Minnesota

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

COURT OF APPEALS OF MINNESOTA

C4-96-2106

1997.MN.19271

May 6, 1997

DANIEL K. KIM, APPELLANT,

v.

SPECTRUM SIGN CORPORATION, ET AL., RESPONDENTS.

Crow Wing County District Court. File No. C9952205. Hon. Frederick J. Casey.

Thomas P. Malone, Bradley A. Kletscher, Barna, Guzy & Steffen, Ltd., 200 Coon Rapids Boulevard, 400 Northtown Financial Plaza, Minneapolis, MN 55433 (for Appellant).

Brian J. Friedman, Thiel, Campbell, Gunderson, Anderson and Friedman, P.l.l.p., 460 Southdale Office Centre, 6600 France Avenue South, Minneapolis, MN 55435 (for Appellant).

Michael B. LeBaron, Vilis R. Inde, Larkin, Hoffman, Daly & Lindgren, Ltd., 1500 Norwest Financial Center, 7900 Xerxes Avenue South, Bloomington, MN 55431 (for Respondents).

Considered and decided by Randall, Presiding Judge, Klaphake, Judge, and Willis, Judge.

The opinion of the court was delivered by: Willis

[Editor's note: originally released as an unpublished opinion]

WILLIS, Judge

Appellant Daniel Kim challenges the district court's dismissal of his complaint. We affirm in part, reverse in part, and remand.

FACTS

In 1993, Daniel Kim obtained a default judgment against Spectrum Sign Corporation (Spectrum) in the amount of $305,827.11. He was unable to collect the judgment because Spectrum stopped doing business in early 1993. Respondents Michael Wise and Sara Wise were the sole shareholders of Spectrum and are the sole shareholders of respondent corporations Summit and Candleman. In August 1995, Kim served respondents with a motion for attachment seeking payment of his judgment against Spectrum and thereafter served a complaint, but the district court granted respondents' motion to dismiss because Kim served no summons.

In November 1995, Kim served a summons and complaint on respondents. In August 1996, the district court granted respondents' motion to dismiss for failure to state a claim on which relief could be granted. Kim appeals, arguing that the complaint states claims on which relief can be granted and, alternatively, that the court had no authority to dismiss with prejudice.

DECISION

1. Statement of a Claim on Which Relief May Be Granted.

Kim argues that the district court erred in determining that he did not state claims for fraudulent transfer, shareholder liability, and piercing the corporate veil.

The Minnesota Rules of Civil Procedure require only notice pleading, the function of which is to give fair notice to the adverse party of the theory on which the claimant is asking for relief. Barton v. Moore, 558 N.W.2d 746, 749 (Minn. 1997). A claimant is not required to allege facts to support every element of a cause of action. Id.

A claim is sufficient against a motion to dismiss [for failure to state a claim] if it is possible on any evidence which might be produced, consistent with the pleader's theory, to grant the relief demanded.

Northern States Power Co. v. Franklin , 265 Minn. 391, 395, 122 N.W.2d 26, 29 (1963).

A. Fraudulent Transfer.

A fraudulent transfer occurs when a debtor makes a transfer or incurs an obligation

(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or

(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(ii) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.

Minn. Stat. § 513.44(a) (1996).

Kim alleges that (1) transfers from Spectrum were made with the intent to defraud him and (2) Spectrum should have known that the transfers would render it unable to pay its creditors. These allegations are sufficient to give notice to respondents that Kim seeks recovery under a theory of fraudulent transfer, and it is possible that evidence could be introduced consistent with that theory that would entitle Kim to relief.

B. Shareholder Liability/Piercing the Corporate Veil.

In his claim entitled "shareholder liability," Kim incorrectly relies on Minn. Stat. § 550.135 (1996), which provides procedures for a sheriff's levy. However, because courts may pierce the corporate veil for the purpose of imposing shareholder liability, we analyze together what Kim has styled as his shareholder liability and piercing the corporate veil claims. See Transamerica Ins. Co. v. FDIC, 489 N.W.2d 224, 227 (Minn. 1992) (stating that alter ego doctrine applies when shareholder disregards corporate entity to degree that corporation and its shareholders do not have separate identities and corporate veil may be pierced to impose shareholder liability).

