Barnes v. Sea Hawaii Rafting, LLC et al
Filing
792
ORDER DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT TO PIERCE THE CORPORATE VEIL (ECF NO. 703) - Signed by JUDGE ALAN C. KAY on 11/09/2020.For above-stated reasons, the Court DENIES Plaintiff Barnes's Motion for [Parti al] Summary Judgment to Pierce the Corporate Veil, ECF No. 703, without prejudice to file a renewed motion seeking summary judgment to pierce Defendant SHR's corporate veil. In the event Plaintiff Barnes intends to file a second motion seeking s ummary judgment to pierce the corporate veil of Defendant SHR, the Court directs him to develop the record and point the Court to any evidence, documents, prior rulings and specific findings, and legal authority that may be relevant to the analysis.< br>IT IS SO ORDERED.COURT'S CERTIFICATE of Service - Non-Registered CM/ECF Participants have been served by First Class Mail to the addresses of record listed on the Notice of Electronic Filing (NEF)(jni)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAI`I
CHAD BARRY BARNES,
Plaintiff,
v.
SEA HAWAI`I RAFTING, LLC;
et al.
Defendants.
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Civ. No. 13-00002 ACK-WRP
ORDER DENYING PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT TO
PIERCE THE CORPORATE VEIL (ECF NO. 703)
Before the Court is Plaintiff Chad Barry Barnes’s
Motion for [Partial] Summary Judgment to Pierce the Corporate
Veil, ECF No. 703 (the “Motion”) in which Plaintiff Barnes seeks
to hold Defendant Kris Henry personally liable for the corporate
debts of Defendant Aloha Ocean Excursions (“AOE”) and Defendant
Sea Hawaii Rafting (“SHR”).
For the reasons set forth below,
the Court DENIES Plaintiff Barnes’s Motion.
Specifically, the
Court holds that (1) there is no reason to pierce Defendant
AOE’s corporate veil because Defendant Henry is already
personally liable for the relevant sanctions, and (2) genuine
issues of material fact exist as to whether Plaintiff Barnes is
entitled to pierce Defendant SHR’s corporate veil.
- 1 -
BACKGROUND
For purposes of this Order, the Court will not recount
this case’s lengthy procedural history.
The Court only
discusses those facts and events of specific relevance to the
issues that this Order addresses.
I.
Factual Background
a. Filing of Lawsuit, Subsequent Bankruptcies, & Judgment
Plaintiff Barnes is a seaman who was injured in 2012
when the boat on which he was working, the M/V Tehani, exploded.
Seeking the maritime remedy of maintenance and cure, among other
relief, Plaintiff Barnes sued the vessel Tehani in rem and
Defendant SHR (the owner of the vessel) and Defendant Henry (the
sole owner and manager of Defendant SHR) in personam, to enforce
his maritime lien against the vessel.
Shortly after the lawsuit was filed, Defendant Henry
and Defendant SHR both filed for bankruptcy.
See In re Kristin
Kimo Henry, Case No. 14-01475 (Bankr. D. Haw.); In re Sea Hawaii
Rafting, LLC, Case No. 14-01520 (Bankr. D. Haw.); see also Pl.’s
Concise Statement of Facts (“CSF”), ECF No. 704, ¶¶ 6-7; Defs.’
CSF, ECF No. 754, ¶¶ 6-7 (admitting).
The bankruptcies
complicated this otherwise simple maritime case and led to years
of litigation while the bankruptcy court and the Ninth Circuit
clarified several novel legal questions at the intersection of
bankruptcy and admiralty law.
- 2 -
The bankruptcy court in 2018 ultimately allowed
Plaintiff Barnes to pursue his in rem claims against the vessel
as well as his in personam claims against Defendant SHR, but not
against Defendant Henry.
The Court conducted a three-day bench
trial to determine the amount of maintenance and cure, and
awarded Plaintiff Barnes a judgment in the amount of
$279,406.12,1/ jointly and severally against Defendant SHR in
personam and the vessel Tehani in rem.2/ See ECF Nos. 446 & 447.
b. Collection Efforts & Transfer of Commercial-Use Permit
Plaintiff Barnes has been largely unsuccessful in
collecting on his judgment.
His collection efforts have been
hindered by the bankruptcies and other procedural complications,
as well as by Defendant SHR’s insolvency.
Plaintiff Barnes has
also been unable to pursue what was virtually the only asset of
Defendant SHR (aside from the vessel Tehani), a valuable
commercial-use boating permit.
See ECF Nos. 608 & 657.
At the
time of the accident, lawsuit, and bankruptcy filings, the permit
had been associated with the vessel Tehani and in Defendant SHR’s
name.
Id.; see also ECF No. 528.
At a hearing on February 28, 2019, it was revealed that
two years earlier Defendant Henry had written a letter to the
Plaintiff Barnes was also awarded $233,405.44 in attorney’s fees and
ECF No. 517.
2/
Defendant Henry was not a defendant for purposes of the trial because
he was protected by an automatic stay as a result of his Chapter 13
bankruptcy. ECF No. 446 at 2 n.3.
1/
costs.
- 3 -
harbor master at Honokohau Harbor—where the vessel Tehani was
located—requesting that the Division of Boating and Ocean
Recreation (“DOBOR”) reissue the commercial-use permit from
Defendant SHR to Defendant AOE.
ECF No. 585.
Defendant AOE is
another single-member LLC formed by Defendant Henry less than one
year after he and Defendant SHR filed bankruptcy.
