Mansfield v. Pierce ( 1998 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
CONNIE MANSFIELD, Personal
Representative of the Estate of
Harold Mansfield, on behalf of
herself and the Estate,
No. 96-1904
Plaintiff-Appellee,
v.
WILLIAM PIERCE,
Defendant-Appellant.
Appeal from the United States District Court
for the Western District of North Carolina, at Bryson City.
Lacy H. Thornburg, District Judge.
(CA-95-62-2)
Argued: January 26, 1998
Decided: July 27, 1998
Before MURNAGHAN, NIEMEYER, and MOTZ, Circuit Judges.
_________________________________________________________________
Affirmed by unpublished per curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: Steven Kropelnicki, Jr., CARTER & KROPELNICKI,
P.A., Asheville, North Carolina, for Appellant. Jack Richard Cohen,
SOUTHERN POVERTY LAW CENTER, Montgomery, Alabama,
for Appellee. ON BRIEF: Morris S. Dees, Jr., Marcia Bull Stadeker,
SOUTHERN POVERTY LAW CENTER, Montgomery, Alabama; C.
Frank Goldsmith, GOLDSMITH, GOLDSMITH & DEWS, P.A.,
Marion, North Carolina, for Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
The Church of the Creator ("Church" or "COTC"), a religious orga-
nization dedicated to the advancement and expansion of the white
race, has conducted activities at various times through three entities:
an unincorporated association, a North Carolina corporation ("COTC-
NC"), and a Florida corporation ("COTC-FL"). Connie Mansfield
obtained a civil default judgment of $1 million against COTC-FL in
1994 after a COTC adherent murdered her son.
Mansfield subsequently filed suit in federal court against Dr. Wil-
liam Pierce, alleging that Pierce had been the grantee of a fraudulent
conveyance from COTC-NC. Mansfield sought to impose a construc-
tive trust on profits realized by Pierce from his sale of the property.
A jury delivered a verdict in Mansfield's favor, having concluded that
COTC-NC was the alter ego of COTC-FL, and that there had been a
fraudulent conveyance of the property from COTC-NC to Pierce.
Pierce's renewed motion for judgment as a matter of law was denied,
and the district court entered judgment on the verdict. We affirm.
The district court had jurisdiction under 28 U.S.C.§ 1332. We have
jurisdiction under 28 U.S.C. § 1291. Pierce filed a timely notice of
appeal in accordance with F.R.A.P. 4(a).
I
The present controversy originated in May 1991, when George
Loeb murdered Connie Mansfield's son, Harold, in Jacksonville,
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Florida. Loeb, who was convicted of the murder in July 1992, was a
member of the unincorporated COTC. Founded and led by Ben
Klassen, the COTC urged white persons to become adherents of "Cre-
ativity," described as a "White Racial Religion." The self-proclaimed
purpose of the COTC was "the survival, expansion, and advancement
of the White Race." COTC members believed that a racial holy war,
or "RAHOWA," was necessary to further their cause.
In 1973, Klassen incorporated COTC-FL. Klassen lived in Florida
at that time. Eight years later, Klassen moved from Florida to North
Carolina and filed articles of incorporation for COTC-NC. Between
1981 and 1992, COTC-FL ceased actively to operate. Although
COTC-FL remained legally in existence, Klassen conducted all
COTC activities from his property in North Carolina until he trans-
ferred control of the Church to Rick McCarty in 1992.
Two weeks before Loeb's conviction on murder charges in Florida
state court, in July 1992, COTC-NC conveyed the property at issue
in the instant case to Dr. Pierce for $100,000. Pierce, the chairman of
the National Alliance, a white supremacist organization, sold the
property in January 1994 for $200,000. The parties stipulated before
trial that Pierce's profit on the sale was $85,000.
After the transfer of the COTC-NC property to Pierce, Klassen sent
the sale proceeds and the COTC's inventory of books to Mark Wilson
in Milwaukee, Wisconsin, whom Klassen had chosen to succeed him
as "Pontifex Maximus" of the Church. Klassen soon became dissatis-
fied with Wilson, however, and revoked his appointment in favor of
McCarty, a Florida resident. Approximately $50,000, the amount of
proceeds remaining from the sale to Pierce, and the majority of the
books were transferred to the COTC's new headquarters in Florida.
