Minich v. Gem State Developers, Inc.

591 P.2d 1078, 99 Idaho 911, 1979 Ida. LEXIS 389

• Court: Idaho Supreme Court
• Decided: February 16, 1979
• Docket: 12468
• Status: Published

Opinions

McFADDEN, Justice.

This action was brought by plaintiffs-respondents Barry and Donna Minich, husband and wife, for specific performance of a contract to sell a suburban lot and custom-built house. Defendants-appellants are two corporations, Gem State Developers, Inc., and Thomas G. Smith, Inc., and three individuals, Frank Marcum, Bertha Mar-cum, and Thomas G. Smith. Gem State Developers, Inc. is an Idaho corporation engaged in residential real estate development. Thomas G. Smith, Inc., is an Idaho corporation engaged in constructing houses on property owned by Gem State Developers, Inc., with financing obtained by Gem State Developers, Inc. Frank Marcum and Bertha Marcum are officers, directors, and the controlling shareholders of both corporations. Thomas G. Smith, president and co-owner of Thomas G. Smith, Inc., at the time this dispute arose, has since left for California. He has never appeared in this action and is not involved in this appeal.

Two written contracts are involved here. The first was entered into in October 1974, and named as parties “Thomas G. Smith and Valana Sue Smith and Frank E. Mar-cum and Bertha Marcum” as the “Contractors” and respondents as the buyers. The contract was executed on behalf of the “Contractors” by Thomas G. Smith, Inc., without specifying which individual had signed it or in what capacity it had been signed. This contract provided for the construction of a custom-built home and the sale of the home and lot to respondents at the price of cost plus ten percent. The contract also provided for the sale to respondents of a “temporary” home, owned by Gem State Developers, Inc., for occupancy during the period of construction of the new house. When the new house was completed, respondents were to reconvey the “temporary” house back to the “Contractors.” The second contract was entered into in April, 1975, when the new house was nearing completion. This contract was executed by respondents as buyers and by Thomas G. Smith, Inc., as seller. It provided for the sale of the house and lot at the price of $55,000, and set the closing date for the sale as May 1, 1975.

On May 1, 1975, the new home was not yet complete. But because the “temporary” house had already been sold to new owners who were to take possession May 1, 1975, respondents moved into the new house. In the attempt to finalize the transaction, respondents presented the April 1975 contract to Marcum. He repudiated this contract, contending that Thomas G. Smith had no authority to make such an agreement. Marcum instead insisted upon the earlier contract price of cost plus ten percent, which he claimed amounted to $70,223.45. He then ordered all work on the house stopped and refused to close the sale. Respondent’s lender thereafter can-celled its loan, and respondents brought this action to specifically enforce the April 1975 contract at its price of $55,000.

After a trial to the court sitting without a jury, the court found that respondents and Thomas G. Smith, Inc., had entered into both contracts, with the April 1975 contract setting the final selling price. The court found that Thomas G. Smith had authority to enter into the contracts on behalf of the corporation. Specific performance was refused, however, because of the difficulties of judicial supervision over the completion of the custom built home. Instead the court rescinded the entire transaction and restored the parties to their precontract positions. Respondents were awarded restitutionary damages in the amount of $9,012.81 less the amount of $3453.42 for the reasonable rental value for the period in which they occupied the new house. The court also awarded respondents attorney fees in the amount of $4,250.00. Judgment was entered against Thomas G. Smith and Thomas G. Smith, Inc.; against Frank Marcum and Bertha Marcum individually for failing to properly incorporate Thomas G. Smith, Inc.; and against Gem State Developers, Inc., as the alter ego of Frank and Bertha Marcum.

On appeal, appellants challenge the personal liability of Frank and Bertha Mar-cum, the corporate liability of Gem State Developers, Inc., and the award of attorney fees to respondents.

The first issue on appeal concerns the district court’s conclusion that Frank and Bertha Marcum are personally liable for the obligations of Thomas G. Smith, Inc., under I.C. § 30-110, for failing to adhere to the statutory mandates regarding incorporation. I.C. § 30-110 provides that

Conditions precedent to beginning business — Penalty for violation. — 1. A corporation formed under this act shall not incur any debts or begin the transaction of any business, except such as is incidental to its organization, or to the obtaining of subscriptions to or the payment for its shares until a triplicate original of the articles of incorporation has been filed for record in the office of the county recorder as provided in section 30-108.

