's decision to press an arguable contract interpretation that turns out to be incorrect constitutes a breach of fiduciary duty. We hold only that there was sufficient evidence to support the district court's finding that Weston's interpretation of the contract was patently wrong, that Weston knew it was wrong, that Weston concealed that fact from the Associate Defendants, and that Weston pushed the interpretation nonetheless in order to benefit himself and Cascade at the expense of those to whom he owed a fiduciary duty. Those actions constituted a fiduciary breach. 70
71 The district court held that Weston and Cascade and certain other Weston entities misappropriated or otherwise failed to account for $629,474.63 belonging to the Joint Venture. The district court's accounting concerned the misappropriation claims of only the Gold Technics Defendants and not those of the Associate Defendants. 10 72 There is no dispute that Cascade, as managing agent of the Joint Venture, owed the venturers the duty to account properly for all sums entrusted to it. Nor does Cascade dispute that once Gold Technics established its right to an accounting, the burden of proof shifted to Cascade to show how the Joint Venture's funds were expended and to establish any credits to which Cascade might be entitled. Cf. Restatement (Second) Trusts Sec. 172 comment b at 377 (1959). 73 After a full trial concerning the accounting, the district court held that Weston and Cascade had not provided adequate explanations for their handling of the five items listed above totalling $629,474.63. 11 On review, we must uphold the district court's accounting findings unless they are clearly erroneous. Fed.R.Civ.P. 52(a). 74 We agree with the district court that Cascade has failed to meet its burden of proof on four of the five accounting issues. Indeed, as discussed below, the evidence presented at trial showed that Weston regularly dipped into the Joint Venture's checking account whenever one of his entities needed cash, and that he freely shuffled cash among his various entities with essentially no contemporaneous documentation.
75 In his original Affidavit Attesting Plaintiff's Fiduciary Accounting, Weston swore that $36,943.73 of that money was spent for Depreciation. (R. 310 at 5.) The Gold Technics Defendants then submitted interrogatories asking how any part of the Joint Venture's cash possibly could have been spent on a non-cash item such as depreciation. In response, Weston filed an amended affidavit in which he allocated the $36,943.73 to two other line items in his accounting, $28,156 to Other and the remainder to Offering Expense. (R. 321 at 2.) 76 At the accounting trial, Weston was given the opportunity to explain how he had transformed $36,943.73 of depreciation into cash expenditures and why the newly-found cash expenditures were not included in his original accounting. (Accounting Tr. 44-49.) We agree with the district court that Weston's explanations were inadequate. He provided no itemization of the $28,156 that he allocated to Other. (Id. at 46.) He described his increasing of the Offering Expense category as an after-the-fact adjustment that I felt went to the offering expenses. (Id. at 48.) When the district court pressed Weston on the issue of whether his new figure for offering expenses comported with the amount listed as a deduction on Cascade's 1980 tax return, Weston conceded that he did not know and had not checked. (Id. at 48-49.) 77 The district court properly ordered Weston and Cascade to repay the $36,943.73. 78
79 In its response to defendants' various accounting interrogatories, Cascade submitted its December 31, 1981 balance sheet showing that Cascade owed the Joint Venture $305,041.01 as of that date. (R. 322 Exh. Assoc. # 23.) That $305,041.01 item was listed on the balance sheet as a note payable from Cascade to the Joint Venture. 80 At the accounting trial, Weston admitted that Cascade and other Weston entities had taken large sums from the Joint Venture but argued that (1) in the case of Cascade, they totalled $270,200.00 and not $305,041.01; and (2) they constituted capital distributions that need not be reimbursed. The district court held that (1) Cascade's debt to the Joint Venture was $305,041.01 and that Cascade had not adequately justified its contention that it owed only $270,200.00; (2) there was an additional $30,681.89 (which was listed on Cascade's balance sheet as owing from Interphase to Cascade) that Cascade did not demonstrate came from sources other than the Joint Venture; 12 and (3) Cascade's failure to account for the foregoing charges on the theory of 'capital distributions' is an improper and self-serving attempt to avoid accountability for the balances [Cascade and the other Weston entities] owe (Accounting Findings 22). 