Id.; see also
Ex. B to Decl. of Jay Friedheim (“Friedheim Decl.”), ECF No. 7034; Pl.’s CSF ¶¶ 9-10; Defs.’ CSF ¶¶ 9-10 (admitting).
Defendant
Henry’s letter represented that the transfer would only reflect a
“change in name,” ECF No. 527-1, when in fact Defendant SHR and
Defendant AOE were entirely separate entities, ECF No. 585.
Based on Defendant Henry’s misrepresentation in that letter,
DOBOR reissued the commercial-use permit from Defendant SHR to
Defendant AOE, where it remains today.3/
ECF Nos. 585, 608, &
657; see also Ex. C to Friedheim Decl., ECF No. 703-5.
The permit transfer ultimately led the Court to impose
sanctions on Defendant Henry and Defendant AOE.
See ECF Nos. 608
(imposing “initial” sanctions) & 657 (imposing “enhanced”
sanctions).
After holding hearings and considering evidence, the
Court made findings that Defendant Henry’s request for reissuance
of the commercial-use permit from Defendant SHR to Defendant AOE
was a “misrepresentation” in that the “name change” was in fact a
At some point after the permit was reissued, Defendant AOE had the
permit changed to operate with the vessel Wiwo`ole. See Ex. C to Friedheim
Decl.
3/
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transfer between two separate and distinct entities.
at 10-11.
ECF No. 608
The Court found that Defendant’s transfer of the
permit deprived Plaintiff Barnes of the opportunity to pursue the
valuable asset of Defendant SHR, against whom Plaintiff Barnes
held a judgment.
See id. at 7-8.
The Court had previously ruled
that the permit was not appurtenant to the vessel Tehani.
No. 528 at 1.4/
ECF
The Court found that the vessel and the
commercial-use permit were virtually the only assets held by
Defendant SHR against which Plaintiff Barnes might have enforced
his maritime lien and judgment.
See ECF No. 608 at 8.
The Court
thus reasoned that the transfer of the permit to a different LLC
prevented the operation of the vessel out of Honokohau Harbor and
thus significantly diminished the value of the vessel, thereby
severely and negatively impacting Plaintiff Barnes’s ability to
collect.
See id.
Based on those findings, the Court imposed the
initial sanctions in the amount of $25,000, designed to partially
compensate Plaintiff Barnes for the resulting loss.5/
17.
Id. at 16-
The Court also directed Defendant Henry and Defendant AOE to
take steps to have the permit reissued to Defendant SHR or else
the sanctions would be substantially enhanced.
Id. at 17.
This ruling is now pending on appeal before the Ninth Circuit. See
Barnes v. Sea Hawaii Rafting, Case No. 19-15646 (9th Cir.).
5/
The initial sanctions have been paid in full by Defendant Henry and
Defendant AOE.
4/
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When Defendants then ignored the Court’s directive in
the initial sanctions order to take meaningful steps to have the
permit reissued to Defendant SHR, the Court imposed “enhanced”
sanctions.6/
ECF No. 657.
The Court held that Defendants had
acted “recklessly, wrongfully, and with an improper purpose,” and
that their “conduct ‘was tantamount to bad faith and therefore
sanctionable’ pursuant to the Court’s inherent power.”
Id. at 28
(quoting B.K.B. v. Maui Police Dept., 276 F.3d 1091, 1108 (9th
Cir. 2002)).
Based on those findings, the Court assessed
enhanced sanctions to compensate Plaintiff Barnes for the loss of
the value of the commercial-use permit, as well as for related
attorney’s fees and costs.
Id. at 31-35.
c. Attempt to Pierce the Corporate Veil
Plaintiff Barnes now seeks to hold Defendant Henry
personally liable for the judgment against Defendant SHR and the
vessel Tehani.
Whether Plaintiff Barnes can do that depends on
two questions:
(1) is he entitled to pierce the corporate veil
of Defendant SHR and (2) assuming he is, would he be able to
recover from Defendant Henry personally, even though Defendant
Henry is protected by a Chapter 13 bankruptcy discharge?
The bankruptcy court answered “no” to the second
question.
ECF No. 553.
On appeal in the district court, Judge
A large portion of the enhanced sanctions are still being calculated
and remain owing by Defendant AOE and Defendant Henry.
6/
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Watson reversed, concluding that Plaintiff Barnes could recover
his judgment against Defendant Henry personally if the corporate
veil is pierced, but the recovery would be limited to the value
of the debt secured by the maritime lien (in other words, the
value of the vessel Tehani):
[I]f Barnes is successful in piercing the
corporate veil, SHR’s liability to pay
maintenance and cure as the shipowner of the
vessel will, in effect, become
Henry’s
liability.
As a result, . . . if the
corporate veil is pierced, Henry will be
treated as if he had owned the vessel because
he will stand in the shoes of SHR. Just like
SHR, therefore, Henry would be liable in rem
for satisfying the maintenance and cure claim
to the extent it is secured by the relevant
vessel.
Barnes v. Henry, No. 19-cv-00210-DKW-RT, 2020 WL 201457, at *3
(D. Haw. Jan. 13, 2020).7/
While that issue plays out on appeal, Plaintiff Barnes
seeks to answer the first question:
corporate veil?
Is he entitled to pierce the
In his pending Motion, Plaintiff Barnes seeks to
pierce the corporate veils of both Defendant SHR and Defendant
AOE to hold Defendant Henry personally liable for both entities’
debts.
See Mot. at 3-4.