2. If a corporation has transacted any business in violation of this section, the officers who participated therein and the directors, except those who dissented therefrom and caused their dissent to be filed at the time in the registered office of the corporation, or who, being absent, so filed their dissent upon learning of the action, shall be severally liable for the debts or liabilities of the corporation arising therefrom.

The place of filing is controlled by I.C. § 30-108, which provides that a triplicate original of the articles of incorporation “shall then be filed for record in the office of the county recorder of the county in which the registered office of the corporation is situated . . . .” Appellants did not file a triplicate original of the articles of incorporation with the county recorder of Ada County, the location of the registered office of Thomas G. Smith, Inc. Nevertheless they assert three arguments to the effect that I.C. § 30-110 cannot form the basis of their individual liability.

The first argument is that I.C. § 30-110 is unconstitutional as applied to Frank and Bertha Marcum. It is contended that Art. 11, § 17 of the Idaho Constitution¹ forbids imposition of the statutory liability upon appellants because they are shareholders of Thomas G. Smith, Inc., and therefore immune from any liability in excess of the amount of the unpaid portions of the par value of their stock subscriptions.

In ruling on this constitutional challenge to I.C. § 30-110, this court is guided by certain basic principles. In Caesar v. Williams, 84 Idaho 254, 263, 371 P.2d 241, 245 (1962), it was said:

In considering the question of the constitutionality of these acts, certain fundamental rules at all times must be kept in mind. The burden of showing the unconstitutionality of a statute is upon the party asserting it. Eberle v. Nielson, 78 Idaho 572, 306 P.2d 1083; Rich v. Williams, 81 Idaho 311, 341 P.2d 432. This court is without power to invalidate or nullify a constitutional act of the legislature; if the legislation does not clearly violate the Constitution, this court must and will uphold it. Padgett v. Williams, 82 Idaho 114, 350 P.2d 353. Every reasonable presumption must be indulged in favor of the constitutionality of a statute. Robinson v. Enking, 58 Idaho 24, 69 P.2d 603; Idaho Gold Dredging Co. v. Balderston, 58 Idaho 692, 78 P.2d 105.

The court in State ex rel. Brassey v. Hanson, 81 Idaho 403, 409, 342 P.2d 706, 709, quoting from other opinions, stated:

“ ‘It is fundamental that, the judicial power to declare legislative action invalid upon constitutional grounds is to be exercised only in clear cases. . . ’ [citation] Petition of Mountain States Telephone & Tel. Co., 76 Idaho 474, 480, 284 P.2d 681, 683.

“ ‘In the case of statutes passed by the legislative assembly and assailed as unconstitutional the question is not whether it is possible to condemn, but whether it is possible to uphold; and we stand committed to the rule that a statute will not be declared unconstitutional unless its nullity is placed, in our judgment, beyond reasonable doubt . . . [citations]’ Keenan v. Price, 68 Idaho 423, 433, 195 P.2d 662, 667.”

In applying these principles to the case at bar, the court first notes that Idaho Const. Art. 11, § 17 relates only to stockholders, while the statute is narrowly drawn to impose liability only upon the directors and those officers who participated in the unlawful business. On its face, then, the statute could in no way be said to violate the prohibitions of Art. 11, § 17. But in those situations where, as here, the protagonists are at the same time officers, directors, and shareholders, the question arises as to the applied validity of the statute. Even in these situations, however, we conclude that I.C. § 30-110 is not repugnant to the Idaho Constitution. The statutory liability is predicated upon misconduct by a director or officer and is completely unrelated and irrelevant to ownership of stock in the corporation. The intent and purpose of the statute is to impose liability upon the officers and directors in their capacity as officers and directors for breach of their corporate duties regardless of whether or not they also hold stock. Accordingly, this court rejects appellants’ constitutional challenge to the statute, and we hold that whenever shareholders elect to actively participate in the corporate affairs as officers or directors, they will be responsible for their actions as officers or directors.

Appellants’ second argument in the assignment of error directed to the trial court’s conclusion that they were personally liable under I.C. § 30-110 is that the statutory language itself precludes liability unless the officers or directors actually participated in the unlawful business. It is appellants’ theory that the language “officers who participated therein and the directors, except those who dissented therefrom” must be construed together such that unless there was actual participation by the directors the statute does not apply. Appellants argue that because they did not agree to or know of the April 1975 contract, they cannot be held accountable therefor.

