Iowa Court Upholds Piercing Corporate Veil in Fraud Case

On July 20, 2022, the Iowa Court of Appeals affirmed a $960,000 jury verdict against a swine management company and its owner. A group of farmers began a business venture with the management company to purchase, feed, and sell pigs. The business was financially unsuccessful. The investor-farmers brought this lawsuit against the management company and its owner alleging breach of contract, fraudulent misrepresentation, and breach of fiduciary duty. The court found that there was substantial evidence to support the verdict against the management company and to pierce the corporate veil, thus, holding the owner personally liable.

Background

Due to the low price of corn, a group of farmers decided that “they’d rather feed [their corn] through pigs than hauling [the corn] to town.” To implement the “corn to pork” plan, the farmers, along with a feed store, formed C2P Pigs, LLC (C2P). C2P decided to partner with Donald Fedie as the sole shareholder of Agri Control Company Inc. (Agri Control) and the president of Kingsley Livestock LLC (Kingsley). Fedie provided a “Hog Finishing/Marketing Investment Opportunity” document to the potential farmer-investors which claimed that Kingsley had a $1.5 million line of credit.

The parties agreed that C2P and Kingsley would enter into a limited liability partnership (the partnership) “engaged in the business of the purchase, housing and care, feeding and growing and the sale of mature livestock (swine) for harvest.” C2P would provide the funds to purchase feeder pigs and Kingsley would pay for the running expenses to finish and sell the pigs. C2P and Kingsley would split the profits and losses equally. The partnership entered into an agreement with Agri Control to oversee the livestock and financial management of the partnership.

The business venture began in 2015. On behalf of Agri Control, Fedie provided C2P with financial reports twice a year. The December 2015 report showed a net income loss of $105,236. The partnership made a capital call to split the loss. C2P provided $52,618.  

By the fall of 2017, the partnership had difficulty paying its outstanding bills. Fedie suggested another capital call, but C2P refused. Finding the partnership’s books “hard to understand,” the parties hired a CPA “to get the financials up to date and correct.” The CPA was able to recreate the books and determined that the partnership had a cash loss of $570,000 and still owed an outstanding $660,000 for a total loss of approximately $1.2 million.

Soon after, the partnership stopped doing business together and eventually dissolved. C2P and the partnership initiated this lawsuit against Agri Control and Fedie, bringing claims of breach of contract, fraudulent misrepresentation, and breach of fiduciary duty. They also claimed that the court should pierce the corporate veil to hold Fedie personally liable.

The case proceeded to trial at which the jury heard testimony from the CPA regarding the inconsistencies between the financial reports Fedie provided and the partnership’s books at the time of the report. The financial reports overstated the total income, equity, and inventory costs including:

The CPA testified to similar discrepancies with the closeout reports for each group of pigs sold. He also testified that Kingsley’s $1.5 million line of credit had $900,000 borrowed against it when the partnership began, which left the partnership with a $600,000 line of credit. The president of C2P testified that if C2P had been aware that the partnership had lost $300,000 in net income by the end of 2015, it would not have participated in the capital call. Conversely, Fedie claimed that the business failed because of undercapitalization when C2P refused to give the bank a lien against the livestock and complete a second capital call.

The jury determined that both defendants made fraudulent misrepresentations and breached their fiduciary duties. Additionally, the jury found that Agri Control breached its agreement with the partnership and its corporate veil should be pierced to hold Fedie personally liable. The jury assessed $300,000 against Agri Control in favor of C2P and $660,000 against Agri Control and Fedie, joint and severable, in favor of the partnership. Agri Control and Fedie moved for a judgment notwithstanding the verdict (JNOV), claiming that there were entitled to directed verdicts for both claims. The defendants also moved for a new trial. The district court denied both motions. The defendants appealed.

Fraudulent Misrepresentation

The court first determined whether there was sufficient evidence to allow the jury to decide the fraudulent misrepresentation claims. “Each element of the plaintiff’s claim must be supported by substantial evidence to warrant submission to the jury.” ” Van Sickle Constr. Co. v. Wachovia Com. Mortg., Inc., 783 N.W.2d 684, 687 (Iowa 2010).

The jury instructions for fraudulent misrepresentation provided that the plaintiffs must prove, among other things, that they “acted in reliance on the truth of the [defendants’ false] representation.” The defendants claimed that the testimony of C2P’s president as to the whether C2P would have contributed to the capital call if it had known that the business had lost $300,000 demonstrated that the plaintiffs only “acted in reliance” on the December 2015 financial report and Fedie’s initial claim that Kingsley had a $1.5 million line of credit.

The defendants asserted that the December 2015 financial report was not false, but was determined under a cash basis instead of an accrual basis. The court noted that the plaintiffs’ CPA testified to the contrary stating that “[t]he fact that there’s accounts payable would tell me it’s based on an accrual basis.” The court also noted that the October 2015 financial report showed a net income loss of $61,799 while the partnership’s books at the time showed an $114,039 loss. Accordingly, the Court of Appeals found that there was substantial evidence that the defendants made false representations.

Breach of Fiduciary Duty

The defendants next argued that their motion for a directed verdict for the breach of fiduciary duty claims should be granted because there was no fiduciary relationship between the defendants and the plaintiffs. The defendants asserted that they were acting with the plaintiffs, not on behalf of the plaintiffs.

Several factors may indicate a fiduciary relationship exists, including the dependence of one party on another and the inequality among the parties. Kurth v. Van Horn, 380 N.W.2d 693, 696 (Iowa 1986). The plaintiffs relied on Agri Control, and thus Fedie, to obtain and report relevant information as part of managing the business venture. Additionally, the plaintiffs did not have equal access to documents like the partnership’s books or closeout reports which contained financial information and animal health data for each group of pigs sold.

Piercing the Corporate Veil

Lastly, the defendants argued that the district court erred in denying their motion for directed verdict or JNOV as to the piercing the corporate veil claim. The personal liability of a corporate entity may be set aside in exceptional circumstances. The court will consider whether:

(1) the corporation is undercapitalized;

(2) the corporation lacks separate books;

(3) its finances are not kept separate from individual finances, or individual obligations are paid by the corporation;

(4) the corporation is used to promote fraud or illegality;

(5) corporate formalities are not followed; or

(6) the corporation is a mere sham.

Briggs Transp. Co. v. Starr Sale Co., 262 N.W.2d 805, 810 (Iowa 1978). The district court denied the defendants’ motions relying on the third and fourth factors. There was evidence that Fedie used Agri Control’s funds to pay for his personal expenses, such as a boat in Florida and a motor home, when the “business venture was in dire financial straits.” The court also explained that a corporate officer is personally liable for his own fraudulent corporate acts. Id. at 809. Here, the jury found that Fedie made false representations to the plaintiffs. As a result, the court determined that there was sufficient evidence to justify piercing the corporate veil.