Miller & Schroeder, Inc. v. Gearman ( 1987 )

OPINION

NIERENGARTEN, Judge.

Miller & Schroeder, Inc. (Miller) sued A.T. Gearman, the guarantor of a mortgage, to recover a deficiency arising out of foreclosure by advertisement. Gearman counterclaimed, alleging fraud on Miller’s part. The trial court granted Miller’s motion for summary judgment in the amount of $206,604.68 and awarded attorney fees. Gearman appeals. We affirm.

FACTS

A.T. Gearman is a real estate entrepreneur. Twenty years ago he formed a corporation called Wheelock Enterprises, Inc. (Wheelock), ostensibly to hold title to real estate without the necessity of his wife’s attendance at closings. Gearman is the sole shareholder, officer and director for Wheelock. No stock has ever been issued and the shareholders and directors do not meet. The corporation has no bank account and Gearman transfers cash and assets in and out of Wheelock’s name at will. All cash generated by Wheelock’s properties goes into Gearman’s personal account. Wheelock is a subchapter S corporation for tax purposes so profits and losses are taxed to or deducted by Gearman individually. Wheelock has no employees and its only place of business is an office maintained by Gearman for himself. Gearman is always required to personally guarantee Wheelock’s debts.

In 1983 Gearman owned property in Wheelock’s name known as the Parkway Hotel (Hotel). Gearman planned to convert the Hotel to apartments and then sell them as condominiums but later decided to sell them as retirement homes. Miller told Gearman that public financing would provide more favorable rates than any private financing available and suggested it had the political connections to get the necessary approvals to implement the plan.

In January 1984, Miller loaned Wheelock $1,700,000 on the security of a mortgage on the Hotel and Gearman’s personal guarantee. Miller received only Gearman’s personal financial statement, including properties held in Wheelock’s name. Gearman informed Miller that his use of Wheelock was for the convenience of his wife.

Miller was unable to get the public funding and Wheelock defaulted on the loan. Miller foreclosed by advertisement and purchased the Hotel for $1,575,000 at the sheriff’s sale. After the sale, Miller commenced this action against Gearman, as guarantor, for a deficiency of $176,256.25, plus interest.

ISSUES

1. Is appellant entitled to the protection of the antideficiency statute, Minn.Stat. § 580.23, subd. 1 (1984)?

2. Was respondent guilty of fraud?

3. Was summary judgment appropriate?

ANALYSIS

I

Minnesota’s antideficieney statute provided:

When lands have been sold in conformity with the preceding sections of this chapter the mortgagor, his personal representatives or assigns, within six months after such sale, except as otherwise provided in subdivision 2, may redeem such lands, as hereinafter provided, by paying the sum of money for which the same were sold, with interest from the time of sale at the rate provided to be paid on the mortgage debt and, if no rate be provided in the mortgage note, at the rate of six percent per annum, together with any further sums which may be payable pursuant to section 582.03. Where the redemption period is as provided in this subdivision the mortgagee, or his successors, assigns, or personal representative, or any other purchaser so purchasing at the sheriffs sale shall by purchasing the property at the sheriff’s sale thereby waive his right to a deficiency judgment against the mortgagor.

Minn.Stat. § 580.23, subd. 1 (1984) (emphasis added). Gearman argues that he is, for all practical purposes, the mortgagor and thus Miller is not entitled to a deficiency judgment. Miller correctly argues that the statute clearly does not apply to a guarantor. Victory Highway Village, Inc. v. Weaver, 480 F.Supp. 71, (D.Minn.1979), aff'd, 634 F.2d 1099 (8th Cir.1980), involved the foreclosure of a mortgage by advertisement. The court concluded that:

a mortgagee who uses the summary foreclosure proceeding contained in M.S.A. § 580.23, Subd. 1, waives any right to obtain a deficiency judgment against the mortgagor, but is not precluded by § 580.23 from seeking a deficiency judgment against the guarantors.

480 F.Supp. at 74. Thus, the question presented is whether Gearman and Wheel-ock are the same entity so as to entitle Gearman to the protection of the antidefici-ency statute.

