Morrissey v. Krystopowicz , 9 N.M. 242 ( 2015 )

1 IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO
2 Opinion Number: ___________
3 Filing Date: August 31, 2015
4 NO. 32,212
5 KARI T. MORRISSEY, as personal representative
6 of the estate of FRANCES FERNANDEZ, deceased,
7 Plaintiff-Appellant,
8 v.
9 WILLIAM J. KRYSTOPOWICZ, SILVERSTONE HEALTHCARE, INC.,
10 and SILVERSTONE HEALTHCARE OF RATON, LLC,
11 Defendants-Appellees.
12 APPEAL FROM THE DISTRICT COURT OF BERNALILLO COUNTY
13 Beatrice J. Brickhouse, District Judge
14 Paul Kennedy & Associates, P.C.
15 Paul J. Kennedy
16 Arne R. Leonard
17 Albuquerque, NM
18 for Appellant
19 Thomasson Law Firm, LLC
20 Richard E. Thomasson
21 Macon, GA
22 for Appellees
1 OPINION
2 BUSTAMANTE, Judge.
3 {1} Plaintiff Kari T. Morrissey (Plaintiff), personal representative of the estate of
4 Frances Fernandez, deceased, appeals the dismissal of her claims after a bench trial.
5 We consider whether the district court erred in refusing to pierce the corporate veil
6 to hold William J. Krystopowicz (Krystopowicz) liable for a default judgment against
7 two corporations of which he was the sole shareholder. We reverse.
8 BACKGROUND
9 {2} Although the present suit was filed after the death of Mrs. Fernandez in April
10 2006, the facts salient to the issues we resolve start with the formation and
11 management of two corporate defendants, Silverstone Healthcare, Inc. and
12 Silverstone Healthcare of Raton, LLC (collectively, the Silverstone Defendants), in
13 2003. Brian Davidson approached Krystopowicz about acquiring nursing homes in
14 New Mexico. Davidson was barred from acquiring or operating nursing homes
15 himself because of pending bankruptcy proceedings as well as other “tax issues” and
16 “legal problems” which “precluded him from participating in the ownership or
17 operation of licensed nursing home facilities.” Krystopowicz knew that Davidson was
18 so barred. He also knew that Davidson was engaged in self-dealing in violation of his
19 agency relationship with another company. Despite this knowledge, Krystopowicz
1 agreed to join with Davidson to acquire nursing homes in New Mexico and to treat
2 Davidson as fifty percent owner of a corporation formed to do so. Thus Krystopowicz
3 became the “front man” for the enterprise.
4 {3} Silverstone Healthcare, Inc. was incorporated in 2003 with Krystopowicz as
5 the sole shareholder. Silverstone Healthcare, Inc. became the owner of ten limited
6 liability companies—all created by Krystopowicz and Davidson—which in turn
7 acquired ten nursing homes in New Mexico. Krystopowicz did not perform any debt-
8 equity analysis for the facilities, review the operation of the facilities, determine
9 budgetary needs or working capital needs of the facilities, or review the patient
10 census for the facilities before they were acquired. All of the nursing home facilities
11 were managed and operated by Peak Medical NM Management Services, Inc. (Peak)
12 and Krystopowicz was never involved in day-to-day patient care issues at any of the
13 facilities.
14 {4} Silverstone Healthcare of Raton, LLC, doing business as Raton Nursing and
15 Rehabilitation Center (the Center)—where Mrs. Fernandez resided—was one of the
16 LLCs created by Krystopowicz and owned by Silverstone Healthcare, Inc.
17 Krystopowicz was the sole member and managing partner of Silverstone Healthcare
18 of Raton, LLC.
2
1 {5} Revenue generated by the ten facilities in New Mexico, which amounted to
2 over $47 million annually, was transferred into a single “concentration account” to
3 which Krystopowicz and Peak had access. Although neither Davidson nor
4 Krystopowicz performed any services for the Silverstone Defendants between August
5 2003 and June 2005, Krystopowicz caused a “distribution” of $400,000 to be issued
6 from the concentration account in late June 2005. Of the $400,000 distribution,
7 Krystopowicz received $100,000 and Davidson received $200,000. The funds were
8 channeled through another corporation of which Krystopowicz was a shareholder in
9 order to obscure Davidson’s involvement with the Silverstone Defendants and the
10 nursing homes.
