Charles v. Epperson & Co.

• Decision Date: 19 October 1965
• Docket Number: No. 51723,51723
• Citation: 137 N.W.2d 605,258 Iowa 409
• Parties: Ross A. CHARLES, for Himself and All Other Shareholders of Epperson & Company, Inc., Appellants, v. EPPERSON & COMPANY, Inc., E. W. Epperson and W. E. Morton, Appellees, Basil N. Henriksen, Intervenor.
• Court: Iowa Supreme Court

Page 605

137 N.W.2d 605

258 Iowa 409

Ross A. CHARLES, for Himself and All Other Shareholders of Epperson & Company, Inc., Appellants, v. EPPERSON & COMPANY, Inc., E. W. Epperson and W. E. Morton, Appellees, Basil N. Henriksen, Intervenor.

No. 51723.

Supreme Court of Iowa.

Oct. 19, 1965.

Gary S. Gill, Des Moines, for appellants.

Donohue, Wilkins & Donohue, New Hampton, and Phil Gross, Sunner, for appellees.

Hagemann & Hagemann, Waverly, for intervenor.

THORNTON, Justice.

This is a stockholder's derivative action, dismissed by the trial court. Defendant corporation, Epperson & Company, Inc., hereinafter referred to as the corporation, was incorporated by plaintiff Charles, defendant Epperson and intervenor Henriksen and commenced business in 1952. The principal business of the corporation as shown in this record was the construction of grain storage facilities and a chicken house. The incorporators had been partners.

The authorized capital stock is five hundred shares. In 1952 and 1953 stock was issued as follows: plaintiff Charles, 130 shares; defendant Epperson, 170 shares; and intervenor, 58 shares. Defendant Morton was issued one share June 1, 1960. Defendant Epperson acquired control of intervenor's 58 shares June 21, 1962, with the right in intervenor to share in the fruits of this action. No other shares have been issued. The parties are the only stockholders and now hold stock in the corporation as indicated. Defendant Epperson had at all times been a director, chairman of the board, and president, and now is also a vice-president. Plaintiff Charles has at all times been a director. Plaintiff in argument contests such finding by the trial court. However he has so pleaded, no other import can be attributed to his reply. Plaintiff was secretary-treasurer until his retirement in October, 1957. From then until November, 1962, he has drawn $100 per month from the corporation. Intervenor left the corporation June 1, 1962. These three, plaintiff, defendant Epperson, and intervenor, received salaries and bonus on an equal basis until plaintiff's retirement in 1957. Defendant Morton became a director in February, 1961.

The testimony of both plaintiff and intervenor shows defendant Epperson was the lead man, the business getter, the managing officer of the corporation and that they relied on his judgment and gave him a free hand in handling the business of the corporation. Plaintiff was the bookkeeper and office man, intervenor the engineer. Their testimony shows directors' meetings were not held. Plaintiff testified he wrote up minutes of meetings that were not held.

This action is in equity, triable de novo here. Rule 334, Rules of Civil Procedure. Propositions not stated or argued are waived. Rule 344(a)(4) (third), Rules of Civil Procedure.

Plaintiff concedes the purchase of the airplane is barred by the statute of limitations and does not state or argue the use thereof by defendant Epperson.

The transactions on which plaintiff now bases his action for recovery on behalf of the corporation, wherein he contends there was wrongdoing on the part of defendant Epperson and approval and consent of defendant Morton are, 1, Ford Falcon; 2, poultry house; 3, Summer Grain 6 Feed, Inc.; 4, grain dryer; 5, Sumner Builders, Inc.; and 6, E. C. Moran bonus.

I. The burden of proof is on plaintiff to prove his case generally as to misconduct of defendant Epperson as an officer and director. 19 C.J.S. Corporations § 832, page 244; and 19 Am.Jur.2d, Corporation, section 584, page 108. Mere suspicious circumstances are not enough. Des Moines Bank & Trust Company v. George M. Bechtel & Company, 243 Iowa 1007, 1070, 51 N.W.2d 174. Where a corporate director is allowed to run the business as he sees fit without obtaining the consent of other directors through directors' meetings or otherwise, such others are estopped to complain. Anderson v. Dunnegan, 217 Iowa 672, 250 N.W. 115; and Alderman v. Alderman, 178 S.C. 9, 181 S.E. 897, 105 A.L.R. 102. Where it appears a corporate director is dealing on behalf of the corporation with another corporation of which he is also a director he is required to make a full disclosure and obtain the consent of all concerned. When it appears he has not done so the burden is on him to establish the good faith, honesty and fairness of the transaction. First Trust & Savings Bank v. Iowa-Wisconsin Bridge Co., 8 Cir., 98 F.2d 416, 425; and Des Moines Bank & Trust Company v. George M. Bechtel & Company, 243 Iowa 1007, 1081, 51 N.W.2d 174. We said, in Gord v. Iowana Farms Milk Company, 245 Iowa 1, 18, 60 N.W.2d 820, 830:

'This rule and burden should also apply in dealings between directors who are stockholders, especially in a relatively small corporation in which the stock is closely held.'