Klassen committed suicide in August 1993. Although COTC-NC
continued legally to exist, there is no record of any activity by COTC-
NC after McCarty succeeded Klassen as the head of the Church.
McCarty filed articles of dissolution for COTC-FL on February 22,
1994.
On March 7, 1994, Connie Mansfield filed a complaint in Florida
state court against COTC-FL, alleging that COTC-FL had engaged in
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a pattern of racketeering activity that included the murder of her son.
See Fl. Stat. Ann. §§ 772.103 & 772.104. Mansfield served process
on McCarty as the president of COTC-FL in April 1994. After
COTC-FL failed to respond to the complaint or otherwise to appear,
Mansfield moved for the entry of default. A default was entered on
April 25, 1994, and the court entered judgment for Mansfield in the
amount of $1 million on May 2, 1994.
Mansfield filed suit against Pierce on February 27, 1995, in the
United States District Court for the Western District of North Caro-
lina. Mansfield alleged that COTC-NC was the alter ego of COTC-
FL, and claimed that the sale of the COTC-NC property to Pierce
constituted a fraudulent conveyance under North Carolina law.* The
district court denied Pierce's motion to join COTC-NC as a defen-
dant. Motions by Pierce for judgment on the pleadings and for sum-
mary judgment were also denied.
At trial, Mansfield sought to prove that Klassen had sold the prop-
erty to Pierce to protect it from a potential civil judgment arising out
of the Loeb murder case. Among other evidence, Mansfield produced
Klassen's memoirs, in which Klassen expressed concern about civil
liability and discussed the sale of the property to Pierce "at a price far
below its real value . . . the bargain price of $100,000." There was
_________________________________________________________________
*Although Mansfield did not obtain a judgment against COTC-FL
until approximately two years after the date of the conveyance to Pierce,
a tort claimant is deemed to be a creditor of the tortfeasor from the date
of the wrong for the purpose of setting aside a fraudulent conveyance.
See Lewis v. Blackman, 448 S.E.2d 133, 135 (N.C. Ct. App. 1994) (hold-
ing that a tort claimant was entitled to the protection of N.C. Gen. Stat.
§ 39-15 even though the conveyances were made before the tort victim
had filed suit); see also, e.g., Baker v. Geist, 321 A.2d 634, 635-37 (Pa.
1974) (holding that a tort claimant was a creditor when conveyances
were made, even though the tort victim had yet to file suit); Money v.
Powell, 139 So. 2d 702, 703 (Fla. Dist. Ct. App. 1962) (holding that
"contingent creditors and tort claimants are as fully protected against
fraudulent transfers as holders of absolute claims."); Hansen v. Cramer,
245 P.2d 1059, 1060 (Cal. 1952) (en banc) (stating "[i]t is well settled
in this state that the relationship of debtor and creditor arises in tort cases
the moment the cause of action accrues.").
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evidence that Pierce knew of Klassen's reasons for selling the prop-
erty at a price below fair market value.
The jury returned a special verdict finding that COTC-NC and
COTC-FL were "essentially the same entity," and that the conveyance
of property by COTC-NC to Pierce was fraudulent. Pierce's motion
for judgment as a matter of law was denied, and the district court
entered judgment on the verdict on May 31, 1996.
II
On appeal, Pierce presents several arguments to support his conten-
tion that the district court erred in denying his renewed motion for
judgment as a matter of law. Pierce first argues that the evidence
adduced by Mansfield was insufficient as a matter of law to prove that
COTC-NC was the alter ego of COTC-FL. Next, Pierce maintains
that Mansfield failed to prove she was a creditor of COTC-NC. Pierce
contends that Mansfield may not use the Florida judgment to establish
the fact of COTC-FL's indebtedness to Mansfield because Pierce was
not made a party to the Florida proceeding. Pierce also claims that the
Florida judgment was rendered invalid by defective service of pro-
cess. Finally, Pierce argues that even if Mansfield was a creditor of
COTC-FL, that COTC-NC must be afforded an opportunity to litigate
the alter ego question and the underlying issue of indebtedness.
COTC-NC was not made a party to either the Florida suit or the
instant litigation.
