Boyd v. Boyd & Boyd, Inc.

• Decision Date: 26 February 1986
• Citation: 386 N.W.2d 540
• Parties: Grant D. BOYD, Gary C. Boyd, and Randall J. Boyd, Plaintiffs-Appellees, v. BOYD & BOYD, INC., Defendant, and Gene R. Boyd, Defendant-Appellant. 84-1974.
• Court: Iowa Court of Appeals

Page 540

386 N.W.2d 540

Grant D. BOYD, Gary C. Boyd, and Randall J. Boyd, Plaintiffs-Appellees, v. BOYD & BOYD, INC., Defendant, and Gene R. Boyd, Defendant-Appellant.

84-1974.

Court of Appeals of Iowa.

Feb. 26, 1986.

Thomas G. Schebler, of Schebler & Wine, Davenport, for defendants-appellants.

Dennis D. Jasper, of Stafne, Lewis, Jasper & Payson, Bettendorf, for plaintiffs-appellees.

Considered by OXBERGER, C.J., and SNELL and HAYDEN, JJ.

SNELL, Judge.

Defendant Gene R. Boyd was the president and sole stockholder of defendant Boyd & Boyd, Inc., a corporation engaged in the business of buying and selling rare coins, jewelry, gold and silver, and precious metals. Boyd & Boyd, Inc. was established in 1979. Gene transferred assets having a value of $116,000 to the corporation at that time. His capital contribution was $16,000 and a promissory note for $100,000 was executed to Gene by the corporation. In 1979 and 1980, Boyd & Boyd, Inc., acting through Gene, hired three of Gene's relatives as employees. Those three relatives, Grant, Gary, and Randall Boyd, are the plaintiffs herein.

In 1981 and 1982, the corporation experienced financial difficulties and failed to meet some of its payroll obligations. Five of the corporation's employees, including the plaintiffs and Gene, missed the same number of paychecks. The plaintiffs continued working for the corporation on the understanding that the wage arrearages would be paid eventually. However, in May of 1983 Gene fired all three of the plaintiffs after a family dispute. The wage arrearages remained unpaid when the corporation became insolvent shortly thereafter.

At the time of the corporation's insolvency, its debts included not only the wage arrearages, but also $105,000 owed to Gene Boyd on the aforementioned promissory note. After the present petition was filed, the corporation transferred all of its remaining inventory (valued at $86,000) to Gene in partial satisfaction of the corporation's debt to him.

Grant, Gary, and Randall Boyd filed the present action against both the corporation and Gene for unpaid wages. They also claim liquidated damages under Iowa Code Chapter 91A. Liquidated damages may be assessed in an amount equal to five percent of the unpaid wages when the employer has intentionally failed to pay the employee. The district court awarded the plaintiffs a judgment against the corporation and also against Gene individually, but did not assess liquidated damages. The district court held that Gene had breached his fiduciary duty as a corporate director by applying the corporate assets solely toward his own unsecured claim in preference over other debts at a time when the corporation was insolvent.

Gene has appealed from the district court's ruling. He does not dispute the insolvent corporation's liability for the unpaid wages. However, he contends the district court erred by imposing personal liability on him. He argues that "piercing the corporate veil" to impose personal liability on him was unwarranted, especially since the court stated in its decree that it could find no justification for subjecting Gene to individual liability on this theory. The court specifically found that the corporation was not undercapitalized and that it was not a mere sham or used to promote fraud or illegality. The court found that the corporation's indebtedness to Gene was legitimate and enforceable. Gene contends that his disposition of the corporate assets was not so unfair that the court should disregard the general rule against imposing liability on a shareholder for debts of a corporation.

For purposes of this appeal we shall assume that the transfer of corporate inventory to Gene was in payment of a legitimate corporate obligation. There is also no question that this transfer to Gene occurred when the corporation was insolvent. All parties admit that the corporation could not pay its debts as they became due in the usual course of business. See Iowa Code § 496A.2(13) (1985). Therefore, the question we must address is whether the corporation was entitled to pay the debt of its sole shareholder and president in preference to third-party creditors at a time when it was insolvent. Because the Iowa Business Corporation Act does not address this subject, we must look to common law principles.