81 On appeal, Cascade asserts, first, that the district court should not have relied on Cascade's corporate accounting records because they were prepared for Cascade and not the [Joint Venture] and because they were not received into evidence and were not a part of the court's file. (Cascade Br. at 45.) Those contentions are without merit. The fact that Cascade's balance sheet was prepared for Cascade is not relevant to the issue of whether it evidences a bonafide debt owing from Cascade to the Joint Venture. Cascade's assertion that the documents were not properly before the court is belied by the record. Cascade itself filed the documents with the district court as an exhibit to its accounting responses. (R. 322 Exh. Assoc. # 23.) Weston testified about the documents at length during the accounting trial. E.g., Accounting Tr. 87, 151-52. Moreover, the district court invited Cascade to present any clarifying evidence that it had, but Cascade chose not to do so. (Accounting Tr. 183-84, 305-06.) 82 Second, with regard to the $30,681.89 that the district court found owing to the Joint Venture from sums transferred between Interphase and Cascade, Cascade merely responds on appeal that Cascade's ledger account No. 2105 'Interphase N/P' is unrelated to the [Joint Venture]. (Cascade Br. at 45; see also Rex Montis Br. at 18.) Cascade does not provide any record citation for its assertion that the $30,681.89 did not come from the Joint Venture. The record shows that Cascade caused large amounts of money to be transferred from the Joint Venture checking account to Cascade. (R. 322 at 69.) Cascade, in turn, issued numerous checks to Interphase in round-number denominations, such as $1000, $5000, or $10,000. (R. 322 at 82-83; Accounting Tr. 97.) Cascade had hired Interphase to handle the accounting and payroll affairs of Cascade, the Joint Venture, and Weston's other entities. The sums transferred from Cascade to Interphase were transferred either without any invoices being prepared at all or with invoices being prepared after the transaction had taken place. (Accounting Tr. 97.) The funds were transferred into one of Interphase's bank accounts and commingled with the other funds there. (Id. 125.) It was Cascade's burden to show that all funds transferred between Cascade and Interphase were not related to the Joint Venture or else were spent on legitimate Joint Venture expenses. Cascade failed to do so. 13 83 Third, Cascade asserts that much of the money that Cascade and the other Weston entities took from the Joint Venture can be explained as capital distributions. The district court found that explanation to be an after-the-fact rationalization, and we agree. Cascade argues that in February 1981, the Joint Venture issued two checks totalling $40,949 to or for the benefit of Gold Technics. Cascade contends that the $40,949 given to Gold Technics as 10 percent owner of the venture was a capital distribution and that, consequently, Telegraph Limited as 60 percent owner was entitled to $270,200 and Rex Montis as 30 percent owner was entitled to $91,807.55. (Cascade Br. at 45-46.) 14 84 Contrary to Cascade's contention, the evidence at the accounting trial showed that (1) neither the 1980 nor the 1981 tax return for the Joint Venture, both of which were prepared by Cascade, reported the $40,949 payment to Gold Technics as a capital distribution (Accounting Tr. 56-57); (2) neither the 1980 nor the 1981 financial statement of the Joint Venture, both of which were prepared by Cascade, treated the $40,949 payment as a capital distribution (Accounting Tr. 58-59); (3) one of the checks involved in the $40,949 transaction indicated on its stub that $12,255.88 was a repayment to Gold Technics for money advanced by it as part of the Associates' offering (Accounting Tr. 65); (4) another of the checks involved in the transaction indicated on its stub that the remaining $28,723.16 was a loan (Accounting Tr. 68-69; R. 322 Exh. THV7); and (5) Gold Technics' 1981 financial statement, which was prepared by Weston's accountant, treated the $28,723.16 as a loan (Accounting Tr. 73-74). Therefore, the district court was justified in concluding that Gold Technics had not received any capital distributions and that all money taken from the Joint Venture by Cascade and the other Weston entities should be returned. 15
85 In 1981, Cascade caused the Joint Venture to transfer $81,308.40 to Interphase in order to pay for the construction of Interphase's office building. (Accounting Tr. 155.) On appeal, Cascade's only explanation for the transfer is that it constituted a capital distribution, although Cascade nowhere explains how Interphase, which had no ownership interest in the Joint Venture, could ever be entitled to a capital distribution. In any event, for the reasons stated in Part I.C.2 above, Interphase and the other Weston entities were not entitled to any capital distributions from the Joint Venture. Because the only explanation offered by Interphase is not supportable, the district court properly ordered Cascade and Weston, who improperly authorized the transfer, and Interphase to repay the $81,308.40.
