(251) 299-0101

MENTAL ANGUISH DAMAGES & PIERCING THE CORPORATE VEIL - TLIG MAINTENANCE SERVICES, INC. V. FIALKOWSKI

TLIG Maintenance Services, Inc. v. Fialkowski, [Ms. 2150255, Sept. 2, 2016] __ So. 3d __ (Ala. Civ. App. 2016). The Court of Civil Appeals affirms in part and reverses in part a judgment entered by the Madison Circuit Court on a jury verdict in favor of Fialkowski on her claims against TLIG, Rusich, and Kitchura for compensatory damages, including mental anguish damages, following defendant's breach of a contract to make improvements to Fialkowski's home.

Noting first the general rule that "damages for mental anguish are not recoverable as part of a claim alleging breach of contract" Ms. *11, citing B&M Homes, Inc. v. Hogan, 376 So. 2d 667, 671 (Ala. 1979), the court reiterated that an exception to the general rule allows damages to be awarded for mental anguish when the action involves a contract for construction or repairs to a person's residence and the breach of the contract "'actually caused the complaining party mental anguish or suffering and ... was such that would necessarily result in emotional or mental detriment to the plaintiff. ...'" Id., quoting B&M Homes, Inc., 376 So. 2d at 672. The Court reiterated a survey of reported decisions when damages for mental anguish had been permitted in connection with the construction or repair of a residence:

"In Ruiz de Molina v. Merritt & Furman Insurance Agency, Inc., 207 F.3d 1351 (11th Cir. 2000), the United States Court of Appeals for the Eleventh Circuit accurately summarized Alabama law concerning the recovery of mental-anguish damages for breach of a contract to build a residence:

"'Under Alabama law, "damages for mental anguish can be recovered ... where the contractual duty or obligation is so coupled with matters of mental concern or solicitude, or with the feelings of the party to whom the duty is owed, that a breach of that duty will necessarily or reasonably result in mental anguish or suffering." Liberty Homes, Inc. v. Epperson, 581 So. 2d 449, 454 (Ala. 1991) (quoting F. Becker Asphaltum Roofing Co. v. Murphy, 224 Ala. 655, 141 So. 630, 631 (1932)). ...

"'.... The majority of the cases in which a plaintiff has been allowed to recover damages for mental anguish involved actions on "contracts for the repair or construction of a house or dwelling or the delivery of utilities thereto, where the breach affected habitability." See, e.g., Epperson, 581 So. 2d at 454; Orkin Exterminating Co. v. Donavan, 519 So. 2d 1330 (Ala. 1988); Lawler Mobile Homes, Inc. v. Tarver, 492 So. 2d 297 (Ala. 1986); Alabama Power Co. v. Harmon, 483 So. 2d 386 (Ala. 1986). Because a person's home is said to be his "castle" and the "largest single individual investment the average American family will make," these contracts are "so coupled with matters of mental concern or solicitude or with the feelings of the party to whom the duty is owed, that a breach of that duty will necessarily or reasonably result in mental anguish or suffering." B & M Homes, Inc. v. Hogan, 376 So. 2d 667, 671-72 (Ala. 1979). Where such a contractual duty [is] breached, the Alabama Supreme Court has said that "it is just that damages therefor be taken into consideration and awarded." Id. at 671.

"'....

"'The Alabama Supreme Court has made very clear, however, that all these cases represent an exception to the general rule prohibiting mental anguish damages for breach of contract. These cases deserve special treatment because it is highly foreseeable that egregious breaches of certain contracts – involving one's home ..., for example – will result in significant emotional distress. See Sexton v. St. Clair Federal Sav. Bank, 653 So. 2d 959, 962 (Ala. 1995).'

"Ruiz de Molina, 207 F.3d at 1359-60. See also Hardesty v. CPRM Corp., 391 F. Supp. 2d 1067, 1074 (M.D. Ala. 2005) (citing Volkswagen of America, Inc. v. Dillard, 579 So. 2d 1301, 1304 (Ala. 1991), for the proposition that '[t]he Alabama Supreme Court has indicated that it is not eager to "widen the breach in the general rule [prohibiting such damages]"'). ...