We review de novo the district court's denial of judgment as a mat-
ter of law. Reinhold v. Virginia, 135 F.3d 920, 929 (4th Cir. 1998);
Benesh v. Amphenol Corp. (In re Wildewood Litig.), 52 F.3d 499, 502
(4th Cir. 1995). As to any facts found by the jury, however, our
review is circumscribed. Price v. City of Charlotte, 93 F.3d 1241,
1249 (4th Cir. 1996), cert. denied, 117 S. Ct. 1246 (1997). The ques-
tion is whether the evidence, viewed in the light most favorable to
Mansfield, was sufficient to permit a reasonable jury to return a ver-
dict in her favor. Reinhold, 135 F.2d at 929; Andrade v. Mayfair Man-
agement, Inc., 88 F.3d 258, 261 (4th Cir. 1996). We have noted that
an appellant bears a "hefty burden" in establishing that the evidence
is insufficient to support a jury verdict, Price , 93 F.3d at 1249; never-
theless "we are not a rubber stamp convened merely to endorse the
5
conclusions of the jury, but rather have a duty to reverse the jury ver-
dict[ ] if the evidence cannot support it." Id. at 1250 (citing Singer v.
Dugan, 45 F.3d 823, 829 (4th Cir. 1995)).
A
We first consider whether Mansfield presented evidence sufficient
to permit a reasonable jury to conclude that COTC-NC was the alter
ego of COTC-FL. We find that the verdict is supported by the evi-
dence.
North Carolina law permits a court to "disregard the corporate form
. . . and extend liability for corporate obligations beyond the confines
of a corporation's separate entity, whenever necessary to prevent
fraud or achieve equity." Glenn v. Wagner, 329 S.E.2d 326, 330-31
(N.C. 1985); see Atlantic Tobacco Co. v. Honeycutt, 398 S.E.2d 641,
643 (N.C. Ct. App. 1990). In the context of affiliated corporations
dominated by a common shareholder, the North Carolina Supreme
Court has held that the inquiry is whether the two corporations were
"so created, controlled, dominated, and used" by the controlling
shareholder as to make one corporation the "mere alter ego" of the
other. Waff Bros., Inc. v. Bank of N.C., 221 S.E.2d 273, 281 (N.C.
1976); see B-W Acceptance Corp. v. Spencer, 149 S.E.2d 570, 576
(N.C. 1966) (implying that the "corporate structure" would be disre-
garded if the parent corporation dominated both subsidiaries so that
neither subsidiary had a "separate mind, will, or existence"). "If so,
the two corporations must be regarded, for the purposes of this litiga-
tion, as one and the same person." Waff Bros. , 221 S.E.2d at 281.
The "instrumentality rule" applied by the North Carolina courts in
determining whether to pierce the corporate veil consists of three ele-
ments: "(1) the domination and control of the corporate entity; (2) the
use of that domination and control to perpetrate a fraud or wrong;
[and] (3) the proximate causation of the wrong complained of by the
domination or control." Atlantic Tobacco Co. , 398 S.E.2d at 643; see
Glenn, 329 S.E.2d at 330. Four factors are of primary importance in
deciding whether to disregard the separate corporate entity under the
instrumentality rule: "(1) inadequate capitalization; (2) non-
compliance with corporate formalities; (3) complete domination and
control of the corporation so that it has no independent identity; and
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(4) excessive fragmentation of a single enterprise into separate corpo-
rations." Atlantic Tobacco Co., 398 S.E.2d at 643; Glenn, 329 S.E.2d
at 330-31. The North Carolina Supreme Court has emphasized, how-
ever, that "[i]t is not the presence or absence of any particular factor
that is determinative. Rather, it is a combination of factors which,
when taken together with an element of injustice or abuse of corpo-
rate privilege, suggest that the corporate entity attacked had no sepa-
rate mind, will, or existence of its own." Glenn, 329 S.E.2d at 332
(internal quotation marks omitted); see Atlantic Tobacco Co., 398
S.E.2d at 643.