86 In November 1981, Cascade caused the Joint Venture to transfer $10,500 to Rex Montis. At trial, Weston's only explanation for the transfer was that it was a capital distribution. (Accounting Tr. 201; R. 322 at 69.) For the reasons stated in Part I.C.2 above, Rex Montis was not entitled to any capital distributions and must repay the money that it took. The district court properly ordered Cascade and Weston, who improperly authorized the transfer, and Rex Montis to return the $10,500. 87
88 The district court held that Cascade had not accounted for $165,000 in royalty payments that Cascade and Interphase owed to the Joint Venture in connection with Cascade's 1982 purchase of 4 1/2 units of defaulted Associate interests and Interphase's purchase of one defaulted unit. In Cascade's responses to Gold Technics' accounting interrogatories, Cascade produced photocopies of checks and bank records showing that it indeed had paid $135,000 into the Joint Venture's bank account and that Interphase had paid $30,000. (R. 322 Exh. TJV 13.) 89 On appeal, the Gold Technics Defendants do not challenge Cascade's assertion that checks totalling $165,000 were deposited into the Joint Venture's bank account, but rather contend that Cascade failed to submit any evidence of the source of the funds purportedly transferred. (Gold Technics Br. at 9, emphasis in original.) The Gold Technics Defendants ask rhetorically, what 'payment' is there if $135,000 of the Associates' or [the Joint Venture's] funds are taken by Cascade and then checks written by it back into [the Joint Venture]? (Id.) 90 Despite Gold Technics' point, we conclude that the $629,474.63 awarded by the district court double-counts the $165,000. The $165,000 payment could have come from only two sources: either from the Joint Venture or from non-Joint Venture sources (or a combination thereof). If it came from non-Joint Venture sources, then the Joint Venture is entitled to receive only $464,474.63 ($629,474.63 less $165,000) because only $464,474.63 was wrongfully transferred from the venture. On the other hand, if the $165,000 came from the Joint Venture, then the venture still is entitled to only $464,474.63 because $165,000 of the $629,474.63 taken from it was repaid. 91 Therefore, because the evidence shows that Cascade and Interphase in fact paid $165,000 to the Joint Venture, the accounting award should be reduced from $629,474.63 to $464,474.63, and the Gold Technics Defendants should receive their proportionate share of the smaller sum. 92
93 The district court held that Weston and the entities affiliated with him were alter egos of each other and were jointly and severally liable for the entire judgment in this case: 94 Interphase, Gold Technics, Telegraph Mine, Ltd., Telegraph Mine Joint Venture, Cascade, Gnolaum Unitrust, and Rex Montis are instrumentalities of Weston which were and are used by Weston for his own personal purposes. Weston disregarded the purported separateness of the entities and commingled the funds of the entities and his own. He dominated their boards of directors and management, and has been and is able to single-handedly transfer assets from one entity to another and to and from himself as he chooses, with the acquiescence and consent of all. It would be inequitable and a fraud on the opposing parties if any judgment against Weston, Cascade, or Rex Montis were not also against these alter ego entities. Accordingly, the judgments to be awarded herein for balances due, restitution, damages and costs and attorney fees should run not only against Cascade and Weston but against Interphase, Telegraph Mine Limited, Rex Montis and Gnolaum Unitrust. 95 (Accounting Finding 35 as amended Nov. 19, 1985; emphasis added.) 96 At the outset, we need to distinguish between what the district court held regarding corporate veil issues and what it did not hold. 97 First, as we read the district court's findings, the district court did not pierce the corporate veil of Cascade itself, largely because it had no reason to do so. 16 The district court held that both Cascade and its principal officer and shareholder, Weston, were primarily liable for breaching fiduciary duties owed to the Associates and to the Joint Venture. See, e.g., Accounting Findings 26-27 ([T]he judgments to be awarded herein ... run not only against Cascade and Weston, but against Interphase, Telegraph Mine Limited, Rex Montis and Gnolaum Unitrust) (emphasis added). The district court held Weston liable because he personally directed and participated in Cascade's fiduciary breaches. See Restatement Second of Torts Sec. 874 comment c at 300 (1977) (A person who knowingly assists a fiduciary in committing a breach of trust is himself guilty of tortious conduct and is subject to liability for the harm thereby caused). 