ATTORNEY FOR APPELLANT: ATTORNEY FOR APPELLEE:
C. WARREN NERZ DIANE E. BLUHM
McCrosson & Nerz Morgan & Pottinger, P.S.C.
Indianapolis, Indiana Louisville, Kentucky
COURT OF APPEALS OF INDIANA
MICHAEL B. SMITH and COLONIAL MAT )
COMPANY, INC., )
vs. ) No. 41A01-9911-CV-403
MCCLEOD DISTRIBUTING, INC., )
APPEAL FROM THE JOHNSON CIRCUIT COURT
The Honorable Mark Loyd, Judge
Cause No. 41C01-9009-CP-343
December 27, 2000
OPINION - FOR PUBLICATION
Defendants, Colonial Mat Company, Inc. (Colonial Mat) and Michael B. Smith, appeal the
judgment entered against them for a commercial debt owed to Plaintiff, McLeod Distributing,
Inc. (McLeod). McLeod cross-appeals from the trial courts decision to reduce the
amount of prejudgment interest awarded to it. We affirm in all respects.
Colonial Mat and Smith have presented three issues for review, which we consolidate
into two issues restated as follows:
I. whether the trial court erroneously concluded that Colonial Mat was a proper party
to this action because the commercial invoices at issue were directed to Colonial
Carpets, Inc.; and
II. whether the personal guarantee executed by Smith in order to establish a line
of credit for Colonial Mat with McLeod was invalid due to improper execution.
McLeods sole issue on cross-appeal is whether the trial court erred in reducing
the amount of prejudgment interest awarded to McLeod because the record reflects little
or no activity in the prosecution of this case for several years.
McLeod was a corporation involved in the wholesale distribution of floor coverings, including
carpets. It appears from the evidence that Colonial Mat installed carpets and
other floor products in residences and other locations; it was incorporated in 1987.
Colonial Industrial Products Company, Inc., (Colonial Industrial) was incorporated in 1981. At
the time Colonial Mat was incorporated, Colonial Industrial was distributing a certain brand
of industrial rubber products. A few months after Colonial Mat was incorporated,
it applied for a line of credit with McLeod. McLeod initially refused
to ship goods to Colonial Mat on credit, but eventually approved a line
of credit for Colonial Mat after Smith, the president of both Colonial Mat
and Colonial Industrial, signed a personal guarantee for any debt Colonial Mat might
After McLeod and Colonial Mat had been doing business for nearly one-and-a-half years,
Smith sent the following letter to McLeod, which we reprint in its entirety:
March 17, 1989
To: Carpet Suppliers
Re: Colonial Carpets
In the near future we will be selling our matting products under the
name of Logomatts of America. We are obtaining licensing for custom logo
mats from several universities and companies. For marketing reasons we feel a
need for a name change.
However, we will be registering Colonial Carpets to the corporation that we sell
floor products under. We presently use Colonial Carpets as the name we
invoice our carpet jobs.
So, as soon as our printing is completed we will be ordering, as
well as selling, all floor products except Mats & Matting as Colonial Carpets
a corporate division of Colonial Industrial Products Co., Inc.
If you have any questions, feel free to call me at any time.
Very truly yours,
Michael B. Smith
Record p. 201. On March 27, 1989, Colonial Industrial filed a certificate
of assumed name with the Secretary of State, indicating that it would be
doing business as Colonial Carpets. After receiving this letter, McLeod changed Colonial
Mats name on its computer billing system to Colonial Carpets, Inc. It
never closed the account originally opened by Colonial Mat, however, and neither Smith
nor anyone associated with his businesses did so.
McLeod continued doing business with Colonial Industrial d/b/a Colonial Carpets until February and
March of 1990, when several invoices for goods delivered went unpaid. The
total unpaid balance accrued to $6,132.65 as of May 11, 1990, when demand
for payment was made, and McLeod filed a complaint against Colonial Mat and
Smith on September 20, 1990. Colonial Mats corporate existence continued until November 1990,
when the Secretary of State administratively dissolved it because of its failure to
file an annual report.
After this case remained pending for nearly ten years, the trial court conducted
a bench trial and entered judgment in favor of McLeod for the outstanding
debt, plus eighteen percent prejudgment interest, eight percent postjudgment interest, and attorney and
filing fees. However, the trial court reduced the prejudgment interest amount by
$5,519.39, representing a period of approximately five years. After the trial court
denied Colonial Mats and Smiths motion to correct errors, this appeal ensued.
