Woodruff Constr., LLC v. Clark - 924 N.W.2d 534 (Iowa Ct. App. 2018)

Rule:

The corporate veil is central to the concept of a corporation—separation between the corporate entity and the stockholders, limiting their personal liability to the extent of their investment. But the corporate device cannot in all cases insulate the owners from personal liability.

Facts:

Clark Farms, Ltd. (Clark Farms) was an Iowa corporation, with articles of incorporation filed in 1997, then reincorporated in 2001 following an administrative dissolution. K.W. Clark (Clark) was the president, secretary, and treasurer of the corporation. He was also the sole owner and director of the corporation. In April 2010, Woodruff Construction, LLC (Woodruff), a commercial industrial construction company, contracted with Clark Farms for lagoon sludge removal. In 2011, Clark Farms abandoned the project when Clark determined that he had underbid the contract, leaving the work incomplete. Consequently, Woodruff brought a breach of contract action against Clark Farms. In September 2014, Woodruff obtained a judgment against Clark Farms for $410,066.83 plus interest. Clark Farms failed to pay the judgment, hence, Woodruff brought suit to pierce the corporate veil of Clark Farms and recover personally from Clark. The trial court denied Woodruff's request to pierce the corporate veil.

Issue:

Under the circumstances, should the corporate veil on Clark Farms be pierced?

Answer:

Yes.

Conclusion:

The court noted that plaintiffs must prove exceptional circumstances exist to warrant piercing the corporate veil. According to the court, factors that would support piercing the corporate veil included: (1) the corporation was undercapitalized; (2) it lacked separate books; (3) its finances were not kept separate from individual finances, or individual obligations were paid by the corporation; (4) the corporation was used to promote fraud or illegality; (5) corporate formalities were not followed; and (6) the corporation was a mere sham. In this case, the court found that Clark did not see the corporation as a separate entity from himself and did not view personal debts to the corporation as real, because Clark was using the corporation’s bank account for personal purposes and his sole proprietorships. Moreover, the court found that Clark Farms books inadequately distinguished, tracked, and recorded Clark Farms corporate activities as a separate and distinct entity from Clark. The court further noted that the only corporate formalities that were followed after the 2001 incorporation were the filing of taxes, occasional biennial reports, and the officers named on those filings. For these reasons, the court determined that the corporate veil should be pierced. Therefore, the decision of the district court was reversed.