OPINION
FABE, Chief Justice.
I. INTRODUCTION
In April 1997 Nerox Power Systems, Inc. recorded two deeds of trust encumbering mining rights to the Jonesville coal mine in Sutton, for the purpose of securing repayment of debts to certain alleged creditors. At issue in this appeal is the superior court's decision to give other creditors lien priority over the deeds of trust under the doctrine of equitable subordination. A second issue concerning the legal relationship between Nerox Power, its parent company, and the major
shareholder in the parent company is which of these should assume liability for the debts of Nerox Power. The superior court pierced the corporate veil of the parent company to make its major shareholder liable for the debts of Nerox Power. We affirm the decision of the superior court in all respects.
II. FACTS AND PROCEEDINGS
Gemini Capital Corporation was incorporated in Nevada in 1985, and its stock was publicly traded. The corporation held interests in various gas and oil wells and based its profits on royalties from its holdings. By April 1991 Gemini Capital Corporation had run into financial difficulties, and its stock was de-listed due to valuation uncertainties. The company remained dormant for the next several months and in 1992 changed its name to Gemini Energy Corporation. Gemini Operating Company, a subsidiary of Gemini Capital Corporation (later Gemini Energy Corporation), was incorporated in 1990.
In November 1992 Nicholas E. Ross obtained a controlling interest in Gemini Energy Corporation; the corporation changed its name to Nerox Energy Corporation in 1994. Ross served as the president and chief executive officer of Nerox Energy from the time of purchase until November 1997. In 1994 Ross sought to acquire a five percent interest in a Cook Inlet oil field owned by Stewart Petroleum. In order to raise the necessary capital, Ross issued 108,894 shares of common stock in Nerox Energy. Because Nerox Energy was facing financial difficulties at the time, Ross attracted investors by promising that by 1996 Nerox Energy's stock would reach $35.71, for a total valuation of $3.87 million, and that any difference would be paid either in cash or additional stock if this goal was not reached.
Stewart Petroleum went bankrupt in 1996, depriving Nerox Energy of its expected profit.
In 1995 Ross decided to expand into coal mining through the subsidiary Gemini Operating Company, which he renamed Nerox Power Systems, Inc. Nerox Power acquired the Jonesville coal mine in Sutton, which was not operational at the time of acquisition. The mining rights were previously owned by Hobbs Industries, Inc. under a sublease with Placer Dome U.S., Inc. Hobbs assigned its rights to Nerox Power on August 10, 1995 in exchange for stock in Nerox Power and other consideration. In late October 1995 Nerox Power purchased the mining rights from Placer Dome for $1 million, $800,000 of which was paid in cash and the balance executed in a promissory note. Of the $800,000 paid in cash, $400,000 was contributed by the GAR Trust and the Ross Family Trust, while the other $400,000 was raised by the sale of preferred stock to a set of investors.
The mining rights to the Jonesville mine were the only asset Nerox Power ever owned.
The Jonesville mine was not successful, and Nerox Power never generated any revenue from the sale of coal. Ross himself personally loaned approximately $1.8 million to Nerox Power and Nerox Energy to cover operating and development costs for the mine. In September 1996 Nerox Power leased heavy equipment from both M-B Contracting, Inc. and Tope Equipment Company for use at the mine. Out of frustration over Nerox Power's financial difficulties, Ross fired its existing president in December 1996 and replaced him with William Artus, who had been serving as legal counsel for Nerox Energy. Shortly after being hired, Artus loaned $79,500 to Nerox Power to cover operating expenses and a portion of the remaining $200,000 it owed to Placer Dome. Artus was also owed a little over $68,000 for legal services he provided to Nerox Energy prior to becoming president of Nerox Power. Nerox Energy issued Artus 151,016 shares of stock in 1997 but did not specify for which - debt the stock was issued or how much of the debt was relieved by the issuance. Nerox Power recorded a deed of trust against the Jonesville mine on April 11, 1997 to secure a
payment of $191,576 to Artus and Coal Factors, Inc., which had supplied plans, materials, and equipment for a coal washing plant.
Ross purchased Nerox Power in 1998 for $10,000 and the assumption of all corporate debt. Ross also transferred control of Nerox Energy to outside investors as part of the same transaction. Nerox Energy was renamed E*two Media.com.