11 {6} As the facilities became profitable, Krystopowicz secured a $4 million line of
12 credit from GE Capital in September 2005. Although GE Capital prohibited
13 Krystopowicz from transferring fifty percent of his shares in Silverstone Healthcare,
14 Inc. to Davidson, Krystopowicz continued to treat Davidson as a fifty percent owner
15 of Silverstone Healthcare, Inc. Between July 2005 and March 2006, Krystopowicz
16 distributed at least six payments of $25,000 from the “concentration account” to
17 himself, Davidson, and others. Davidson received fifty percent of these payments.
18 {7} In January 2006, New Mexico Medicare officials banned admissions to the
19 Center. In addition, “[f]rom January through April 2006, the Silverstone [Defendants]
3
1 were knowingly overstating their accounts receivable, and by April 2006 [the]
2 Silverstone [Defendants] went into default on [their] line of credit from GE Capital.”
3 Earnings deteriorated because of the Center’s inability to accept new Medicare
4 patients. Krystopowicz then transferred the licenses for all ten New Mexico facilities
5 to Cathedral Rock Corporation for no compensation. Krystopowicz entered into a
6 personal contract with Cathedral Rock Corporation to help close the transaction. He
7 was paid $150,000 under the contract.
8 {8} Plaintiff filed suit in March 2009. Mrs. Fernandez had lived at the Center for
9 approximately one year before her death. Plaintiff named six corporate entities,
10 including the Silverstone Defendants, as well as Krystopowicz and other individuals.
11 The complaint alleged negligence resulting in wrongful death, violation of the New
12 Mexico Unfair Trade Practices Act, negligence per se, breach of contract, and civil
13 conspiracy. The complaint was later amended to include a claim for loss of
14 consortium by Mrs. Fernandez’s son.
15 {9} The Silverstone Defendants failed to answer the complaint and a default
16 judgment was entered against them. Consequently, the allegations in the complaint
17 were considered admitted. Chronister v. State Farm Mut. Auto. Ins. Co., 1963-
18 NMSC-093, ¶ 7, 72 N.M. 159, 381 P.2d 673 (stating that “by permitting the default
19 judgments to be entered against him, [the defendant] admitted all the allegations in
4
1 said complaints”). After a two-day hearing, the district court awarded Plaintiff
2 $4,828,300 in damages. After the other defendants were dismissed from suit, the case
3 proceeded to a bench trial against Krystopowicz only. Krystopowicz was the only
4 witness at the trial.
5 {10} Plaintiff argued two theories. First, she argued that the Silverstone Defendants’
6 corporate veil should be pierced so as to hold Krystopowicz personally liable for the
7 damages awarded against the Silverstone Defendants. Second, she argued that
8 Krystopowicz had engaged in a civil conspiracy with the other defendants and should
9 be held personally liable for the negligence of his co-conspirators, the Silverstone
10 Defendants.
11 {11} The district court ruled against Plaintiff on both theories. While the district
12 court agreed that Krystopowicz had satisfied some of the criteria for piercing the
13 corporate veil, the district court reaffirmed an earlier ruling that the corporate veil
14 could not be pierced to hold Krystopowicz liable for the Silverstone Defendants’
15 conduct because “Plaintiff[] had not shown . . . that [Mrs.] Fernandez suffered any
16 damages as a result of [Krystopowicz’s] domination of Silverstone [entities] for an
17 improper purpose.” Similarly, although the district court found that the Silverstone
18 Defendants “ha[d] admitted to participating in a civil conspiracy
19 with . . . Krystopowicz and others[,]” it concluded that the civil conspiracy claim
5
1 against Krystopowicz failed as a matter of law because there was no evidence
2 “establishing a causal connection between . . . Krystopowicz[’s conduct] and the
3 death of [Mrs.] Fernandez.” Inherent to both of these rulings is the district court’s
4 rejection of Plaintiff’s argument that the allegations deemed admitted through the
