Equipto Div. Aurora Equipment Co. v. Yarmouth

• Decision Date: 05 February 1998
• Docket Number: Nos. 64863-8,65053-5,s. 64863-8
• Citation: 134 Wn.2d 356,950 P.2d 451
• Court: Washington Supreme Court
• Parties: EQUIPTO DIVISION AURORA EQUIPMENT COMPANY, Respondent, v. Jerry YARMOUTH, d/b/a J & R Interiors, Inc., Petitioner. DRAPER SHADE & SCREEN COMPANY, INC., Respondent, v. Jerry YARMOUTH, and his wife, "Jane Doe" Yarmouth, and the marital community thereof, d/b/a J & R Interiors, Inc., Appellants.

Page 356

134 Wn.2d 356

950 P.2d 451

EQUIPTO DIVISION AURORA EQUIPMENT COMPANY, Respondent, v. Jerry YARMOUTH, d/b/a J & R Interiors, Inc., Petitioner.

DRAPER SHADE & SCREEN COMPANY, INC., Respondent, v. Jerry YARMOUTH, and his wife, "Jane Doe" Yarmouth, and the

marital community thereof, d/b/a J & R Interiors,

Inc., Appellants.

Nos. 64863-8, 65053-5.

Supreme Court of Washington En Banc.

Argued Sept. 23, 1997.

Decided Feb. 5, 1998.

Ross Taylor, Tacoma, for Petitioner.

Breskin & Robbins, Arnold B. Robbins, Seattle, Joe Quaintance, Tacoma, for Respondents.

DOLLIVER, Justice.

Petitioner Jerry Yarmouth seeks review of two summary judgments against him, both of which find him personally liable for debts incurred by Yarmouth in the name of J & R Interiors, Inc., a corporation which was dissolved at the time the contracts were made. We reverse both judgments and remand for further fact-finding.

In 1990 a certificate of incorporation was issued to J & R Interiors, Inc. (hereinafter J & R). Jerry Yarmouth was the sole shareholder, director, and officer of the corporation. Thomas Farrow was the registered agent of the corporation, and the corporation's registered office was Farrow's law office. In 1991 Thomas Farrow closed his firm and took a position on the Pierce County District Court bench.

Some time in 1991, the Secretary of State mailed notice of the due date for payment of J & R's annual license fee and filing of the annual report. Yarmouth alleges the 1991 notice was sent to J & R's registered office--Farrow's old business address--and was returned as undeliverable to the State. The record before this court contains no documentation supporting Yarmouth's claim, but Respondents did not contest the allegation.

As a result of J & R not receiving the notice, Yarmouth failed to pay J & R's annual fee and file the annual report. On August 19, 1991, in light of the unpaid fee and missing annual report, the Secretary of State administratively dissolved J & R. Yarmouth claims that notice of the dissolution was sent to Farrow's old address and returned as undeliverable; thus, Yarmouth claims he never received notice of the dissolution. Yarmouth, purportedly with the good faith belief that the corporation was intact, operated J & R as an ongoing business after its dissolution.

In fall 1992 J & R purchased a workbench from Equipto Division Aurora Equipment (Equipto). The bill for the workbench, totaling nearly $20,000, became outstanding on December 20, 1992. J & R failed to pay the bill, so Equipto brought this action in February 1994 against Yarmouth personally. Yarmouth filed an answer in March 1994 claiming Equipto's cause of action was solely against the corporation, J & R. Equipto then filed a motion for summary judgment, to which it attached a sealed certificate from the Secretary of State showing J & R had been dissolved in 1991. Yarmouth claims his first notice of J & R's administrative dissolution was when Equipto served its summary judgment motion, with the attached certificate of dissolution, some time between August 24 and August 26, 1994. Yarmouth immediately contacted the Secretary of State and was told he could not reincorporate the "old" J & R because more than two years had passed since dissolution. Yarmouth was allowed to file incorporation papers to start a brand new corporation. Yarmouth filed the new papers on August 26, 1994--just days after he first learned of the dissolution. The "new" J & R has the same name, the same Washington business identification number, and Yarmouth also claims the new corporation has the same federal tax identification number as the old. Yarmouth claims Equipto's cause of action properly lies against J & R, and not Yarmouth personally. Even though the "new" J & R is legally independent from the "old" J & R, Yarmouth concedes the new corporation is responsible for the old corporation's debts.

The trial court granted summary judgment to Equipto, against Yarmouth personally, for the outstanding debt. Yarmouth appealed, and the Court of Appeals affirmed. Equipto Div. Aurora Equip. Co. v. Yarmouth, 83 Wash.App. 817, 924 P.2d 405 (1996) (hereinafter Equipto ). This court granted the petition for review. Equipto Div. Aurora Equip. Co. v. Yarmouth, 131 Wash.2d 1015, 936 P.2d 417 (1997).

