Arkansas

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and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

Clara Crutchfield v. Russ-Mar, Inc. et al.,
No. CA98-901 (Ark.App. 03/17/1999)

COURT OF APPEALS OF ARKANSAS, DIVISION ONE

March 17, 1999, Opinion Delivered

NOTICE: [*1]

NOT DESIGNATED FOR PUBLICATION. PLEASE REFER TO THE ARKANSAS RULES OF COURT.

PRIOR HISTORY: APPEAL FROM PULASKI COUNTY CHANCERY COURT. No. OT 97-2409. HONORABLE ALICE S. GRAY, CHANCELLOR.

DISPOSITION: AFFIRMED.

COUNSEL: For Plaintiff or Petitioner: BOB LESLIE, LITTLE ROCK, DEENITA D. MOAK, LITTLE ROCK.

For Defendant or Respondent: G. RANDOLPH SATTERFIELD, LITTLE ROCK.

JUDGES: JOHN E. JENNINGS, Judge. ROBBINS, C.J., and HART, J., agree.

OPINIONBY: JOHN E. JENNINGS

OPINION: JOHN E. JENNINGS, Judge

Clara Crutchfield has appealed from an order of the Pulaski County Chancery Court rejecting her petition to pierce the corporate veil of appellee Russ-Mar, Inc., and hold appellees Donna Fleharty and Michael Fleharty personally liable for a previous judgment that appellant had obtained against Russ-Mar. We find no error in the chancellor's decision and affirm.

Appellees Donna and Michael Fleharty are the only shareholders of Russ-Mar, which operated a day care and school known as the Roper School on real property owned by the Flehartys. In 1993, appellant entered into a written contract with Russ-Mar to teach kindergarten for the school and was terminated from that position a few months later. Appellant successfully [*2] sued Russ-Mar for breach of contract and obtained a judgment against it in November 1995. In April of 1995, the Flehartys entered into a contract to sell the real property used by the school. Appellant could not obtain satisfaction of her judgment because the corporation had no assets. In a deposition in aid of execution, Mrs. Fleharty stated that a bank account used by the school was not a corporate account. Appellant then filed this action in chancery court against appellees, seeking to pierce the corporate veil and hold Mr. and Mrs. Fleharty personally liable for the judgment against Russ-Mar. Appellant also sought damages pursuant to Ark. Code Ann. § 4-59-204 (Repl. 1996) for the Flehartys' fraudulent conveyance of corporate property in the sale of the school.

At trial, appellant attempted to prove that the checking account into which the students' tuition was deposited was not a corporate account but was instead a personal account of appellees. Appellant argued that piercing the corporate veil of Russ-Mar was warranted in this case. Appellees argued that the checking account was indeed a corporate account and that the funds in that account had never been commingled with appellees' [*3] personal funds.

Donna Fleharty testified that she and her husband own all of the stock in Russ-Mar and the land, inventory, and equipment where the school is located; she said that they leased the property to the school. She further stated that she and Mr. Fleharty were personally responsible for the mortgage on the land. She said that in April 1995, she and her husband entered into a contract to sell the real estate, along with the equipment, inventory, furniture, fixtures, and supplies; the purchase price was the balance of the debt that appellees owed the bank. According to the terms of that contract, closing was to occur by April 1997. She stated that because the purchasers were unable to obtain financing, the sale had not yet occurred and the purchasers were continuing to operate a school there under a month-to-month lease while they attempted to obtain a loan. Mrs. Fleharty stated that when they entered into the contract, the purchasers were already operating a school and brought their own curriculum with them; the Flehartys introduced the purchasers to the students and provided them with enrollment papers if they wanted to attend the school under the new ownership.

When Mrs. [*4] Fleharty was confronted at trial with her earlier deposition testimony that the school's checking account was not a corporate account, she explained that she had been confused by the question asked of her. She emphatically testified that the school's checking account was in fact a corporate account in the name of "Russ-Mar, Inc., d/b/a Roper Schools," and that it was not a personal account. She testified that tuition was deposited into, and that the school's operating expenses were paid out of, that account. She stated that she had never used any of the school's money for personal expenditures. She also emphasized that appellant had entered into an employment agreement with the corporation and that she (Mrs. Fleharty) had signed the contract as an officer of the corporation. According to Mrs. Fleharty, the corporation had no assets at the time of trial. Mrs. Fleharty also testified that she had kept corporate records, minutes of meetings, and canceled checks from the corporate account. Russ-Mar's articles of incorporation were admitted into evidence.