Gearman argues that when the guarantee is in reality executed by the primary obligor, the guarantor should come within the protection of the statute. In effect, Gearman asks the court to “reverse pierce the corporate veil” and find that Wheelock was his alter ego and merely an instrumentality.

White v. Jorgenson, 322 N.W.2d 607 (Minn.1982), lays out a two-pronged test for using an alter ego theory to find liability. The first prong focuses on the relationship of the shareholder to the corporation. Factors to be considered include:

[Insufficient capitalization for purposes of corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation at time of transaction in question, siphoning of funds by dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and existence of corporation as merely facade for individual dealings.

Id. at 608 (quoting Victoria Elevator Co. v. Meriden Grain Co., 283 N.W.2d 509, 512 (Minn.1979)). Some of these factors apply to Wheelock.

However, there is a second, and more important prong to the test. In order to justify piercing the corporate veil the court must find “an element of injustice or fundamental unfairness.” Victoria Elevator Co., 283 N.W.2d at 512. Usually, this means that the corporation “has been operated as a constructive fraud or in an unjust manner.” West Concord Conservation Club, Inc. v. Chilson, 306 N.W.2d 893, 898 n. 3 (Minn.1981). Common law fraud is not required. Id. Generally, one is piercing the corporate veil on behalf of a creditor dealing with the corporation because it is unfair or unjust not to. In a reverse pierce, this court must determine that it was unfair and unjust not to pierce the corporate veil in order to provide Gearman with the protection of the antideficiency statute. We do not find such injustice here.

In Cargill, Inc. v. Hedge, 375 N.W.2d 477 (Minn.1985), the court stressed the limited application of a reverse pierce.

We are aware of the danger of a debtor being able to raise or lower his corporate shield, depending upon which position best protects his property. Consequently, a reverse pierce should be permitted in only the most carefully limited circumstances.

Id. at 480 (emphasis added). In this case we have two established, experienced business parties involved in a commercial transaction. Gearman has acted through his corporation for over twenty years, held various properties through it, acquired title to the Hotel in 1980 and executed two mortgages through it, and enjoyed the benefits thereof. It is therefore neither unfair nor unjust to leave Gearman in a position where he must repay money he borrowed in order to carry on business activities.

II

Gearman argues that Miller should not be allowed to collect the deficiency judgment because of fraud on Miller’s part. Fraud must relate to a past or existing fact and cannot be based on statements of intentions or opinions. Dollar Travel Agency, Inc. v. Northwest Airlines, Inc., 354 N.W.2d 880, 883 (Minn.Ct.App.1984), pet. for rev. denied (Minn. Dec. 21, 1984). The record clearly shows that Miller agreed to use its best efforts in developing a financing program and was turned down by the City of Minneapolis because of the nature of the project. Miller’s conduct does not support a fraud claim.

III

Summary judgment may be granted only if there are no material issues of facts and one party is entitled to judgment as a matter of law. See Ostendorf v. Kenyon, 347 N.W.2d 834, 836 (Minn.Ct.App.1984). The burden of proof is on the moving party. Polk v. Mutual Service Life Insurance Co., 344 N.W.2d 427, 429 (Minn.Ct.App.1984). The evidence will be reviewed in the light most favorable to the nonmoving party and doubts and inferences will be resolved against the movant. Lindner v. Lund, 352 N.W.2d 68, 70 (Minn.Ct.App.1984).

The facts in this case with regard to the activities and representations in this case are not disputed. The parties disagree over whether the circumstance require piercing the corporate veil and a finding of fraud. Resolution of these disputes is a matter of law, not fact, and summary judgment is appropriate.

Attorney Fees

Miller has requested attorney fees and the guaranty in this case specifically provided that the guarantor will pay the cost of collection, including attorney fees. The lower court set the attorney fees at $15,-425.90 and Miller requests an additional $5,000. We decline to award additional fees.

DECISION

There is no injustice, unfairness or strong public policy reasons which would justify a reverse piercing of the corporate veil in this case. Fraud must be based on past or existing facts. Attorney fees are denied.

Affirmed.