Dorton v. Dorton

• Decision Date: 19 November 1985
• Docket Number: No. 8514DC75,8514DC75
• Citation: 336 S.E.2d 415,77 N.C.App. 667
• Parties: John P. DORTON v. Betty B. DORTON.
• Court: North Carolina Court of Appeals

Page 415

336 S.E.2d 415

77 N.C.App. 667

John P. DORTON v. Betty B. DORTON.

No. 8514DC75.

Court of Appeals of North Carolina.

Nov. 19, 1985.

Mount, White, King, Hutson & Carden by Elizabeth R. Stuckey and William O. King, Durham, for plaintiff-appellee.

Susan H. Lewis, Chapel Hill, for defendant-appellant.

WEBB, Judge.

Defendant challenges the trial court's findings and conclusions in sixteen questions presented on appeal. We vacate the judgment and remand the cause for a new hearing on equitable distribution due to the errors discussed below. In all fairness to the trial court we note that it did not have the benefit at the time judgment was entered of much of the case law on equitable distribution.

The trial court must identify the property owned, evaluate it, and order its distribution in an equitable distribution action pursuant to G.S. 50-20. Capps v. Capps, 69 N.C.App. 755, 318 S.E.2d 346 (1984). The findings indicate that the parties acquired during their marriage the following holdings: (1) rental property at 823 Buchanan Boulevard in Durham, (2) lots 17 and 18 in Willowhaven subdivision, (3) lot 14 in Willowhaven subdivision, (4) lot 16 in Willowhaven subdivision, (5) an Emerald Isle beach house, (6) rental property at 201 Albemarle Street in Durham, (7) the family residence in Willowhaven subdivision, (8) an office building at 1306 Broad Street in Durham, (9) personal property in the family residence, (10) personal property in the beach house, (11) office equipment in the Broad Street office, and (12) a vacant lot on Buchanan Boulevard. The parties had transferred the beach property, Willowhaven lots 17 and 18, and the Albemarle and both Buchanan properties to a family corporation formed in 1981 and known as B J & K Investments, Ltd. The trial court concluded that all of the aforementioned property was marital property, except for the vacant lot on Buchanan Boulevard which had been sold, and it found and concluded that neither party owned separate property.

The finding and conclusion that neither party owned separate property constitutes error on the face of the record which we point out, despite the lack of an exception by either party, to guide the trial court upon remand. The evidence shows that plaintiff was a practicing dentist. G.S. 50-20(b)(2) classifies professional licenses as separate property. G.S. 50-20(c)(1) requires the trial court to consider the property of each party when making a property division. Thus the trial court must identify plaintiff's dental license as separate property. Poore v. Poore, 75 N.C.App. 414, 423-24, 331 S.E.2d 266, 272-73 (1985). The trial court then must consider the dental license as one of the factors affecting equitable distribution. Id.

In the course of identifying and distributing the marital property, the trial court disregarded the corporate entity of B J & K Investments on the grounds that the corporation was a "sham." The trial court then distributed the assets of the corporation as marital property, but held defendant personally liable for $23,000 worth of notes and deeds of trust she had executed, apparently in the name of the corporation, after the parties separated. This part of the judgment constitutes reversible error because several of the reasons cited by the trial court for disregarding the corporate entity are unsupported by the evidence or are irrelevant.

As R. Robinson, North Carolina Corporation Law and Practice, § 2-12 (3d ed.1983), observes,

Disregarding the corporate entity is an equitable remedy imposed in a particular case only to prevent or rectify an abuse of the corporate privilege or to avoid some other injustice. The remedy is exercised reluctantly and cautiously, and the burden of establishing a basis for invoking it rests on the party asserting the claim.

Robinson identifies four principal factors that support a decision to disregard a corporate entity: (1) inadequate capitalization; (2) noncompliance with corporate formalities; (3) complete domination and control of the corporation so that it has no independent identity; and (4) excessive fragmentation of a single enterprise into separate corporations. Id. Other factors may exist, depending on the facts of the case. See Glenn v. Wagner, 313 N.C. 450, 458, 329 S.E.2d 326, 332 (1985); DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681 (4th Cir.1976). The trial court's findings in the present case relate to Robinson's second and third factors.