5 Silverstone Defendants’ default judgment could be used against Krystopowicz.
6 Additional facts are provided as relevant to our discussion of Plaintiff’s arguments.
7 DISCUSSION
8 {12} The main issue on appeal is whether the district court erred by ruling that the
9 corporate veil could not be pierced to hold Krystopowicz personally liable for the
10 judgment against the Silverstone Defendants. Plaintiff makes a number of arguments
11 related to this issue, including (1) that the admissions of the Silverstone Defendants
12 should be imputed to Krystopowicz, (2) that the admissions are admissible against
13 Krystopowicz as a co-conspirator, and (3) that the district court erred in not holding
14 Krystopowicz liable for civil conspiracy. Because we conclude that the corporate veil
15 should be pierced, we need not address Plaintiff’s other arguments.
16 {13} “A basic proposition of corporate law is that a corporation will ordinarily be
17 treated as a legal entity separate from its shareholders.” Scott v. AZL Res., Inc., 1988-
18 NMSC-028, ¶ 6, 107 N.M. 118, 753 P.2d 897. Under this rule, individual
19 shareholders cannot be held personally liable for the corporation’s debt. Id. Under
6
 1 certain circumstances, however, courts may exercise their equitable power to “pierce
2 the corporate veil,” thereby requiring shareholders to answer for the corporation’s
3 liability. Id. (“Only under special circumstances will the courts disregard the
4 corporate entity to pierce the corporate veil [and] hold[] individual shareholders . . .
5 liable.”); London v. Bruskas, 1958-NMSC-020, ¶ 18, 64 N.M. 73, 324 P.2d 424
6 (stating that “in a proper case equity would require the general rule [that corporations
7 and their shareholders are separate] to be discharged”). To do so, the district court
8 must make three findings. First, that “the subsidiary or other subservient corporation
9 was operated not in a legitimate fashion to serve the valid goals and purposes of that
10 corporation but . . . instead under the domination and control and for the purposes of
11 some dominant party.” Scott, 1988-NMSC-028, ¶ 7. This requirement is known as
12 “instrumentality,” “domination,” or, in New Mexico, as the “alter ego doctrine.” Id.
13 Second, that there is “[s]ome form of moral culpability attributable to the
14 [shareholder], such as use of the subsidiary to perpetrate a fraud.” Id. ¶ 9 (“[I]n
15 fairness to the [shareholder] and to support the policy of limited liability of a
16 corporation, improper purpose must be established before the [shareholder] can be
17 found liable.” (alterations, internal quotation marks, and citation omitted)). Third, the
18 court must find that “there [is] some reasonable relationship between the injury
19 suffered by the plaintiff and the actions of the defendant.” Cathy S. Krendl & James
7
1 R. Krendl, Piercing the Corporate Veil: Focusing the Inquiry, 55 Denver L.J. 1, 27
2 (1978). This finding must demonstrate “some knowing or cooperative effort between
3 the related parties which results in unjust injury to the plaintiff, even though it may
4 not be possible to prove that the defendant’s control directly caused [the] plaintiff’s
5 injury.” Krendl, supra (footnote omitted), quoted in Garcia v. Coffman, 1997-
6 NMCA-092, ¶ 24, 124 N.M. 12, 946 P.2d 216. This requirement is referred to as
7 “proximate cause.” Garcia, 1997-NMCA-092, ¶ 10 (“The three requirements for
8 piercing the corporate veil are: (1) instrumentality or domination; (2) improper
9 purpose; and (3) proximate cause.”). “The burden of proof is upon the party seeking
10 to impose individual liability on the shareholder to demonstrate that the grounds for
11 piercing the corporate veil exist.” Nursing Home Grp. Rehab. Servs., Inc. v. Suncrest
12 Health Care, Inc., 162 Ohio App. 3d 577, 581, 2005-Ohio-3945, 834 N.E.2d 382, at
13 ¶ 12 (alteration, internal quotation marks, and citation omitted).