He asserts that “[Defendant] Henry
Judge Watson left “for the admiralty court to determine whether
SHR’s corporate veil should be pierced and [to determine] the value of the
relevant vessel.” Barnes, 2020 WL 201457 at *3. Plaintiff Barnes has
appealed several of Judge Watson’s rulings on appeals from the bankruptcy
court that implicate the extent to which Plaintiff Barnes can enforce his
judgment against Defendant Henry personally. See Barnes v. Henry, Case No.
19-17614 (9th Cir.) (appeal of district court cases 19-cv-00212-DKW-RT, 19cv-00213-DKW-RT, & 19-cv-00215-DKW-RT).
7/
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should be held personally liable for the Maintenance payments
which SHR owes to Barnes” and for the “original and enhanced
sanctions owed by AOE and Henry” in connection with the wrongful
transfer of the commercial-use permit.
II.
Id.
Procedural Background
Plaintiff Barnes filed his Motion for partial summary
judgment and CSF on July 1, 2020.
704 (CSF).
See ECF Nos. 703 (Motion) &
Two weeks later, the Court administratively withdrew
the Motion, finding that it was in the parties’ interests and in
the economy of justice to defer proceeding with the Motion.8/
No. 717.
ECF
Plaintiff Barnes then asked the Court to reconsider
that decision.
ECF No. 724.
On August 13, the Court granted
the motion for reconsideration, reinstated the Motion, and set a
hearing.
ECF No. 739.
Defendant Henry and Defendant AOE filed
their Opposition and CSF in opposition on September 23.
753 (Opposition) & 754 (CSF).
reply.
ECF Nos.
Plaintiff Barnes did not file any
A telephonic hearing on the Motion was held on October
14.
8/
Specifically, the Court determined that, because the extent to which
Plaintiff Barnes could recover from Defendant Henry personally (if at all)
was on appeal, it would be premature and possibly moot to decide whether the
corporate veil should be pierced. See ECF No. 717.
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STANDARD
Summary judgment is proper where there is no genuine
issue of material fact and the moving party is entitled to
judgment as a matter of law.
Fed. R. Civ. P. 56(a).
Federal
Rule of Civil Procedure (“Rule”) 56(a) mandates summary judgment
“against a party who fails to make a showing sufficient to
establish the existence of an element essential to the party’s
case, and on which that party will bear the burden of proof at
trial.”
Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct.
2548 (1986); see also Broussard v. Univ. of Calif., 192 F.3d
1252, 1258 (9th Cir. 1999).
“A party seeking summary judgment bears the initial
burden of informing the court of the basis for its motion and of
identifying those portions of the pleadings and discovery
responses that demonstrate the absence of a genuine issue of
material fact.”
Soremekun v. Thrifty Payless, Inc., 509 F.3d
978, 984 (9th Cir. 2007) (citing Celotex, 477 U.S. at 323, 106
S. Ct. 2548); see also Jespersen v. Harrah’s Operating Co., 392
F.3d 1076, 1079 (9th Cir. 2004).
“When the moving party has
carried its burden under Rule 56[(a)] its opponent must do more
than simply show that there is some metaphysical doubt as to the
material facts [and] come forward with specific facts showing
that there is a genuine issue for trial.”
Matsushita Elec.
Indus. Co. v. Zenith Radio, 475 U.S. 574, 586–87, 106 S. Ct.
- 9 -
1348 (1986) (citation and internal quotation marks omitted and
emphasis removed); see also Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 247–48, 106 S. Ct. 2505 (1986) (stating that a party
cannot “rest upon the mere allegations or denials of his
pleading” in opposing summary judgment).
“An issue is ‘genuine’ only if there is a sufficient
evidentiary basis on which a reasonable fact finder could find
for the nonmoving party, and a dispute is ‘material’ only if it
could affect the outcome of the suit under the governing law.”
In re Barboza, 545 F.3d 702, 707 (9th Cir. 2008) (citing
Anderson, 477 U.S. at 248, 106 S. Ct. 2505).
When considering
the evidence on a motion for summary judgment, the court must
draw all reasonable inferences on behalf of the nonmoving party.
Matsushita Elec. Indus. Co., 475 U.S. at 587, 106 S. Ct. 1348;
see also Posey v. Lake Pend Oreille Sch. Dist. No. 84, 546 F.3d
1121, 1126 (9th Cir. 2008) (stating that “the evidence of [the
nonmovant] is to be believed, and all justifiable inferences are
to be drawn in his favor” (internal citation and quotation
omitted)).
DISCUSSION
This Motion requires the Court to decide the narrow
question of whether Plaintiff Barnes has established as a matter
of law that he is entitled to pierce the corporate veils of
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Defendant SHR and Defendant AOE.
Courts are generally wary of
piercing the veil, especially on summary judgment and especially
where fraud is alleged.
As detailed below, the Court holds that
Plaintiff Barnes has failed to meet his burden of showing that
there is no genuine issue of material fact as to his ability to
pierce the corporate veils of both entities.9/
Although
Plaintiff Barnes may ultimately be able to show that the veil of
Defendant SHR should be pierced, he has failed to put forth
sufficient evidence demonstrating veil piercing is appropriate
as a matter of law.
Accordingly, Plaintiff Barnes’s Motion must
be DENIED.
I.
Applicable Law
The doctrine of “piercing the corporate veil” allows
creditors of corporations to pierce the corporate shell to hold
shareholders liable for corporate debts if they abuse the
corporate form to defraud creditors.
See UA Local 343 of the
United Ass’n of Journeymen & Apprentices of the Plumbing &
Pipefitting Indus. of the U.S. & Canada, AFL-CIO, 48 F.3d 1465,
1475 (9th Cir. 1994).
