Crowley v. Valley West Water Co., 91-587
| Decision Date | 13 October 1994 |
| Docket Number | No. 91-587,91-587 |
| Citation | 882 P.2d 1022,267 Mont. 144 |
| Parties | John H. CROWLEY, Plaintiff and Respondent, v. VALLEY WEST WATER COMPANY, a Montana corporation, R Montana, Inc., a Montana corporation, and Missoula Water Works Limited Partnership, a Montana limited partnership, Defendants and Appellants. |
| Court | Montana Supreme Court |
George C. DeVoe, Missoula, for appellant.
Christopher B. Swartley, Datsopoulos, MacDonald & Lind, Missoula, for respondent.
Defendants appeal the Order of the District Court of the Fourth Judicial District, Missoula County, appointing a receiver to administer their assets during the pendency of this litigation. In addition to the request for appointment of a receiver, plaintiff has also asserted claims of fraudulent conveyances and alleged a constructive trust; these claims are not before this Court at this time. We affirm.
The sole question in this appeal is whether the District Court erred in appointing a receiver to handle assets of defendants.
Plaintiff John H. Crowley (Crowley) and Valley West Water Company (Valley West) negotiated a written contract signed July 1, 1981, agreeing to transfer Crowley's shares of stock in Valley West back to the corporation for $75,000. Crowley was president of Valley West and owned 25 percent of total shares prior to the sale. The only other shareholder was Charles Isaly (Isaly), secretary of the corporation.
The contract between the parties provided that $20,000 would be paid to Crowley by January 4, 1982, and that the $55,000 remaining balance would be amortized over ten years and paid in quarterly installments at 12 percent interest on the declining balance. The contract also provided for additional security, including the requirement that an escrow account be established for payments to Valley West, so that Crowley would receive his payments under the contract before the balances could be paid to Valley West. The contract also provided that Crowley's rights to receive quarterly payments would be protected if Valley West transferred its interest in the water system operating rights to another entity. Further, it had provisions relating to default by Valley West by which Crowley could foreclose on Valley West pursuant to foreclosure provisions for trust indentures, to apply as though the security provided by Valley West was real property subject to a trust indenture.
Valley West's major asset was the water system operating rights it owned under an agreement with the City of Missoula. When Valley West and Crowley contracted to sell Crowley's stock back to Valley West in 1981, Crowley knew that Valley West intended to try to sell its operating rights. Valley West sold the operating rights on November 18, 1982 to R Montana, Inc. The same day, R Montana, Inc. sold the operating rights to Missoula Water Works Limited Partnership (Missoula Water Works). Concurrently, Missoula Water Works executed an agreement with Valley West to "lease back" the operating rights to Valley West. Although Montana law requires that any sale of assets of a public utility be approved by the Montana Public Service Commission, the Commission did not approve any sale of Valley West's assets between 1981 and 1991 and does not recognize either of these sales as valid.
For approximately eight years, quarterly payments under the contract between Crowley and Valley West were made as agreed through the escrow account. Starting in September 1989, Valley West stopped making these payments. Pursuant to the contract's default provisions, Crowley gave thirty days notice of default to Valley West on April 9, 1990, and instituted the breach of contract action against Valley West on June 19, 1990. Crowley later amended the complaint to include claims for fraudulent conveyance and constructive trust. After Valley West notified its customers that effective June 1, 1991, Missoula Water Works would assume revenue collection responsibilities for customer water charges, Crowley amended his complaint again to add Missoula Water Works as a defendant.
Isaly is president and sole shareholder of Valley West and the only general partner of Missoula Water Works. An addendum to the 1982 lease agreement between Missoula Water Works and Valley West, which was signed by Isaly for both entities, states they had
just and substantial cause to believe that in the near future there will be attempts by creditors of Lessee to attach or in some way interfere with the flow of customer payments to Lessee for water services.