M-B recorded a lien against Nerox Power and Nerox Energy on May 14, 1997 and a lien extension on October 27, 1998. Tope recorded a similar lien on May 22, 1997 and a lien extension on November 19, 1997. Nerox Energy stipulated to a judgment of $47,500 in outstanding legal expenses to Alaska Law Offices and Steven Jones on August 28, 1997 for services rendered with regard to continuing litigation between Nerox Power and Hobbs Industries.
On April 10, 1998, M-B filed to foreclose on its mechanie's lien and hold Nerox Energy liable for Nerox Power's debt. Tope cross-claimed and counter-claimed to foreclose on its mechanic's lien, and Alaska Law Offices and Steven Jones later moved to foreclose on its judgment lien. As a sanction for failing to comply with a discovery order, the superi- or court held that Nerox Energy was the alter ego of Nerox Power. Following a May 2000 trial, Superior Court Judge Karen L. Hunt concluded, based on extensive factual findings: that M-B and Tope could foreclose on their mechanic's liens and that Alaska Law Offices and Steven Jones could foreclose on their judgment lien; that the two April 1997 deeds of trust were subordinated to the mechanic's and judgment liens; and that both Nerox Power and Nerox Energy were instrumentalities of Ross, thus "piercing" the corporate veil and making Ross liable for their debts. Ross, Artus, Nerox Power, Ner-ox Energy, and other investors in Nerox Energy appeal this decision.
III. DISCUSSION
There are two main issues in this case: (1) whether the two April 1997 deeds of trust can be equitably subordinated to the liens of M-B, Tope, and Alaska Law Offices;
and (2) whether Ross is personally liable for the debts of Nerox Power and Nerox Energy. The primary factual question raised by both issues is whether Ross and Artus acted fraudulently in their handling of the financial affairs for Nerox Energy and Nerox Power. Judge Hunt found sufficient evidence to conclude that fraud existed. To this finding we apply the "clearly erroneous" standard of review.
A finding of fact is clearly erroneous "if it leaves this court with a 'definite and firm conviction on the entire record that a mistake has been made. "
This standard, therefore, requires us to give great deference to the findings of the superior court
Judge Hunt further concluded that the deeds of trust should be subordinated to the liens and that Ross was personally liable for the debts of Nerox Power. These are questions of law to which we apply our independent judgment.
A. The Superior Court Did Not Err by Subordinating the Two April 1997 Deeds of Trust to the Liens of M-B, Tope, and Alaska Law Offices.
The Alaska Supreme Court has recognized that the doctrine of equitable sub
ordination, whereby the court may "undo or offset any inequity in the claim position of a creditor that would produce injustice or unfairness to other creditors in terms of bank-ruptey results,"
can exist outside of the standard bankruptcy context.
A need for equitable subordination arises in situations of "[fIraud, unfairness, or breach of the rules of 'fair play' "
It is also the case, however, that "an insolvent debtor may convey property to one creditor, even if it means that the debtor's assets will thereby be depleted, and that the claims of other creditors will be defeated."
In the absence of inequitable conduct on the part of a debtor, a court cannot alter the pre-existing priorities among creditors.
It is also important to note that we have held both that directors of insolvent corporations have a fiduciary duty to preserve the assets of the corporation for its creditors
and that attorneys who represent insolvent corporations and have control over their assets must also protect those assets for the creditors where they "know[] or should know that the director or officer intends to interfere with creditors' claims through an improper distribution of those assets."
1. The April 11, 1997 deed of trust
a. The debt to William Artus
On April 11, 1997, Nerox Power recorded a deed of trust against the Jonesville mine and listed as beneficiaries William Artus and Coal Factors, Inc. Artus himself signed the deed in his role as president of Nerox Power. Debt amounts to Artus and Coal Factors were not separately listed in the deed of trust itself. The 1997 10-K report that Ner-ox Energy was required to file with the Securities and Exchange Commission lists debts to Artus of: (1) $68,196 for legal services in 1996 and 1997 combined, and (2) $85,482 for a loan that Artus made to Nerox Energy in late 1996 or early 1997. However, Artus testified at trial that he was owed $79,500 for the loan. This amounts to a total debt to Artus of either $158,628 or $147,696. Nerox Energy issued 151,016 shares of stock to Artus "in conversion of debt" sometime in 1997.