Factors courts look to in determining whether a shareholder has disregarded the corporate form to the extent that the corporate veil may be pierced and shareholder liability imposed include: (1) insufficient capitalization, (2) failure to observe corporate formalities, (3) nonpayment of dividends, (4) insolvency of debtor corporation, (5) siphoning of funds by dominant shareholder, (6) nonfunctioning of other officers and directors, (7) absence of corporate records, and (8) use of the corporation as a facade for individual dealings. Victoria Elevator Co. v. Meriden Grain Co. , 283 N.W.2d 509, 512 (Minn. 1979). A court may disregard the corporate entity if "a number" of the factors are present and it would be fundamentally unfair to grant the shareholder the protection of the corporate form. Id.

Kim alleges (1) insufficient capitalization, (2) insolvency of the corporation, (3) siphoning of funds, (4) fraud against creditors, and (5) disregard of corporate formalities. Facts could be introduced consistent with these claims that would entitle Kim to recover. Further, Kim's identification of his claims as "shareholder liability" and "alter ego" along with his statement that Wise used Spectrum and Summit in such a manner that "the fiction of corporate separateness should be disregarded" show that he is making the claims under an alter ego/piercing the corporate veil theory. See Barton , 558 N.W.2d at 749-50 (concluding that although complaint did not specify alter ego theory, conclusory statement that defendants were "personally liable for the obligations of their corporation" stated a claim).

2. Dismissal with Prejudice.

Kim argues that the district court had no authority to dismiss his complaint with prejudice in ruling on a Minn. R. Civ. P. 12.02(e) motion. Minn. R. Civ. P. 41.02(c) provides that unless the court specifies otherwise, any dismissal, except dismissals for lack of jurisdiction, forum non conveniens, or failure to join an indispensable party, operates as an adjudication on the merits. Id. ; see also Royal Realty Co. v. Levin , 243 Minn. 30, 32, 66 N.W.2d 5, 5-6 (1954) (concluding that a dismissal under rule 12.02 is governed by rule 41.02(c) and is thus on the merits and appealable); Lampert Lumber Co. v. Joyce , 405 N.W.2d 423, 425 (Minn. 1987) (stating that rule 41.02(c) provides for dismissal with or without prejudice). The district court therefore had the authority to dismiss with or without prejudice in granting the rule 12.02(e) motion.

Kim argues that even if the district court had discretion to dismiss with prejudice, it abused its discretion in doing so because it based its conclusion that Kim failed to state a claim on "pleading technicalities." Minnesota cases express disapproval of dismissing with prejudice on procedural grounds: "An order of dismissal on procedural grounds runs counter to the primary objective of the law to dispose of cases on the merits." Firoved v. General Motors Corp ., 277 Minn. 278, 283, 152 N.W.2d 364, 368 (1967). However, because rule 41.02(c) provides that a rule 12.02(e) dismissal is with prejudice unless the district court specifies otherwise, we cannot say the district court abused its discretion by dismissing with prejudice. See Johnson v. Hunter , 447 N.W.2d 871, 873 (Minn. 1989) (concluding that even though case dismissed with prejudice for lack of prosecution is disposed of on nonsubstantive ground, it nonetheless operated as adjudication on merits and formed basis for res judicata).

Finally, Kim argues that the district court should have granted him leave to amend his complaint, citing Bonanno v. Thomas , 309 F.2d 320 (9th Cir. 1962). In Bonanno , the court held that when a complaint is

dismissed for failure to state a claim on which relief could be granted, leave should [be] granted to amend unless the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency.

Id. at 322. Bonanno , therefore, does not stand for the proposition that the district court has no authority to grant a motion to dismiss for failure to state a claim without first granting leave to amend. Moreover, Bonanno is not controlling precedent in this jurisdiction.

Because Kim's complaint states claims for fraudulent transfer and piercing the corporate veil to impose shareholder liability, the district court erred in dismissing those claims. The district court acted within its discretion, however, in dismissing with prejudice the balance of Kim's claims.

Affirmed in part, reversed in part, and remanded.

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