No party to this action requested special findings of fact, and the trial
court did not enter any such findings sua sponte; thus, Colonial Mat and
Smith are appealing from a general judgment, and the standard of review for
such judgments is applicable. Shelby Engineering Co., Inc. v. Action Steel Supply,
Inc., 707 N.E.2d 1026, 1027 (Ind. Ct. App. 1999). A general judgment
will be affirmed if it can be sustained upon any legal theory consistent
with the evidence. Id. In making this determination we neither reweigh
the evidence nor judge the credibility of witnesses; rather, we consider only the
evidence most favorable to the judgment together with all reasonable inferences to be
drawn therefrom. Id. In reviewing a general judgment, we must presume
that the trial court correctly followed the law. Perdue Farms, Inc. v.
Pryor, 683 N.E.2d 239, 240 (Ind. 1997).
I. Liability of Colonial Mat
Colonial Mat argues that it was not a proper party to this suit
because it is undisputed that all of the invoices at issue were addressed
to Colonial Carpets, Inc., which Colonial Mat claims was a distinct corporate entity.
It also claims that McLeod had notice before these invoices were issued,
via the March 17, 1989, letter, that Colonial Mat and Colonial Industrial d/b/a
Colonial Carpets were separate companies. McLeod essentially responds that it would be
inequitable not to hold Colonial Mat liable for this debt because Colonial Mat
and Colonial Carpets were indistinguishable entities. In order to conclude that Colonial
Mat was a proper party to this action, the trial court would have
been required to conclude that Colonial Industrial d/b/a Colonial Carpets was merely an
adjunct to or alter ego of Colonial Mat, which could be properly held
liable for a debt incurred by Colonial Industrial.
Although Indiana courts are reluctant to disregard a corporate entity, they may do
so to prevent fraud or unfairness to third parties. Winkler v. V.G.
Reed & Sons, Inc., 638 N.E.2d 1228, 1232 (Ind. 1994). When a
court exercises its equitable power to pierce a corporate veil, it engages in
a highly fact-sensitive inquiry. Id. Therefore, we will give deference to
a trial courts decision to pierce the corporate veil or disregard the fiction
of a separate corporate entity. That fiction may be disregarded where one
corporation is so organized and controlled and its affairs so conducted that it
is a mere instrumentality or adjunct of another corporation. Extra Energy Coal
Co. v. Diamond Energy & Resources, Inc., 467 N.E.2d 439, 441 (Ind. Ct.
App. 1984). Indiana courts refuse to recognize corporations as separate entities where
the facts establish several corporations are acting as the same entity. General
Finance Corp. v. Skinner, 426 N.E.2d 77, 84 (Ind. Ct. App. 1981).
While no one talismanic fact will justify with impunity piercing the corporate veil,
a careful review of the entire relationship between various corporate entities, their directors
and officers may reveal that such an equitable action is warranted. Stacey-Rand,
Inc. v. J.J. Holman, Inc., 527 N.E.2d 726, 728 (Ind. Ct. App. 1988).
Our supreme court has held that the burden of proof with respect
to piercing the corporate veil rests with the plaintiff, and that in deciding
whether the plaintiff has met this burden:
an Indiana court considers whether the plaintiff has presented evidence showing: (1)
undercapitalization; (2) absence of corporate records; (3) fraudulent representation by corporation shareholders or
directors; (4) use of the corporation to promote fraud, injustice or illegal activities;
(5) payment by the corporation of individual obligations; (6) commingling of assets and
affairs; (7) failure to observe required corporate formalities; or (8) other shareholder acts
or conduct ignoring, controlling, or manipulating the corporate form.
Aronson v. Price, 644 N.E.2d 864, 867 (Ind. 1994).
II. Personal Liability of Smith
However, Aronson specifically concerned piercing the corporate veil in order to hold a
shareholder personally liable for a corporate debt; our supreme court was not asked
in that case to hold one corporation liable for another closely related corporations
debt. We do not believe the eight Aronson factors were intended to
be exclusive, particularly when a court is asked to decide whether two or
more affiliated corporations should be treated as a single entity. In fact,
Indiana courts (in cases cited by Aronson) have often evaluated additional factors in
such a situation, factors that would not be applicable where one was attempting
to pierce the corporate veil to hold a corporations directors, officers, or shareholders
personally liable for a corporate debt.