Courts have applied the veil-piercing
doctrine to limited liability companies, Ermis Mgmt. Co. Ltd. V.
The Court notes at the outset that Judge Watson has already decided
that Defendant Henry can be held personally liable for the in rem judgment
against the vessel Tehani if the corporate veil is pierced. The Court makes
no findings herein as to the extent to which Plaintiff Barnes would be
entitled to recover from Defendant Henry personally if he is ultimately
successful in piercing the veil.
9/
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United Calif. Discount Corp., No. 2:07-CV-01021-PMP-RJJ, 2009 WL
10709407, at *6 (D. Nev. Aug. 3, 2009), and in admiralty cases,
Chan v. Society Expeditions, Inc., 123 F.3d 1287, 1294 (9th Cir.
1997).
“Federal courts sitting in admiralty generally apply
federal common law when examining corporate identity.”
Id.
Federal common law in the Ninth Circuit considers three factors
to decide whether to pierce the corporate veil:
“[1] the amount
of respect given to the separate identity of the corporation by
its shareholders, [2] the degree of injustice visited on the
litigants by recognition of the corporate entity, and [3] the
fraudulent intent of the incorporators.”
Seymour v. Hull &
Moreland Eng’g, 605 F.2d 1105, 1111 (9th Cir. 1979).
A
plaintiff “must prevail on the first threshold factor and on one
of the other two.”
UA Local 343, 48 F.3d at 1475.
“The Ninth Circuit has applied ‘a relatively rigorous
veil-piercing standard, and ought to be placed among the
circuits where it is relatively difficult to pierce the veil.’”
Viera v. Chehaiber, Civ. No. ED CV:08-00182 JRG (JCRx), 2010 WL
960347, at *3 (C.D. Cal. Mar. 16, 2010) (quoting Stephen B.
Presser, Piercing the Corporate Veil 3-114 to -115 (1999)).
“Corporate separateness is respected unless doing so would work
injustice upon an innocent third party.”
Chan, 123 F.3d at 1294
(quoting Kilkenny v. Arco Marine Inc., 800 F.2d 853, 859 (9th
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Cir. 1986)).
Moreover, “federal common law allows piercing of
the corporate veil where a corporation uses its alter ego to
perpetrate a fraud or where it so dominates and disregards its
alter ego’s corporate form that the alter ego was actually
carrying on the controlling corporation’s business instead of
its own.”
Id.
However, “[c]ommon ownership alone is
insufficient to support disregard of the corporate form,” id.,
and the “inability to collect [from an insolvent defendant] does
not, by itself, constitute an inequitable result,” Bd. of Trs.
of Mill Cabinet Pension Tr. Fund for N. Calif. v. Valley Cabinet
& Mfg. Co., 877 F.2d 769, 774 (9th Cir. 1989) (quoting
Seymour, 605 F.2d at 1113).
Although federal common law controls, courts “may look
to state law for guidance.”10/
Id. at 772 (quoting Laborers
Clean-Up Contract Admin. Tr. Fund v. Uriarte Clean-Up Serv., 736
F.2d 516, 523 (9th Cir. 1984)).
“Hawai`i appellate courts
historically have been reluctant to pierce the corporate veil.”
Estate of Daily v. Title Guar. Escrow Serv., Inc., 178 B.R. 837,
844 (D. Haw. 1995) (collecting cases).
The Hawai`i Supreme
Court has stated that “[t]he corporate ‘veil’ will be pierced
and the legal entity of the corporation will be disregarded only
where recognition of the corporate fiction would bring about
Both Plaintiff Barnes and Defendants AOE and Henry rely without
distinction on both federal common law and Hawai`i state law. See Mot. at 511; Opp. at 7-8.
10/
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injustice and inequity or when there is evidence that the
corporate fiction has been used to perpetrate a fraud or defeat
a rightful claim.”
Chung v. Animal Clinic, Inc., 63 Haw. 642,
645, 636 P.2d 721, 723 (1981).
Hawai`i courts have looked to
several factors when deciding whether to pierce the corporate
veil.11/
See Robert’s Haw. Sch. Bus, Inc. v. Laupahoehoe Transp.
Co., 91 Haw. 224, 242, 982 P.2d 853, 871 (1999), superseded by
These factors include:
[1] Commingling of funds and other assets, failure to segregate
funds of the separate entities, and the unauthorized diversion of
corporate funds or assets to other than corporate uses; [2] the
treatment by an individual of the assets of the corporation as his
own; [3] the failure to obtain authority to issue stock or to
subscribe to or issue the same; [4] the holding out by an individual
that he is personally liable for the debts of the corporation; [5]
the identical equitable ownership in the two entities; [6] the
identification of the equitable owners thereof with the domination
and control of the two entities; [7] identi[ty] of . . . directors
and officers of the two entities in the responsible supervision and
management; [8] sole ownership of all of the stock in a corporation
by one individual or the members of a family; [9] the use of the
same office or business location; [10] the employment of the same
employees and/or attorney; [11] the failure to adequately
capitalize a corporation; [12] the total absence of corporate
assets, and undercapitalization; [13] the use of a corporation as
a mere shell, instrumentality or conduit for a single venture or
the business of an individual or another corporation; [14] the
concealment and misrepresentation of the identity of the
responsible ownership, management and financial interest, or
concealment of personal business activities; [15] the disregard of
legal formalities and the failure to maintain arm's length
relationships among related entities; [16] the use of the corporate
entity to procure labor, services or merchandise for another person
or entity; [17] the diversion stockholder [sic] or other person or
entity, to the detriment of creditors, or the manipulation of assets
and liabilities between entities so as to concentrate the assets in
one and the liabilities in another; [18] the contracting with
another with intent to avoid performance by use of a corporate
entity as a shield against personal liability, or the use of a
corporation as a subterfuge of illegal transactions; and [19] the
formation and use of a corporation to transfer to it the existing
liability of another person or entity.