In rejecting appellants’ suggested construction of the statute, it is important to emphasize that “[t]his Court has consistently adhered to the primary canon of statutory construction that where the language of the statute is unambiguous, the clear expressed intent of the legislature must be given effect and there is no occasion for construction.” State v. Riley, 83 Idaho 346, 349, 362 P.2d 1075, 1076 (1961); Swensen v. Buildings, Inc., 93 Idaho 466, 463 P.2d 932 (1970). Since the statute clearly imposes liability upon “the officers who participated therein” and “the directors, except those who dissented therefrom,” there is no need for this court to speculate on whether or not a director must also participate in the unlawful business before he may be held liable. The statute does not require such participation, and this court is without power to read this requirement into the statute. Roe v. Hopper, 90 Idaho 22, 408 P.2d 161 (1965). This court therefore declines to accept appellants’ interpretation of I.C. § 30-110, and we conclude that the trial court properly found that as directors who had not filed a dissent, appellants Frank and Bertha Marcum were personally liable whether or not they actually transacted the unlawful corporate business.

Appellants’ third argument regarding this issue is that respondents are estopped to deny the corporate existence of Thomas G. Smith, Inc., since they knew at all times that they were dealing with the corporation as a corporation. Appellants rely upon Allen Steel Supply Co. v. Bradley, 89 Idaho 29, 402 P.2d 394, 403 P.2d 859 (1965), and Jolley v. Idaho Securities, Inc., 90 Idaho 373, 414 P.2d 879 (1966), for the proposition that estoppel constitutes an effective defense to personal liability under I.C. § 30-110. Our review of these cases, however, indicates that the issue has not yet been authoritatively decided.

In Allen Steel, this court held that there can be no de facto corporation where the articles of incorporation had not been filed with the secretary of state and where no certificate had been issued. Thus there was no corporate existence either de jure or de facto. The purported “incorporators” had also failed to comply with the secondary filing requirements of I.C. § 30-110, but this was irrelevant to the court’s decision to hold the principals personally liable. Any mention in Allen Steel of the potential defense of estoppel to liability under I.C. § 30-110 is mere dictum and is to be disregarded.

Jolley was an action by an individual against a corporation for rescission of a contract to exchange deeds to real property. The corporation had failed to file a certified copy of its articles of incorporation in the office of the county recorder of the county where the real property was situated as required by I.C. § 30-108(4), and in addition it had failed to comply with I.C. § 30-110. In affirming the trial court’s decision denying recission of the contract to exchange deeds, this court held that the failure to comply with I.C. § 30-108(4) did not render the corporate deed void. No discussion was necessary as to the impact of I.C. § 30-110, and none was given.

Since no prior decision stands to the contrary, this court today holds that the defense of estoppel has no application to liability asserted under I.C. § 30-110. This liability is not predicated upon the theory of piercing the corporate veil or upon distinctions between de facto or de jure corporations, to which estoppel might in certain instances apply. Rather, the statute sets forth explicit requirements as conditions precedent to the transaction of corporate business and provides for definite penalties for failure to comply. The defense of estoppel under these circumstances would effectively emasculate any remedy intended by the legislature in enacting I.C. § 30-110 and would defeat the statutory purpose. As concisely stated in 18 Am.Jur.2d, Corporations, § 76, p. 617:

[n]o estoppel arises in the case of statutory liability from the fact that creditors dealt with the corporation as such, to prevent them from suing under a statute imposing liability on stockholders or officers in addition to that resting on the corporation, for failure to perform certain things; to allow an estoppel in such a case would nullify the statute.

(Emphasis ours.) The Supreme Court of Illinois in Loverin v. McLaughlin, 161 Ill. 417, 44 N.E. 99 (1896), was faced with the issue of. the liability of officers and directors under a statutory provision making them personally liable for obligations of the corporation incurred prior to the recording in the recorders’ office of a completed certificate of incorporation from the secretary of state. The court declared:

[T]o say that the creditor is estopped from suing the officers and directors because he contracted with the corporation or pretended corporation is to make the [statutory] provision in his favor entirely nugatory. Section 18 imposes the liability upon the officers and directors, because, being prohibited from proceeding to business, they permit business to be commenced and liabilities to be incurred in violation of their duty.

