Salem Tent & Awning Co. v. Schmidt

Citations: 719 P.2d 899; 79 Or. App. 475Docket: 141,038; CA A36789

Court: Court of Appeals of Oregon; May 21, 1986; Oregon; State Appellate Court

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In the case of Salem Tent & Awning Co. v. Schmidt, Ulven, and Western Oregon Christmas Trees, Inc., the Oregon Court of Appeals addressed an appeal regarding a contract dispute for tent rentals. The plaintiff, Salem Tent & Awning Co., sought damages after the corporate defendant, Western Oregon Christmas Trees, Inc. (WOCT), failed to pay for damages incurred during the rental period. The trial court found WOCT liable for $12,364 but ruled that individual defendants Schmidt and Ulven were not personally liable, nor were attorney fees awarded.

Key issues on appeal included the plaintiff's challenge to the damage amount, which was upheld due to sufficient evidence supporting the trial court's finding. Additionally, the plaintiff argued that Schmidt and Ulven should be held personally liable either as agents of an undisclosed principal or by piercing the corporate veil. The defendants countered that the plaintiff could not claim nondisclosure as a basis for liability since there was no evidence that the plaintiff would have withheld the rental had it known of the incorporation. The court affirmed the trial court’s decisions on both the damage amount and the individual liability of Schmidt and Ulven.

Plaintiff's claim is rooted in the contract rather than misrepresentation, eliminating the need to prove that misrepresentation caused damages. According to Restatement (Second) Agency 322, an agent acting on behalf of an undisclosed principal is a party to the contract. Oregon law allows for personal liability of an agent who does not disclose the principal's existence or identity. Plaintiff asserts that Schmidt and Ulven engaged with it as individuals or partners, supported by evidence, which the trial court incorrectly required to be linked to damages for personal liability. 

Plaintiff's second theory involves "piercing the corporate veil." The second amended complaint claims that Western Oregon Christmas Trees, Inc. is a corporation operated as the alter ego of individual defendants, who exercised total control and commingled personal and corporate affairs. Defendants denied these allegations and claimed they failed to state a valid claim. They also objected to evidence regarding corporate undercapitalization on relevance grounds, which the trial court upheld, limiting the plaintiff’s argument to allegations of commingling without considering undercapitalization.

Generally, corporate shareholders have limited liability, only responsible for debts up to their capital contributions. Piercing the corporate veil is an extraordinary remedy, applied only when adequate remedies from the corporation are unavailable. However, under specific circumstances, corporate creditors may pierce the veil to hold shareholders personally liable.

To pierce the corporate veil under the alter-ego theory, a plaintiff must establish three elements: (1) actual control of the corporation by the shareholder; (2) improper conduct by the shareholder in exercising that control; and (3) the shareholder's conduct leading to the plaintiff's inability to obtain an adequate remedy from the corporation. The plaintiff alleged that shareholders Ulven and Schmidt controlled the corporation, commingled their personal and corporate affairs, and caused the plaintiff to be unable to collect its debt.

The court found sufficient evidence supporting the claim to pierce the corporate veil. Schmidt and Ulven were the sole officers, owned all corporate stock, and managed day-to-day operations. They engaged in improper conduct by mixing personal and corporate assets, failing to maintain corporate records, and transferring corporate assets to themselves upon dissolution. WOCT was also undercapitalized, with only $1,559 contributed against a stated capital of $5,000, and incurred significant debts relative to its operations.

The plaintiff's pleadings were deemed sufficiently specific to notify the defendants of the piercing theory, and the court should allow evidence on this issue. Additionally, the trial court was found to have erred in denying the plaintiff's claim for attorney fees, as the fees were stipulated in the contract, and the plaintiff is entitled to reasonable attorney fees against WOCT and potentially against Schmidt and Ulven if personal liability is established on remand. The judgment against Western Oregon Christmas Trees, Inc. was affirmed and remanded for attorney fees, while the decision concerning Schmidt and Ulven was reversed and remanded.

Plaintiff's evidence of damages due to nondisclosure was limited to a claim that knowledge of Schmidt and Ulven's incorporation would have prompted full rental fee payment in advance, despite ultimately receiving the full fee. Defendants argue that the issue raised by the plaintiff regarding WOCT's alleged undercapitalization does not support claims against Schmidt and Ulven, as gross undercapitalization must be demonstrated for shareholder liability. The trial court found that WOCT was adequately capitalized and had insurance for expected business risks, indicating that the windstorm causing issues was an unforeseen act of God. The court also ruled that plaintiffs could not introduce new materials on appeal that were not part of the trial record, but allowed the appeal based on previously submitted evidence. During trial, a discussion arose over whether evidence regarding the corporation's capitalization was relevant for piercing the corporate veil, with the court sustaining an objection due to the lack of specific allegations in the plaintiff's pleadings. ORS 57.131(1) specifies that shareholders are only liable for the consideration owed for shares. Additionally, while the plaintiff accused Schmidt and Ulven of using corporate profits to repay a $50,000 loan, evidence indicated the loan was made to the corporation, with Schmidt and Ulven as guarantors. Schmidt and Ulven had also transferred WOCT's personal property to another corporation, Greenvalley Trees, with the trial court ordering the return of that property. Ulven testified that the insurance company would not cover property without the defendants' equity.