Robert’s, 91 Haw. at 242, 982 P.2d at 871; see also Calipjo v. Purdy, 144
Haw. 266, 278 n.23, 439 P.3d 218, 230 (2019) (discussing various factors
relevant to piercing the veil).
11/
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statute on other grounds as noted in Davis v. Four Seasons Hotel
Ltd., 122 Haw. 423, 428 n.9, 228 P.3d 303, 308 n.9 (2010).
Hawai`i courts have recognized that “piercing the
corporate veil ordinarily should not be disposed of by summary
judgment, in view of the complex economic questions often
involved, especially if fraud is alleged.”
Id. (quoting 1
William Fletcher, Fletcher Cyclopedia of the Law of Private
Corporations § 41.95, at 699-705 (ed. 1999)); see also
Television Events & Mktg., Inc. v. AMCON Distrib., Co., 484 F.
Supp. 2d 1124, 1143 (D. Haw. 2006) (acknowledging “the
reluctance of Hawaii courts to make determinations regarding
alter ego liability at the summary judgment stage”).
II.
Analysis
With the substantive law in mind, the Court now
considers the merits of Plaintiff Barnes’s summary judgment
motion, which seeks to pierce the corporate veils of both
Defendant AOE and Defendant SHR.
a. Defendant AOE
Plaintiff argues that the Court should pierce the
corporate veil of Defendant AOE to hold Defendant Henry
personally liable for the initial and enhanced sanctions
assessed against Defendant Henry and Defendant AOE in connection
with the wrongful transfer of the commercial-use permit.
at 3-4; see also ECF Nos. 608 & 657.
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Defendant Henry and
Mot.
Defendant AOE counter that this argument is “a moot point”
because the sanctions were assessed against Defendant AOE and
Defendant Henry jointly and severally.
Opp. at 23.
The Court
agrees.
As discussed, the veil-piercing doctrine allows a
creditor to pursue a corporate debt personally.
Here, Plaintiff
has not shown the existence of any corporate debt owed by
Defendant AOE for which Defendant Henry is not already
personally liable.
See UA Local 343, 48 F.3d at 1476
(explaining that the “veil-piercing doctrine does not come into
play” unless the plaintiff establishes the right to a money
judgment against the corporate entity).
There is no judgment
against Defendant AOE, and both sanctions orders assessed
sanctions jointly and severally against Defendant AOE and
Defendant Henry.
There is thus no reason for the Court to
conduct the veil-piercing analysis for Defendant AOE when
Plaintiff Barnes is already in a position to pursue the amounts
against Defendant Henry personally.
Accordingly, to the extent
that Plaintiff Barnes’s Motion seeks to pierce the corporate
veil of Defendant AOE, the Motion is DENIED.
b. Defendant SHR
Turning to the central question raised by the Motion,
the Court must decide whether Plaintiff Barnes has met his
burden of showing that there is no genuine issue of fact
- 16 -
material to whether he is entitled to pierce the corporate veil
of Defendant SHR.
The Court holds that Plaintiff Barnes has not
met that burden.
Considering the legal framework and the circumstances
here, the Court concludes that Plaintiff Barnes has failed to
establish as a matter of law that the three factors of the Ninth
Circuit’s veil-piercing test favor piercing the veil.
As
discussed earlier, those factors are “[1] the amount of respect
given to the separate identity of the corporation by its
shareholders, [2] the degree of injustice visited on the
litigants by recognition of the corporate entity, and [3] the
fraudulent intent of the incorporators.”
1111.
Seymour, 605 F.2d at
And to prevail on summary judgment, Plaintiff Barnes must
establish that there are no genuine issues of material fact as
to the first prong and either of the second two prongs.
See UA
Local 343, 48 F.3d at 1475.
During the hearing on Plaintiff Barnes’s summary
judgment Motion important points were made toward the Seymour
first factor on separate identity and second factor on
injustice, especially in general regarding the transfer of the
permit from Defendant SHR to Defendant AOE; however, most of
those points were not adequately raised in Plaintiff Barnes’s
Motion, and little evidence supporting those points was
included, such as pertinent documents and specific findings in
- 17 -
this Court as well as in the bankruptcy proceedings.
Thus,
Defendant AOE and Defendant Henry did not have the opportunity
to prepare a meaningful response, and the Court cannot consider
such points.
The Court will next assess Plaintiff Barnes’s
presentation pertaining to the Seymour factors.
Here, Plaintiff Barnes has failed to establish as a
matter of law that Defendant Henry disregarded corporate
formalities, which is necessary for the first factor.
alone compels the Court to deny the Motion.
That
But even if
Plaintiff Barnes had established a disregard of corporate
formalities, he has failed to establish one of the other two
factors, which require a showing of injustice or fraudulent
intent.
i. Factor 1: Respect for the Separate Identity of
Corporate Entity
The first factor of the three-prong test is the amount
of respect given to the separate identity of the corporation.
When analyzing the first factor, courts typically look to
whether corporate formalities were disregarded.
“Corporate
formalities include keeping separate corporate records, issuing
stock, avoiding commingling of funds, and maintaining the formal
roles of corporate officials.”
Trs. of the Alaska Laborers
Health & Sec. Retirement, Training & Legal Servs. Fund v.