98 Second, the district court held that Rex Montis and three other Weston entities--Interphase, Telegraph Limited, and Gnolaum Unitrust--were alter egos of Weston and were liable for the entire judgment against Weston and Cascade. Although the district court did not explain its exact reasoning, the court apparently adopted a variant of the reverse piercing theory which led to the peculiar result of holding the corporation liable for the debts or torts of its controlling shareholder rather than the other way around. 17 99 Here, the district court held that Rex Montis, Interphase, Telegraph Limited, and Gnolaum Unitrust all were liable for what Weston had done. Although we agree that each of those entities should be responsible for any wrongs that it committed and for any money that it took, we do not agree that those enterprises had no entity status separate from Weston. 100 Under Utah law, two circumstances must exist before a corporate entity can be disregarded: 101 (1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, viz., the corporation is, in fact, the alter ego of one or a few individuals; and (2) the observance of the corporate form would sanction a fraud, promote injustice, or an inequitable result would follow. 102 Norman v. Murray First Thrift & Loan Co., 596 P.2d 1028, 1030 (Utah 1979). 18 103
104 The district court's decision to reverse pierce the entity veils of Rex Montis, Interphase, Telegraph Limited, and Gnolaum Unitrust was based on three key factual findings: (1) Weston dominated the boards of directors and the management of the four entities; (2) Weston was single-handedly able to transfer assets among the various entities and did so; and (3) Weston commingled the funds of the various entities, in the sense that when he transferred funds from one entity to another, the funds were deposited in the receiving entity's general bank account and were mixed with other funds there. (Accounting Findings 26.) 105 Having examined the record, we conclude that the district court's specific factual findings about how Weston operated his entities are justified. Weston wielded almost total control over the entities. That control was evidenced particularly by his control over each entity's finances. The record shows that Weston freely transferred cash from any entity that had it to any entity that needed it, whenever he wanted to do so. See, e.g., Accounting Tr. 290, 292, 311-12. 106 There is no question that Weston's bookkeeping system made it nearly impossible to provide defendants with a precise accounting. The district court properly concluded that, because the transferred funds were commingled with existing funds of the receiving entity, [i]t was and is impossible to trace individual dollars from source to use. (Accounting Findings 9.) But the issue is whether those facts constitute sufficient grounds for disregarding the entity status of the entities in this case.
107 We believe that a Utah court would not reverse pierce the entity veils of Rex Montis, Interphase, Telegraph Limited and Gnolaum Unitrust for a variety of reasons. 108 First, corporate veils exist for a reason and should be pierced only reluctantly and cautiously. The law permits the incorporation of businesses for the very purpose of isolating liabilities among separate entities. See generally Dockstader v. Walker, 510 P.2d 526, 528 (Utah 1973) (Ordinarily a corporation is regarded as a legal entity, separate and apart from its stockholders); McCulloch Gas Transmission Co. v. Kansas-Nebraska Natural Gas Co., 768 F.2d 1199, 1200 (10th Cir.1985) (The standards for the application of alter ego principles are high, and the imposition of liability notwithstanding the corporate shield is to be exercised reluctantly and cautiously.) (quoting 1 Fletcher Cyc. Corp. Sec. 41.10 (Rev. Vol.1974), emphasis added); G. Henn & J. Alexander, Laws of Corporations Sec. 146 at 347 (1983) (limited liability is one of the principal objectives of incorporation). 109 Second, this case largely involves reverse piercing, and it is far from clear that Utah has adopted the doctrine of reverse piercing, much less this particular variant of reverse piercing. Messick v. PHD Trucking Service, 678 P.2d 791, 793 (Utah 1984) does discuss the reverse pierce concept, calling it little-recognized theory, but the Utah court ultimately declined to pierce the corporate veil there because of the failure to prove the traditional piercing the corporate veil elements of 1) non-observance of corporate formalities, 2) resulting in fraud, injustice or inequity. Thus, the court did not decide whether it would have pierced the corporate veil in the reverse context had those elements been present. The reverse-pierce theory presents many problems. It bypasses normal judgment-collection procedures, whereby judgment creditors attach the judgment debtor's shares in the corporation and not the corporation's assets. Moreover, to the extent that the corporation has other non-culpable shareholders, they obviously will be prejudiced if the corporation's assets can be attached directly. In contrast, in ordinary piercing cases, only the assets of the particular shareholder who is determined to be the corporation's