Id. 44 N.E. at 105. Other cases adopting the rule that estoppel can not be asserted against a claim predicated upon statutory directors’ liabilities include Cook v. J. I. Case Plow Works Co., 85 Fla. 421, 96 So. 292 (1923); Charles v. Young, 74 Fla. 298, 76 So. 869 (1917); Ragland v. Doolittle, 100 Miss. 498, 56 So. 445 (1911); Hanson v. Martin, 192 Wis. 40, 211 N.W. 790 (1927). Since the requirements and duties of I.C. § 30-110 are clear and unambiguous, we conclude that the doctrine of estoppel has no applicability. Accordingly, we affirm the district court’s judgment imposing personal liability upon Frank and Bertha Marcum for the obligations of Thomas G. Smith, Inc.

Appellants next assign error to the district court’s conclusion that Gem State Developers, Inc., was the alter ego of Frank and Bertha Marcum. Appellants’ argument proceeds on two grounds: first, that as a matter of law the alter ego doctrine cannot be utilized in reverse so as to hold a corporation liable for the acts of its controlling shareholders; and second, that there was insufficient evidence for the trial court to disregard the corporate identity of Gem State Developers, Inc.

Regarding the trial court’s finding of fact that the Marcums treated the corporation as their alter ego, it is the elementary rule that such finding will not be disturbed on appeal if it is supported by substantial and competent evidence. See I.R. C.P. 52(a); Skelton v. Spencer, 98 Idaho 417, 565 P.2d 1374 (1977); Idaho Water Resource Board v. Kramer, 97 Idaho 535, 548 P.2d 35 (1976); Baker v. Ore-Ida Foods, Inc., 95 Idaho 575, 513 P.2d 627 (1973). Based on the record, we conclude that there was substantial and competent evidence to support this finding. Most important, and all that need be discussed here, is the contract itself, naming as parties Frank and Bertha Marcum individually as “Contractors.” The contract called for the conveyance of a suburban lot which the Marcums did not own and could not transfer. Title to the property was held by the corporation, Gem State Developers, Inc., yet the Mar-cums contracted in their individual capacities to sell and convey the lot. In addition, the “temporary” home which respondents were to purchase and occupy during the construction of the custom home was owned by the corporation, yet again the Marcums personally contracted to sell and later to reacquire this property. These facts alone indicate that the Marcums themselves disregarded the corporateness of Gem State Developers, Inc. and considered their personal business transactions identical to those of the corporation. Accordingly, the trial court’s finding will not be disturbed.

From this finding the trial court concluded that Gem State Developers, Inc., is also liable for the debts and obligations of the Marcums, and entered judgment accordingly. With this judgment we concur.

As this court stated in Tom Nakamura, Inc. v. G. & G. Produce Co., 93 Idaho 183, 457 P.2d 422 (1969), quoting with approval from Hayhurst v. Boyd, 50 Idaho 752, 300 P. 895 (1931):

“ ‘To warrant casting aside the legal fiction of distinct corporate existence . it must also be shown that there is such a unity of interest and ownership that the individuality of such corporation and such person had ceased; and it must further appear from the facts that the observance of the fiction of separate existence would, under the circumstances, sanction a fraud or promote injustice.’ ”

93 Idaho at 185, 457 P.2d at 424. See also Surety Life Insurance Co. v. Rose Chapel Mortuary, Inc., 95 Idaho 599, 514 P.2d 594 (1973); Jolley v. Idaho Securities, Inc., supra. The facts and circumstances of the instant case are sufficient to warrant casting aside of the separate corporate existence. Appellants contend, however, that this would be a misapplication of the alter ego doctrine, because such doctrine is only available to pierce the corporation to reach the individual and cannot be used to go beyond the individual to reach the corporation which he controls. For this proposition appellants cite but one authority, Olympic Capital Corp. v. Newman, 276 F.Supp. 646, 655 (D.C.Cal.1967), where it was said:

The court has been able to find no situation in which the doctrine of alter ego has been applied to a fact situation such as is presented to the court in this case. Alter ego would appear to be limited to the situation where there is reason to disregard a corporate entity to reach individuals, it has no applicability in disregarding the existence of an individual to reach corporate assets.

In answer to appellants’ argument, we adopt reasoning of Central Nat’l Bank & Trust Co. of Des Moines v. Wagener, 183 N.W.2d 678, at 682 (Iowa 1971), the Supreme Court of Iowa’s response to this identical issue:

The Olympic Capital Corporation’s case presented a Federal District Court venue problem arising out of a very complicated financial fact situation. Whatever validity the quoted observation may have had for the case in question, it cannot be accepted in this jurisdiction, for plaintiff’s argument that assets may be traced from a corporation to an individual but not vice versa. This court and other courts have disregarded the claimed corporate ownership of assets to satisfy individual debts where the facts dictated a necessity so to do.

