Fairbanks v. Chambers

• Decision Date: 10 January 1984
• Docket Number: No. WD,WD
• Citation: 665 S.W.2d 33
• Parties: Lloyd J. FAIRBANKS and Betty Fairbanks, Plaintiffs/Respondents, v. Edwin W. CHAMBERS and Janice R. Chambers, Defendants/Appellants. 33673.
• Court: Missouri Court of Appeals

Page 33

665 S.W.2d 33

Lloyd J. FAIRBANKS and Betty Fairbanks, Plaintiffs/Respondents, v. Edwin W. CHAMBERS and Janice R. Chambers, Defendants/Appellants.

No. WD 33673.

Missouri Court of Appeals,

Western District.

Jan. 10, 1984.

Richard E. Lee, Edward M. Manring (argued), Albany, for defendants/appellants.

Jim Turner, St. Joseph, for plaintiffs/respondents.

Before PRITCHARD, P.J., and MANFORD and NUGENT, JJ.

NUGENT, Judge.

The defendants appeal from a judgment entered on a verdict in plaintiffs' favor in this action to recover damages for breach of an implied warranty of fitness for consumption of hog feed supplement. Defendants primarily argue that the evidence was not sufficient to justify piercing the corporate veil so as to hold them individually liable for plaintiffs' loss. We agree with the defendants that the trial court erred in concluding that the evidence was sufficient for that purpose. Accordingly, we reverse and remand for new trial.

Defendants' appeal is not concerned with damages or causation, therefore, we need not review the evidence on those issues. Briefly, the evidence shows that the plaintiffs purchased a hog feed supplement from defendant Chambers Feed and Farm Supply, Inc., and fed the supplement to their hogs. By the next day, 219 hogs had died.

Plaintiffs brought suit against defendants and their corporation, Chambers Feed and Farm Supply Company. The plaintiffs alleged that the defendants were engaged in the feed and supply business and that defendants, through a long course of dealing in, mixing and supplying hog feed supplement to plaintiffs, had impliedly warranted the fitness of the material as hog feed. The petition further charged that on September 13, 1977, the defendants had sold and delivered to plaintiffs a quantity of feed supplement under the implied warranty, but that the supplement was not in fact fit to feed hogs and was toxic and killed plaintiffs' hogs, damaging plaintiffs.

As trial began, the plaintiffs sought damages from both the corporation and the corporation's only officers and shareholders, Edwin and Janice Chambers. The action against the corporate defendant, however, was voluntarily dismissed at the close of all the evidence. The record indicates that the plaintiffs dismissed the corporation because they did not know which of the corporation's assets were unencumbered and could have been used to satisfy a judgment.

Evidence as to the relationship between Mr. and Mrs. Chambers and Chambers Feed and Farm Supply, Inc., indicated that the couple had operated the business for a number of years before incorporating in 1973. Since that date, Edwin Chambers has held the positions of president and vice president, and Janice Chambers has served as secretary and treasurer. The two own all the stock in the corporation. Mr. Chambers acknowledged that their purpose in incorporating was to enable them to borrow money to purchase their present facilities. (He testified that at that time a corporation could be charged any rate of interest it was willing to pay. For that reason, lenders were willing to lend to a corporation but not to individuals because of Missouri's usury law.) Title to all real property, inventory, vehicles and office equipment is held in the corporate name.

At the time of trial, all billing forms, signs and phone listings showed the firm name as Chambers Feed and Supply. Plaintiffs testified that they were unaware that the firm, with which they had done business for seven years, was incorporated. Mr. Chambers testified that he "would not take issue with" Mr. Fairbank's assertion. Mr. Chambers had never indicated to him at any time prior to the sale that the Chambers "were a corporation." At trial, plaintiffs' attorney argued without objection that the Fairbanks did not know of the existence of the corporation until the matter came to a lawsuit. Defendants' counsel made no attempt to adduce evidence of or to argue the plaintiffs' prior knowledge of the corporation's existence or its operation of the defendants' business. Defendants' main line of defense was that the individual defendants did not sell to the plaintiffs, the corporation did.