alter ego are subject to attachment. See 1 Fletcher Cyc. Corp. Sec. 41.20 at 413 (1988 Supp.) ([A] necessary element of the [alter ego] theory is that the fraud or inequity sought to be eliminated must be that of the party against whom the doctrine is invoked, and such party must have been an actor in the course of conduct constituting the abuse of corporate privilege--the doctrine cannot be applied to prejudice the rights of an innocent third party.). Absent a clear statement by the Supreme Court of Utah that it has adopted the variant reverse piercing theory urged upon us here, we are inclined to conclude that more traditional theories of conversion, fraudulent conveyance of assets, respondeat superior and agency law are adequate to deal with situations where one seeks to recover from a corporation for the wrongful conduct committed by a controlling stockholder without the necessity to invent a new theory of liability. 110 Third, the analysis of corporate veil issues is different in a consensual transaction, such as a breach of contract case, than in a nonconsensual transaction, such as many tort cases: 111 The issues of public policy raised by tort claims bear little relationship to the issues raised by a contract claim. It is astonishing to find that this fundamental distinction is only dimly perceived by many courts, which indiscriminately cite and purport to apply tort precedents in contract cases and vice versa. 112 Hamilton, The Corporate Entity, 49 Tex.L.Rev. 979, 984-85 (1971). The obvious difference between consensual and nonconsensual transactions is that the claimants in consensual transactions generally have chosen the parties with whom they have dealt and have some ability, through personal guarantees, security agreements, or similar mechanisms, to protect themselves from loss. For example, the fact that a company is undercapitalized can be overcome in many contractual settings, because the parties can allocate the risk of financial failure as they see fit. But in nonconsensual cases, there is no element of voluntary dealing, and the question is whether it is reasonable for businessmen to transfer a risk of loss or injury to members of the general public through the device of conducting business in the name of a corporation that may be marginally financed. Id. 113 Although breaches of fiduciary duty can be analyzed using tort principles (see Restatement (Second) of Torts Sec. 874 at 300 (1977)), the relationships among the parties in this case were basically voluntary and contractual. Cascade undertook the contractual obligation to manage the affairs of the Joint Venture and of the Associates, and consequently assumed the fiduciary duty of loyalty and duty of care inherent in any principal-agent relationship. See Restatement (Second) of Agency Secs. 1, 379, 387 (1958). The upshot is that Utah courts, like courts generally, appear less likely to pierce a corporate veil when a consensual, contract-like transaction is involved than when a nonconsensual, tort-like transaction is involved. See, e.g., Centurian Corp. v. Fiberchem, Inc., 562 P.2d 1252, 1253 (Utah 1977) (piercing not allowed in sales contract dispute); Dockstader v. Walker, 510 P.2d 526, 528 (Utah 1973) (piercing not allowed in employment contract dispute). 19 114 Fourth, although Weston obviously used his entities to further his personal objectives, just as corporate parents often use their subsidiaries to achieve corporate goals, Weston held the entities out to the world as separate organizations. No one disputes that Weston's entities were validly organized and that de jure formation requirements were met. Indeed, Rex Montis was a publicly held company with over 850 shareholders. (Accounting Tr. 362.) The entities filed separate tax returns. E.g., Accounting Tr. 364-65. The entities held separate shareholder and director meetings. E.g., Exh. 381, Notice of Rex Montis Shareholders Meeting; Accounting Tr. 362-63. In sum, besides Weston's transfers of funds among his entities, the district court made no finding that the entities did not maintain the external incidents of separateness. 115 Fifth, even if Weston's entities failed to comply with all of the formalities that they should have and even if Weston did freely transfer funds among the entities, the claimants here have not shown how their injury was connected with the entities' commingling or lack of formalities or how the claimants relied on the entities' separateness or the lack thereof. As the Utah corporate-veil test demonstrates, it is not enough to declare that two corporations or a corporation and its prime shareholder are not really separate. The claimant must show that recognition of the corporate form would sanction a fraud, promote injustice, or [produce] an inequitable result. Norman v. Murray First Thrift & Loan Co., 596 P.2d 1028, 1030 (Utah 1979). 