- 18 -
Raindance Health Care Grp., Inc., No. 3:09-cv-0120-RRB, 2010 WL
11619563, at *3 (D. Alaska May 2, 2010) (citing Valley Cabinet,
887 F.2d at 772-73).
The mere fact that a company ultimately
fails or becomes insolvent “is not probative evidence that
corporate formalities were not observed.”
Id. (citing Seymour,
605 F.2d at 1112).
Plaintiff Barnes argues that this factor favors
piercing the veil because Defendant Henry “is just a guy who has
these corporate entities and he does what he pleases [and] he
figures that because they are both entirely his he can do what
ever [sic] he wants to do.”
Mot. at 15.
He also proffers some
arguments at pages six, seven, and nine in his Motion, and some
evidence, in an attempt to establish that Defendant Henry
disregarded corporate formalities.
But his arguments are
speculative, and most of the evidence is improper, inadequate,
or not material to the relevant legal question.
Plaintiff Barnes submits four pieces of evidence that
he claims show a disregard of corporate formalities:
(1) the
Hawaii Department of Commerce and Consumer Affairs (“DCCA”)
business record of Defendant SHR (Ex. A to Friedheim Decl., ECF
No. 703-3); (2) a copy of the commercial-use permit, currently
in the name of Defendant AOE and associated with the vessel
Wiwo`ole (Ex. C to Friedheim Decl.); (3) Defendant SHR’s charter
vessel insurance policy reflecting its coverage in place at the
- 19 -
time of Plaintiff Barnes’s injury (Ex. D to Friedheim Decl., ECF
No. 703-6); and (4) copies of checks issued on behalf of
Defendant SHR (Ex. E to Friedheim Decl., ECF No. 703-7).12/
At
the summary judgment stage, the Court must consider all evidence
and inferences therefrom in the light most favorable to
Defendant AOE and Defendant Henry, as the nonmoving parties.
Viewing the limited evidence submitted by Plaintiff Barnes
through that lens, the Court identifies material issues of fact
as to the amount of respect given to the corporate identity.
For example, Plaintiff Barnes argues that Defendant
SHR was not adequately capitalized.
As evidence of
undercapitalization, he points to Defendant SHR’s lack of assets
and its bankruptcy, as well as its “inadequate” insurance
coverage that failed to cover injuries to captain or crew.
at 10.
Mot.
The fact that a company fails or becomes insolvent is
not evidence that corporate formalities were not observed.
See
Seymour, 605 F.2d at 1112; see also Sheppard v. River Valley
Fitness One, L.P., No. CIV.00-111-M, 2002 WL 197976, at *12
(D.N.H. Jan. 24, 2002) (rejecting the argument that entities had
“no assets” as “factually insufficient to support a claim that
those entities were undercapitalized for purposes of veil
piercing”).
In addition, Plaintiff Barnes points to admissions made by
Defendants in their answer to the Third Amended Complaint.
12/
- 20 -
And as far as inadequate insurance coverage, Plaintiff
Barnes has provided no authority for his assumption that limited
insurance coverage is evidence of undercapitalization for
purposes of the veil-piercing analysis.
aware of no such authority.
Indeed, the Court is
Most courts measure capitalization
based on what is sufficient to operate normal business, not
based on the ability to pay a potential liability arising from a
lawsuit.
See, e.g., Laborers Clean–Up, 736 F.2d at 524
(explaining that a corporation is undercapitalized when it is
unable to meet debts that may reasonably be expected to arise in
the normal course of business); In re: Hydroxycut Marketing &
Sales Practices Litig., 810 F. Supp. 2d 1100, 1122-23 (S.D. Cal.
2011) (declining to find that company was undercapitalized
because even though capital was not enough to satisfy large
judgments, it was enough to operate normal business); Sheppard,
2002 WL 197976 at *12 (“[T]he proper measure of the sufficiency
of a corporate entity's capitalization is not whether it can pay
a potential judgment in a lawsuit but, rather, whether it had
sufficient assets to meet the obligations incurred by conducting
ordinary business in the industry in which it operates.”).
Plaintiff also asserts that Defendant Henry
“intermingled his own money with that of his companies.”
Mot.
at 10.
There is no evidence in the record of commingling of
funds.
Plaintiff points to a series of checks issued by
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Defendant SHR, sometimes payable to “Chad Barnes” and sometimes
payable to “cash.”
See Ex. E to Friedheim Decl.
Plaintiff
Barnes does not explain how these checks show that Defendant
Henry commingled his personal funds with corporate funds.
In
fact, if anything, the checks—issued by Defendant SHR—show that
Defendants did not commingle funds.13/
Plaintiff Barnes’s other arguments are likewise not
backed up by any evidence.
He asserts that Defendants failed to
comply with federal and state law to “maintain their corporate
existence, including but not limited to holding meetings, having
proper insurance in place and paying applicable state and
federal taxes, on their employees.”
Pl.’s CSF ¶ 13.
Besides
there being no evidence to support these claims,14/ Defendants
have proffered evidence and a declaration in opposition to show
that they indeed complied with state and federal tax
requirements.15/
See Ex. 1 to Decl. of Kris Henry (“Henry
13/
Plaintiff also suggests without explanation that Defendant Henry
caused Defendant SHR to “falsely label[] the checks as being for such things
at boat supplies.” Mot. at 9. There is no evidence in the record to support
the claim that these checks were “falsely label[ed],” and Plaintiff Barnes’s
conclusory assertion does not make it so.