The 1997 10-K report does not explain to what extent the debts owed to Artus, both from his loan and for his legal services, were satisfied by the 151,016 shares issued to him. There is no monetary value attached to the shares, although one could reasonably infer that the entire debt was satisfied by the issuance of stock. The 1997 10-K report states that Nerox Energy converted $568,168 in debt to shares of common stock in 1997 at $1.00 per share. There is nothing definitive to say that the issuance of stock to Artus was included in this debt conversion, although converting debt at a dollar per share for the 151,016 shares issued to Artus would closely approximate the combined debt owed to Ar-tus for his loan and for legal services. Judge Hunt concluded that Artus's debt was satisfied by the issuing of the stock. She further found that the loan to Nerox Power by Artus was a capital contribution for which he received the shares of common stock in Nerox Energy. Judge Hunt found that fraud existed in these transactions:
Mr. Artus breached his fiduciary duty to the creditors by attempting to place the interests of William D. Artus and Coal Factors, Inc., shareholders in the corporation, over the interests of third-party ered-itors. The execution of the deed of trust
was done at a time when both corporations were grossly undercapitalized. Such conduct constituted a fraudulent conveyance, hindered creditors and was "inequitable conduct."
Artus contends
that because the amount of debt compensated by the 151,016 shares is unclear, the conveyance of the deed of trust cannot be fraudulent. However, we cannot say that the superior court was clearly erroneous in concluding that "Nerox Power satisfied any debts Nerox Power owed to Artus." Based on the 1997 10-K statement that certain unspecified debts were converted to common stock "at a price of $1.00 per share in 1997," Judge Hunt found that the stock issued in satisfaction of debt in 1997 was issued for a dollar a share. Because the 151,016 shares issued to Artus are roughly equal to the amount of money owed to Artus by Nerox Power ($158,628 based on the figures in the 1997 10-K), there is evidentiary support for the superior court's conclusion that all of Artus's debts had been satisfied, and we cannot say that this factual determination is clearly erroneous.
Furthermore, Judge Hunt could have effected the subordination of Artus's interest in the deed of trust independently of whether or not she believed that his debt had been satisfied by the issuance of stock. Ap-pellees M-B, Tope, and Alaska Law Offices focus on Artus's position as an insider in Nerox Power and argue that this status supports a finding of a fraudulent conveyance to Artus's own benefit. Appellees argue that this is sufficient to support equitable subordination of the deed of trust. The law supports this conclusion. Federal courts have recognized three types of misconduct that constitute "inequitable conduct": (1) fraud, illegality, or breach of fiduciary duties; (2) undereapitalization; and (8) claimant's use of the debtor as a "mere instrumentality" or alter ego.
Judge Hunt found the first two of these to exist, and her conclusions were not clearly erroneous.
The prohibition against fraudulent conveyances has been codified in Alaska law.
The intent to defraud through a conveyance "is a question of fact usually to be proved by cireumstantial evidence."
Many cireum-stantial factors can indicate the existence of fraud.
"Badges of fraud must be viewed within the context of each particular case."
Judge Hunt found that Artus either knew or should have known that many creditors had not been paid at the time the deed of trust was recorded and that these creditors would likely claim a lien against the mining rights. In his role as a director of the company, and in his former role as a lawyer for Nerox Energy, Artus had an obligation to protect the rights and assets of the corporation for its creditors.
Judge Hunt further found
that by naming himself as a beneficiary of a deed of trust encumbering Nerox Power's only asset for the purpose of repaying a loan and reimbursing the costs of legal services he provided, Artus ignored his fiduciary duty and engaged in inequitable conduct.
We have recognized inadequate consideration, the insolvency of the debtor/transferor, and a transfer of assets in anticipation of a pending suit to be among the badges of fraud.
All of these existed in the present case. Judge Hunt found that Nerox Power was insolvent; that there was inadequate consideration for the deed of trust; and that Artus knew Nerox Power was likely to be burdened by mechanic's liens in light of its insolvency. These factual findings are not clearly erroneous and satisfy the fraud category of inequitable conduct.
