Court Opinion

ID: 2683727
Source: CourtListenerOpinion
Date Created: 2014-07-15 14:02:48.692737+00
Date Added: 2024-06-11T13:13:37.094058
License: Public Domain

IN THE NEBRASKA COURT OF APPEALS

              MEMORANDUM OPINION AND JUDGMENT ON APPEAL

                                  TFF, INC. V. ST. ELLEN 100

  NOTICE: THIS OPINION IS NOT DESIGNATED FOR PERMANENT PUBLICATION
 AND MAY NOT BE CITED EXCEPT AS PROVIDED BY NEB. CT. R. APP. P. § 2-102(E).

  TFF, INC., A NEBRASKA CORPORATION, DOING BUSINESS AS TFF CONSTRUCTION, APPELLANT,
                                          V.
      ST. ELLEN 100 LLC, A NEBRASKA LIMITED LIABILITY COMPANY, ET AL., APPELLEES.

                             Filed July 15, 2014.   No. A-13-595.

       Appeal from the District Court for Douglas County: SHELLY R. STRATMAN, Judge.
Affirmed.
       Brian T. McKernan and Noah M. Priluck, of McGrath, North, Mullin & Kratz, P.C.,
L.L.O., for appellant.
       Lindsay K. Lundholm, of Baird Holm, L.L.P., for appellees.

       MOORE, PIRTLE, and RIEDMANN, Judges.
       RIEDMANN, Judge.
                                      INTRODUCTION
        TFF, Inc., appeals from the order of the district court for Douglas County denying its
request to pierce the corporate veil of St. Ellen 100 LLC and hold St. Ellen Group, Inc., and
Aaron Bilyeu liable for unpaid debts incurred by St. Ellen 100. TFF also challenges the district
court’s reliance on portions of the testimonies of certain witnesses. Finding no merit to TFF’s
arguments on appeal, we affirm.
                                       BACKGROUND
       Bilyeu is a licensed architect who has performed both architecture and real estate
development work. He formed St. Ellen Group in 2005 for the purpose of real estate
development, leasing, sales, and architecture work. He is the sole shareholder and owner of St.
Ellen Group.

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         In June 2006, Bilyeu and Joe Frost formed St. Ellen 100 for the purpose of buying a
property located at 8812 Westover Road in Omaha, Nebraska, renovating the property, and
selling it for a profit. This process is known as “flipping” a house. According to Bilyeu, he and
Frost each contributed $5,000 to the formation of St. Ellen 100. St. Ellen 100 was also approved
for a line of credit from Enterprise Bank for $485,000 to pay the expenses associated with the
property renovations. The Westover Road property was purchased for $225,000, and Bilyeu
estimated that the home could be sold for $650,000 once the renovations were completed. His
intention in undertaking the project was to sell the property, pay off all of the expenses
associated with the project, and earn a profit for himself and Frost.
         St. Ellen 100 hired St. Ellen Group to act as the project manager for a fee of $18,000.
This fee was disclosed on the business plan submitted to Enterprise Bank, and Matt Moyer, then
president and chief executive officer of the bank, testified that this amount appeared to be
reasonable. St. Ellen 100 then hired TFF to perform the construction work on the property. The
project began in early 2007 and was to be completed by July 2007. Due to unforeseen delays,
however, the renovations were not actually completed until December 2007. At that point,
Bilyeu executed a listing agreement to sell the home for $650,000; however, unbeknownst to
him, Frost entered into a 6-month lease agreement to rent the home. St. Ellen 100 fell behind on
payments to TFF, leaving a balance due of $132,146.61. St. Ellen 100 also fell behind on
payments to Enterprise Bank, and ultimately, the bank foreclosed on the property in December
2008.
         TFF filed an amended complaint against St. Ellen 100, St. Ellen Group, and Bilyeu on
April 1, 2009, alleging that St. Ellen 100 breached the contract with TFF and that the court
should pierce the corporate veil of St. Ellen 100 to hold St. Ellen Group and Bilyeu liable. After
trial, the district court entered an order finding in favor of TFF on the breach of contract claim
against St. Ellen 100. However, the district court determined that TFF failed to meet its burden to
show that St. Ellen 100’s corporate identity should be disregarded, and therefore, the court
dismissed the claims against St. Ellen Group and Bilyeu, individually. TFF timely appeals.
                                  ASSIGNMENTS OF ERROR
       TFF assigns that the district court erred in (1) dismissing the claim against Bilyeu, (2) not
piercing the corporate veil of St. Ellen 100, and (3) relying on portions of the testimonies of
Moyer and Bilyeu as expert witnesses.
                                   STANDARD OF REVIEW
        Proceedings seeking disregard of a corporate entity, that is, piercing the corporate veil to
impose liability on a shareholder for a corporation’s debt or other obligation, are equitable
actions. Christian v. Smith, 276 Neb. 867, 759 N.W.2d 447 (2008). In an appeal of an equity
action, an appellate court tries factual questions de novo on the record, reaching a conclusion
independent of the findings of the trial court. Id. Where credible evidence is in conflict on a
material issue of fact, the appellate court considers and may give weight to the circumstances
that the trial judge heard and observed the witnesses and accepted one version of the facts rather
than another. Torres v. Morales, 287 Neb. 587, 843 N.W.2d 805 (2014).

