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Brown v. Knowles

Supreme Court of Alaska

August 16, 2013

Edward BROWN and Heidi Brown, Appellants and Cross Appellees,
v.
Leon KNOWLES and E. Brown Inc. d/b/a International Steel, Appellees and Cross Appellants.

Rehearing Denied Sept. 13, 2013.

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William H. Ingaldson, Ingaldson, Maassen & Fitzgerald, P.C., Anchorage, for Appellants/Cross Appellees.

Kim Dunn, Landye Bennett Blumstein LLP, Anchorage, for Appellee/Cross Appellant Leon Knowles.

Before: CARPENETI, Chief Justice, FABE, WINFREE, and STOWERS, Justices.

OPINION

CARPENETI, Chief Justice.

I. INTRODUCTION

The unpaid employee of a closely-held corporation sued the corporation and its president for back wages in superior court. The day after the employee filed suit, the corporation filed for Chapter 11 bankruptcy. The bankruptcy court discharged the corporation's debts, and the superior court dismissed the corporation, but the superior court allowed trial to proceed against the president on a veil-piercing theory. A jury found that the corporation was a mere instrumentality of the president, and that the president owed the former employee wages under a bonus agreement. The president appeals the superior court's decision on multiple grounds.

When a corporation files for bankruptcy, the corporation's legal claims become property of the bankruptcy estate. Here, the president claims that the corporation theoretically could have brought the plaintiff's

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veil-piercing claim against him prior to bankruptcy. Thus, the president reasons, the employee's veil-piercing claim became property of the bankruptcy estate. But in this case, the plaintiff did not allege injury to the corporation, and therefore the corporation could not have brought the plaintiff's legal claim against its president. For this reason, the plaintiff's veil-piercing claim did not become property of the estate. And the discharge of the corporation's personal liability on the debt did not prevent the superior court from establishing the corporation's indebtedness for the sole purpose of holding the president liable. Thus, the court could pierce the corporate veil to hold the president liable.

Additionally, the mere-instrumentality test is a sufficient basis to pierce the corporate veil. The superior court did not err in piercing the veil based on the jury's finding that the mere-instrumentality test was met. The superior court correctly answered the jury's questions on the mere-instrumentality test and properly determined the statute of limitations on the employee's claims under the Alaska Wage and Hour Act (AWHA). The superior court's calculation of the overtime and derivative AWHA claims was also proper, and the superior court did not err in awarding attorney's fees. The superior court did not err in declining to find that a dismissed party who was only minimally involved in the litigation was a prevailing party. We therefore affirm.

II. FACTS AND PROCEEDINGS

A. Facts

In 1999, Edward Brown and Leon Knowles entered into a bonus agreement. At the time, Brown was the president, chief operating officer, managing officer, and either the sole owner or half-owner of a closely-held Anchorage-based construction company incorporated as E. Brown, Inc., but doing business as International Steel. Brown stated that his wife Heidi owned 50% of International Steel's stock, but Brown could not explain how or when Heidi obtained the stock, and his account of how she obtained the stock conflicted with International Steel's financial reports. In a 2004 financial statement, Brown stated that he owned 100% of the issued stock.

Brown admitted that he was not aware of the legal requirement that International Steel hold annual meetings. The only minutes found in the corporate record document a meeting between Brown and Heidi held on Grand Cayman Island, British West Indies, in 1988, shortly after Brown's marriage to Heidi. That meeting occurred in November 1988 after International Steel had been involuntarily dissolved by the State of Alaska for failure to pay its taxes. International Steel came back into good standing in 1989, but the corporate record contains no account of any annual meetings after 1988.

In 1994, Brown recruited Knowles to work for International Steel as an " expediter," but as International Steel's volume of work increased, Knowles began receiving project management work, taking on his first official project management job in 1997. In the fall of 1999, Knowles requested a raise. Knowles testified that Brown suggested using a bonus plan instead of a wage raise to compensate him. The two parties reached an agreement on a bonus plan, which Knowles drafted and the parties never signed.

On the basis of the bonus agreement, Knowles received a bonus of $27,455 in 2000, but in 2001 International Steel began to experience financial troubles and was unable to pay a bonus. The next year, after International Steel received a $968,000 settlement on an old project, Brown paid Knowles a bonus of $100,000 for work performed under the bonus agreement. Knowles claimed at trial that, according to his calculations, he was owed an additional $72,666 for that work. Knowles testified that Brown assured him that International Steel would pay him the rest when the company could afford it. Brown testified that he did not believe he owed Knowles any more bonus, but that he could not remember telling Knowles this, because he did not know " how that would come up."

