Doyle v . Hoyle CV-92-244-SD 07/20/95 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Diana F. Doyle, individually

and as Trustee of DB Realty Trust

v. Civil N o . 92-244-SD

Wayne Hoyle; Hoyle Insurance, Inc. O R D E R

By order of this court dated March 1 4 , 1995, the parties to this action were given an additional 30 days to depose defendant Wayne Hoyle and file supplemental memoranda on the limited question of whether defendant Hoyle Insurance Agency's corporate form should be disregarded due to undercapitalization. The court has received the parties' supplemental memoranda and turns now to that question.

In arguing that Hoyle Insurance Agency's corporate veil should be pierced and that Wayne Hoyle should be held personally liable for breach of contract and warranty because of the undercapitalization of Hoyle Insurance Agency, plaintiff asserts that Massachusetts law should apply since the agency is a Massachusetts corporation. As defendants do not dispute this

contention, the court will apply Massachusetts law.1

"The principle of limited liability is a pillar of corporate

law." United Elec. Workers v . 163 Pleasant S t . Corp.,

, 1091 (1st Cir. 1992) (citing DeBreceni v . Graf Bros.

Leasing, Inc.,

7 7 , 879 (1st Cir. 1987), cert. denied,

(1988)). Limited liability allows individuals to take a calculated risk when they engage in the investment and entrepreneurial ventures central to a capitalist economy. If the venture fails, corporate shareholders lose only their interest in the corporation, not their homes or life savings. Of course, the principle of limited liability has itself been limited by the common law doctrine which permits the piercing of the corporate veil

DeBreceni, supra, 828 F.2d at 879.

Massachusetts courts "will pierce the corporate veil only

'in rare particular situations in order to prevent gross

inequity.'" Gurry v . Cumberland Farms, Inc.,

2 7 , 134

(Mass. 1990) (quoting My Bread Baking C o . v . Cumberland Farms,

Inc.,

4 8 , 752 (Mass. 1968)). See also Gordon Chem.

1 Although the court is applying Massachusetts law here, it notes that the law of New Hampshire is in accord with that of Massachusetts in this area. Accordingly, the outcome reached herein is the same one the court would have reached had New Hampshire law been applied.

2 C o . v . Aetna Cas. & Surety Co.,

(Mass. 1971)

("'It is only where the corporation is a sham, or is used to

perpetrate deception to defeat a public policy, that it can be

disregarded.'") (quoting New England Theatres, Inc. v . Olympia

Theatres, Inc., 192 N . E . 9 3 , 97 (1934)). In deciding whether to

disregard the corporate form, Massachusetts courts weigh the

following factors: (1) common ownership; (2) pervasive control; (3) confused intermingling of business activity assets, or management; (4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of corporate assets by the dominant shareholders; (10) nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; (12) use of the corporation in promoting fraud.

Evans v . Multicon Constr. Corp.,

(Mass. App.

Ct.) (citing Pepsi-Cola Metro. Bottling C o . v . Checkers, Inc.,

0 , 14-16 (1st Cir. 1985)), review denied,

(Mass. 1991). The only factor at issue here is whether Hoyle

Insurance Agency has been inadequately capitalized.

"'Inadequate capitalization' means capitalization very small

in relation to the nature of the business of the corporation and

the risks the business necessarily entails." 1 WILLIAM M . FLETCHER,

3 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 44.1, at 812

(perm. ed. rev. vol. 1990) (hereinafter FLETCHER'S CYCLOPEDIA).

[I]n regard to that amount of capital that constitutes sufficient capitalization, the following standard emphasizing economic viability rather than an inflexible computation of minimal capitalization should be used: A corporation is undercapitalized when there is an obvious inadequacy of capital, measured by the nature and magnitude of the corporate undertaking.

Id.

Hoyle Insurance Agency was incorporated in Massachusetts in

1973 for the purpose of "carry[ing] on the business exclusively of an insurance agent, broker or adjuster of fire losses."

Articles of Organization (Plaintiff's Exhibit C ) . The agency has

been operating continuously since that time and, according to its

accountant, "has never filed bankruptcy, or been declared

insolvent in any action in the Commonwealth of Massachusetts, or

filed an assignment for the benefit of creditors." Affidavit of

Paul Haggerty ¶ 5 (Defendants' Exhibit 1 ) . Further, Hoyle

Insurance "is able to meet its current debts in the ordinary

course of business as they become due." Id. ¶ 7 . Defendant's

accountant also opines that "Hoyle Insurance, Inc. is adequately

capitalized for the purpose of providing the services required of an insurance agency." Id. ¶ 8 .