Appellant testified that when she signed her employment contract, she believed that Russ-Mar was the owner and operator of the school, [*5] and that she had no reason to believe she was contracting with anyone else. She also admitted that her payroll checks had been issued by Russ-Mar. Appellant admitted that she was not concerned about the land but argued that the supplies, equipment, and list of students were corporate assets. She contended that the fraudulent transfer of the corporate assets was sufficient to warrant piercing the corporate veil. Michael Fleharty testified that the value of items such as paper towels and toilet paper that were transferred to the purchasers was approximately $ 200. He also corroborated Mrs. Fleharty's testimony that all of the students' tuition payments went into the corporate checking account and that school expenses were paid out of this account.

In her order, the chancellor found that corporate assets valued at $ 200 had been fraudulently conveyed from the corporation by the Flehartys and held Mr. and Mrs. Fleharty jointly and severally liable for the sum of $ 200. The chancellor found that the evidence did not support piercing the corporate veil. She also found that "[appellee] Donna Fleharty's deposition testimony regarding the identity of a bank account not being a corporate [*6] account is inconsistent with the facts which has delayed and protracted this litigation" and that "[appellees] shall therefore be liable for [appellant's] attorneys fees associated with this action."

On appeal, appellant argues that the chancellor erred in refusing to pierce the corporate veil. She contends that the Flehartys illegally abused the corporate form by making the fraudulent conveyance of corporate assets and through Donna Fleharty's inconsistent statements about the corporate bank account in her deposition.

It is a nearly universal rule that a corporation and its stockholders are separate and distinct entities, even though a stockholder may own the majority of the stock. First Commercial Bank v. Walker, 333 Ark. 100, 969 S.W.2d 146 (1998). In special circumstances, the court will disregard the corporate facade when the corporate form has been illegally abused to the injury of a third party. Enviroclean, Inc. v. Arkansas Pollution Control and Ecology Comm'n, 314 Ark. 98, 858 S.W.2d 116 (1993); Don G. Parker, Inc. v. Point Ferry, Inc., 249 Ark. 764, 461 S.W.2d 587 (1971). The conditions under which the corporate entity may be disregarded or looked upon as [*7] the alter ego of the principal stockholder vary according to the circumstances of each case. Winchel v. Craig, 55 Ark. App. 373, 934 S.W.2d 946 (1996). The doctrine of piercing the corporate veil is founded in equity and is applied when the facts warrant its application to prevent an injustice. Humphries v. Bray, 271 Ark. 962, 611 S.W.2d 791 (Ark. App. 1981). Piercing the fiction of a corporate entity should be applied with great caution. Banks v. Jones, 239 Ark. 396, 390 S.W.2d 108 (1965).

Appellant has cited no authority supporting her contention that the transfer of the corporate assets worth $ 200 or Mrs. Fleharty's misleading responses in her deposition require that the corporate veil be pierced. Even though the chancellor found Mrs. Fleharty's answers in her earlier deposition to be misleading and thereby warranting the imposition of attorneys' fees, she obviously believed Mr. and Mrs. Fleharty's testimony that the checking account into which tuition was deposited and out of which the school's bills were paid was a corporate and not a personal account. Also, appellant has shown nothing to contradict the conclusion that Russ-Mar was a properly constituted and existing [*8] corporation under the laws of this state or that it complied with the principles of corporate law in form and practice. We therefore cannot say that the chancellor's finding that these circumstances do not warrant piercing the corporate veil is clearly erroneous or clearly against a preponderance of the evidence. Chancery cases are reviewed de novo on appeal, and we will not disturb the chancellor's findings unless they are clearly erroneous or clearly against the preponderance of the evidence, and because the question of the preponderance of the evidence turns largely on the credibility of the witnesses, the appellate court will defer to the chancellor's superior opportunity to assess credibility. Jones v. Jones, 43 Ark. App. 7, 858 S.W.2d 130 (1993).

Appellant also argues that the chancellor erred in setting a value of $ 200 for the paper towels and toilet paper left in the building at the time of the sale of the school property. Although appellant argues that the school's good will, the other supplies and equipment, and the student lists were assets of the corporation, appellant supplied no evidence of their value at trial. It is the appellant's responsibility to bring up a [*9] record demonstrating reversible error on appeal. Brown v. Tucker, 330 Ark. 435, 954 S.W.2d 262 (1997). Accordingly, we cannot say that the chancellor's assignment of a value of $ 200 to the property is clearly erroneous.

Affirmed.

ROBBINS, C.J., and HART, J., agree.

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