Opinion
NO. 2010-CV-00741
03-10-2014
PlasTech Machining & Fabrication, Inc. v. StemTech, Ltd. et al.
ORDER
The Plaintiff, PlasTech Machining and Fabrication, Inc. ("PlasTech"), obtained a judgment against the Defendant, StemTech, Ltd. ("StemTech"), in 2011 in the amount of $44,428.26. That judgment has not been paid. PlasTech seeks to hold the sole shareholder of StemTech, Paul A. Harris, liable on an alter ego theory, seeking to pierce the corporate veil. It also seeks to hold another corporation of which Harris is the sole shareholder, FSC Precision, Ltd. ("FSC"), liable on a successor liability theory. An evidentiary hearing was held on the alter ego claim. For the reasons stated in this Order, the Court finds that both Harris and FSC are liable to PlasTech.
I
The Court finds the following facts based upon the documents admitted and testimony before the Court. Harris was the sole shareholder and "sole officer" of StemTech, a New Hampshire corporation created on November 19, 2008 and administratively dissolved on September 1, 2010 for failure to file annual reports. (Pl.'s Ex. 1); (Pl.'s Ex. 2.) StemTech nonetheless purported to do business through February 2, 2012. StemTech did business under a trade name "FlowerTech." FlowerTech was registered personally to Harris and was first used in commerce in 2007. (Pl.'s Ex. 3.)
StemTech had no corporate book in which minutes or notes were kept. Although Harris claimed that StemTech had bylaws, they were not produced at trial, because he testified that they were lost. He was cross-examined with the fact that at his deposition, he had admitted that no bylaws and no corporate minutes were ever kept. The Court does not credit his testimony.
StemTech did business from Harris' personal residence in North Hampton, New Hampshire, which was owned by his ex-wife, Heather Harris. A lease was produced at trial between Heather Harris and FlowerTech. (Pl.'s Ex. 4.) Harris testified that he considered StemTech to be a subtenant of FlowerTech, but he admitted that StemTech never signed a sublease. Harris signed the lease on behalf of FlowerTech, as tenant. See (id.) Harris cannot produce any checks evidencing rent payments to anyone by StemTech.
FlowerTech was the d/b/a ("doing business as") designation registered to Harris personally, which both StemTech and FSC used to conduct business.
No balance sheets or, for that matter, financial records of any kind relating solely to StemTech were ever produced at trial. Harris never kept track of profits or losses of StemTech, although he claims that StemTech never made any money. Neither Harris nor StemTech has filed a federal income tax return since 2009. All of StemTech's revenues went into a bank account at Optima Bank and Trust ("Optima") in StemTech's name. The Optima account appears to have been used for both Harris' purposes and StemTech's purposes.
On February 2, 2012, articles of incorporation were filed for FSC. (Pl.'s Ex. 5.) The Court finds that no bylaws, books, minutes, balance sheets, or memoranda of directors meetings exist. On February 2, 2012, despite the fact that the trade name FlowerTech had been registered to Harris at the United States Patent and Trademark Office, Harris filed an application for registration of the trade name "FlowerTech" for "Paul Harris, FSC Precision, Ltd." with the New Hampshire Secretary of State. See (Pl.'s Ex. 3); (Pl.'s Ex. 6.) Harris testified that he used the FlowerTech name in operating FSC because he wanted to maintain "market recognition." However, at another point in his testimony, he claimed that StemTech had no real assets at the time it ceased operating.
A screen shot of the 2013 website for FlowerTech was introduced, which contained a number of testimonials. (Pl.'s Ex. 7); (Pl.'s Ex. 8.) The testimonials related to transactions before and after February 2, 2012, when FSC began operating and using the trade name FlowerTech. The telephone number for StemTech and FSC remained the same. When Harris opened a commercial account for FSC, he used his social security number instead of a taxpayer identification number.
Neither of the corporations ever had an accountant, and Harris did not consult an attorney in creating these corporations. Harris claims that despite the lack of formality, and the lack of records, both StemTech and FSC were operated as corporations, and not merely his alter egos. However, the checking account records establish that certain expenses, which would not ordinarily seem to be business expenses, were paid from the Optima account that supposedly was used by StemTech. For example, a check to AAMCO transmission was produced; while Harris claimed it was used to repair a company vehicle, he admitted StemTech never owned a company vehicle and no documents evidence use of a personal vehicle for business purposes.
Many of the debits to the account were to grocery stores. (Pl.'s Ex. 11.) Harris testified that StemTech was in the business of first manufacturing products to cut the stems on flowers, and much of the expenses related to purchasing flowers for testing purposes. While Harris has a colorable explanation for these charges, there is no reasonable explanation why StemTech would have debits for the Secondary School Admission test, or Fryeberg Snowmobiles. The bulk of the documents provide no basis for the Court to credit his testimony. Illustrative are the records for January 2012 from StemTech's Optima account, which include purchases from Apple's ITunes store, Wal-Mart, Stop and Shop, Comcast Cable, and Starbucks. (Id. at 362-69.) Similar purchases can be found each month. Harris has no records whatsoever to support characterizing these purchases as business expenses. In addition, there were occasional checks made out to cash from StemTech's Optima account and transfers to Harris' personal account, and there is no credible evidence to support Harris' testimony that these transfers occurred to repay a loan. Significantly, Harris refused to answer any questions about his personal finances at his deposition.