The particular facts of the consolidated case, Draper Shade & Screen Co. v. Yarmouth, present the identical issue. Draper Shade sued Yarmouth personally over outstanding bills for merchandise ordered and received by J & R between October 1992 and December 1993--again, while the corporation had been administratively dissolved. The trial court granted summary judgment to Draper Shade and found Yarmouth liable for over $16,000. Yarmouth successfully motioned to have the appeal from summary judgment transferred and consolidated with Equipto.

Since these consolidated cases both stem from summary judgments granted to Respondents, this court must view the facts most favorably to Yarmouth. Schaaf v. Highfield, 127 Wash.2d 17, 21, 896 P.2d 665 (1995). Review of the question of law is de novo. Id.

For an excellent and comprehensive survey of the numerous ways states have dealt with the exact issue presented by this case, see Thomas G. Fischer, Annotation, Liability of Shareholders, Directors, and Officers Where Corporate Business Is Continued After Its Dissolution, 72 A.L.R.4th 419 (1989). Many states base their corporate statutes on the Model Business Corporation Act (MBCA). See Robert J. McGaughey, Washington Corporate Law Handbook 10-11 (1993) (McGaughey). Washington's former Title 23A RCW, enacted in 1965, adopted most of the Model Act. Id. Even though many states follow the MBCA, the case law from those jurisdictions varies greatly on the issue of post-dissolution liability, and there is little consistency in the analysis used to resolve the issue, or the results reached.

Further complicating research and analysis of the issue, the MBCA was significantly revised in 1984, when the American Bar Association adopted the Revised Model Business Corporation Act (RMBCA). Washington State completely revised its corporate act in 1989, repealing RCW 23A, and enacting RCW 23B, which is based primarily on the 1984 RMBCA. Laws of 1989, ch. 165; McGaughey at 11. Most of the case law from all state jurisdictions, on the issue of postdissolution liability, relies on the old version of the MBCA. Few Washington cases have discussed the sections of RCW 23B which are applicable to this case.

Our analysis must begin with a brief overview of administrative dissolution under RCW 23B.14.200-.220. No party contests that J & R was properly incorporated. Once incorporated, however, a corporation has yearly responsibilities to maintain its corporate status. A domestic corporation must pay an annual $50 license fee, RCW 23B.01.530, and it must file an annual report with the Secretary of State. RCW 23B.16.220. Yarmouth does not dispute J & R failed to file its annual report or pay the $50 annual license fee in 1991, 1992, and 1993. A corporation's failure to pay its annual fee or file its annual report are grounds for administrative dissolution of the corporation by the Secretary of State. RCW 23B.14.200. Once a cause for dissolution arises, the corporation is notified and has 60 days to correct the condition. RCW 23B.14.210(1), (2). If the corporation fails to correct the condition, the Secretary of State will administratively dissolve the corporation. RCW 23B.14.210(2). Once dissolved, the corporation "continues its corporate existence but may not carry on any business except that necessary to wind up and liquidate its business and affairs under RCW 23B.14.050 and notify claimants under RCW 23B.14.060." RCW 23B.14.210(3).

The statutory scheme allows for the reinstatement of an administratively dissolved corporation. Under former RCW 23B.14.220(1), in effect in 1994, a corporation could apply for reinstatement within two years of dissolution. If the Secretary of State found that the grounds for dissolution had been corrected, the Secretary of State would reinstate the corporation. RCW 23B.14.220(2). Reinstatement related back to the effective date of the original dissolution, and the corporation resumed its business as if the dissolution had never occurred. RCW 23B.14.220(3). J & R was administratively dissolved in August 1991, and this two-year reinstatement window closed in 1993. When Yarmouth attempted to reinstate J & R in 1994, the Secretary of State required Yarmouth to form a new corporation because the two-year reinstatement period had passed.

One very interesting issue presented by RCW 23B.14.220(1) has not been mentioned by any of the parties or the Court of Appeals. In 1995 the Legislature amended the subsection and extended the reinstatement window to five years. Laws of 1995, ch. 47, § 2. The Final Legislative Report explains the reason for changing the time limit: "Additionally, concern exists that the two-year reinstatement period is too short, producing a number of negative consequences for unintended dissolutions." Final Legislative Report, 54th Legis. 210 (Wash.1995). Had J & R applied for reinstatement in the summer of 1995, after this amendment became effective, his reinstatement application would have fallen within the five-year window. One could argue the amendment is remedial, such that it should be applied retroactively, thereby affording Yarmouth relief. In re F.D. Processing, Inc., 119 Wash.2d 452, 462-63, 832 P.2d 1303 (1992) (a remedial amendment is applied retroactively when it relates to practice, procedure or remedies). No party has advanced this argument, and it is not critical to our resolution of the matter, so further discussion on this particular point is unwarranted.

In Equipto, the Court of Appeals quotes RCW 23B.14.210(3) as limiting a dissolved corporation's activities to those necessary to wind up business. Equipto, 83 Wash.App. at 823 & n. 15, 924 P.2d 405. Since...