Equity Trust Co. Custodian FBO Heather Eisenmenger Ira v. Cole

Citations: 766 N.W.2d 334; 2009 Minn. App. LEXIS 109; 2009 WL 1587225Docket: A08-1681

Court: Court of Appeals of Minnesota; June 9, 2009; Minnesota; State Appellate Court

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An appeal was filed regarding a decision to pierce the corporate veils of several entities involved in a consumer-fraud scheme, leading to personal liability for appellants Geoff and Nancy Thompson and their partners. The Thompsons argued that the district court abused its discretion by holding them liable despite them not being shareholders or members of the implicated entities. They also claimed errors in the receivership administration and in the denial of their summary judgment motions. The appeal arises from eight consolidated lawsuits related to a real estate investment fraud scheme purportedly orchestrated by the Thompsons and their partners, involving the sale of memberships in an "AMP Plan." This scheme promised exclusive investment opportunities, requiring investors to pay membership fees to Progressive Home Services, Inc. or its affiliates. Investors were misled about investment opportunities in various condominium projects and a "Private Loan Program," which promised high returns but ultimately proved fraudulent, as none of the investments were completed, and substantial funds were not returned to the investors.

Loaned funds were not utilized for real estate development, with all loans defaulting and remaining unpaid. An insurance policy intended to protect the investments was not secured. In August 2006, 178 investors filed eight lawsuits against various principals and corporate entities involved in the scheme, including IPM, NREA, IPA, Amerifunding Group, and J. J. The lawsuits included claims such as breach of fiduciary duty, breach of contract, misrepresentation, conspiracy, civil theft, and violations of several Minnesota and Illinois laws related to consumer fraud and securities regulation. The investors contended that the corporate entities were "alter egos" of the principals.

In September 2006, the state intervened in the Sober lawsuit, alleging violations of Minnesota consumer fraud and securities statutes, and sought a temporary injunction and a receiver to manage non-exempt assets. The district court granted the injunction and appointed Cordes and Company, LLC as receiver for specific entities. A month later, the district court consolidated the lawsuits. 

In January 2007, the state moved to dismiss its complaint in intervention, stating it had fulfilled its role in protecting public interest through injunctions and securing a receiver, which the court granted. Following this, the court expanded the receivership to include three more corporate entities linked to the principals and ordered the Thompsons' attorneys to surrender $750,000 in proceeds.

The Thompsons attempted to dismiss the case based on failure to state a claim, but the district court denied their motion, asserting that the complaints presented valid claims. After discovery, the investors sought summary judgment against the Thompsons and default judgment against the corporate entities that had not responded. They also aimed to pierce the corporate veil to hold the Thompsons personally liable. The Thompsons countered with a cross-motion for summary judgment, arguing lack of evidence for personal liability and that they were not officially recognized as shareholders in corporate documents. The district court denied both summary judgment motions but granted default judgment against the corporations and approved piercing the corporate veil to hold the Thompsons personally accountable under the "alter ego" theory.

The district court pierced the corporate veil, holding the Thompsons personally liable for the acts of corporate entities despite their claim that liability required them to be listed as shareholders or members. The court found substantial evidence indicating the Thompsons acted as owners and officers, citing their representations in communications with clients and employees. Following a request from investors, the court entered a personal judgment against the Thompsons for $22.68 million, stemming from a default judgment against the corporate entities related to a real estate investment scheme. The Thompsons subsequently appealed, raising three issues: (I) whether the court abused its discretion in piercing the veil, (II) whether it erred in expanding the receivership, and (III) whether it wrongly denied their summary judgment motion.

The analysis highlights that piercing the corporate veil is an equitable remedy used to prevent injustice, and a district court's decision in this regard is reviewed for abuse of discretion, with factual findings assessed for clear error. The court may pierce the veil if a corporate entity is misused for fraudulent purposes or if the individual is considered the entity's alter ego. Various factors, such as undercapitalization, failure to follow corporate formalities, and the corporation functioning merely as a facade, are considered in this determination. The Thompsons acknowledged the presence of several alter-ego factors but argued against personal liability based on their non-shareholder status. The court, however, emphasized that ownership interest is not the sole factor; the reality of their involvement in the corporate enterprise is paramount in equitable considerations.