At no time did International Steel pay Knowles overtime on his bonus payments. Knowles testified that when he and Brown negotiated the bonus agreement, Knowles

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was unaware of the provisions in the Alaska Wage and Hour Act that require overtime payments on non-discretionary bonuses.[1]

International Steel's finances continually deteriorated until it had completely drawn down its credit line. Knowles, who testified he had " some serious medical issues," discovered that his health insurance had been cancelled due to nonpayment by International Steel on October 6, 2004. He resigned the same day. Knowles testified that Brown continued to communicate with him about an outstanding claim on one of Knowles's projects, the Bassett claim, which seemed potentially to be worth millions of dollars to International Steel. Knowles also purchased his company truck from International Steel, receiving a bill of sale in return, signed by Brown. The bill of sale, dated November 2004, refers to " wages and/or bonus payments which are outstanding and currently owed by International Steel to Knowles," and according to which " the parties will determine at a later time the total amount which Knowles is owed."

B. Proceedings

On January 19, 2005, Knowles filed suit in superior court against International Steel and Brown. His original complaint included: (1) a breach of contract claim against International Steel based on the bonus agreement; (2) a breach of contract claim against the company based on failure to pay the agreed-upon bonus; (3) accompanying AWHA claims against the company based on failure to pay overtime on the bonus and pay raise; (4) assorted common law claims directed against both the company and Brown; and (5) a claim under AS 23.05.140 based on International Steel's failure to pay Knowles all of his wages within three days of termination of the employment contract.

The next day, on January 20, 2005, International Steel filed a petition for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Alaska.

After Brown filed his answer to Knowles's complaint, the superior court noted that Knowles's case against International Steel had been stayed by the bankruptcy proceedings and asked the parties whether they intended the bankruptcy stay to apply to Brown as well. The parties stipulated to a six-month stay. In November 2005, they renewed the stay to apply until March 10, 2006.

Meanwhile, Knowles filed a proof of claim with the bankruptcy court dated May 18, 2005, for unpaid compensation from International Steel in the years 2002 to 2005, estimating that he was owed $365,000 in unsecured debts and $5,000 in secured debts from International Steel, but noting in an attachment that he was still gathering information regarding the amounts due. On April 14, 2006, the bankruptcy court confirmed International Steel's Amended Plan of Reorganization (the Plan). Knowles, along with other unsecured nonpriority claimants, received nothing under the Plan. Nonetheless, he filed a notice withdrawing his claim against International Steel in the bankruptcy court.

The superior court reported in a later order that at a status hearing on September 5, 2006, " in anticipation of the approval of the reorganization plan, the parties agreed the complaint against [Brown] could proceed." Later that month, Knowles filed an amended complaint, still directed toward both International Steel and Brown, but adding for the first time a veil-piercing claim against Brown. The claim alleged that International Steel " was a mere instrumentality or alter ego of Brown." Brown's answer asserted " collateral estoppel or res judicata " as an affirmative defense.

In early 2007, the parties stipulated to dismiss International Steel from the state court litigation without prejudice. After Knowles moved for partial summary judgment against Brown, Brown opposed and cross-moved for partial summary judgment, asserting as a defense that Knowles's wage and overtime claims were barred by AWHA's two-year statute of limitations.

In early 2008, Knowles was granted leave to file a second amended complaint, seeking to add a spoliation claim and to add Heidi as a defendant. His motion was supported

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by affidavits from himself and his attorney. These affidavits asserted that Brown had destroyed files and had been unable to produce International Steel's corporate book, " which includes corporate resolutions, minutes of annual shareholder meetings, and minutes of board meetings." Knowles's affidavit also indicated that he had recently discovered Heidi was a shareholder of International Steel, contrary to Brown's representations throughout Knowles's relationship with him that Brown was International Steel's sole shareholder.

In March 2008, the superior court issued an order that made several preliminary legal determinations regarding AWHA's overtime provisions, but it also found genuine issues of material fact surrounding the bonus agreement and its effects. The next month, International Steel moved for dismissal or summary judgment of Knowles's spoliation claim, arguing that the claim violated the company's discharge in bankruptcy, and noting in any case that the corporate book had now been found and produced to Knowles. International Steel, Brown, and Heidi also filed counterclaims alleging that Knowles breached the covenant of good faith and fair dealing in various ways and that Knowles's claims against International Steel violated the bankruptcy discharge.

In May 2008, the U.S. Bankruptcy Trustee moved to dismiss or convert International Steel's bankruptcy case for cause, based on International Steel's " failure to file post-confirmation reports and to pay quarterly fees." The IRS joined the motion, based on late payments by International Steel. The company opposed the Trustee's motion on May 28, arguing that it had " performed its obligations to provide post-petition reports and is current on its quarterly fees."

In July 2008, Knowles moved to file a third amended complaint, to add parallel claims under the federal Fair Labor Standards Act (FLSA) to his wage claims under AWHA, and to drop unnecessary claims. The motion was granted.