14/
In his CSF, the only evidence Plaintiff Barnes cites for these
assertions is Defendants’ answer to the operative complaint, ECF No. 697.
Pl.’s CSF ¶ 13. Defendants omitted any response to the relevant paragraph,
which they now assert is “of no consequence” because their answer contained a
catch-all denial. Opp. at 11; see also ECF No. 697 ¶¶ 38, 43. The Court
agrees with Defendants that, without more, this apparent omission in the
answer is not enough to carry Plaintiff Barnes’s burden on summary judgment .
15/
The Court makes no finding on this point one way or another. It is
unnecessary where Plaintiff Barnes has provided absolutely no evidence in the
first place to show that Defendants failed to pay state and federal taxes.
(Continued . . . )
- 22 -
Decl.”), ECF No. 753-3; Henry Decl. ¶¶ 9, 14.
Plaintiff
Barnes’s own evidence even shows that Defendant SHR was in good
standing with the Hawaii DCCA until it filed for bankruptcy in
2014.
See Ex. A to Friedheim Decl; cf. Henry Decl. ¶ 13.
All this to say, absent from Plaintiff Barnes’s Motion
and CSF is any meaningful evidence that Defendants disregarded
the corporate formalities.
The Motion, CSF, and supporting
evidence submitted by Plaintiff Barnes contain no evidence of
intermingling funds, no evidence of undercapitalization, no
evidence that Defendant SHR failed to pay federal taxes, and no
evidence or legal authority that a single-member LLC is required
to maintain a certain type of insurance coverage or to hold
meetings.
Moreover, Plaintiff Barnes’s overarching assertion
that Defendant Henry views himself and his LLCs as one and the
same is not supported by proper evidence.16/
And Plaintiff
Barnes vaguely alluding to misrepresentations in the bankruptcy
proceedings without pointing to any specific findings or
See Enter. Tech. Holdings, Inc. v. Noveon Sys., Inc., No. 05-CV-2236 W (CAB),
2008 WL 11338356, at *8 (S.D. Cal. July 29, 2008) (“If the moving party fails
to discharge this initial burden, summary judgment must be denied and the
court need not consider the nonmoving party's evidence.” (citing Adickes v.
S.H. Kress & Co., 398 U.S. 144, 159-60, 90 S. Ct. 1598, 1609-10 (1970))).
16/
The only evidence Plaintiff Barnes cites for this point is argument
of counsel from a hearing before this Court. “[T]he arguments and statements
of counsel ‘are not evidence and do not create issues of material fact.”
Barcamerica Int’l USA Tr. v. Tyfield Importers, Inc., 289 F.3d 89, 593 n.4
(9th Cir. 2002) (quoting Smith v. Mack Trucks, 505 F.2d 1248, 1249 (9th Cir.
1974))).
- 23 -
documents to back up his claims is not enough at this late stage
in the litigation.
As the moving party, it is Plaintiff Barnes’s “initial
burden of informing the court of the basis for [his] [M]otion
and of identifying those portions of the pleadings and discovery
responses that demonstrate the absence of a genuine issue of
material fact.”
Soremekun, 509 F.3d at 984 (citing Celotex, 477
U.S. at 323, 106 S. Ct. 2548).
Defendant AOE and Defendant
Henry cannot adequately respond to Plaintiff Barnes’s legal
position if Plaintiff Barnes fails to state it outright in his
Motion.
And it is not this Court’s job to gather evidence and
frame Plaintiff Barnes’s argument for him.
See United States v.
Sainz, 933 F.3d 1080, 1087 (9th Cir. 2019) (“[A]s a general
rule, our adversary system is designed around the premise that
the parties know what is best for them, and are responsible for
advancing the facts and arguments entitling them to relief.”
(quoting Greenlaw v. United States, 54 U.S. 237, 244, 128 S. Ct.
2559 (2008))).
At the summary judgment stage, the Court must consider
all evidence and inferences therefrom in the light most
favorable to Defendants as the nonmoving parties.
The only real
undisputed fact tilting in Plaintiff Barnes’s favor on this
first factor is that Defendant Henry was the sole owner and
stockholder of both Defendant SHR and Defendant AOE, and that he
- 24 -
was and is the only person exercising control over both
entities.
Pl.’s CSF ¶ 8; Defs.’ CSF ¶ 8 (admitting); see
Robert’s, 91 Haw. at 242, 982 P.2d at 871 (a case cited by both
parties, Mot. at 5 & Opp. at 8-9 n.3, that recognized several
factors for piercing the veil, including “identical equitable
ownership in the two entities,” “equitable owners . . . with the
domination and control of the two entities,” and “sole ownership
of all of the stock in a corporation by one individual”).
It is
well settled, however, that piercing the corporate veil requires
more than common ownership.
Chan, 123 F.3d at 1294; cf.
Robert’s, 91 Haw. at 242, 982 P.2d at 871 (recognizing as other
factors for piercing the veil, “the concealment and
misrepresentation of the identity of the responsible ownership,
management and financial interest, or concealment of personal
business activities,” “the disregard of legal formalities and
the failure to maintain arm’s length relationships among related
entities,” and “the manipulation of assets and liabilities
between entities so as to concentrate the assets in one and the
liabilities in another”).
Applying the Ninth Circuit’s “relatively rigorous
veil-piercing standard,” Viera, 2010 WL 960347 at *3 (citation
omitted), the limited evidence proffered by Plaintiff Barnes in
his Motion does not support a finding that Defendant Henry so
disregarded the corporate form that the veil should be pierced.