See footnote Some of these factors have included
whether similar corporate names were used,
see Extra Energy Coal Co., 467 N.E.2d
at 442; Clarke Auto Co. v. Fyffe, 124 Ind.App. 222, 227-230, 116 N.E.2d
532, 535-36 (1954); whether there were common principal corporate officers, directors, and employees,
see Stacey-Rand, Inc., 527 N.E.2d at 728-29 (Ind. Ct. App. 1988); whether the
business purposes of the corporations were similar, see Extra Energy Coal Co., 467
N.E.2d at 441; and whether the corporations were located in the same offices
and used the same telephone numbers and business cards, see id. Additionally,
we have previously noted that other jurisdictions have disregarded the separateness of affiliated
corporations when the corporations are not operated as separate entities but are manipulated
or controlled as one enterprise through their interrelationship to cause illegality, fraud, or
injustice or to permit one economic entity to escape liability arising out of
an operation conducted by one corporation for the benefit of the whole enterprise.
Eden United, Inc. v. Short, 573 N.E.2d 920, 933 (Ind. Ct. App.
1991), trans. denied. Indicia of common identity, excessive fragmentation, or single
business enterprise corporations may include, among other factors, the intermingling of business transactions,
functions, property, employees, funds, records, and corporate names in dealing with the public.
McLeod failed to present much evidence relevant to the Aronson factors in support
of its claim; it presented no evidence of undercapitalization, fraud, absence of corporate
records, failure to observe formalities, or shareholder misconduct, for example. Nonetheless, we
believe there was sufficient evidence presented from which the trial court might have
concluded that Colonial Mat and Colonial Industrial were effectively one and the same
corporation, thus justifying a holding that Colonial Industrial was merely an adjunct to
or alter ego of Colonial Mat, which is liable for this debt.
First, we note the obvious similarity between the names of the two companies.
Colonial was apparently used by Smith at the time to identify his
See footnote the business card that McLeod introduced into evidence had in one
corner Colonial Mat Co., Inc., and in the opposite corner was simply Colonial.
Second, Colonial Mat and Colonial Industrial d/b/a Colonial Carpets were engaged in
virtually identical lines of business. Colonial Industrials Articles of Incorporation indicated its
purpose was to engage in the sales and distribution of industrial products, Record
p. 313, while Colonial Mats purpose was to engage in the sale, distribution
and services related to industrial products including, but not limited to, floor covering
products . . . Record p. 299. The only apparent difference
between Colonial Mat and Colonial Industrial d/b/a Colonial Carpets was that Colonial Mat
dealt in all floor coverings, while Colonial Industrial dealt in all floor coverings
except mats. Third, Smith was president of both Colonial Mat and Colonial
Industrial; the only other director for both corporations was the same individual, the
treasurer Joe Eller. The two companies also shared the same office manager,
Lois Jean Bennett, who testified that she was the only office personnel Smith
had at the time. Fourth, the two companies operated at the same
address and used an identical phone number. Fifth, while not of major
importance, we find it interesting that Colonial Mats credit application states that it
had been in business since 1970. Given that Colonial Mat was incorporated
in 1987, it would appear to be reasonable to infer that Smith was
referring to 1970 as the date when he, personally, went into business.
Sixth, there is evidence from which a fact finder could have reasonably inferred
that Colonial Mat and Colonial Industrial intermingled their assets, or that Colonial Mat
paid for obligations of Colonial Industrial, which would satisfy two of the
factors. McLeod introduced certain invoices directed to Colonial Mat that were paid
by Colonial Mat checks following the March 17, 1989, letter that Colonial Mat
and Smith claims gave notice of a change in corporate structure. We
understand that a corporation that is going out of business will have a
period of winding up, where it will pay debts incurred before it went
out of business. However, included among those invoices, for example, was an
order for 500 business cards placed on March 23, 1989, paid for with
a Colonial Mat check. It would seem unusual for a company going
out of business to order 500 business cards; a reasonable inference would be
that this represented some of the printing referred to in the March 17,
1989, letter, and that it was paid for out of Colonial Mats checking
account. The record also contains several payroll checks to Smith and Bennett
written on Colonial Mat checks in April of 1989, as well as a
Colonial Mat check written to McLeod itself in May of 1989. Finally,
we address Smiths and Colonial Mats claim that [i]t is undisputed that by
letter dated March 17, 1989, Michael B. Smith served notice upon McLeod that
its carpet business would be affected by a corporate change. Appellants Brief
p. 7. We find this to be far from undisputed; rather, the
letter is ambiguous in this regard. First, the letter at no point
states that Colonial Mat is going out of business, and in fact makes
no mention of Colonial Mat at all. It can be argued that
it refers to Colonial Mat inferentially by stating, we will be registering Colonial
Carpets to the corporation that we sell floor products under. Record p.
