Crown v. Hawkins Co., Ltd.

910 P.2d 786, 128 Idaho 114, 1996 Ida. App. LEXIS 4
CourtIdaho Court of Appeals
DecidedJanuary 2, 1996
Docket21283
StatusPublished
Cited by9 cases

This text of 910 P.2d 786 (Crown v. Hawkins Co., Ltd.) is published on Counsel Stack Legal Research, covering Idaho Court of Appeals primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Crown v. Hawkins Co., Ltd., 910 P.2d 786, 128 Idaho 114, 1996 Ida. App. LEXIS 4 (Idaho Ct. App. 1996).

Opinion

WALTERS, Chief Judge.

Wayne Crown, Clark Bean and Steve Bean (the “Growers”) appeal from a district court judgment which held that William Nungester did not breach any duties he owed as a director of the warehouse where the Growers deposited their beans, and that Nungester’s actions were not the proximate cause of the Growers’ injury. The Growers also challenge the district court’s pretrial order denying their motion to disqualify Nungester’s counsel because of an alleged conflict of interest. The court below determined that although Nungester was a member of the law firm and his name remained on the firm’s title, the prejudice from excusing his counsel just prior to trial was so great that Nunges-ter’s counsel could remain and any potential ethical problems could be resolved upon consideration by the Idaho State Bar Association. For the reasons stated below, we affirm.

I. FACTUAL BACKGROUND

Hawkins Co., Ltd. (the “warehouse”) began business as a corporation in 1978. A warehouse that had existed prior to incorporation was purchased by Robert Blass, Jerry Hawkins and William Nungester, each of whom (along with their respective spouses) were issued one-third of the shares of stock in the corporation. The board of directors was composed of Blass, Hawkins and Nun-gester. Hawkins was president and general manager, and was in charge of operating the warehouse from the corporation’s inception until the warehouse’s closure. Blass and Nungester were not active in the day-to-day management of the warehouse.

During the operation of the warehouse, Nungester was an attorney practicing with the law firm of Hepworth, Nungester and Lezamiz. 1 Other than occasionally preparing the annual statement for filing with the Secretary of State, Nungester provided no legal services or legal representation for the warehouse. The warehouse was represented by the law firm of Hepworth, Nungester and Lezamiz on one occasion, but Nungester was not directly involved.

In addition to operating under the Bonded Warehouse Law, I.C. § 69-201 et seq., the warehouse acted as a broker in selling beans to third party wholesalers. Deposited beans remained in the ownership of the depositors until the beans were sold to the warehouse, at which point they became company-owned beans. The purchase of beans from the depositors throughout the period at issue was generally conducted by Hawkins. Hawkins had no authority to sell the beans without the depositors’ approval.

From 1983 through 1988, the Growers delivered their bean crops to the warehouse. During this time the Idaho Department of Agriculture, Bureau of Warehouse Control *117 (the “DOA”) conducted annual inspections of the warehouse’s physical contents and its financial records to ensure that the warehouse had sufficient inventory for its depositors. These inspections were always unannounced, unless specifically requested by the warehouse. Until November 22, 1988, the warehouse successfully passed all the DOA’s inspections.

From 1978 through July 31, 1987, Tom Schabot, a certified public accountant, examined the warehouse’s financial records and grower cards and physically inventoried all beans in the warehouse twice a year. On January 31 of each year, Schabot conducted his uncertified reviews, and at fiscal year-end on July 31, he performed the certified audits. Until July 31, 1987, all of Schabot’s certified audits showed that the grower and financial records balanced and matched the physical inventory present in the warehouse.

By April 1987, the warehouse began experiencing a cash flow shortage. In August or September of the same year, First Security Bank discovered that Blass and Hawkins had established a check kiting scheme in an attempt to cover the warehouse’s insufficient cash flow. Nungester first learned of these activities from First Security Bank who had discovered that approximately 2.2 million dollars in check kiting had occurred. Once informed, Nungester instructed both Blass and Hawkins to discontinue the practice, which they did. Nungester made no further inquiries, and he did not inform any authorities of the scheme.

From 1986 through 1988, Nungester made several checks payable to the warehouse for the purchase of beans, although he never actually took possession. Schabot noted this activity during his 1987 certified audit and recharacterized the purchases as loans by Nungester to the warehouse. Subsequent to these activities, additional loans were also made to the warehouse by various individuals including Nungester. These activities provided temporary cash flow to the warehouse.

Near the end of the summer in 1987, Jerre Hills was employed by the warehouse to replace, in part, Hawkins as a broker. Hills reviewed the Grower Lot Sheets. Every grower who had deposited beans with the warehouse had a sheet prepared for each variety of beans for the year that the beans were deposited. Entries on these sheets were made when the beans were weighed at the warehouse, after the beans were cleaned, and when the beans were sold. After reviewing the Grower Lot Sheets, Hills discovered that several of the sheets had printed on them negative balances which indicated that more beans were sold on that specific account than were on deposit at the warehouse. To cover these negative balances, Hawkins had altered the warehouse’s copies of the Grower Lot Sheets so the books would balance. Upon seeing these balances, Hills went to Nungester’s home and informed him of the situation. Nungester confronted Hawkins with this information and the explanations provided by Hawkins regarding the negative balances were to Nungester’s satisfaction. Nungester did not investigate the matter further.

In 1988, several irregularities at the warehouse were discovered. Interim financial statements prepared by Schabot in January of 1988 revealed that the accounts receivable were large and were increasing. Hawkins had neither billed the accounts, nor had he charged any interest on them. In his audit letter, Schabot recommended to the board that these accounts be billed. In response, the board directed Hawkins to bill and collect the accounts receivable. The board was not aware, however, that Hawkins purposely failed to undertake collection of some of the accounts.

In May of 1988, Hawkins requested that the DOA inspect the warehouse. Prior to the inspection, Hawkins had several bean boxes filled with culls and dirt moved into the warehouse. David Sparrow, an inspector with the DOA reviewed the warehouse records and counted the physical inventory. The inspection found a shortage of at least 6,475 sacks of pinto beans, which was explained by Hawkins to the DOA’s satisfaction. The fact that many of the boxes contained culls and dirt was not discovered.

By September 18,1988, Schabot had begun reviewing the warehouse’s records again. He first contacted Nungester on September *118 29,1988, to inform him that problems existed with the audit. Sehabot told Nungester that he could not reconcile the physical inventory count with the warehouse’s books. Sehabot and Nungester met with Hawkins. Hawkins informed them that he could provide documentation to reconcile the shortage. While waiting for the documentation from Hawkins, neither Sehabot nor Nungester investigated the matter further, and the warehouse continued to receive the 1988 bean crops.

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910 P.2d 786, 128 Idaho 114, 1996 Ida. App. LEXIS 4, Counsel Stack Legal Research, https://law.counselstack.com/opinion/crown-v-hawkins-co-ltd-idahoctapp-1996.