14 {14} Here, the district court found in a letter decision that “Plaintiff presented
15 sufficient evidence that Krystopowicz exercised improper domination of the
16 Silverstone [D]efendants” and that “Krystopowicz used the Silverstone [D]efendants
17 for improper purposes.” Thus, the first two requirements for piercing the corporate
18 veil were established. The district court also found that
19 there was no evidence presented to the [district c]ourt that as a result of
20 Krystopowicz’s domination of the Silverstone [D]efendants for an
8
1 improper purpose . . . [Mrs.] Fernandez got less or substandard care . . .,
2 or that the distributions taken by Krystopowicz . . . adversely affected
3 the operations of the [Center] in any way.
4 {15} It concluded that “without any evidence to satisfy the causation prong,
5 Plaintiff’s [argument for piercing the corporate veil must] fail.” The district court’s
6 conclusions as to the lack of evidence of a link between Krystopowicz’s actions and
7 Mrs. Fernandez’s injury were included in the district court’s findings of fact and
8 conclusions of law accompanying the final written judgment. Because Krystopowicz
9 does not challenge the district court’s findings and conclusions as to the first two
10 prongs, our focus is on the narrow issue of whether there is a causal connection
11 between Krystopowicz’s misuse of the corporate form and injury to the Plaintiff.
12 {16} We do not disagree with the district court that Plaintiff failed to demonstrate
13 a direct causal link between Mrs. Fernandez’s death and Krystopowicz’s management
14 of the Silverstone Defendants. Although she argues that the evidence at trial was
15 sufficient to demonstrate such a link, Plaintiff does not direct us to evidence
16 suggesting that (1) the Center was underfunded; (2) any understaffing was the result
17 of lack of funds; (3) Krystopowicz’s distributions of funds to himself and others, or
18 any other misuse of the corporate form, led to any underfunding, staffing shortage,
19 or impairment of care at the Center; (4) Krystopowicz knew that the budget for the
20 Center was inadequate; or (5) Krystopowicz denied requests for changes in the
9
1 Center’s budget or ignored reports of inadequate staffing or care. While
2 Krystopowicz testified that he reviewed monthly profit and loss statements for the
3 facilities, and that those statements included “analysis of census [and] operational
4 issues,” there was no evidence that he modified the Center’s operations based on that
5 information. Finally, there was no evidence presented related to industry standards
6 for staffing levels, minimum capital or cash flow requirements, or the impact of
7 “profit siphoning” on nursing homes generally. See generally Mark R. Kosieradzki
8 & Joel E. Smith, Direct Participant Liability in Causes of Action for Corporate
9 Negligence, 5 Litigating Tort Cases § 63:37.50 (2014) (discussing both direct and
10 indirect liability, including corporate veil, theories). Nor did Plaintiff propose
11 findings of fact related to these issues.
12 {17} However, a direct causal link to the tort-related acts is not required. The
13 question is not whether there is a direct link between Krystopowicz’s conduct and
14 Mrs. Fernandez’s death but rather whether Krystopowicz’s abuse of the corporate
15 form caused some injury to Plaintiff. Garcia, 1997-NMCA-092, ¶ 24 (“It is sufficient
16 to show some knowing or cooperative effort between the related parties which results
17 in unjust injury to the plaintiff, even though it may not be possible to prove that the
18 defendant’s control directly caused the plaintiff's injury.” (alterations, internal
19 quotation marks, and citation omitted)). We explain by starting with an example.
10
1 {18} In Mobius Management Systems, Inc. v. West Physician Search, L.L.C., the
2 Missouri Court of Appeals considered whether the district court correctly denied the
3 plaintiff’s efforts to pierce the corporate veil where a consent judgment against the
4 defendant company had been entered. 175 S.W.3d 186, 187 (Mo. Ct. App. 2005). The
5 case arose out of the defendant company’s failure to pay rent to the plaintiff. Id. The
6 plaintiff sued under a Missouri statute to recover past and future rent, attorney fees,
7 and possession of the property. Id. The parties entered into a consent judgment, which
8 was signed by the defendant company’s managing member. Id. When the plaintiff
9 was unsuccessful in collecting the judgment from the defendant company, it filed a
10 motion to pierce the corporate veil to hold the managing member accountable. Id. The
11 district court dismissed the motion. Id. at 188.
