Schumacher v. Schumacher

• Decision Date: 07 May 1991
• Docket Number: No. 890180,890180
• Citation: 469 N.W.2d 793
• Parties: Dean O. SCHUMACHER and Sandra L. Schumacher, Plaintiffs and Appellants, v. Mary S. SCHUMACHER, as Personal Representative of the Estate of Robert O. Schumacher; Roam's Rentals, a North Dakota General Partnership whose partners are Robert O. Schumacher and Mary S. Schumacher; and Schumacher's of Fargo, Inc., a North Dakota corporation, Defendants and Appellees. Civ.
• Court: North Dakota Supreme Court

Page 793

469 N.W.2d 793

Dean O. SCHUMACHER and Sandra L. Schumacher, Plaintiffs and Appellants, v. Mary S. SCHUMACHER, as Personal Representative of the Estate

of Robert O. Schumacher; Roam's Rentals, a North Dakota

General Partnership whose partners are Robert O. Schumacher

and Mary S. Schumacher; and Schumacher's of Fargo, Inc., a

North Dakota corporation, Defendants and Appellees.

Civ. No. 890180.

Supreme Court of North Dakota.

May 7, 1991.

Vinje Law Office, Fargo, for plaintiffs and appellants; argued by Edmund G. Vinje II. Appearance by Daniel L. Hull.

Morley & Morley, Ltd., and McConn, Fisher, Olson & Daley, Grand Forks, for defendants and appellees; argued by Patrick R. Morley. Appearance by Patrick W. Fisher.

GIERKE, Justice.

Dean Schumacher, and his wife Sandra, appeal from a district court judgment (1) dismissing all claims which were handled by the court as derivative and equitable claims against Mary Schumacher, as personal representative of the estate of Robert O. Schumacher, her deceased husband; Roam's Rentals, a North Dakota general partnership (Roam's); and Schumacher's of Fargo, Inc., a North Dakota corporation (Schumacher's), and (2) providing relief to the parties pursuant to a jury verdict. We reverse the judgment in its entirety and remand for a jury trial on the merits of all issues.

After several years of discussions, Robert and Dean agreed in 1974 to start a Goodyear tire retail and service business in Fargo. In 1975 Roam's, a partnership consisting of Robert and Mary, purchased the land for the original building for $67,357. The Certificate of Incorporation for Schumacher's was issued by the Secretary of State on April 14, 1976. Robert received 51 shares of stock and Dean received 49 shares. Under the bylaws of the corporation, the four directors of the corporation were Dean, Sandra, Robert, and Mary. Each held an equal voting right on corporate business.

On May 10, 1976, an employment agreement between Dean and Schumacher's was signed. The tire store opened for business on August 1, 1976. Dean was to operate the day-to-day activities of the store for a specified salary and Robert was to act as a consultant, for which he would receive an amount equal to one-third of Dean's salary.

Interim financing for construction of the building and for the business was obtained by Dean and Robert, both signing notes, in amounts of $181,751.64, and $50,000. On May 13, 1977, Robert and Dean closed on the permanent financing for the building with Western States Life Insurance Company in the amount of $252,000. The loan called for monthly payments of $2,349. The loan was secured by a mortgage on the real property and an assignment of all rentals due under a lease between Roam's and Schumacher's. That lease required Schumacher's to make monthly payments to Roam's of $2,450.

Dean thought that he and Robert, individually, were to own the land and building rather than the Roam's partnership. However, Robert informed Dean that under the terms of the lease between Roam's and Schumacher's the land and the building would revert to the corporation at the end of the twenty-year lease term. The lease was signed on behalf of Roam's by Robert and Mary and on behalf of Schumacher's by Robert and Dean.

In 1979, the corporation expanded, and on November 14, 1979, a second lease between Roam's and Schumacher's was signed requiring a monthly rent of $3,695 with an option to purchase after the nineteenth year of the lease term. To finance the additional building construction required by the expansion, Roam's obtained a loan through Western States Life Insurance Company on November 26, 1979, in the amount of $345,500 which required monthly payments of $3,335. The loan was secured by a mortgage and an assignment of lease similar to the previous loan agreement between Western States Insurance Company and Roam's. The November 26, 1979, mortgage satisfied the initial May 13, 1977, mortgage.

On August 24, 1985, the lease was cancelled by Roam's on grounds that Schumacher's had defaulted on real estate taxes and assessments.