Judge Hunt also found that both Nerox Power and Nerox Energy were "grossly un-dercapitalized" and that this constituted inequitable conduct.
The only asset of Nerox Power was the right to mine coal at the Jonesville mine, which never went into production. Judge Hunt found that Nerox Power had neither the expertise nor the equipment to run a coal mine, hence the need to hire M-B and Tope. All the funding for the expenses of Nerox Power came either directly from Ross or indirectly from Ross via Nerox Energy. Given these facts, it was not clearly erroneous to find that Nerox Power was undercapitalized and that the deed of trust for Artus could thus be equitably subordinated to the liens of M-B, Tope, and Alaska Law Offices.
b. The debt to Coal Factors, Inc.
Judge Hunt found that Coal Factors was a consultant to Nerox Power and had advanced them funds for use in developing the mine, making them either an investor or an unsecured creditor. Because Nerox Energy satisfied its debts to consultants by issuing stock, Judge Hunt found that the debts owed to Coal Factors had been satisfied. Coal Factors thus could not be preferred over bona fide creditors.
Yet, the evidence Judge Hunt cites to show that Coal Factors was a consultant actually suggests that Coal Factors was a standard contractor rather than a consultant. Furthermore, the billing statements in the record demonstrate that a substantial amount of Coal Factors's billing was for material goods provided to Nerox Power for use in developing the mine. There
is also very little testimony at trial to support the conclusion that Coal Factors served as a consultant. However, M-B argues an alternative ground on which to affirm the equitable subordination ordered by Judge Hunt.
It is unclear exactly how much was owed to Coal Factors. There are no specific debt figures contained in the 1997 10-K report. Artus testified conflictingly that Coal Factors was owed $115,000 and that it was owed $130,000. Nerox Power and Coal Factors do not provide in their combined briefs any clarification of the amount owed other than to rely on Artus's testimony.
Because the deed of trust was drafted for payment of $191,576, subtracting the $151,016 that Artus received leaves $40,560 for Coal Factors. However, the timing between the debts incurred, the payments made, and the April 11, 1997 recording of the deed confuses matters further.
The largest expense incurred by Coal Factors-$80,000 for structural steel for a coal wash plant-was invoiced on September 8, 1997, several months after the deed of trust was recorded on April 11, 1997. It is conceivable that some or perhaps all of this expense was incurred prior to the recording of the deed of trust.
Certain other expenses apparently were incurred prior to April 11, 1997, even though they were not invoiced until several months later. M-B alleges that Coal Factors was only owed $27,541.44 on April 11, 1997, when the deed of trust was recorded. Ultimately, it is impossible to get a clear accounting from the record of the expenses Coal Factors incurred before April 11, 1997.
Based upon the evidence in the record, there is insufficient justification for the amount of the Coal Factors deed of trust.
The record shows that prior to April 11, 1997, Coal Factors had incurred costs of $33,394.46
for work done and materials provided to Nerox Power
and been paid $17,794.90 for these costs, leaving indebtedness of only $15,599.56. The deed of trust, as far as the record goes, provides collateral to Coal Factors for a debt of only $40,560. There is no indication in the deed of trust as to what the deed is securing and no indication of what consideration, if any, Coal Factors gave to Nerox Power to justify any amount in excess of its existing debt. This court cannot act as the accountant for Coal Factors, determining when its debts were incurred and which ones are valid for the purpose of the deed of trust.
Were the deed of trust clearer or the record more complete, it is possible that Coal Factors could demonstrate that it was error for Judge Hunt to shift the priority of the liens of M-B, Tope, and Alaska Law Offices.
As the record stands before this court, however, a sufficient implication of fraud exists with regard to the dealings between Coal Factors and Nerox Power to support Judge Hunt's conclusion that Coal Factors's interest in the
deed of trust must be equitably subordinated to the claims of other creditors.