The Court finds that Harris treated the supposed StemTech corporate account as his own property and used its assets for his personal expenses.
As with the StemTech account, Harris regularly used the funds in FSC account at Optima, opened in 2012, for personal expenses. While he similarly attempted to characterize these expenses as business expenses, the Court does not credit his testimony. Both StemTech and FSC used the FlowerTech trademark registered to Harris throughout their business operations. It is apparent that Harris used both corporate forms, when it suited him, to carry out the business he carried on under the trade name "FlowerTech."
The Court recognizes that Harris testified that in 2012, the business changed from a manufacturing company to a marketing company. Even assuming this is true, the evidence compels the conclusion, based upon use of the same d/b/a designation by both StemTech and FSC as well as testimonials relating to the prior company on the website, that the business are functionally the same.
II
Plaintiff first argues that Harris should be held personally liable for StemTech's obligations since it was his alter ego under the corporate veil piercing doctrine. The New Hampshire Supreme Court has stated that "one of the desirable and legitimate attributes of the corporate form of doing business is the limitation of the liability of the owners to the extent of their investment." LaMontagne Builders, Inc. v. Bowman Brook Purchase Group, 150 N.H. 270, 275 (2003). In New Hampshire, the doctrine of piercing the corporate veil is an equitable remedy. Id. at 274; Terren v. Butler, 134 N.H. 635, 640 (1991). A court may pierce the corporate veil where the owners of the corporation have used the corporate identity to promote injustice or fraud. Norwood Group v. Phillips, 149 N.H. 722, 724 (2003); Michnovez v. Blair, LLC, 795 F. Supp. 2d 177, 185 (D.N.H. 2010). Under settled New Hampshire law, veil piercing is appropriate where the shareholder "creates a false appearance which causes a reasonable creditor to misapprehend the worth of the corporate obligor." Peter R. Previte, Inc. v. McAllister Florist, Inc., 113 N.H. 579, 582 (1973).
Thus, in LaMontagne Builders, the Court sustained a finding that the corporate veil should be pierced where the principal breached an express promise to pay a construction company out of the proceeds of the loan to a development company, the principal made the promise in order to stop the construction company from filing a mechanic's lien for interfering with the loan, the principal's claimed reasons for breach were disingenuous, and the loan proceeds went to the principal's family and family owned businesses. 150 N.H. at 276. In Terren, the Court held that piercing the corporate veil was an appropriate remedy where the individual defendants—the sole shareholders and directors of the corporation—substantially depleted the corporate assets after being advised that defects existed in a condominium project the corporation was developing. 134 N.H. at 640-41. Piercing the corporate veil is appropriate if a shareholder suppresses the fact of incorporation, misleads his creditors as to the corporate assets, or otherwise uses the corporate entity to promote injustice or fraud. Druding v. Allen, 122 N.H. 823, 827 (1982).
The New Hampshire Supreme Court recently noted that in both Terren and Druding, as here, the officers disregarded some corporate formalities; however, liability was found in Terren because the corporation continued to distribute its assets at time claims were made against it while in Druding, liability was not found because corporate assets remained constant. Mbahaba v. Morgan, 163 N.H. 561, 569 (2012). In this case, as in Terren, it is apparent that Harris used the assets in the Optima account personally.
Most of the New Hampshire cases are grounded in their specific facts, and do not set forth a broad framework for analysis. PlasTech cites Platten v. HG Bermuda Exempted Ltd., 437 F.3d 118, 128 (1st Cir. 2006) as setting forth factors to be considered in whether the corporate veil should be pierced. In Platten, the First Circuit, relying on Massachusetts law, stated that the factors to be considered in determining whether piercing the veil is appropriate may include:
(1) common ownership; (2) pervasive control; (3) confused intermingling of business assets; (4) thin capitalization; (5) nonobservance of corporateId. at 128.
formalities; (6) absence of corporate records; (7) no payment of dividends (8) insolvency at the time of the litigated transaction; (9) siphoning away of the corporation's funds by dominant shareholder; (10) nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; and (12) use of the corporation in promoting fraud.
The Court finds that these criteria provide a helpful framework for analysis. In fact, "Massachusetts has been somewhat more 'strict' than other jurisdictions in respecting the separate entities of different corporations." Birbara v. Locke, 99 F.3d 1233, 1238 (1st Cir. 1996) (quoting My Bread Baking Co. v. Cumberland Farms, Inc., 233 N.E.2d 748, 752 (Mass. 1968)). Application of these criteria to the instant case is probably more favorable to Harris than New Hampshire law requires and illustrates the overwhelming evidence that supports piercing the corporate veil in this case.