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                                            ANALYSIS
Claim Against Bilyeu and
Piercing Corporate Veil.
         TFF argues that the district court erred in refusing to pierce the corporate veil of St. Ellen
100 and dismissing the claim against Bilyeu. We note that St. Ellen 100 is a limited liability
company, not a corporation; however, many of the same general principles apply in determining
whether an individual can be held liable for a debt of the entity. Individual members of a limited
liability company are generally not held liable for a debt or obligation of the company, just as
shareholders and officers are not, as a general rule, liable for the debts and obligations of the
corporation. See, Thomas & Thomas Court Reporters v. Switzer, 283 Neb. 19, 810 N.W.2d 677
(2012); Christian v. Smith, supra. A court will disregard a corporation’s identity only where the
company has been used to commit fraud, violate a legal duty, or perpetrate a dishonest or unjust
act in contravention of the rights of another. Thomas & Thomas Court Reporters v. Switzer,
supra. A company’s identity as a separate legal entity will be preserved, as a general rule, until
sufficient reason to the contrary appears. Id.
         A plaintiff seeking to pierce the corporate veil must allege and prove that the company
was under the actual control of the member and that the member exercised such control to
commit a fraud or other wrong in contravention of the plaintiff’s rights. Christian v. Smith,
supra. A plaintiff seeking to impose liability for a company debt on a member has the burden to
show by a preponderance of the evidence that the company identity must be disregarded to
prevent fraud or injustice to the plaintiff. Id.
         Some of the relevant factors in determining whether to disregard the company entity on
the basis of fraud are (1) grossly inadequate capitalization, (2) insolvency of the debtor company
at the time the debt is incurred, (3) diversion by the member or members of company funds or
assets to their own or other improper uses, and (4) the fact that the company is a mere facade for
the personal dealings of the member and that the operations of the company are carried on by the
member in disregard of the company entity. Id.
         The first element of the test, inadequate capitalization, means capitalization very small in
relation to the nature of the business of the company and the risks entailed. Id. Inadequate
capitalization is measured at the time of organization. Id. A company which was adequately
capitalized when formed but which has suffered losses is not necessarily undercapitalized. Id.
Undercapitalization presents a question of fact that turns on the nature of the business of the
particular company. Id.
         In the present case, St. Ellen 100 filed its articles of organization on June 22, 2006, and
therefore, we determine the amount of capitalization as of that date. Bilyeu claimed that he
contributed $5,000 of capital to St. Ellen 100 at the time of formation, and Frost did as well. The
district court noted that there was no evidence to corroborate Bilyeu’s testimony regarding these
contributions but there was also no evidence presented to the contrary. Although we review
factual questions de novo, we recognize and consider that the district court observed Bilyeu’s
testimony regarding the contributions from him and Frost and found it to be credible.
         In addition, St. Ellen 100 was approved for the $485,000 line of credit from Enterprise
Bank in May 2006. It was this line of credit that was used throughout the project to pay TFF. If

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we consider the line of credit to be capital, St. Ellen 100 was sufficiently capitalized at the time
of its formation. If we do not consider the line of credit to be capital, we must still consider the
other factors pertinent to piercing the company veil. St. Ellen 100 was created solely for the
purpose of purchasing the Westover property, renovating it, and selling it for a profit. Thus, the
nature of the house “flipping” business often involves similar circumstances as those in this case
wherein a company receives financing from a bank in order to purchase a property and “flip” it.
Consequently, regardless of whether the line of credit is considered capital, it was through this
financing that St. Ellen 100 was able to pay its expenses as they came due.
         The second factor used to determine whether a company’s identity should be disregarded
is whether the company was insolvent at the time the debt was incurred. Christian v. Smith, 276
Neb. 867, 759 N.W.2d 447 (2008). A company is insolvent if it is unable to pay its debts as they
become due in the usual course of its business or if it has an excess of liabilities of the company
over its assets at a fair valuation. Id. Whether a company is insolvent is usually a question of
fact. Id.
         In this case, at the time St. Ellen 100 entered into the contract with TFF, it had funds
available to pay TFF through the line of credit. The evidence establishes that St. Ellen 100
initially paid TFF’s invoices but fell behind after September 2007 and failed to pay the
remaining balance. The original plan was to have the renovations completed in July 2007 and
sell the property, which would have allowed St. Ellen 100 to pay all of its debts. Ultimately,
because St. Ellen 100 never sold the property, Enterprise Bank foreclosed on the home in order
to satisfy the outstanding balance on the line of credit.
         The district court, in considering the initial contributions by Bilyeu and Frost, the line of
credit used to pay TFF, the business plan approved by Enterprise Bank, the testimony of Moyer,
the intentions of the parties, and the nature of the business, concluded that there was insufficient
evidence to show that St. Ellen 100 was insolvent. We agree with this conclusion and find that
the fact that St. Ellen 100 was unable to pay all of its debts was not the result of insolvency at the
time of the contract, but, rather, the result of a failed business venture.
         The third factor of the test to determine whether the company veil should be pierced is
evidence of a diversion by the member or members of company funds or assets to their own or
other improper uses. When a member appropriates and uses corporate funds and property for his
personal purposes and thereby defrauds and causes damages to creditors, the member can be held
individually liable for corporate debt. Id.
         There was no evidence adduced at trial to show that Bilyeu diverted funds from St. Ellen
100 for his personal purposes or improper uses. Bilyeu testified that St. Ellen 100 paid St. Ellen
Group for project management fees and that he was paid through “distributions” from St. Ellen
Group. The project management fee was included in the business proposal presented to
Enterprise Bank, and Moyer testified that he knew of the fee and considered it to be reasonable.
As such, there is no evidence to show that Bilyeu diverted funds from St. Ellen 100 for his
personal use or other improper uses.
         We turn now to the fourth prong of the test. If the company is a facade for the personal
dealings of the member and the operations of the company are carried on by the member in
disregard of the company entity, the member may be individually liable for company debt. Id.
The separate entity concept of the limited liability company may be disregarded where the