Such director is not liable merely for failure to make full disclosure and to obtain consent but because the transaction is not in good faith, honest and fair. Such burden is not cast on an officer or director acting in the regular course of business.

II. Plaintiff contends defendant Epperson admitted the conversion of the Ford Falcon station wagon owned by the corporation in his pleading and the stipulated cost of the car should be taken as the value in entering judgment against defendants for such amount. The plaintiff must fail for lack of proof. Defendant Epperson did admit he 'is using' the station wagon because he failed to deny such, rule 102, Rules of Civil Procedure, and he admitted his wife 'at times had made use of the * * * station wagon for her private use,' and 'the total mileage as of this time upon said Ford * * * is approximately 8000 miles.'

It was stipulated the following amounts were paid for the Ford, cash, $1419.27, trade in allowance for 1958 Chevrolet, $1268.65, and that the book value of the Chevrolet at the time of trade was $250. From this plaintiff contends he is entitled to a judgment in favor of the corporation for $1669.27, the loss to the corporation.

It is apparent the amount of the use by defendant Epperson or his wife is not admitted. The admission that there is total mileage of 8000 miles does not admit such defendant or his wife put such mileage on the Ford. No other evidence was offered. In this state of the record there is no proof of conversion or of the value of the Ford at the time of the claimed conversion. See Merchants and Farmers State Bank of Weatherford, Texas v. Rosdail, Iowa, 131 N.W.2d 786, 790, 136 N.W.2d 286.

III. Relative to the poultry house transaction plaintiff states his contentions thus. Epperson purchased the poultry house plant and equipment with corporation funds without authority and contrary to the articles of incorporation, that he used corporate funds to operate and maintain it, personnel employed and paid by the corporation were used in operating it and he retained, managed and controlled the income and accounts receivable from the operation of the poultry house in a personal checking account and expended the funds most suitable for his needs. In argument plaintiff contends Epperson so handled this transaction that if there was a loss it would fall on the corporation and if the venture was a success Epperson personally would be able to retain the profit.

We believe plaintiff's first premise that Epperson individually purchased the poultry plant cannot be sustained.

The transaction arose in this manner. In September 1957, while plaintiff was still active in the corporation, one Heying purchased a four-acre tract from Epperson individually. He at the same time entered into contracts with the corporation and Farm Building Supply, Inc. (a purchasing corporation set up by plaintiff, Epperson and intervenor for purchasing purposes which for all practical purposes in the record is actually the corporation, and will hereinafter by disregarded) for the construction and equipping of a poultry plant for egg production. Plaintiff took part in this. The plant was placed in operation and the construction and equipping were financed by conditional sales contracts which the corporation endorsed with recourse. Later Heying ran into financial difficulty and he, Kent Feeds, Inc., and Epperson entered into an agreement whereby Epperson undertook, as agent for Kent Feeds, Inc., to handle the proceeds of Heying's poultry operation and to pay from December, 1958, through June of 1959 the operating expenses, dertain payments to Kent Feeds, Inc., other indebtedness of Heying, and Heying's living expenses. In the same instrument Epperson undertook personally to guarantee the operating expenses and payments to Kent as provided for the months December 1958, through June of 1959. At this time Epperson was interested in the successful operation of the Heying poultry operation, 1, individually as he had sold the land to Heying on an installment real estate contract, and 2, as the largest stockholder and managing officer of the corporation. The corporation was then liable upon default of Heying on the conditional sales contracts.

There is nothing about this agreement that in any manner sustains a finding Epperson purchased the poultry plant individually. The agreement does not necessarily indicate Epperson acted for himself in the transaction to follow.

After the above agreement, Heying employed counsel and made a claim against the corporation for faulty construction of the poultry plant and equipment in that the same was improperly ventilated and insulated causing excess condensation which in turn resulted in sickness and death of a large number of chickens. Mr. Epperson employed counsel to resist and handle this claim. There is no reason to believe he then was acting solely as an individual. On the face of things he would not be personally liable for the faulty construction, the corporation was liable if such condition existed. He signed the settlement agreement both on behalf of the corporation and individually. It was necessary for him to do so...