Other cases which have pierced corporate ownership to satisfy individual debts include Rainbo Gold Mines v. Magnus, 371 F.2d 519 (10th Cir. 1966); Allied Chemical Corp. v. Randall, 321 F.2d 320 (7th Cir. 1963); Shamrock Oil and Gas Co. v. Ethridge, 159 F.Supp. 693 (D.C.Colo.1958); Kolmer-Marcus, Inc. v. Winer, 32 A.D.2d 763, 300 N.Y.S.2d 952 (1969); Platts v. Platts, 49 Wash.2d 203, 298 P.2d 1107 (1956); and Central Nat’l Bank and Trust Co. of Des Moines v. Wagener, supra. This court can find no reason in law or logic to limit the application of the alter ego doctrine as appellants would have us. Therefore we affirm the trial court’s decision and hold that Gem State Developers, Inc., as the alter ego of Frank and Bertha Marcum, is liable for the obligations incurred by the Marcums in this transaction.

Appellant’s final assignment of error is that the district court erred in awarding attorneys fees to respondents. Appellants contend that such award constitutes consequential damages and is inappropriate in light of the trial court’s decision to restore the parties to their pre-contract positions. Whatever the merit of this argument, we find it unnecessary to make an analysis of the substantive law of damages in answering this issue. Rather, we hold that the award of attorneys fees was properly made under the authority of I.C. § 12-121,² which was enacted by the legislature in 1976 and became effective July 1, 1976 under the usual rule of I.C. § 67-510. See V-1 Oil Co. v. State Tax Comm., 98 Idaho 140, 559 P.2d 756 (1977). Since the final judgment in this case was entered November 26, 1976, I.C. § 12-121 was applicable. And since the sum of $4250 was found to be reasonable by the trial judge, and the award was made so as to do complete justice between the litigants, this court will not interfere. We conclude that the award was well within the trial court’s discretionary powers under the statute, and we affirm.

Finally there is the issue of attorneys fees sought by respondents on this appeal. Respondents maintain that I.C. § 12-121 provides the authority for this court to make an award to the prevailing party for reasonable attorneys fees incurred in preparing for this appeal. We agree.

The statute provides that “in any civil action, the judge may award reasonable attorney’s fees to the prevailing party . .” As an aid in construing this language, I.C. § 73-114 provides:

Statutory terms defined. — Unless otherwise defined for purposes of a specific statute, words used in these compiled laws in the present tense, included the future as well as the present; words used in the masculine gender, include the feminine and neuter; the singular number includes the plural and the plural the singular.

(Emphasis added.) See also State v. Holder, 49 Idaho 514, 290 P. 387 (1930); Houser v. Hobart, 22 Idaho 735, 127 P. 997 (1912). Since a “judge” is simply an officer or member of a tribunal assembled under authority of law for the administration of justice, we conclude that the singular “judge” should also be construed to mean the plural “judges” or “justices,” and we hold that the statutory power to award attorneys fees applies to the members of this court as well as to the district court judges throughout the state. This construction does no violence to the clear purpose of the statute which in a proper case is to reimburse the successful party for legal fees incurred in prosecuting his or her legal rights. Moreover, had the legislature intended to limit the statutory authority to any particular level of courts within the judicial system, it could easily and clearly have done so.

In awarding reasonable attorney fees to the prevailing party on appeal, this court will be guided by the following general principles. Since the statutory power is discretionary, attorney fees will not be awarded as a matter of right. Nor will attorney fees be awarded where the losing party brought the appeal in good faith and where a genuine issue of law was presented. In normal circumstances, attorney fees will only be awarded when this court is left with the abiding belief that the appeal was brought, pursued or defended frivolously, unreasonably or without foundation. See I.R.C.P. 54(e)(1). Applying these considerations to the case at bar, this court declines to award attorney fees on appeal to respondents.

Judgment affirmed. Costs to respondents.

SHEPARD, C. J., BAKES and BISTLINE, JJ., concur.

1 . § 17. Liability of stockholders — Dues.—Dues from private corporations shall be secured by such means as may be prescribed by law, but in no case shall any stockholder be individually liable in any amount over or above the amount of stock owned by him.

2 . Attorney’s fees. — In any civil action, the judge may award reasonable attorney’s fees to the prevailing party or parties, provided that this section shall not alter, repeal or amend any statute which otherwise provides for the award of attorney’s fees.