With regard to noncompliance with corporate formalities, the trial court found that defendant never issued any stock, never paid any franchise tax, never filed a corporate tax return, and held only one meeting during the existence of the corporation. Defendant was the president, a director, and 51% shareholder or owner of B J & K Investments, Ltd. Plaintiff was a director, vice president, and 40% shareholder. Their daughter Katina was secretary and 9% shareholder until 22 February 1984, when she resigned from the corporation and gave her ownership interest in equal parts to her parents.

We fail to see how noncompliance with the corporate formalities mentioned above could justify disregarding the corporate entity in favor of plaintiff. Plaintiff acquiesced in the formation of the corporation. He knew what property belonged to the parties in their individual capacities and what property belonged to their corporation. As a director, officer, and shareholder he bore responsibility for observance of corporate formalities along with plaintiff. The present case is thus distinguishable from the more typical situation where a person unassociated with a corporation and unaware of its existence may hold an agent of the corporation individually liable on the grounds that the plaintiff was led to believe he was dealing with the agent in an individual capacity rather than in a corporate capacity due to the noncompliance with corporate formalities. See, e.g., Bone International, Inc. v. Brooks, 304 N.C. 371, 283 S.E.2d 518 (1981). Equipment Co. v. DeBruhl, 28 N.C.App. 330, 220 S.E.2d 867, disc. review denied, 289 N.C. 451, 223 S.E.2d 160 (1976), presents a more analogous situation. In Equipment Co. plaintiff knew or should have known that defendant was acting as president of his corporation. This Court held that it would not disregard the corporate entity for noncompliance with corporate formalities:

Furthermore, we do not see merit in plaintiff's contention that LaFayette Transportation Service is merely defendant's alter ego. Plaintiff's evidence establishes that defendant's den is the corporate office, that defendant has not read the corporate by-laws, and that he is not familiar with the corporation's tax matters. This is not sufficient evidence to show that the corporation was "ignored as a separate entity," and it is insufficient to apply the alter ego doctrine and hold defendant personally liable.

Id. at 333, 220 S.E.2d at 869. Plaintiff in the present case not only knew of the existence of the corporation, he shared in the duty to observe corporate formalities. He could not have been deceived by the noncompliance with formalities, so the noncompliance with corporate formalities is irrelevant in this case. Plaintiff will not be allowed to disregard the corporate entity on that basis.

The trial court's findings also refer to several instances of mismanagement and fraudulent activity by defendant as a basis for disregarding the corporate entity. These findings are best categorized under the "principal factor" identified in Robinson, supra, as "complete domination and control of the corporation so that it has no independent identity." The North Carolina Supreme Court has provided a broad rule applicable to this factor:

[W]hen ... the corporation is so operated that it is a mere instrumentality or alter ego of the sole or dominant shareholder and a shield for his activities in violation of the declared public policy or statute of the State, the corporate entity will be disregarded and the corporation and the shareholder treated as one and the same person.... (Citations omitted.)

Henderson v. Finance Co., 273 N.C. 253, 260, 160 S.E.2d 39, 44 (1968). Such a drastic remedy should be invoked only in an extreme case where necessary to serve the ends of justice. Robinson, supra.

As one example of defendant's domination through mismanagement, the trial court found that defendant had not fulfilled her fiduciary obligations with respect to accountability. The record is replete with evidence to support this finding. Generally a lack of accountability to other shareholders would not, by itself, be sufficient grounds to pierce the corporate veil. G.S. 55-37 and 55-38 provide an adequate remedy at law to enforce accountability, so the court need not resort to the more drastic equitable remedy of denying the existence of the corporation. However, the trial court was entitled to weigh defendant's lack of accountability in conjunction with other evidence of defendant's complete domination and control of the corporation.

The trial court also found that defendant mismanaged corporate property by allowing it to deteriorate and not realizing the full rental potential from it. Again, the trial court properly considered this as one of several factors demonstrating defendant's domination of the corporation to the detriment of plaintiff as a minority shareholder, although it is questionable whether this finding alone could justify piercing the corporate veil in equity since less drastic remedies are available at law under G.S. 55-125.1.

The trial court further found that, "Another piece of property on Buchanan Boulevard which had been acquired by the parties was somehow sold to the defendant's mother for less than its fair market value without any authority whatsoever from plaintiff, either individually or as a principal of the corporation." Presumably this piece of property had belonged to the corporation and was sold by de...