201. That corporation was Colonial Mat, and thus this sentence may have
indicated Colonial Carpets was going to be registered to Colonial Mat, thus lending
support to the idea that Colonial Carpets and Colonial Mat were one and
the same. The letter also states that the change to Colonial Carpets
was a name change made for marketing reasons. Ron McLeod, McLeods president,
testified that this indicated to him that the name change was a marketing
thing that had no bearing on anything else . . . .
It didnt change the company, it just had another name. . . .
It was just all the same stuff. Record pp. 196-99.
McLeod also testified that the meaning of the letter to him was they
are adding a name to their Colonial Industrial Products Company, Inc. a company
called Colonial Carpets. Record p. 205. Thus, far from providing clear
and unambiguous notice of a change in corporate structure, the letter appears to
have only added to the confusion about the purported corporate separateness of Colonial
Mat and Colonial Industrial d/b/a Colonial Carpets.
Upon review of the evidence, we cannot say that it leads solely to
a result contrary to that reached by the trial court. There is
ample indication that, in dealing with the public, Smith treated Colonial Mat and
Colonial Industrial d/b/a Colonial Carpets as if they were adjunct corporations, or mere
alter egos or instrumentalities of each other that shared a common identity.
Therefore, equity requires that Colonial Mat be held liable for the debt at
issue here in order to protect an innocent third party, McLeod, from unfairness.
Smiths liability in this matter is based upon a personal guarantee he executed
at the time Colonial Mat applied for a line of credit with McLeod;
there is no argument that Smith is personally liable, as an officer, director,
or shareholder, under a piercing the corporate veil theory. Smiths first argument
regarding his personal liability is that he never guaranteed the debts of Colonial
Industrial d/b/a Colonial Carpets, only Colonial Mat, and thus he cannot be liable
in this case because the invoices at issue were directed to Colonial Carpets.
However, having resolved that Colonial Industrial was merely an adjunct to or
alter ego of Colonial Mat, and that Colonial Mat may be liable for
Colonial Industrials debts, this argument has been effectively rendered moot because Smith did
purportedly guarantee any debt Colonial Mat might incur to McLeod.
We turn to Smiths second argument, namely that his personal guarantee of Colonial
Mats debt is invalid because it was not properly executed. In Indiana,
three parties are required to properly execute a continuing guarantee agreement: the
obligor, the obligee, and the surety or guarantor. Kordick v. Merchants Nat.
Bank & Trust Co., 496 N.E.2d 119, 123-24 (Ind. Ct. App. 1986).
Smith claims that the McLeod sales representative who signed the Colonial Mat credit
application, which also contained the personal guarantee, was not an authorized representative of
McLeod, the obligee, and thus the guarantee is ineffective.
Even though we assume without deciding that the guarantee was improperly executed, we
disagree that the guarantee is ineffective. The law applicable to guarantee agreements
is governed by the general law of contracts.
Bickel v. Deitch, 532
N.E.2d 617, 618 (Ind. Ct. App. 1989), trans. denied. That being the
case, we believe that the contract law principle of ratification is applicable here.
Ratification applies when a party to a contract, with knowledge of facts
entitling that party to rescind the contract, treats the contract as a continuing
and valid obligation, thus leading the other party to believe that the contract
is still in effect. Winkler v. V.G. Reed & Sons, Inc., 638
N.E.2d 1228, 1236 n.6 (Ind. 1994).
Before the disputed invoices in this case were issued in the early part
of 1990, McLeod and Colonial Mat had been doing business pursuant to Colonial
Mats line of credit that it applied for in August of 1987.
Ron McLeod made it clear in his trial testimony that Colonial Mats credit
application was initially inadequate, based upon a review of Colonial Mats finances, and
its line of credit was approved only after review of Smiths personal finances
and his personal guarantee of any debt Colonial Mat might incur. Thus,
Smiths guarantee was an integral condition precedent to McLeods agreeing to ship goods
to Colonial Mat on credit, and McLeod did in fact ship goods to
Colonial Mat on credit for nearly two and a half years in reliance
upon the personal guarantee. At no time did Smith seek to rescind
the guarantee. We believe it is clear that Smith had knowledge of
the fact that would permit him to rescind the guarantee (the faulty execution)
but he did not do so, perhaps because his companies, Colonial Mat and
its alter ego Colonial Industrial d/b/a Colonial Carpets, received the benefit of doing
business with McLeod on credit because of the guarantee. McLeod had no
reason to believe that Smith considered the guarantee ineffective.