4 Plaintiff contends that Hoyle Insurance is "grossly

undercapitalized" and is "an empty shell." Plaintiff's

Supplemental Memorandum at 4 , 6. In support thereof, plaintiff

submits the transcript from the deposition of defendant Wayne

Hoyle. Hoyle states that the agency's assets include personal

computers and related peripherals, office furniture and equipment, a car with a market value of $3,000, and a client

list. Deposition of Wayne Hoyle, Sr., at 59-61 (Plaintiff's

Exhibit A ) .

Plaintiff also submits the affidavit and expert's report of

Eric G. Gustafson,2 who opines "that the assets of the Hoyle

Agency are not reasonably adequate to meet its prospective

liabilities." Gustafson Affidavit ¶ 5 . Gustafson's opinion is

based on his review of Hoyle's deposition testimony, including

his testimony regarding the agency's assets and the fact that the

agency did not carry errors and omissions insurance, and his

review of an insurance binder filled out by Hoyle for plaintiff's

property. Id. ¶¶ 3-4. Gustafson states that "[s]ince the binder

fails to identify an insurance company, M r . Hoyle and his agency

2 Gustafson states in his affidavit that he "ha[s] been an insurance agent for 38 years and [is] the chairman of the Blake Insurance Agency, Inc. in Portsmouth, New Hampshire." Affidavit of Eric G. Gustafson ¶ 2 (Plaintiff's Exhibit B ) .

5 appear to be the entities issuing the binder and as such, are the

insurers of the property identified on the binder." Id. ¶ 4 .

As a preliminary matter, the court finds that the evidence

before i t , including the evidence regarding defendant's failure

to name an insurer on an insurance binder covering plaintiff's

property, is insufficient to support a finding that Hoyle Insurance Agency was, as plaintiff contends, engaged in the

business of insuring risks. Instead, the evidence before the

court shows that the agency was in the business of selling

insurance as an agent for insurance companies.

The court further finds that the evidence before it is

insufficient to support a finding that Hoyle Insurance Agency's

capital was inadequate "in relation to the nature of the business

of the corporation and the risks of the business necessarily

entails." FLETCHER'S CYCLOPEDIA, supra, § 44.1, at 812. Indeed,

even plaintiff's own expert states that most insurance agencies have relatively small amounts of current and fixed assets in excess of liabilities on their balance sheets. As a practical matter, the real value of an insurance agency is generally based on such intangible assets as customer lists, renewal records, client information and good will, all of which is refected [sic] in the "going business" value of the agency.

Expert Report of Eric G . Gustafson at 8 (Plaintiff's Exhibit E ) .

6 Plaintiff also points to Hoyle Insurance Agency's failure to

carry errors and omissions liability insurance as a reason why

the agency's corporate form should be disregarded. However,

plaintiff has not cited, nor has this court uncovered, any

authority that supports or even suggests that the failure to

carry liability insurance is an indication of undercapitalization or that such a failure, standing alone, warrants a piercing of

the corporate veil.

Finally, under Massachusetts law, inadequate capitalization

is "a ground frequently relied upon, when taken with other

factors, as permitting disregard of a corporate entity." My

Bread Baking Co., supra, 233 N.E.2d at 753 (emphasis added). See

also FLETCHER'S CYCLOPEDIA, supra, § 44.1, at 813 ("while grossly

inadequate capitalization is an important factor in determining

personal liability of the stockholders, by itself it may not be a

sufficient ground for piercing the corporate veil"). Here, there

is no evidence of other factors, see supra at 3 , to suggest that

this is one of those "'rare particular situations'" where the

corporate veil should be pierced to "'prevent gross inequity.'"

Gurry, supra,

(quoting My Bread Baking Co.,

supra, 233 N.E.2d at 7 5 2 ) .

For all of these reasons, the court finds that the

circumstances presented do not warrant a piercing of Hoyle

7 Insurance Agency's corporate veil with respect to plaintiff's

claims for breach of contract and warranty. Defendant Wayne

Hoyle's motion for partial summary judgment (document 14) as to

said claims is accordingly granted.

Related Motions Also before the court are plaintiff's motion to compel discovery (document 31) and defendants' motion for a protective order (document 3 6 ) , both of which are related to discovery directed at the undercapitalization issue.

Plaintiff has not requested any extension of time in which to file its supplemental memorandum because of this discovery dispute. Instead, their supplemental memorandum relies in part on the deposition testimony of Wayne Hoyle, which was the subject matter of plaintiff's previous Federal Rule of Civil Procedure 56(f) request. See Order of March 1 4 , 1995, at 8-10. The discovery motions described herein are accordingly denied as moot, with leave to refile if the issues raised therein have not been resolved and remain relevant to this action.

SO ORDERED.

Shane Devine, Senior Judge United States District Court July 2 0 , 1995

8 cc: Edward M . Van Dorn, Jr., Esq. Anthony L . Introcaso, Esq. Edward P. O'Leary, Esq.

9