In an October 2008 order granting in part and denying in part Brown's cross-motion for partial summary judgment, the superior court concluded that the accrual of both Knowles's AWHA and contract claims " cannot be decided as a matter of law, but is for the jury as a matter of fact."

The case went to trial. On the first day, November 3, 2008, Knowles moved to dismiss Heidi and International Steel. Brown asserted, without prior briefing, that because of International Steel's bankruptcy discharge, the superior court could not proceed against Brown on a veil-piercing theory. The superior court ordered a stay of claims against International Steel, allowed the veil-piercing claim to proceed against Brown, and ordered the dismissal with prejudice of the claims involving Heidi, while reserving the matter of attorney's fees for later resolution.

Before the jury began deliberations, the parties agreed that the court would address the matter of overtime after the verdict was returned. On November 19, the jury delivered a verdict. It found " it to be more likely true than not true that [International Steel] owes [Knowles] additional bonus compensation" in the amount of $62,311. It found that Knowles was entitled to keep the $100,000 bonus compensation as of September 25, 2002. The jury did not find " it more likely true than not true that [International Steel] owes [Knowles] additional hourly pay." Finally, the jury did not find that " the corporate form of [International Steel] was used to defeat public convenience, justify wrong, commit fraud, or defend crime," but it did find that International Steel " was a mere instrumentality or alter ego of Ed Brown."

On February 3, 2009, the bankruptcy court issued an order granting the U.S. Trustee's motion to dismiss International Steel's bankruptcy case, a motion which International Steel non-opposed on the day of the bankruptcy court's decision. The bankruptcy court stated, at the company's request, that " International Steel shall continue to have the right and ability to operate its business, including any outstanding construction projects, as if it had not filed for bankruptcy."

After the jury delivered its verdict, the superior court issued an order denying Heidi's motion for attorney's fees, on the ground that there was no prevailing party as between Heidi and Knowles. The court also

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concluded that Knowles's AWHA claim to overtime on the unpaid bonus was not barred by AWHA's statute of limitations.

On September 28, 2009, the superior court issued an order granting in part Knowles's motion for attorney's fees under AWHA. The court declared that Knowles was the prevailing party. The court then granted Knowles 60% of his actual fees, taking into account: (1) the amount of work Knowles's attorneys dedicated to non-AWHA-related claims; (2) the Rule 82 fees Knowles would receive; and (3) the overlap in Knowles's attorneys' work when Knowles changed counsel. On the same day, the superior court issued its final judgment, awarding Knowles $216,894.83 based on Knowles's unpaid bonus; his unpaid overtime on that bonus; the liquidated damages, attorney's fees, and costs Knowles received under AWHA for non-payment of overtime; and interest.

Brown and Heidi appeal.

III. STANDARD OF REVIEW

We review questions of law de novo.[2] We also review " questions regarding personal and subject matter jurisdiction de novo because jurisdictional issues are questions of law subject to this court's independent judgment." [3] Where a party has objected to a jury instruction in accordance with Rule 51(a), " [t]he correctness of jury instructions is reviewed de novo." [4]

We review findings of fact for clear error,[5] and we find clear error only " ‘ when we are left with a definite and firm conviction based on the entire record that a mistake has been made.’ " [6] With regard to mixed questions of law and fact, we " review[ ] the superior court's factual findings for clear error, and the legal issues de novo." [7]

Finally, we review awards of attorney's fees for abuse of discretion,[8] and we will identify an abuse of discretion only " if an award is arbitrary, capricious, manifestly unreasonable, or improperly motivated." [9] Insofar as the trial court's calculation of attorney's fees consists purely of the interpretation of law, however, we review the interpretation de novo.[10]

IV. DISCUSSION

A. Knowles's Veil-Piercing Claim Was Not The Property Of The Corporation's Bankruptcy Estate Because The Claim Alleged No Injury To The Corporation.

Once a bankruptcy case has been initiated by the filing of a bankruptcy petition,[11]section 362(a)(3) of the Bankruptcy Code[12] operates as an automatic stay of " any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." [13] " Property of the estate" includes

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"all legal or equitable interests of the debtor in property as of the commencement of the case." [14] " Property of the estate" is construed broadly and includes any cause of action that belongs to the debtor.[15] A cause of action belongs to the debtor if the debtor could have brought it as of the commencement of the case.[16] Only the trustee has standing to bring the estate's legal claims,[17] and the bankruptcy court is the proper forum to resolve disputes about property of the estate.[18]

A corporation can bring a veil-piercing claim against its own corporate insider only if the veil-piercing claim alleges that the corporate insider's conduct caused an actionable injury to the corporation. [19] If a corporation could have brought a veil-piercing claim against its own corporate insider prior ...


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