Rounds & Porter Lumber Co. v. Burns, 4-8979
| Citation | 216 Ark. 288,225 S.W.2d 1 |
| Decision Date | 19 December 1949 |
| Docket Number | No. 4-8979,4-8979 |
| Parties | ROUNDS & PORTER LUMBER CO. v. BURNS et ux. |
| Court | Supreme Court of Arkansas |
Alvin S. Buzbee and Edward L. Wright, Little Rock, J. Wirth Sargent, Wichita, Kan., for appellant.
Aubert Martin and DuVal Purkins, Warren, for appellees.
The appellant is a Kansas corporation that owns about thirty retail lumberyards in Kansas and Oklahoma. This suit was filed by the appellee to hold the appellant liable for failure to account for lumber valued at $8,000. The defense is that the appellee's cause of action is against another corporation, the Taylor Oak Flooring Company. The chancellor found that the appellant had so dominated and controlled the Flooring Company that the separate entities of the two corporations should be disregarded. The appellee recovered judgment for $5,830.76, and this appeal followed.
The events leading to this suit extend over a period of about nine months, beginning in October of 1947 and ending in the following July. The appellee was the owner of real property on which there was stored rough and finished lumber worth $12,000. On October 22 he leased the land to Manning Taylor. By the terms of the lease the lessee became the lessor's agent to sell the finished lumber and to process and sell the rough lumber. The lessee agreed to account to the appellee for the proceeds of sale, with certain deductions for the lessee's services. The appellee contends that a full accounting has not been made, and the trial court upheld his view.
It is shown that Taylor, a young man under thirty, was not financially able to pay the rentals under the lease or to undertake the task of processing the lumber. In the month of December he interested the appellant in organizing the Taylor Oak Flooring Company to take over the lease and to enter the business of manufacturing flooring. Half the capital stock was issued to Taylor (partly in his wife's name), in return for which he assigned the lease to the new corporation and contributed machinery and equipment. For the other half of the stock the appellant contributed its check for $30,000. It is argued that Ralph M. Rounds, president of the appellant, was actually the original stockholder, but we think the trial court was justified in concluding that the corporation in fact subscribed the stock. The appellant is a closely held family corporation, and the stock was not issued to Rounds individually until March 12. The corporation, however, had paid the money almost three months earlier, and it is shown that the agreement to incorporate listed the corporation as the original stockholder.
The Flooring Company was in financial difficulties almost from the day it began business. Taylor, who was the company's general manager, withdrew various sums from the corporate treasury, for which he gave promissory notes of doubtful value. When an audit was made as of April 30, it was shown that operations to that date had resulted in a loss of almost $29,000 and that in addition Taylor owed the company about $21,500. Even so the company was apparently still solvent, having begun business with assets valued at $60,000. Had the company been liquidated at once it appears that its creditors would have been paid but that the stockholders would have lost the greater part of their investment.
On May 11, after the audit had been made, the corporate directors met and in effect surrendered control of the company to the appellant. Mrs. Taylor resigned as a director and was replaced by R. W. Elliott, one of appellant's employees. Taylor resigned as general manager and was succeeded by Elliott. Taylor's stock was pledged to the company to secure his indebtedness. While Taylor continued as a director he does not appear to have attended subsequent meetings. Also on May 11 the appellant advanced $35,000 to the Flooring Company and took as security a blanket chattel mortgage on all its assets. The result of the May 11 directors' meeting was that the officers and employees of the appellant assumed the control and management of the Flooring Company.
Now of course a parent corporation is not liable for the debts of its subsidiary merely because the parent holds the controlling interest or because the two are managed by the same officers. Lange v. Burke, 69 Ark. 85, 61 S.W. 165; Powell, Parent and Subsidiary Corporations, § 6(a, b). It is only when the privilege of transacting business in corporate form has been illegally abused to the injury of a third person that the corporate entities should be disregarded. Powell, supra, § 3. One of the surest indications of such abuse, however, is the fact that the executives of the subsidiary, instead of acting independently in its interest, take their orders from the parent...
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