Belt v. Belt
| Decision Date | 10 April 1984 |
| Docket Number | No. 14299,14299 |
| Parties | LaRue C. BELT and Ann B. Belt, husband and wife, Plaintiffs-Respondents, v. Larry F. BELT and Kristie Belt, husband and wife; Christopher Belt; and Belbro, Inc., an Idaho corporation, Defendants-Appellants. |
| Court | Idaho Court of Appeals |
Thomas A. Mitchell, Coeur d'Alene, for defendants-appellants.
Michael J. Newell, Coeur d'Alene, for plaintiffs-respondents.
Larry and Kristie Belt, Larry's son Christopher and Belbro, Inc., appeal from a district court judgment dissolving Belbro, Inc. The judgment ordered Belbro's net assets distributed according to the capital contributions of Larry Belt and his brother LaRue Belt, rather than according to stock ownership, in order to avoid unjust enrichment of Larry. The appellants argue that Idaho law requires distribution of corporate assets according to stock ownership. They contend that unjust enrichment is not applicable here because the parties had an agreement which implicitly covered distribution of assets. Also, they assert that Larry Belt's capital contribution should include the reasonable value of the time and efforts which Larry contributed to the business. We agree the district court erred in applying the unjust enrichment approach and we reverse on that point. We uphold, however, the court's finding that Larry failed to prove his capital contribution included the value of any time or effort devoted to the business.
The district court found the following facts. LaRue Belt owned two large parcels of property which he wanted to develop for mineral extraction and timber sales. In 1973, he invited his brother, Larry, to join him in the effort. LaRue was to contribute the real property to the enterprise and Larry was to manage the enterprise.
Efforts to develop the land began in October, 1973, before the corporation was formed. At that time, Larry moved into the residence of LaRue and Ann Belt. A joint checking account was established for the business, in which proceeds of timber sales were deposited. To this account LaRue also deposited the proceeds of loans, which he borrowed in his individual capacity. The account was used to purchase tools and equipment. However, it was also used to pay the personal expenses of both parties. After Larry married Kristie in 1975, they purchased a mobile home, using funds from the account.
LaRue testified that both he and Larry had intended to incorporate their business from the beginning, in part to escape individual liability. LaRue planned to put his property into the corporation to give it an operating base. He intended that Larry would manage the development of the property. However, LaRue also testified that he did not know how a corporation functioned or what rights he would retain as a shareholder. He also testified that he did not understand that, by transferring title to his property to the corporation (half of the stock of which was issued to Larry and Kristie), he potentially was giving up a half interest in his transferred assets.
In September, 1975, the brothers and their wives incorporated their business enterprise. Each brother received 10,000 shares and a corporate promissory note for $2500. Each of their wives received 5000 shares and the corporation's note for $1250.
LaRue transferred title to his two parcels of real property to the corporation. According to appraisals made later, LaRue's real property was worth $68,900 in 1973. Larry transferred title to his 1967 Ford Bronco. The parties agree that the vehicle was worth $1000. In addition, title to tools and equipment, purchased between October, 1973 and September, 1975 for use in the enterprise, was transferred to the corporation. As noted, these purchases had been financed in part with personal loans which LaRue negotiated from various lenders and for which LaRue was personally liable. The proceeds of sales of timber from LaRue's two parcels also financed part of these purchases.
The records of business transactions which occurred after October, 1973 were very incomplete. Neither party attempted to record any of the business transactions in a ledger until after this suit was brought. Only cancelled checks, check stubs, bank deposits and some log scale slips could be found to aid in tracking the expenditures and income of the corporation. At trial, testimony that a substantial number of purchases were paid for with cash was undisputed. Because the payments were made in cash, and records of these transactions were usually not kept, the amount and nature of these transactions could not be determined accurately. The nature of transactions which were paid for by check could usually be determined by the nature of the business of the payee. However, some checks were made out to "cash", or to LaRue or Larry, who cashed them. Other checks were made payable to payees from whom both business and personal purchases were made. Also, other than bank deposits and some log scale slips, no records were kept of income received by the corporation or of its accounts receivable.
In 1977, the corporation ran out of money. Larry suggested that the corporation sell some of its land. LaRue objected. Eventually, LaRue brought this action, requesting dissolution of the corporation and return of the property which he had contributed to the corporation. Larry agreed that the corporation should be dissolved, but argued that distribution of the corporate assets, following dissolution of the corporation, should be made according to the proportionate ownership of the stockholders. In opposition, LaRue argued that Larry would be unjustly enriched by a distribution based on stock ownership.
The district court ordered dissolution of the corporation. The judge ordered that all creditors be paid. He then turned to the question of distributing the remaining corporate assets between the parties. The court concluded that distribution "in strict accordance with the stockholdings would result in unjust enrichment of the defendant Larry Belt." Therefore, the district court ordered distribution of the remaining corporate assets "in proportion to the capital contributions made by each to the corporation at the time of its formation."
The district court then determined that Larry Belt could not be given credit, as a contribution to capital, for services he had rendered to the corporation. 1 The court explained that there was no agreement between LaRue and Larry, or between the corporation and Larry, regarding the payment of salary or wages to Larry. The court noted that Larry had not proved that his services had enhanced the value of any corporate property. Finally, the court found that Larry had not shown the reasonable value of the services which he had rendered, or that the value of those services exceeded the value of the personal expenses which the corporation paid for him.
The court thus limited Larry's participation in the distribution of the corporate assets to the proportionate interest resulting from his contribution of the $1000 vehicle. The court determined that in proportion to their investments--the $1000 vehicle plus the $68,900 parcels of land--Larry should receive 1/70 and LaRue should receive 69/70 of the remaining corporate assets, after satisfaction of corporate debts and liabilities.
As noted, the court chose to distribute the assets of the corporation according to the contribution of the parties because, in the court's view, a distribution based on the respective stockholdings would result in an unjust enrichment of Larry. The court recognized, that in exchange for their capital contributions, each of the Belt brothers had received 10,000 shares of stock and each of their wives had received 5000 shares. In essence the court treated LaRue and Larry as the owners of 15,000 shares of stock each. In addition, the court found that Larry had purchased 2500 shares from his son, Christopher, giving Larry voting control of the corporation.
The decision of the district court to avoid unjust enrichment by declining to order distribution based upon the number of shares owned by the stockholders overlooked a basic premise relating to those shares. The court apparently assumed that all shares of stock were validly issued to the stockholders. In this regard, we conclude, the court erred.
Usually a share of a corporation represents the right to participate, equally with other shares, in control of a corporation, in the profits of the corporation, and, upon dissolution, in the corporate assets. Business Corporation Act, 1929 Idaho Session Laws ch. 262, § 1 at 546 (); H. HENN, LAW OF CORPORATIONS § 157 at 289 (2d ed. 1970). However, to gain this status, the shares of the corporation must be issued in compliance with the applicable provisions of the Idaho Constitution and the Idaho Code.
Article XI, § 9 of the Idaho Constitution provides that "[n]o corporation shall issue stocks or bonds, except for labor done, services performed, or money or property actually received; and all fictitious increase of stock or indebtedness shall be void." The Idaho Legislature elaborated on this constitutional provision in the Business Corporation Act, 1929 Idaho Session Laws, ch. 262, § 13 at 554 () which was in force during the time Belbro, Inc. was formed and was in operation. That section provided, in part:
1. No allotment of shares of a corporation shall be made except:
a. Pursuant to subscriptions received therefor; ....
a. With cash to an amount not less than the aggregate par value of the shares subscribed for; or,
b. With consideration other than cash, the fair valuation of which to the corporation is not less than the...
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