2. The April 21, 1997 deed of trust
On April 21, 1997, Nerox Power, with Ar-tus as president, recorded a deed of trust encumbering the Jonesville mine and naming as beneficiaries ten entities or individuals: Duane Albert, Mr. and Mrs. LG. and C. Brotzman, George Peterson, The Larson Family Trust, The LKL Trust, Paul F. Schroff, Robert O. Jones, Sally L. Zutter, John Wallace for the Wallace Family Trust, and Gretchen A. Ross for the Ross Family Trust and the GAR Trust. The total debt owed to all of these beneficiaries was $1,040,000. Judge Hunt found that those named as beneficiaries had already had their debts satisfied by receiving preferred shares for their capital contributions. As such, Judge Hunt determined that the interests of these beneficiaries in the deed of trust should be equitably subordinated to the claims of other creditors.
The primary dispute lies in who lent money to Nerox Energy to raise capital for the purchase of the Placer Dome lease. Ross stated in his deposition
that $800,000 was raised for this purpose and that the investors received preferred shares in exchange. He listed as lenders: "Myself, or I should say my family trust, my wife's family trust, that was the GAR trust. Last names only, Brockman; Shiba ...; Peterson; Larson; Albert ... Schroff; ... Zutter." The corresponding total amount for these names on the deed of trust is $695,000, although no amount can be found for the alleged investor "Shiba."
Nerox Power admits in its brief that the GAR Trust received shares of preferred stock in exchange for its loan of $400,000. Nerox Power further admits that Peterson, Larson, Albert, Schroff, and Zutter also received preferred stock.
Nerox Power in its brief only challenges the finding that Mr. and Mrs. LG. and C. Brotzman, the LKL Trust, Robert O. Jones, and the Wallace Family Trust received preferred stock.
Ross's deposition confirms that those who supplied the money for the Placer Dome lease received preferred stock for their "loans":
Q: Now the money that was paid to Placer Dome, you've already told us that came from these six or seven people you.....
A: Correct.
Q: Did you end up paying back those people the amounts that they had lent?
A: They got preferred shares in Nerox Energy Corporation.
Q: Were they ever paid back any money?
A: No, they had preferred shares.
Q: Are they still preferred shareholders of.....
A: They're preferred shareholders, correct.
As such, these people would be investors and not creditors, which would prevent them from having priority over the liens of M-B, Tope, and Alaska Law Offices because they were already compensated for the money they provided.
Artus in his testimony provides further evidence that the investors who had "provided money to acquire the coal mine" were listed as beneficiaries in the April 21 deed of trust to compensate them with "collateral for their payment" used in the acquisition of the Jonesville lease:
Q: ... [WJho directed you to record either or both of these [deeds of trust]?
A: Myself as a director and Mr. Ross as a director.
Q: So other than yourself, Mr. Ross was the other one who directed you to do this?
A: Yes.
Q: From what Mr. Ross told youl[,] what was his reasoning for reporting these two deeds of trust?
A: These people were owed money by Nerox Power Systems, Inc., and they provided money to acquire the coal mine, or for the development of the coal mine, and they were owed money and he wanted them to have some collateral for their payment.
Q: And why was he or you taking this step in recording this deed of trust at this time?
A: Because the board of directors determined it was an appropriate thing to do.
Q: -And why?
A: Because these people had loaned money for the acquisition of the coal lease and/or development of the coal mine and we thought it was appropriate that they have security for payment of the debts that were owed.
By themselves, the statements of Ross and Artus are inconclusive. However, when Ar-tus's statement that those listed on the deed of trust were the people who had provided money to start the corporation is combined with Ross's statement that those who "loaned" the money received preferred shares in return, one could reasonably reach the conclusion that those listed in the deed of trust received preferred shares for their investments. Because the mine had never gone into operation, these investors had not received any return on the money they provided to Ross and thus still could have been viewed as creditors.
There is therefore evidence to support Judge Hunt's conclusion that the parties listed in the deed of trust were investors who were compensated for their expenditures with preferred stock.
Nerox Power argues that no evidence was ever provided showing that the beneficiaries "engaged in any inequitable conduct." This misses the point. The issue is not whether those listed as beneficiaries in the deed of trust acted inequitably but rather whether those who recorded the deed did. The evidence in the record supports the conclusion that those who provided money to Nerox Power for the coal mine simply made a bad investment. This finding is not clearly erroneous. It was not inappropriate to conclude that to compensate these investors over the rights of bona fide creditors would be inequitable. Consequently, the interests in the mining lease held by those named in the deed of trust could be equitably subordinated to the liens by M-B, Tope, and Alaska Law Offices.