The evidence at trial showed that both COTC-FL and COTC-NC
were founded by Klassen and were financed, during his lifetime, with
Klassen's personal funds. There was substantial evidence that Klassen
exercised unilateral control over the corporations, although other indi-
viduals were named as directors in various corporate filings. The
transaction challenged here, the sale of the COTC-NC property to
Pierce, was not authorized by the COTC-NC board of directors, but
evidently was undertaken by Klassen without consultation. Similarly,
the record fails to show that anyone other than Klassen participated
in the decisions to transfer the sale proceeds and the COTC's library
of books to Wilson and later, to McCarty. And although the articles
of incorporation for COTC-FL provided for the election of directors
by COTC-FL members, and for the election of officers by the direc-
tors, the evidence indicated that Klassen simply appointed McCarty
to the positions of director, President, Secretary, and Treasurer.
There was considerable other evidence of noncompliance with cor-
porate formalities. COTC-FL was administratively dissolved four
times between 1973 and 1993 for failure to file an annual report. See
Fl. Stat. Ann. § 617.1622. Although Florida law prescribes a mini-
mum of three directors, see Fl. Stat. Ann.§ 617.0803, COTC-FL's
annual reports between 1980 and 1990 identify Klassen as the sole
director. COTC-FL's 1993 application for reinstatement lists
McCarty, Klassen, and Janet Quaise [sic], as officers and directors.
Quaife testified, however, that she had not agreed to be a director of
COTC-FL, and in fact, had no knowledge that her name had been
used on the application for reinstatement. There was no evidence that
any director had ever been elected by the COTC-FL members in
accordance with the articles of incorporation. McCarty testified that
7
he had never met anyone who purported to be an officer, director, or
member of COTC-FL, other than Klassen, and never attended a board
meeting or saw a list of members.
The articles of dissolution for COTC-FL filed by McCarty in 1994
stated that the number of directors was one, again in contravention of
Florida law. Furthermore, the articles indicated that COTC-FL had no
members, notwithstanding the provision in the articles of incorpora-
tion for a minimum of three members.
The only corporate documents on file with the North Carolina Sec-
retary of State as of May 16, 1995, with respect to COTC-NC were
the articles of incorporation, filed on December 14, 1981, and a notice
of resignation from the initial registered agent, Clayman Dean Con-
ner, filed on May 21, 1982. COTC-NC has not designated a registered
agent since Conner's resignation. See N.C. Gen Stat. § 55-5-01 (stat-
ing that "[e]ach corporation must continuously maintain in this State:
. . . a registered agent"). Although North Carolina law has required,
since 1990, that an annual report be filed with the Secretary of State,
see N.C. Gen. Stat. § 55-16-22, COTC-NC has never filed such a
report.
We conclude that the record contained ample evidence to sustain
the jury's finding that COTC-NC and COTC-FL were alter egos of
Klassen and of each other. Klassen had complete control of both cor-
porations until he transferred command to McCarty. Klassen exer-
cised his control over COTC-NC to cause the sale of the real estate
to Pierce at a price well below fair market value, thereby draining the
corporation of funds available to satisfy any civil judgment arising out
of the murder of Harold Mansfield. Because the evidence supports the
jury verdict that COTC-NC and COTC-FL were alter egos, "the two
corporations must be regarded, for purposes of this litigation, as one
and the same person." Waff Bros., 221 S.E.2d at 281.
B
Next, Pierce argues that the judgment against COTC-FL can not be
used to establish the fact of COTC-FL's indebtedness to Mansfield in
the instant litigation. Pierce claims that he must be given an opportu-
8
nity to relitigate the issues underlying the default judgment because
he was not made a party to the Florida proceeding.
Although it appears the question has not been addressed by the
North Carolina courts, the general rule has been stated as follows:
A judgment which has been obtained by a defrauded credi-
tor is, as against the transferee of the property, conclusive
as to the fact of indebtedness on which it is based, provided
that the judgment has been rendered by a court of competent
jurisdiction, and that there is nothing to show fraud or collu-
sion . . . .
37 Am.Jur.2d Fraudulent Conveyances § 178. See, e.g., Commerce
Bank of Lebanon v. Halladale A Corp., 618 S.W.2d 288, 290 (Mo. Ct.