Veil piercing is not solely based on ownership interest; it is also grounded in equity to prevent abuse of corporate protections. A district court can impose personal liability on any party disregarding the corporate form, regardless of ownership status. Evidence showed that the Thompsons were deeply involved in the management and operation of the entities, with testimonies indicating that the corporate entities functioned as a single operation under an oral partnership agreement among the principals. The Thompsons, experienced in real estate and finance, were treated as officers with equal authority in the entities. Internal communications supported their active management role. The principals did not maintain corporate formalities, with evidence showing significant financial intermingling between the entities, including shared office space and services. The Thompsons' invocation of the Fifth Amendment allowed for negative inferences regarding their involvement. The evidence satisfied the first prong of the Victoria Elevator test, which assesses whether piercing the corporate veil is necessary to prevent injustice or unfairness, as established in prior case law.

Proof of strict common law fraud is not necessary; however, evidence of constructive fraud or unjust operation of the corporate entities must be shown. The entities were involved in a large-scale real estate fraud scheme, which satisfies this requirement. Due to the Thompsons' significant involvement and numerous uncontested alter-ego factors, the district court's decision to pierce the corporate veil and hold them accountable for corporate judgments was appropriate. 

The Thompsons raised multiple issues regarding the district court's administration of the receivership, claiming abuse of discretion in (1) expanding the receivership to include additional entities, (2) requiring them to turn over $750,000 held by their attorneys, and (3) not mandating the receiver to post a bond. 

The expansion of a receivership is subject to an abuse of discretion standard. The Thompsons argued the expansion was unauthorized since the original receivership was appointed under Minn.Stat. 8.31, which they claimed was no longer applicable. However, the court clarified that the receiver was appointed under Minn.Stat. 576.01 and its general equitable powers, not solely under the attorney general statute. 

The Thompsons also contended the receiver lacked standing to pursue the expansion, but a receiver acts as a fiduciary representing the court and interested parties, not as a party to the lawsuit itself. The district court's order established the receiver's authority to request amendments to the receivership, which was within its rights. Additionally, satisfying the statutory requirements of Minn.Stat. 576.01 is not a prerequisite for expanding a receivership, as such powers can also be exercised through the court's general equity powers. Therefore, the expansion of the receivership was justified and did not require statutory findings.

The Thompsons argue that the receiver lacked authority to seek funds from North Fort Meyers, claiming the receiver was only appointed in the Sober lawsuit and that the funds were related to the Seminole Bay project, linked to the Ahmann lawsuit. However, the receiver's motion to expand the receivership was based on allegations that funds used by North Fort Meyers were sourced from entities named in the original receivership order, which included those involved in the Sober lawsuit. The receivership order does not limit investigations to Sober-related entities; it allows the receiver to identify and seize assets from any receivership entities.

Additionally, the Thompsons contend that the receiver should have filed a lawsuit against them and proven the need for injunctive relief prior to attaching $750,000 in their possession. This argument is dismissed as the receiver's goal was to secure property under the receivership order, not to obtain a judgment against the Thompsons, who failed to prove ownership of the funds.

The Thompsons also claim the receiver should have posted a bond as a condition of appointment, but the receiver had already posted a bond with the court. Previous rulings indicate that a bond is not required for wrongful appointments unless mandated by statute.

The Thompsons further assert that the district court erred in denying their motion for summary judgment on personal claims against them, but the court notes these claims are not appealable as there has been no final judgment. The evidence supports the finding that the Thompsons disregarded corporate formalities, justifying the court's decision to pierce the corporate veil and hold them personally responsible for damages from the default judgment and to grant the receiver's motion to expand the receivership. The decision is affirmed.