3. The extent of the lien
In her final judgment, Judge Hunt recognized M-B and Tope as having mechanic's lens on the entire Jonesville coal mine site. Nerox Power argues that mechanic's liens only attach to the specific location at which the hired machinery was used and that because M-B and Tope did not identify the specific locations where their machinery was used, their mechanic's liens cannot extend to the entire lease site. Nerox Power urges that this interpretation is required by the language in AS 34.35.055(a).
However, the statute does not require so narrow an interpretation.
Although the determination of who qualifies as a lienholder is strictly construed, the
intent and purpose of lien laws are to be liberally construed.
In the present situation, M-B and Tope supplied equipment for use on the mining site. Nerox Power admits that the equipment was used on the mining site. The granting of a lien contemplates not just the physical area in which a contractor worked but also the monetary costs the contractor incurred.
M-B and Tope were contracted to provide equipment for the purpose of developing the entire mine site, not just a portion of it. As such, their Hens should extend to the entire mine site.
The fact that construction was so incomplete as to make it difficult or perhaps impossible to determine the precise location or locations at which their equipment was used does not deprive M-B and Tope of recovery.
B. Judge Hunt Did Not Err in Ruling that Nicholas Ross Was Personally Liable for the Debts of Nerox Power and Nerox Energy.
Judge Hunt found that Nerox Energy was the "mere instrumentality" of Nicholas Ross. As part of a sanction for failure to comply with a discovery order, Judge Hunt held Nerox Energy to be liable for the debts of Nerox Power.
At trial, Judge Hunt also found Nerox Power to be a "mere instrumentality" of Nicholas Ross. The finding that Nerox Power, both directly and via its identity with Nerox Energy, is a mere instrumentality of Ross allows M-B, Tope, and Alaska Law Offices to "pierce the corporate veil" and hold Ross personally liable for the debts of Nerox Power and Nerox Energy.
Alaska law establishes six factors for determining if a corporation is a "mere instrumentality" of one of its shareholders: (1) whether the shareholder owns all or most of the stock; (2) whether the shareholder subscribed to all of the capital stock or caused the incorporation; (8) whether the corporation is "grossly" undercapitalized; (4) whether the shareholder uses the property of the corporation for his or her own benefit; (5) whether the directors of the corporation
act independently of the shareholder; and (6) whether the "formal legal requirements of the corporation are observed."
It is not necessary for all six factors to be satisfied before instrumentality can be found.
However, at least some evidence of five of the six factors can be found in the present case. This evidence supports Judge Hunt's conclusion that both Nerox Energy and Nerox Power were "mere instrumentalities" for Nicholas Ross and that Ross was thus liable for their debts to M-B, Tope, and Alaska Law Offices. Judge Hunt's factual findings are not clearly erroneous; we therefore affirm those findings.
1. Ownership of stock
Ross admitted that he owned a controlling interest in Nerox Energy. Through Ross Production Company, Inc., for which Ross was the sole shareholder, Ross never owned less than twenty percent of Nerox Energy. Nicholas Ross admitted that Ross Production Company had no business and was "just a shell corporation." Ross Production Company owned eighty-one percent of the shares of Nerox Power.
As part of the conversion of Nerox Energy into a shell corporation for purchase by outside investors, Ross Production Company assumed all of the debts and liabilities of Nerox Power. This evidence supports the finding that Nicholas Ross "was the dominant and controlling shareholder of Nerox Energy Corporation from 1992 through the end of 1998" and "exercised exclusive control over Nerox Power Systems, Inc." This finding is not clearly erroneous.
2. Cause of incorporation
Ross did not initially incorporate either of the companies that became Nerox Energy or Nerox Power. However, at the time Ross took control of the two companies under their former names of Gemini Energy Corporation and Gemini Operating Company, both were essentially dormant. Ross thus played
a crucial role in reactivating the two companies. Judge Hunt concluded that this "activation" of Nerox Power was "substantively no different than originally incorporating the corporation." Judge Hunt reached a similar conclusion with regard to Nerox Energy, which "would have gone out of existence but for the 1992 infusion of capital by Mr. Ross." When a corporation was previously dormant and thus for practical purposes non-existent, the difference between "activation" of the corporation and its initial incorporation is, for the purposes of this factor, minimal. We therefore affirm the superior court's finding.