12 {19} On appeal, the appellate court reversed. Id. at 189. The court determined that
13 the plaintiff had sufficiently shown that the first two requirements for piercing the
14 corporate veil—alter ego/control and breach of a duty/improper purpose—were met.
15 Id. The appellate court concluded that “[the managing member] circumvented [the
16 defendant company’s] legal obligations by operating an undercapitalized shell
17 corporation—and therefore used his control over [the defendant company] to avoid
18 its obligations to [the plaintiff].” Id.
11
1 {20} As to the third prong, it held that, like in New Mexico, “the plaintiff must show
2 that the control and breach of duty proximately caused the injury or unjust loss.” Id.
3 It concluded, “Clearly, [the plaintiff] has suffered an injury—an unpaid $175,000
4 Judgment—and this injury was proximately caused by [the defendant company’s]
5 conduct. The only reason [the plaintiff] has not been paid the money it is legally owed
6 is because [the defendant company] lacks the necessary capital to satisfy this
7 judgment.” Id. Thus, the managing member in Mobius was liable for the corporation’s
8 debts because he had intentionally manipulated the corporation so as to avoid having
9 to pay any judgment. See Rice v. Oriental Fireworks Co., 707 P.2d 1250, 1255-56
10 (1985) (framing the proximate cause prong as whether “the shareholder’s improper
11 conduct . . . caused [the] plaintiff’s inability to obtain an adequate remedy from the
12 corporation” and holding that “there can be no doubt that [the shareholder’s] failure
13 adequately to capitalize or obtain insurance coverage for [the defendant corporation]
14 has caused [the] plaintiff to have an inadequate remedy against the corporation”).
15 {21} We recognize that generally insolvency of a corporation alone is not a
16 justification for piercing the corporate veil. O’Neal & Thompson’s 2 Close
17 Corporations and LLCs: Law and Practice § 8:20 (Rev. 3d ed. 2015) (stating that “if
18 a corporation has ‘adequate’ capital and if proper formalities have been observed,
19 shareholders are not liable for the corporation’s torts, even if corporate assets prove
12
1 to be insufficient to pay the tort claimants”); Scott, 1988-NMSC-028, ¶ 10 (“Mere
2 proof that the corporation is now insolvent is insufficient.”). However, “[i]t is
3 inequitable to allow shareholders to set up a flimsy organization just to escape
4 personal liability.” Fontana v. TLD Builders, Inc., 362 Ill. App. 3d 491, 504, 840
5 N.E.2d 767, 779 (2005); see Scott, 1988-NMSC-028, ¶ 10 (“[A] party seeking to
6 pierce the corporate veil must show that the financial setup of the corporation is a
7 sham and causes an injustice.”); cf. Mobius, 175 S.W.3d at 189 (“Inadequate
8 capitalization is circumstantial evidence of an improper purpose or reckless disregard
9 for the rights of others.”).
10 {22} We conclude that, similar to Mobius, Krystopowicz’s abuse of the corporate
11 form resulted in a sham corporation leading to Plaintiff’s inability to recover for her
12 injury. Together with the district court’s findings that Krystopowicz used the
13 Silverstone Defendants in order to obscure Davidson’s involvement with the nursing
14 homes and to funnel funds from the “concentration account” to himself and Davidson,
15 the district court’s other findings indicate that Krystopowicz failed to manage the
16 Silverstone Defendants in good faith to meet their legal obligations. See Hammett v.
17 Atcheson, 438 S.W.3d 452, 461 (Mo. Ct. App. 2014) (“Where a corporation [or an
18 LLC] is used for an improper purpose and to perpetuate injustice by which it avoids
19 its legal obligations, equity will step in, pierce the corporate veil and grant
13
1 appropriate relief.” (internal quotation marks and citation omitted)). Krystopowicz
2 does not challenge the following findings; consequently, they are binding on appeal.
