Opinion ID: 1969727
Heading Depth: 3
Heading Rank: 1

Heading: the separate corporate identity prong

Text: KG & E has advanced four factors it contends justify disregard of the corporate entity: (1) undercapitalization; (2) failure to observe corporate formalities; (3) commingling of Jeff Ross's personal funds with corporate funds; and (4) Jeff Ross's appropriation of corporate property for his personal use. We will now review the evidence in light of these factors to determine whether the first prong of the test has been met.
Shareholders must equip a corporation with a reasonable amount of capital for the nature of the business involved. Baatz, supra ; and see Mobridge, 273 N.W.2d at 132-33 (An obvious inadequacy of capital, measured by the nature and magnitude of the corporation's undertaking, is an important factor in denying directors and controlling shareholders the corporate defense of limited liability.); Curtis v. Feurhelm, 335 N.W.2d at 576. (Shareholders who equip corporation with a reasonable amount of capital have assumed appropriate proprietary risk for the nature of the business involved, and the law has not required more). KG & E argues that because Ross Service was experiencing financial troubles at the time the agreement was entered into, the corporation was undercapitalized. KG & E relies on Mobridge, supra as authority for this assertion. [11] That case, however, is clearly distinguishable from the instant case. First, KG & E has made no assertion, and the record is devoid of any evidence tending to show that Jeff Ross or Ross Service made any representations as to the corporation's financial ability to perform the contract. There is no evidence in the record that KG & E even investigated Ross Service's financial ability to perform. Second, in April of 1990, Jeff Ross and Edith Ross individually borrowed $20,000 on behalf of the corporation and placed it in Jeff Ross's trucking company account which was also being used as Ross Service's corporate account. The record also shows that prior to entering into the contract with KG & E, Ross Service had over $200,000 in corporate equity. It still had well over $100,000 in corporate equity after entering into the contract. Third, we note that whether or not Ross Service was experiencing financial difficulties, it is undisputed that Ross Service paid over $500,000 of the $700,000 contract price. Unlike the defendant corporation in Mobridge, Ross Service had been in existence for eleven years when it entered into the contract with KG & E. There is no evidence that it was formed solely to provide personal immunity to the board members. Inadequate capitalization means capitalization very small in relation to the nature of the business of the corporation and the risks the business entails measured at the time of formation. Global Credit Services, 508 N.W.2d at 843. A corporation which was sufficiently capitalized at formation but which has suffered losses is not necessarily undercapitalized, Southern Lumber v. M.P. Olson Real Est., 229 Neb. 249, 426 N.W.2d 504, 509 (1988), and a mere assertion that the corporation is undercapitalized does not make it so. Baatz, 452 N.W.2d at 142. Finally, [s]imply identifying evidence of financial problems is insufficient to show that [Ross Service] was undercapitalized. Bollwerk v. Susquehanna Corp., 811 F.Supp. 472, 478 (D.S.D.1993). There is simply no evidence that Ross Service's capital in whatever amount was inadequate for the operation of business. Baatz, supra . Without some evidence of the inadequacy of the capital, [KG & E] fails to present specific facts demonstrating a genuine issue of material fact. Id.
KG & E contends that Ross Service failed to maintain corporate formalities because corporate meetings were discontinued after 1983. Corporate minutes are also unavailable after that time. When corporate owners, by their own acts, show that they have ignored the corporate entity, the courts may do likewise. Ethan Dairy Products, 448 N.W.2d at 230 (citing Annot. Disregarding Corporate Entity, 46 A.L.R.3d 428 (1972)). The evidence in the settled record shows that KG & E was clearly aware that it was dealing with the corporation and not Jeff Ross individually. [12] Despite a lack of certain corporate formalities, the trial court found, and the record shows that Ross Service was operated and conducted business as a separate corporation, that corporate tax returns and annual reports were filed, and that the corporation borrowed money and entered into contracts in its own name. `Genuine corporate organization, even when adopted for the express purpose of avoiding personal liability, is not to be lightly disregarded, and mere failure upon occasion to follow all the forms prescribed by law for the conduct of corporate activities will not justify such disregard.' Larson v. Western Underwriters, Inc., 77 S.D. 157, 164, 87 N.W.2d 883, 887 (1958) (quoting P.S. & A. Realties, Inc., v. Lodge Gate Forest, Inc., 205 Misc. 245, 127 N.Y.S.2d 315, 324 (1954)). KG & E fails to present a genuine issue of material fact regarding this factor.