3. Undercapitalization
The determination of whether the capitalization of a corporation is sufficient is based on whether the corporation has sufficient capital to satisfy its likely business obligations.
This matter is assessed in relation to the corporation's operations.
Judge Hunt found that the initial capitalization of Nerox Energy was "grossly inadequate" and that Nerox Power was "grossly undercapital-ized during all relevant times." Nerox Power's only asset was the rights to the Jones-ville mine, which never went into production. All of the funding for the expenses of Nerox Power came from Ross.
The finances of Nerox Power were never entirely clear, even to those ostensibly in charge. The initial president of Nerox Power testified that he could not assess whether the company was undercapitalized because he never knew what funds were in its accounts. He further testified that it was his understanding that Nerox Power had none of its own funding, but depended entirely on money from Nerox Energy. Nerox Energy, which was dependent in large part on a bankrupt Stewart Petroleum for its source of income, did not fare much better. To what extent these circumstances were business transactions gone sour and to what extent they were initial undereapitalization is hard to determine definitively. However, there is enough evidence to conclude that Judge Hunt's finding of undereapitalization is not clearly erroneous.
4. Shareholder use of corporate assets
Judge Hunt found that Nicholas Ross used the corporate assets of Nerox Power and Nerox Energy for his personal benefit by: naming his family trusts as beneficiaries in a deed of trust encumbering the Jonesville coal mine lease, which was Nerox Power's only asset; using Nerox Power's coal lease as collateral for a $300,000 loan (increasing to $500,000 when interest is included) that was used to pay the operating expenses of Nerox Energy; and improving his own financial situation as the principal shareholder in Ner-ox Energy, and by extension in Nerox Power, through converting the debt of those two companies into shares in what he knew to be an essentially insolvent corporation. These actions alone do not clearly indicate that Nerox Power was an instrumentality of Ross. Because not all factors in the Uchitel test need to be satisfied to institute equitable subordination, we decline to determine whether or not the actions of Ross constitute the use of corporate assets for one's own personal gain.
5. Independence of directors
Judge Hunt found that the various directors of Nerox Power "took their directions" from Ross himself.
This finding is supported by trial testimony. Ross personally loaned $1.8 million for continuing the operations of Nerox Power, giving him substantial control over the operations of the company. Ross himself admitted that Nerox Power could not make any investments without some sort of loan from him. This is confirmed by the testimony of the two directors of Nerox Power. The first director of Nerox Power testified that he had limited involvement in the financial dealings of Ner-ox Power and did not even have the authority to sign checks for the company. When asked who he considered himself an employee of-
Nerox Power, Nerox Energy, or Nick Ross-the director answered "Nick Ross." Artus, the second director of Nerox Power, testified that as director he recorded the deeds of trust at Ross's direction. Artus further testified that it was Ross's responsibility to ensure that there was enough money to pay the bills for Nerox Power. Given the financial control that Ross exercised over Nerox Power, this finding is not clearly erroneous.
6. Corporate formalities
Judge Hunt's conclusions about the inadequate financial records kept by Nerox Power and Nerox Energy are supported by the record, or lack thereof, There was no documentation of the loans to acquire the Jones-ville lease. There was incomplete documentation of loans from Nerox Energy to Nerox Power. The financial reports are exceedingly vague as to who received shares of stock and in compensation for what.
Nerox Power points in its defense to the fact that its corporate meeting minutes were transcribed. While these minutes are helpful in building a chronology of events, they do little to clarify the sources of financing for Nerox Energy or Nerox Power. The lack of record keeping by Nerox Power calls into question its existence as an independent entity and justifies the finding by Judge Hunt that Nerox Power was an instrumentality of Nicholas Ross.
IV. CONCLUSION
Judge Hunt did not err in her factual findings that Nerox Power committed fraud in recording its deed of trust and that Nerox Power was a "mere instrumentality" of Ross. Nor did Judge Hunt err in applying the law to these findings. The decision of the superi- or court is therefore AFFIRMED in all respects.
MATTHEWS, Justice, not participating.