The total to be paid to Roam's under the written terms of the leases, through August 24, 1985, the date that Roam's cancelled the lease, was $323,910.15. However, actual lease payments received by Roam's from the corporation for that period totaled $415,387.34. An explanation for these excess payments was that the corporation was making monthly payments of $1,025 to Roam's in order to reimburse Roam's for the cost of acquiring the land on which the building was located. Dean thought that the amount allocated to land payments was part of and included in the monthly lease payments of $3,695. The monthly payment in the sum of $3,695 required by the 1979 lease and the monthly land payment of $1,025 exceeded Roam's monthly mortgage payments for the building and the land by $360 each month.

In addition to the real property, the corporation leased vehicles and equipment through Roam's. In July of 1976, Robert told Dean that most of the leases carried a period of three years. In 1979, the leases were to end. In 1980, Dean became suspicious because, in addition to Robert not allowing him to see the "leases", the rentals being paid to Roam's for equipment and vehicles were not significantly reduced, as Dean believed would be consistent with the status of terminated leases. Following the court trial on this case, Judge Garaas found that the leases were actually month-to-month leases rather than three-year leases. Testimony adduced at trial was that the monthly lease payments were considerably higher than should have been for three-year leases. An expert at trial testified that the payments by the corporation on the nine lease transactions between the corporation and Roam's for vehicles and equipment exceeded the amount a leasing company would have charged for three-year leases by $34,421.31.

In 1983, the corporation changed its banking from First Bank to Dakota Bank. Dakota Bank was willing to take over as the bank for the corporation if Dean and Robert personally guaranteed all the loans to the corporation. Dakota Bank loaned the corporation $217,000. In signing the documents for this loan, Dean asserts that he unknowingly signed a pledge agreement, pledging his 49 shares of stock in Schumacher's to Robert if the corporation defaulted on the $217,000 promissory note and the bank collected more than 51% of the unpaid balance from Robert. Schumacher's executed a security agreement with Dakota Bank pledging as security all equipment, inventory, accounts and contract rights in consideration for the loan. Additionally, Dean and Robert signed unlimited personal guaranties to Dakota Bank. On January 19, 1984, Dakota Bank loaned the corporation an additional $25,000.

The corporation showed a net profit in 1976, 1978, and 1979. However, in 1977 and during the period from 1980 through 1984 the corporation showed a net loss and a deteriorating financial picture. On March 28, 1984, Robert and Dean met to discuss the future of the struggling corporation. They agreed that Robert would buy Dean out of the business, effective April 1, 1984. However, there was apparently no agreement made as to the buy-out price of Dean's share in the corporation.

Upon arriving at the store on April 2, 1984, Dean discovered that the building locks had been changed. Three days later Robert sent Dean a letter stating that his employment as General Manager had been terminated as of the close of business on March 31, 1984. The letter further stated that determinations of the assets and liabilities of the corporation as of March 31, 1984, for the purposes of arriving at the net financial worth of the corporation would be made and an evaluation of the property at fair market value would be made where appropriate. Dean was never paid for his interest in the corporation.

On April 24, 1984, Robert informed Dean that his medical and other insurance coverage was being terminated as well as his use of a company vehicle. On July 1, 1984, Goodyear terminated Schumacher's line of credit. The corporation underwent further credit and financial problems. On September 7, 1984, Dakota Bank mailed a letter to Robert and Dean advising them that the corporate note was ten days past due. Subsequently, Dakota Bank wrote several letters to both Robert and Dean advising them of their unlimited personal guaranties on the past due note. On November 9, 1984, Dakota Bank wrote a letter to Robert and Dean advising them, once again, of their unlimited personal guaranties and informing them that they would be looking for payment from each of them with regard to the loans made to the corporation which were past due in an amount exceeding $200,000.

On November 15, 1984, a special meeting of the Board of Directors was held. At the meeting, Dean stated that he wanted the corporation to close its business operations and find a new tenant so the corporation could keep current with the real estate lease payments to Roam's, and ultimately have an opportunity to exercise its favorable option to purchase the real estate. This motion failed, because Robert voted against it.

Subsequently, on November 29, 1984, Roam's sent a letter terminating the lease with the corporation. The basis for the termination was that Schumacher's had failed to pay the 1983 real estate taxes and assessments against the real estate as required under the lease. However, Roam's allowed the corporation to continue leasing on a month-to-month basis.

Robert personally paid the entire Dakota Bank obligation in the amount of $222,429.27 on November 29, 1984. Dean made no part of this payment, nor has he ever made any payment to Dakota Bank for debts incurred through the corporate operation. Upon receipt of the debt obligation payment from Robert, Dakota Bank assigned Dean's personal guaranty to Robert, the $217,000 note to Robert, the Schumacher's security agreement to Robert, and Roam's security...