App. 1981) (holding that judgment against debtor-transferor was con-
clusive as to the fact of indebtedness in a suit against transferees to
set aside conveyances); Chapline v. North Am. Acceptance Corp., 544
P.2d 682, 685 (Ariz. Ct. App. 1976) (same); see also Giove v. Stanko,
977 F.2d 413, 418 (8th Cir. 1992) (holding that transferees of fraudu-
lent conveyances had no due process right to attack directly a judg-
ment against the debtor-transferor because none of their own property
was at risk; the action was against the debtor-transferor's property,
not the property of the transferees). Because Pierce has failed to
allege that the Florida judgment was obtained through fraud or collu-
sion, we conclude that Mansfield's status as a creditor of COTC-FL
was conclusively established by the $1 million default judgment
against COTC-FL.
C
Pierce next challenges the validity of the Florida default judgment,
arguing that service of process on the dissolved COTC-FL was defec-
tive. Under Florida law, process against a dissolved corporation is to
be served on "one or more of the directors of the dissolved corpora-
tion as trustees thereof." Fl. Stat. Ann. § 48.101. In the instant case,
the return of service indicated that process was served on "Church of
the Creator Inc (c/o President, Richard McCarty)." Pierce contends
that service was ineffective because the summons was not directed to
9
McCarty as a trustee of the dissolved corporation, but to COTC-FL
and McCarty in his capacity as president of COTC-FL.
We find no merit to Pierce's argument. Pierce does not dispute that
McCarty was a proper person to receive service under§ 48.101. The
erroneous identification of the capacity in which Pierce was served is
nothing more than a "hypertechnical" defect which does not invalidate
the service. See American Hosp. of Miami, Inc. v. Nateman, 498 So.
2d 444, 445-46 (Fla. Dist. Ct. App. 1986) (holding that a variance
which "does not result in prejudice to a defendant does not serve to
invalidate the service."); cf. Stoeffer v. Castagliola, 629 So. 2d 196
(Fla. Dist. Ct. App. 1993) (finding defective service where process
against a dissolved corporation was served on the corporation's regis-
tered agent, who was not a director).
D
Finally, Pierce maintains that the judgment against COTC-FL can-
not bind COTC-NC unless COTC-NC is afforded an opportunity to
litigate the alter ego question and contest the issue of indebtedness.
Pierce relies principally on Zenith Radio Corp. v. Hazeltine Research,
Inc., 395 U.S. 100 (1969). In Zenith, the district court entered judg-
ment against both the named defendant, Hazeltine Research, Inc.
("HRI"), and its parent company, Hazeltine Corporation
("Hazeltine"), based on a pretrial stipulation that Hazeltine and HRI
were alter egos. Noting that Hazeltine had not been a party to the liti-
gation, or to the stipulation, the Supreme Court held that the Court of
Appeals had correctly vacated the judgment against Hazeltine, stat-
ing:
It is elementary that one is not bound by a judgment in
personam resulting from litigation in which he is not desig-
nated as a party or to which he has not been made a party
by service of process. The consistent constitutional rule has
been that a court has no power to adjudicate a personal
claim or obligation unless it has jurisdiction over the person
of the defendant.
Id. at 110.
10
Zenith is readily distinguishable from the instant case. Mansfield
sought to prove that COTC-NC and COTC-FL were alter egos in
order to establish the fact of COTC-NC's indebtedness to her, a nec-
essary element of a suit to set aside a fraudulent conveyance. Mans-
field, however, has not sought an in personam judgment against
COTC-NC, an entity which both parties agree is, for all practical pur-
poses, nonexistent. There is no question that the district court had per-
sonal jurisdiction over Pierce, the party against whom judgment was
entered. And unlike Hazeltine, Pierce has had a full and complete
opportunity to litigate the alter ego question, and to defend against
Mansfield's allegation that the conveyance from Klassen to Pierce
was fraudulent.
III
In sum, we conclude that the evidence is sufficient to support the
jury verdict that COTC-FL and COTC-NC were alter egos. Further-
more, we hold that the default judgment against COTC-FL was not
rendered invalid by the technical defect in service of process, and that
the district court properly permitted Mansfield to use that judgment
to establish the fact of COTC-FL's indebtedness. Finally, we are not
persuaded that the judgment is rendered infirm by COTC-NC's
absence. Accordingly, the judgment of the district court is hereby
AFFIRMED.
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