III. Cross-Appeal: Reduction of Prejudgment Interest Award
In its appellate brief, McLeod raises a cross-appeal concerning the amount of prejudgment
interest awarded to it by the trial court. Specifically, it attacks the
trial courts decision to reduce the prejudgment interest award by $5,519.39 based upon
an approximate five (5) year period with little or no activity by Plaintiff
in pursuit of prosecution of this case. Record p. 19. McLeod
claims that [t]here is no evidence that any gap in activity in this
case is attributable solely to the Appellee. Appellees Brief p. 7.
The approximate five-year period of no activity referred to by the trial court
appears to be from November 1992, when a pre-trial conference was apparently held,
to March 1997, when McLeod moved to refer this case to mediation.
The only activity during that period was the trial courts 1994 sua sponte
motion to involuntarily dismiss the case pursuant to Indiana Trial Rule 41(E) and
McLeods response to that motion.
Although not raised by Colonial Mat and Smith, we believe it is clear
that McLeod has waived appellate review of this alleged error. A party
may not take advantage of an error that he commits, invites, or which
is the natural consequence of his own neglect or misconduct. Stolberg v.
Stolberg, 538 N.E.2d 1, 5 (Ind. Ct. App. 1989). Invited error is
not subject to review by this court. Id. At the closing
of this bench trial, the trial court specifically asked McLeods counsel to address
the gap in activity in this case and its potential effect on a
prejudgment interest award. Counsel replied in part, you are correct it is
within your discretion as far as how much of that interest to award.
. . . But I will agree though that probably in the
entire ten years this has been going on, equity would not call for
interest during the entire period. But I dont think wiping it away
for the entire period would be correct either. Record pp. 543-44.
Based upon these statements, McLeod cannot now complain that the reduction in prejudgment
interest was in error, contrary to law, and cannot be supported by any
valid legal theory. Appellees Brief p. 7. We also observe that
McLeod does not argue on appeal that the amount of reduction was excessive
or more than it had in mind, but only that any reduction at
all was erroneous. As requested by McLeods counsel, the trial court did
not entirely wipe away the prejudgment interest award and McLeod is still entitled
to interest for an approximate five-year period, representing delays in this ten-year-old case
that the trial court apparently did not attribute to McLeod.
We hold that there was sufficient evidence supporting the trial courts exercise of
its equitable power to conclude that the fiction of corporate separateness should be
disregarded in this case, and that Colonial Mat may be held liable for
the debt of Colonial Industrial d/b/a Colonial Carpets at issue here. We
also hold that Smith ratified his personal guarantee of Colonial Mats debt to
McLeod, even if it had been improperly executed. Finally, we hold on
McLeods cross-appeal that it invited any error with respect to the reduction of
its prejudgment interest award.
BAILEY, J., and RILEY, J., concur.
We also note that the record here does not permit us to
evaluate whether Colonial Mat and Colonial Industrial were ever in a parent-subsidiary relationship,
and so the control theory of piercing a subsidiarys corporate veil to hold
a dominating parent company liable for the subsidiarys debt is also inapplicable here.
However, we have previously approved piercing of a corporations veil in order
to reach the assets of a so-called brother-sister corporation. See Eden United,
Inc. v. Short, 573 N.E.2d 920, 933-34 (Ind. Ct. App. 1991), trans.denied.
Additionally, we observe that the reasons given by the
Aronson court for the
limited liability of corporate shareholders are inapplicable in the brother-sister corporation context.
Those reasons include furthering capital formation by encouraging shareholders to invest through limiting
their liability, as a means of encouraging the small-scale entrepreneur and of keeping
entry into business markets competitive and democratic. Aronson, 644 N.E.2d at 867
(citing Stephen B. Presser, Thwarting the Killing of the Corporation: Limited Liability,
Democracy, and Economics, 87 Nw. U.L. Rev. 148, 155 (1992)).
He now owns a company called Custom Mat Company. Record p.
Because the continuing guarantee signed by Smith is not a draft, a
check, a certificate of deposit, or a note, it is not governed by
the rules of the Indiana Uniform Commercial Code. See Kordick, 496 N.E.2d