"The Eleventh Circuit Court of Appeals' summary of Alabama law indicates that our decisions have set out three elements that are essential to the right to recover mental-anguish damages for the breach of a home-construction contract, namely: (1) that the breach be egregious, i.e., that it result in severe construction defects; (2) that those defects render the home virtually uninhabitable; and (3) that the breach necessarily or reasonably result in mental anguish or suffering. See, e.g., Liberty Homes, Inc. v. Epperson, 581 So. 2d 449, 454 (Ala. 1991)(wiring defects that presented an imminent fire hazard); B & M Homes, Inc. v. Hogan, 376 So. 2d 667 (Ala. 1979) (crack in the concrete slab extending from the front porch through the den that widened and extended throughout the house, causing severe damage); Hill v. Sereneck, 355 So. 2d 1129, 1132 (Ala. Civ. App. 1978) (crack in the concrete slab that warped the doors and made them unable to be closed and locked, causing the owner's stay-at-home wife to be 'afraid and apprehensive' about her safety); F. Becker Asphaltum Roofing Co. v. Murphy, 224 Ala. 655, 141 So. 630 (1932) (roof that, each time it rained, leaked into every room of the house, including the bedroom where the plaintiff slept)."

Ms. *11-14, quoting Baldwin v. Panetta, 4 So. 3d 555, 567-568 (Ala. Civ. App. 2008). Because the contracted-for improvements to Fialkowski's home did not put the structure at risk or impair her ability to live in the home, the evidence did not support the conclusion that she suffered mental anguish to the degree required for damages to be awarded. Hence, the judgment entered on the jury's verdict awarding Fialkowski $15,000.00 in damages for mental anguish is reversed. Ms. *17.

The court also affirmed in part and reversed in part as to the Madison Circuit Court's judgment determining the corporate veil of the business entity with which Fialkowski had contracted to perform the improvements could be pierced because of disregard of the corporate formalities and commingling of the corporation's assets with personal assets. Citing Heisz v. Galt Indus., Inc., 93 So. 2d 918 (Ala. 2012)(Ms. *17-8), the court set forth the procedure for determining when the corporate veil should be pierced:

"Whether the corporate veil of a business entity should be pierced is a matter of equity, properly decided by a judge after a jury has resolved the accompanying legal issues. Stephens v. Fines Recycling, Inc., 84 So. 3d 867, 877 (Ala. 2011); Ex parte Thorn, 788 So. 2d 140 (Ala. 2000). We accordingly review a trial court's determination in this regard under the ore tenus standard of review, which dictates that the trial court's judgment based on ore tenus evidence '"is presumed correct and should be reversed only if the judgment is found to be plainly and palpably wrong, after consideration of all the evidence and after drawing all inferences that can logically be drawn from that evidence."' Thomas v. Neal, 600 So. 2d 1000, 1001 (Ala. 1992) (quoting Sundance Marina, Inc. v. Reach, 567 So. 2d 1322, 1324–25 (Ala. 1990))."

Id. at 929. The court then examined whether the evidence supported the Madison Circuit Court's judgment under the test established by the Supreme Court for when it is appropriate to pierce the corporate veil:

"The Alabama Supreme Court has set out the following extraordinary circumstances in which it would be appropriate to pierce the corporate veil: 1) where the corporation is inadequately capitalized; 2) where the corporation is conceived or operated for a fraudulent purpose; or 3) where the corporation is operated as an instrumentality or alter ego of an individual or entity with corporate control. First Health, Inc. v. Blanton, 585 So. 2d [1331] at 1334 [(Ala. 1991)] (citing Messick v. Moring, 514 So. 2d 892, 894 (Ala. 1987)). See also M & M Wholesale Florist, Inc. v. Emmons, 600 So. 2d 998 (Ala. 1992)."

Ms. * 22, quoting Gilbert v. James Russell Motors, Inc., 812 So. 2d 1269, 1273 (Ala. Civ. App. 2001).

* * *

"The corporate veil may be pierced where a corporation is set up as a subterfuge, where shareholders do not observe the corporate form, where the legal requirements of corporate law are not complied with, where the corporation maintains no corporate records, where the corporate maintains no corporate bank account, where the corporation has no employees, where corporate and personal funds are intermingled and corporate funds are used for personal purposes, or where an individual drains funds from the corporation."

Ms. *23, quoting Simmons v. Clark Equip. Credit Corp., 554 So. 2d 398, 401 (Ala. 1989). Upon review of the evidence in light of these standards, the court concludes that the Madison Circuit Court correctly determined the corporate veil could be pierced as to the sole shareholder, but that the Madison Circuit Court erred in concluding the veil could be pierced to a non-shareholder and non-officer such that the judgment in that regard was required to be reversed as well.

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