- 25 -
Plaintiff Barnes has failed to meet his burden of establishing
the first factor, and Defendants’ Opposition raises material
issues of fact that preclude disposition of this issue on
summary judgment.
Even assuming Plaintiff Barnes had met his
burden on the first factor, “evidence establishing shareholder
disrespect for a corporation’s separate identity alone is an
insufficient reason to pierce the corporate veil.”
Cabinet, 811 F.2d at 773.
Valley
For the sake of completion, the Court
briefly considers the second and third factors of the veilpiercing test.
ii. Factors 2 & 3:
Injustice or Fraudulent Intent
The failure to establish disrespect of the corporate
form is enough to deny the Motion.
Nonetheless, the Court
briefly addresses the other two factors, which consider the
degree of “injustice” and the “fraudulent intent” of the
incorporators.
Plaintiff Barnes argues that the evidence
proffered by him in his Motion supports a finding of both
injustice and fraudulent intent.
The Court disagrees.
In his Motion and when asked by the Court at the
hearing, Plaintiff Barnes identified one overarching
“injustice.”
He asserts that it would be unjust not to pierce
the veil because Plaintiff Barnes is suffering financially and
will not be able to recover maintenance and cure if the veil is
not pierced.
While the Court is sympathetic to this concern, it
- 26 -
is not in itself reason enough to pierce the veil.
Precedent in
this circuit establishes that the “inability to collect does
not, by itself, constitute an inequitable result.”
Valley
Cabinet, 877 F.2d at 774; see also UA Local 343, 48 F.3d at 1476
(rejecting the argument that “it would be unjust not to pierce
the veil because they would not be able to recover damages
otherwise”); Robert’s, 91 Haw. at 242, 982 P.2d at 871
(recognizing as other relevant factors those referenced earlier
regarding the separate identity factor).
As far as the “fraudulent intent” factor, Plaintiff
Barnes argues that Defendant Henry’s misrepresentation to DOBOR
about the relationship between Defendant SHR and Defendant AOE
is evidence of fraud.
Based on the scant evidence submitted by
Plaintiff—despite this case having been litigated for many
years—the Court cannot agree that this is enough for a finding
of fraudulent intent on summary judgment.
As noted earlier,
courts in this circuit and in Hawai`i are generally reluctant to
pierce the veil on summary judgment, especially where fraud is
alleged.
See Robert’s, 91 Haw. at 242, 982 P.2d at 871
(“[P]iercing the corporate veil ordinarily should not be
disposed of by summary judgment, in view of the complex economic
questions often involved, especially if fraud is alleged.”).
In any event, it is well settled that “[g]arden
variety fraud should be insufficient to pierce the corporate
- 27 -
veil in the absence of evidence of shareholder abuse of the
corporate form to defraud creditors.”
UA Local 343, 48 F.3d at
1476 (quoting Valley Cabinet, 877 F.2d at 773).
As the moving
party seeking to establish the fraud factor in his favor,
Plaintiff Barnes has the burden to establish as a matter of law
that Defendant Henry “misused the corporate form to perpetrate
the[] fraud.”17/
Id. (quoting Valley Cabinet, 877 F.2d at 773).
His Motion fails to meet that burden here.
Viewed in the light most favorable to Defendants,
genuine issues of fact exist on all three factors of the veilpiercing inquiry.
Accordingly, to the extent that Plaintiff
Barnes’s Motion seeks to pierce the corporate veil of Defendant
SHR, the Motion is DENIED.18/
At the hearing, counsel for Defendants suggested that the fraud
factor can only be satisfied by a showing that the corporation was formed
with fraudulent intent, not that the corporation was subsequently used to
perpetrate a fraud. This distinction has been rejected by the Ninth Circuit.
See Valley Cabinet, 877 F.2d at 774 (“We perceive no valid distinction
between forming a corporation with fraudulent intent and subsequently using a
corporate shell to perpetrate a fraud. Consequently, we hold that post
incorporation misuse of the corporate form in appropriate cases can satisfy
the fraudulent intent element.”).
18/
Although counsel for Plaintiff Barnes seemed to back away from this
position at the hearing, the Motion invites the Court to decide the validity
of Henry’s Chapter 13 discharge, Mot. at 10-13, and to find Defendant Henry
personally liable for the full judgment rather than just the value of the
maritime lien, Mot. at 21. The Court declines that invitation and instead
limits its analysis to the veil-piercing inquiry. The Court makes no finding
as to the validity of the bankruptcy discharge or as to the amount Plaintiff
Barnes would be entitled to recover if he is ultimately successful in
piercing the veil (both of which are issues pending on appeal in the Ninth
Circuit).
17/
- 28 -
CONCLUSION
For above-stated reasons, the Court DENIES Plaintiff
Barnes’s Motion for [Partial] Summary Judgment to Pierce the
Corporate Veil, ECF No. 703, without prejudice to file a renewed
motion seeking summary judgment to pierce Defendant SHR’s
corporate veil.
In the event Plaintiff Barnes intends to file a
second motion seeking summary judgment to pierce the corporate
veil of Defendant SHR, the Court directs him to develop the
record and point the Court to any evidence, documents, prior
rulings and specific findings, and legal authority that may be
relevant to the analysis.
IT IS SO ORDERED.
DATED:
Honolulu, Hawai`i, November 9, 2020.
________________________________
Alan C. Kay
Sr. United States District Judge
Barnes v. Sea Hawai`i Rafting, et al., Civ. No. 13-00002 ACK-RLP, Order
Denying Plaintiff’s Motion for Partial Summary Judgment to Pierce the
Corporate Veil (ECF No. 703).
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