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company is a mere shell, serving no legitimate business purpose, and is used as an intermediary
to perpetuate fraud on the creditors. Id.
       In this case, Bilyeu testified that he and Frost formed St. Ellen 100 for the purpose of
renovating the Westover property and selling it for a profit. He said that his intention was to pay
all of the debts associated with the project and earn a profit. However, due to delays in
completing the renovation and changes in the housing market, St. Ellen 100 was unable to
achieve its goal. But this, in itself, is insufficient to show that St. Ellen 100 was a mere shell to
perpetrate fraud. St. Ellen 100 was created for a legitimate business purpose, despite the fact that
the business was ultimately unsuccessful, and there was no evidence of an intention to perpetuate
fraud or injustice on TFF.
       Upon our de novo review, after reviewing all of the factors applicable to piercing the
company veil, we conclude that the district court did not err in refusing to hold Bilyeu and St.
Ellen Group liable for the debts of St. Ellen 100. Accordingly, we find no error in dismissing
Bilyeu from the suit as a defendant.
Expert Witnesses.
        TFF argues that the district court erred in relying on portions of the testimonies of Moyer
and Bilyeu as expert witnesses. In proceedings where the Nebraska Evidence Rules apply, the
admissibility of evidence is controlled by the Nebraska Evidence Rules; judicial discretion is
involved only when the rules make discretion a factor in determining admissibility. Simon v.
Drake, 285 Neb. 784, 829 N.W.2d 686 (2013). In a civil case, the admission or exclusion of
evidence is not reversible error unless it unfairly prejudiced a substantial right of the complaining
party. Id.
        Neb. Rev. Stat. § 27-702 (Reissue 2008) governs the admissibility of expert testimony
and provides that the witness must be qualified as an expert, “If scientific, technical, or other
specialized knowledge will assist the trier of fact to understand the evidence or to determine a
fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or
education, may testify thereto in the form of an opinion or otherwise.” Under § 27-702, a trial
court does not have discretion to permit a witness who has not been qualified as an expert to
testify to issues that require an expert’s opinion. Simon v. Drake, supra. If a witness is not
testifying as an expert, his testimony in the form of opinions or inferences is limited to those
opinions or inferences which are (a) rationally based on the perception of the witness and (b)
helpful to a clear understanding of his testimony or the determination of a fact in issue. Neb.
Rev. Stat. § 27-701 (Reissue 2008).
        We have reviewed the testimony to which TFF objected at trial on the grounds that it
called for an expert opinion, and we find no error in the district court’s overruling those
objections and relying on the testimony. Bilyeu was asked several questions based on his own
experiences in the house “flipping” business or real estate industry. This is proper lay testimony
under § 27-701. Similarly, Moyer was questioned regarding Enterprise Bank’s practices and
procedures and his observation of the real estate market changes in 2008. Because the testimony
provided was based on the witnesses’ own perceptions and was helpful to the trier of fact, it was
properly admitted under § 27-701. Even to the extent any of the testimony could be considered
expert testimony, in a civil case, the admission or exclusion of evidence is not reversible error

                                                -5-
unless it unfairly prejudiced a substantial right of the complaining party. See Simon v. Drake,
supra. Since none of this testimony affects whether the court erred in refusing to pierce the
corporate veil, we find it was not unfairly prejudicial.
                                        CONCLUSION
        Based upon our de novo review, we find that the district court did not err in refusing to
pierce the company veil of St. Ellen 100 and dismissing the claim against Bilyeu. We also find
no error in the court’s reliance on Bilyeu’s and Moyer’s testimonies. Accordingly, we affirm the
decision of the district court.
                                                                                      AFFIRMED.

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