KG & E's third contention is that because Jeff Ross commingled his personal funds with those of Ross Service in the trucking company account, Jeff Ross and Ross Service failed to maintain separate identities. [13] Both sides agree that Ross Service used Jeff Ross's trucking company account at Norwest Bank in Dell Rapids as a depository for Ross Service's corporate funds between April 1990 and January of 1991. They also agree that this commingling was done for the corporation's benefit because Ross Service's regular bank in Colman, South Dakota would have automatically applied any deposits in that account to Ross Service's outstanding loans. KG & E's argument focuses on Jeff Ross's personal deposits and withdrawals from his trucking company account during the contract period between KG & E and Ross Service. In its argument to the circuit court, KG & E specifically alleged that because Jeff Ross's personal withdrawals exceeded his personal deposits in this account between July 1990 and January 1991 by approximately $14,000, he had in effect stolen this money from Ross Service. KG & E claimed that this alleged theft justified piercing the corporate veil of Ross Service to hold Jeff Ross individually liable for the unpaid contract price of about $194,000. However, Jeff Ross effectively rebutted this argument and demonstrated that there was no issue of material fact by showing: (1) that KG & E was conveniently looking only at the months of July 1990 through January 1991 to establish this $14,000 deficit; and (2) that KG & E had overlooked the fact that he had deposited $14,715.59 into this account on May 29, 1990. On appeal, KG & E has fashioned a new argument in an effort to show that Jeff Ross's personal withdrawals exceeded his personal deposits. KG & E now claims that by including the $9,700 spent on a Ford truck and trailer, Jeff Ross's withdrawals exceed his deposits in the trucking company account by $9,032.40. We will not consider an argument raised for the first time on appeal. Oesterreich v. Canton-Inwood Hospital, 511 N.W.2d 824, 829 (S.D.1994); Hawkins v. Peterson, 474 N.W.2d 90, 95 (S.D.1991); Mayrose v. Fendrich, 347 N.W.2d 585 (S.D.1984); Jones v. Sully Buttes School, 340 N.W.2d 697 (S.D.1983); Mortweet v. Eliason, 335 N.W.2d 812 (S.D.1983); Weaver v. Boortz, 301 N.W.2d 673 (S.D.1981). Even if we were to accept KG & E's argument as true, this in and of itself would not justify piercing the corporate veil. At most, these facts (1) demonstrate that Jeff Ross may have taken money or property from Ross Service and (2) may give Ross Service a cause of action against Jeff Ross for the amount of the account deficit. These facts, however, do not demonstrate that Jeff Ross and Ross Service failed to maintain separate identities or that Ross Service was merely the alter ego of Jeff Ross. As to this factor then, KG & E fails to present a genuine issue of material fact which would justify piercing the corporate veil.
KG & E's final contention is that Jeff Ross misappropriated corporate property for his personal use. It argues that because Jeff Ross acquired a 1976 Ford truck and trailer through the trucking company account in October of 1990, he took corporate property. The record clearly shows, however, that (1) Jeff Ross reimbursed Ross Service for these items by depositing $10,000 into the account from a loan he received from Norwest Bank, (2) that the 1976 Ford truck and the trailer were listed on the loan documents as the property being purchased, and (3) that Jeff Ross gave a security interest in this property to Norwest Bank. The claim that Jeff Ross took corporate property for his own use does not appear to be sufficiently supported in the evidence to create a genuine issue of material fact. Even if we accept these allegations as true, however, these facts do not prove that there was such a unity of interest and ownership that the separate personalities of Jeff Ross and Ross Service were indistinct or non-existent. Ross Service shareholders, other than Jeff Ross, owned 99.7% of the corporation. If Jeff Ross did, in fact, take the truck and trailer, he took it, ultimately, from the value of the corporation owned by those shareholders. But neither Ross Service, in being wronged, nor Jeff Ross in committing that wrong, engaged in conduct demonstrating a unity of interest and ownership that rendered non-existent the difference between Jeff Ross and Ross Service. At all times the interests of Jeff Ross and Ross Service remained separate and distinct. Committing a wrong against the corporation neither changed that fact nor justifies disregard of the corporate entity. As to this factor, then, KG & E fails to present a genuine issue of material fact which would justify piercing the corporate veil. In summary, KG & E has not satisfied the first prong of the test because it has not presented any genuine issue of material fact showing that Jeff Ross disregarded Ross Service's corporate identity or treated it as his alter ego. Even so, we will briefly analyze the facts as they apply to the second prong of the test.