This addendum, dated June 4, 1991, allowed Missoula Water Works to collect income for water services that previously was paid directly to Valley West. Isaly subsequently stated in a letter to Ron Woods of the Public Service Commission dated June 17, 1991, that
the reason for this change [in payee to Missoula Water Works] is so that the Internal Revenue Service cannot interrupt the cash flow stream from the water system customers pursuant to a tax lien that they have filed against Valley West Water Company.
On June 6, 1991, partial summary judgment in this action was granted by the District Court in favor of Crowley, giving him a money judgment in the amount of $32,818.31 for contract damages and attorney's fees of $6,000.00, the total of $38,818.31 to accrue interest at 12 percent.
Although Valley West was involuntarily dissolved by the Secretary of State as of February 28, 1985, it has continued to operate in a corporate capacity by holding itself out as a corporation and doing business under its former name. In fact, Valley West requested approval from the Public Service Commission and was granted a rate increase under that name in 1990. According to Ron Woods of the Public Service Commission, the assets of Valley West, including the rights under the Agreement with the City of Missoula, still remain with Valley West, and would so remain unless and until a transfer request was submitted and approved by that entity. Nonetheless, Missoula Water Works collected the accounts for Valley West for water services beginning in June 1991.
In addition, Valley West and Missoula Water Works both use the same telephone numbers and addresses in Missoula and in Phoenix, Arizona, which is also Isaly's mailing address. The District Court determined that the intermingling of names, addresses and telephone numbers and the status of Isaly as general partner and president indicated that Isaly's actions on behalf of the entities in question constitute an effort to avoid legitimate creditors' claims and that Isaly seemed to control all of the entities, including R Montana, Inc. Further, the court determined that the transactions were undertaken with little or no attention to the requirements of Montana law in regulating corporations, particularly private utility companies, or to the legitimate interest of creditors, including the IRS and the plaintiff. Payments have gone to Isaly at the same address in Phoenix both before and after the name change.
Because Valley West's major asset, the water system operating rights, had been transferred to Missoula Water Works and then leased back to Valley West, Crowley was unable to collect the money due him from Valley West. On September 5, 1991, Crowley moved the District Court to appoint a receiver to administer assets of Valley West, Missoula Water Works and R Montana, Inc. The court determined that immediate action needed to be taken to prevent irreparable damage to Crowley by virtue of the transfers of assets between entities. The District Court granted Crowley's motion on October 22, 1991, stating:
For the Court to allow the continuance of the transfer during the litigation would produce great and irreparable injury to Plaintiff Crowley, due to the lack of other assets and the dissolved status of Defendant Valley West Water Company. Furthermore, it appears that during the course of the litigation, Defendant Valley West Water Company, through Mr. Isaly, is undertaking transfers in violation of the rights of a judgment lien creditor, respecting the subject of this action which would tend to render Plaintiff Crowley's Judgment ineffectual if concluded; such conduct consists in the removal or disposition of Valley West Water Company's property from the State of Montana with the stated purpose of avoiding legitimate creditor's [sic] claims. Pecuniary compensation would not afford adequate relief to the Plaintiff under the circumstances.
This appeal concerns only the appointment of a receiver in this action. Valley West filed an application to stay the order appointing a receiver on October 30, 1991, which was subsequently denied by the District Court.
Defendants Missoula Water Works and Valley West have filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Arizona. Valley West filed a Chapter 7 bankruptcy petition on January 17, 1992, and Missoula Water Works, as debtor and debtor in possession, initiated a Chapter 11 bankruptcy reorganization in April 1993. Crowley moved for and was granted temporary lifting of the stay in the Valley West Chapter 7 proceeding pending resolution of the Montana District Court action on April 5, 1993. Missoula Water Works initiated its Chapter 11 proceeding later the same month. After more than two years of proceedings in state court including the removal of both bankruptcy stays in the Arizona Bankruptcy Court, Missoula Water Works removed this case to federal district court. On March 7, 1994, Judge Lovell remanded the case to state court and this appeal followed.
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