3 Stueber v. Pickard, 1991-NMSC-082, ¶ 9, 112 NM 489, 816 P.2d 1111. The district
4 court found that the total initial capitalization of Silverstone Healthcare, Inc. and
5 Silverstone Healthcare of Raton, LLC was $2,000 and $100, respectively. It found
6 that the “initial working capital for Silverstone Healthcare, Inc.” also included a line
7 of credit of $1,900,000 that was “apportioned equally among [ten] underlying LLC[]s,
8 including Silverstone Healthcare of Raton[, LLC].” It found that the ten nursing home
9 facilities together generated over $47 million in annual revenue. In addition, it found
10 that Krystopowicz “intentionally failed to perform any debt-equity analysis for the
11 [nursing home] facilities, to check operations at the facilities, to determine the
12 budgetary needs of the facilities, to determine working capital needs of the facilities,
13 or to review the patient ‘census’ for the facilities.” The district court found that
14 “[a]lthough he was contractually obligated to make good faith attempts to secure
15 insurance coverage for the Silverstone entities, . . . Krystopowicz failed to secure any
16 such insurance and he failed to verify or even inquire as to whether or not any such
17 insurance coverage existed.” See Joseph E. Casson & Julia MacMillen, Protecting
18 Nursing Home Companies: Limiting Liability Through Corporate Restructuring, 36
19 J. Health L. 577, 603 (2003) (stating that nursing home companies should “[m]aintain
14
1 adequate insurance according to state-law and industry standards” in order to avoid
2 corporate veil piercing). The district court also found that Krystopowicz caused
3 “distributions” of approximately $550,000 to be made to him and others from the
4 “concentration account.” Id. (stating that nursing home companies should “[a]void
5 even the appearance of siphoning revenues to related entities or
6 shareholders/members” to prevent corporate veil piercing). And, when the enterprise
7 collapsed, Krystopowicz conveyed all of Silverstone Healthcare, Inc.’s assets for no
8 consideration to the corporation. Instead, he personally profited from the failure.
9 Finally, it found that “[a]s of October 17, 2011, the Silverstone [D]efendants have an
10 outstanding liability to the Internal Revenue Service for $1,000,000 in . . . taxes and
11 penalties.”
12 {23} In addition to these findings regarding Krystopowicz’s management of the
13 Silverstone Defendants, the district court made several findings as to Krystopowicz’s
14 conduct in the current suit. It found that “[a]lthough he was the sole shareholder,
15 officer, and director of . . . Silverstone Healthcare, Inc. and the manager of . . .
16 Silverstone Healthcare of Raton, LLC[], . . . Krystopowicz took no action to assure
17 that the interests of these corporate entities were defended in the current litigation,
18 and he intentionally declined to engage counsel to represent these entities in the
19 current litigation.” It further found that “Krystopowicz has intentionally failed to
15
1 verify or determine if either of the two Silverstone [D]efendants maintained insurance
2 coverage which could have provided for a defense in the current litigation.”
3 {24} The inability to recover for her injuries is itself a harm caused by
4 Krystopowicz’s misuse and abuse of the corporate form. There can be no question
5 about the causal relationship between Krystopowicz’s dominance and control of the
6 Silverstone Defendants for an improper purpose and the corporations’ inability to
7 answer for their obligations.
8 {25} We hold that the corporate veil should be pierced and that Krystopowicz should
9 be accountable for the Silverstone Defendants’ default judgment. Given this
10 disposition, we need not address Plaintiff’s other arguments.
11 CONCLUSION
12 {26} We hold that the unchallenged findings and conclusions meet the requirements
13 for piercing the corporate veil of the Silverstone Defendants such that Krystopowicz
14 can be held liable for the default judgment against those entities. The district court’s
15 concept of injury was too narrow. The district court therefore erred in dismissing
16 Plaintiff’s claims against Krystopowicz. We reverse and remand for entry of an order
17 consistent with this Opinion.
18 {27} IT IS SO ORDERED.
19 __________________________________
20 MICHAEL D. BUSTAMANTE, Judge
16
1 WE CONCUR:
2 ___________________________________
3 RODERICK T. KENNEDY, Judge
4 ___________________________________
5 M. MONICA ZAMORA, Judge
17