Most jurisdictions follow the view that officers and directors of an insolvent corporation, who are also creditors thereof, have no right to grant themselves preferences or advantages in the payment of their claims over other creditors. 15A W. Fletcher, Cyclopedia of the Law of Private Corporations § 7468 at 224 (rev.perm.ed.1981); 19 C.J.S., Corporations § 1390 (1974); 19 Am.Jur.2d, Corporations § 1574 (1965). While some jurisdictions have statutory prohibitions of such preferences, in others, the courts invoke what is called the trust fund doctrine, and still others rely upon a theory that the directors as fiduciaries cannot be permitted to use their positions to benefit themselves at the expense of third-party creditors. According to 15A W. Fletcher, Cyclopedia of the Law of Private Corporations § 7469 (rev.perm.ed.1981):

When a corporation becomes insolvent and can no longer continue in business, the directors and other managing officers occupy a fiduciary relation towards creditors by reason of their position and their custody of the assets, and they cannot, by conveyance, mortgage, pledge, confession of judgment, or otherwise secure to themselves, as creditors, any preference or advantage over other creditors, but the most that they can claim is the right to come in and share pro rata with the creditors in the distribution of the assets, and this rule applies to banking corporations as well as to others. More especially is this true with respect to a preexisting debt.

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This is the rule sustained by the great weight of authority, and the fiduciary relation occupied by the officers results from their duty to wind up the affairs of an insolvent corporation and pay the debts incurred. This rule is recognized even in states where corporations have the right to prefer creditors.

The rules of the text are frequently applied to attempts by corporate presidents to secure preferences for themselves, and also to attempted transfers of the company's property to officers' wives in payment of alleged debts due to one or both of them.

The denial of the right of directors of an insolvent corporation to obtain a preference by way of security or payment of debts due them by the corporation is not as a rule founded upon the trust fund doctrine, but upon the theory that it is inequitable that a director, whose position as to knowledge of conditions and power to act for the corporation gives him an advantage, should be permitted to protect his own claim to the detriment of others at a time when it is apparent that all the unsecured debts of the corporation are equally in peril, and that all of them cannot be paid. And some cases take the position that he is not even a creditor as against creditors having no connection with the corporation.

Early Iowa cases disagreed with this majority view and held that a corporation may prefer a creditor even though he is an officer or director. See e.g., Rollins v. Shaver Wagon & Carriage Co., 80 Iowa 380, 45 N.W. 1037 (1890) (during insolvency director attached the corporation's property to secure indebtedness to him); Warfield Howell & Co. v. The Marshall County Canning Co., 72 Iowa 666, 34 N.W. 467 (1887) (during insolvency all shareholders voted to grant a mortgage on all assets of corporation to secure indebtedness to officers, director and principal stockholders). However, in a later case, while not expressly overruling its prior decisions, the Iowa Supreme Court greatly modified its general rule. In State v. Simmer Oil Corp., 231 Iowa 1041, 2 N.W.2d 760 (1942), the court was faced with the following factual situation. The corporation in question became insolvent. It deeded certain parcels of real estate to its president and director in satisfaction of money that he had previously advanced to the corporation. The trial court held that the conveyance was valid. On appeal the court stated:

It must be admitted that some of our earlier cases tend to support the decision below. Appellees cite the following authorities in support of their contention that a corporation may prefer a creditor even though he be an officer or director. (citations omitted)

These cases do declare generally the right to give such preference but our later cases, while not overlooking the prior decisions, have limited their apparent scope. In discussing the so-called "trust-fund" doctrine we said in Luedecke v. Des Moines Cabinet Co., 140 Iowa 223, 118 N.W. 456, 458, 32 L.R.A., N.S., 616:

We do not recognize the trust-fund doctrine to the extent that it has obtained in some of the courts; but are of opinion that corporate creditors are entitled in equity to the payment of their debts before any distribution of corporate property is made among the stockholders, and recognize the right of a creditor of a corporation to follow its assets or property into the hands of any one who is not a good-faith holder in the ordinary course of business.

Id. at 1044, 2 N.W.2d at 762.

The court concluded that the corporate director was not a good-faith holder in the ordinary course of business and, therefore, the transferred properties were made subject to the corporation's other debts. Id. The court emphasized that its conclusion was not based on any actual fraud in the transaction. The court reasoned:

Assuming that one corporate officer may be given security over others, can this be done where the security is given for a pre-existing debt? There is a difference of opinion in the various jurisdictions, some holding that such security or preference may be given only for a contemporaneous loan or advance to the corporation. We think this should be the rule as better...