116 But the injustice or inequity on which a piercing claim is based cannot stem from the mere existence of limited liability, which is a legitimate characteristic of the corporate form. Rather, the injustice or inequity to the claimant must be connected with the lack of separateness between the corporation and its controlling stockholder and the failure to observe corporate formalities. Here, the defendants' losses generally had little to do with the Weston entities' lack of corporate formalities. Although there was comingling of funds among the various Weston entities, all the parties knew that they were separate entities and Weston maintained the corporate formalities of each entity separate from the others. The acts of comingling may have been acts of conversion, breach of fiduciary duty or the like, but there was no misrepresentation of the corporate stature of the entities with whom the various investors dealt. For example, the evidence showed that Cascade misappropriated roughly $300,000 from the Joint Venture and that Rex Montis misappropriated about $10,000. See Part I.C above. Cascade plainly is obligated to return the $300,000 and Rex Montis must return the $10,000. But there is no reason to make Rex Montis responsible for repaying the $300,000 taken by Cascade. That result would be a windfall to the Joint Venture. 20 117 We note that to the extent Weston or Cascade have an ownership interest in the entities, that interest may be susceptible to attachment by creditors. Thus, Cascade's 50 percent interest in Telegraph Limited may be subject to levy. Likewise, Weston's 22 percent interest in his trust, Gnolaum Unitrust, may be reachable by his creditors.
118 We hold that Rex Montis, Interphase, Telegraph Limited, and Gnolaum Unitrust are not jointly and severally liable for defendants' damage award against Weston and Cascade. We affirm the district court's holding that Rex Montis is liable in its own right for having taken $10,500 from the Joint Venture. Likewise, we agree that Interphase is liable in its own right for having taken $111,990.29 ($30,681.89 plus $81,308.40) from the Joint Venture. On remand, the district should determine whether Rex Montis, Interphase, Telegraph Limited, and Gnolaum Unitrust are directly liable for breaching any other duties owed by them (provided the defendants properly raised those grounds below). 119
120 The district court held that although the Associate Defendants could not recover any of the cash that they had paid to the Joint Venture for royalty payments ($30,000 per 1/35th unit in both 1980 and 1981), they were relieved of any obligation to pay the promissory notes that they had given to the Joint Venture as royalty payments ($44,285 per 1/35th unit in both 1980 and 1981). We affirm that holding. The promissory notes given by the Associate Defendants were clearly given in exchange for promises that were materially breached. Those uncured, material breaches discharged the Associate Defendant's duty to render further performance, including payments not yet made on their promissory notes. Restatement (Second) Contracts Secs. 232 (Illustration 4), 237, 242 (1981). 21 121
122 The district court held that the Associate Defendants were relieved of all liability for repayment of the $800,000 development loan which the Joint Venture had made to the Associates from the proceeds of the working-interest sale. For the same reasons that we affirm the ruling discharging the Associate Defendant's liability on the promissory notes in Part 1.E, we similarly affirm the ruling of the district court discharging the Associate Defendant's from any liability to repay the $800,000 development loan. 123
124 The district court awarded the Associate Defendants attorneys' fees for Cascade's bad faith in suing the Associates for additional cash capital contributions. Utah law expressly permits an award of attorneys' fees for actions not brought in good faith. Utah Code Ann. Sec. 78-27-56 (allowing award of reasonable attorney's fees to a prevailing party if the court determines that the action or defense to the action was without merit and not brought or asserted in good faith). 125 We do not think that the district court abused its discretion in awarding attorneys' fees here, and consequently, we affirm that ruling. 126 H. Alleged Fiduciary Breach By Associate Defendants And Gold Technics Defendants (Weston Entities' Issue No. 8) 127 The district court rejected Gnolaum Unitrust's claims that certain of the Associate Defendants and the Gold Technics Defendants were liable to Gnolaum Unitrust for breach of fiduciary duty, breach of contract, breach of partnership duty, fraud, and tortious interference with business relationships. See Gnolaum Br. at 6. The district court held basically that the Associate Defendants had no duty to pay assessments under the Operating Agreement (see Part I.A above) and that the defendants had not engaged in any tortious conduct toward Gnolaum Unitrust or the other Weston affiliates. (Findings 95, 114.) 128 After reviewing the record, we do not believe that the district court's findings on this issue are clearly erroneous.