First, there is no doubt that Harris led the Plaintiff to believe that it was dealing with a corporation. The invoices from PlasTech to StemTech, which form the basis of the judgment, all reference sales from one corporation to another. Indeed, StemTech introduced a document called "Investment Agreement," which shows that the principal of PlasTech, Louis C. Ferriero, agreed to invest in StemTech, Ltd., described as a New Hampshire corporation, agreed to pay $15,000, and would own 5% of the currently outstanding shares of the corporation. (Defs.' Ex. C.) Despite the language of this agreement, no shares of StemTech were ever issued. Defendant argues that the fact that Ferriero never inquired about the capitalization of StemTech, and never sought personal guarantees, exculpates it. (Def.'s Post-Hearing Memorandum 2.) The Court disagrees. Rather, this evidence tends to show that PlasTech believed that it was dealing with a legitimate corporation, and that the corporation's assets would be used to pay the corporation's debts and not diverted to the corporation's sole shareholder.
Additionally, the Court finds, based upon the evidence, that StemTech's assets were used to benefit Harris personally. Virtually all of the factors referenced in Platten exist here. See 437 F.3d at 128. Harris was the sole owner of StemTech; he had complete control of the corporation; no corporate formalities were ever observed; there are no corporate records; no directors existed, and no officers managed the corporation's affairs; and the corporation was used for the transactions of Harris.
On their face, the corporation's bank records show that Harris used corporate assets to pay personal expenses. No records exist that would support Harris' claim that payments, which on their face appear personal in nature, were actually meant to benefit the corporation. Significantly, neither Harris nor the corporation filed tax returns during the relevant period that would likely shed light on Harris' claims. Under these circumstances, the Court finds complete commingling of StemTech's assets with Harris' personal assets.
Moreover, the corporation was plainly used in promoting fraud, because it continued to do business as StemTech after September 1, 2010—the date of StemTech's administrative dissolution. In doing so, it violated RSA 293-A14.21 (c), which prohibits carrying on any business not strictly necessary to winding up and liquidate the business. He admits that he transferred $700 to himself to close the account in February 2012, when he created FSC to carry on the FlowerTech business. At that time, StemTech had a judgment creditor, PlasTech, and the transfer was in clear violation of New Hampshire law.
Indeed, it could be argued that after the administrative dissolution of StemTech, no corporation existed and all of the transactions involved Harris in his personal capacity.
In sum, StemTech was merely the alter ego of Harris; it was used by him to attempt to insulate himself from debts he incurred personally. As a result, he is personally liable for its debts.
III
Plaintiff further alleges that FSC is also liable for StemTech's debts because it is a "mere continuation" of StemTech. As a general rule, one corporation is not liable for the debts of a corporation whose assets it purchases unless only one corporation remains after the transfer of assets and unless there is an identity of stock, stockholders, and directors between the two corporations. Bielagus v. EMRE of N.H., 149 N.H. 635, 644 (2003). New Hampshire has specifically rejected the "continuity of the enterprise" or "substantial continuity theory" of successor liability accepted by the federal courts. Id. (distinguishing Kleen Laundry & Dry Cleaning Servs., Inc. v. Total Waste Management Corp., 817 F. Supp. 225, 231 (D.N.H. 1993)). However, successor liability may be imposed on a new corporation where the purchaser is merely the seller, reincarnated under a different entity. Bielagus, 149 N.H. at 645-46. A successor corporation may be held liable when: (1) the buyer expressly or impliedly agrees to assume such liability; (2) the transaction amounts to a de facto consolidation or merger; (3) the buyer corporation is merely a continuation of the seller corporation; or (4) the transaction is entered into fraudulently for the purpose of escaping liability. See Bielagus, 149 N.H. at 645-46; see also Welco Industries v. Applied Companies, 617 N.E.2d 1129, 1132 (Ohio 1993) (citing and quoting Flaugher v. Cone Automatic Machine Co., 507 N.E.2d 331 (Ohio 1987)).
Here, the facts compel a conclusion that the creation of FSC was a mere continuation of StemTech. FSC continued to do business as FlowerTech, the same d/b/a designation used by StemTech, and was registered under both state and federal law to Harris. Neither corporation had any directors and officers other than Harris. They operated from the same place of business; the website used by FlowerTech after FSC was created referenced testimonials given to StemTech. Harris was the sole employee of both corporations during all relevant times, and they operated in the same business. The conclusion is inescapable that FSC held itself out as being the same entity as StemTech; as a result, FSC is a mere continuation of StemTech.
Moreover, the evidence compels a conclusion that the creation of the new corporation was fraudulent, and done for purposes of avoiding liability. At the time FSC was created, StemTech was a judgment debtor to Plaintiff. It disposed of its only cash assets by paying them to Harris, its sole stockholder, in violation of RSA 293. FSC continued to engage in the same business with the same vendors, and advertised using testimonials provided for StemTech. The Court finds that FSC is therefore liable for the debts and obligations of StemTech.
It is not clear that a finding under the "mere continuation" doctrine requires a finding by clear and convincing evidence. In any event, the Court finds that the requisites of the doctrine are satisfied by clear and convincing evidence in the circumstances of this case.
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SO ORDERED.
__________
Richard B. McNamara
Presiding Justice
RBM/