Plaintiffs' Exhibit 1, an unidentified document (apparently related to the defendants' application for insurance coverage), showed the firm name as Edwin W. Chambers and Janice R. Chambers d/b/a Chambers Feed and Farm Supply. A small box was checked under the name indicating "partnership." Mr. Chambers explained the document as one filled out by a third party.

Following dismissal of the action against the corporation, the jury returned a verdict in favor of the plaintiffs, assessing damages at $18,500.

On appeal, defendants raise three issues: (1) that the trial court erred in overruling their motion for directed verdict because the evidence directed toward piercing the corporate veil and holding the defendants individually liable was insufficient to warrant submitting the question to the jury; (2) that plain error occurred in the admission of a statute into evidence; and (3) that the plaintiffs' petition failed to state a cause of action.

At trial, the plaintiffs asserted that the corporation was the "alter ego" of Edwin and Janice Chambers and, therefore, the individuals were liable because they made no effort to inform either the public in general or the plaintiffs in particular that their feed and supply company was a corporation. On appeal, the plaintiffs attempt to refine this argument by contending that the defendants' failure to disclose that they were agents of the corporation constitutes a basis for piercing the corporate veil.

The plaintiffs misunderstand the elements of the equitable doctrine of piercing the corporate veil. The mere failure to inform the public of a corporate existence has never been held in Missouri to justify piercing the corporate veil. Although plaintiffs are correct that § 351.110(1) ¹ does require a corporate name to contain the word "corporation," "company," "incorporated," or "limited" or an abbreviation of one of those words, decisions interpreting that section relate only to the secretary of state's discretion in establishing corporate names and the ability of similarly named corporations to challenge the name as confusing. The section has never been interpreted to require that the corporate name must appear on all signage, letterheads, company forms, phone listings, and the like. Moreover, assuming arguendo that the section has that meaning, its violation could not be said to automatically give rise to anything more than those sanctions which the state may choose to impose. Certainly the loss of all the protections and advantages of the corporate form (among them the fundamental protection of limited liability) cannot be said to spring spontaneously from the failure to comply.

Loss of corporate protections is based not on technical statutory noncompliance but on a two-prong test of "alter ego" and an improper purpose. The corporate entity may be disregarded only in special circumstances. Not only must the corporation be controlled and influenced by one or a few persons, in addition, the evidence must establish that the corporate cloak was used as a subterfuge to defeat public convenience, to justify wrong or to perpetuate fraud. Sampson Distributing Co. v. Cherry, 346 Mo. 885, 143 S.W.2d 307, 309 (1940). A mere showing that one individual has absolute control of a corporation does not without more justify disregarding legal forms. See Smith v. City of Lee's Summit, 450 S.W.2d 485, 489 (Mo.App.1970).

The plaintiffs here do not suggest that the corporate entity was used as a subterfuge. The only evidence presented as to the purpose of Mr. and Mrs. Chambers in failing to add "Inc." to their signage and forms, was presented by Mr. Chambers who testified that because he was "too frugal" he chose to use his old pre-incorporation office supplies still on hand. Although the jury was free to disbelieve that explanation, plaintiffs offered no evidence whatsoever of any other or improper purpose. The burden is on the party arguing that the corporate form should be disregarded to present such evidence. See Lynn v. Lloyd A. Lynn, Inc., 493 S.W.2d 363 (Mo.App.1973).

The merest hint of a deliberate misleading may be detected in the checking of the "partnership" box on defendants' insurance application. Even if we assume, however, that that action was taken to deceive the insurer as to the corporate status (an assumption wholly unjustified by the evidence even if defendant's explanation that the form was filled out by a third party is ignored), the fundamental question remains--to what purpose? Plaintiffs suggest no improper purpose or advantage of any kind accruing to the defendants in misrepresenting their status on the application and in the absence of such evidence, we will not read impropriety into this check mark.

The insufficiency of that merest hint is made most clear when contrasted with the evidence in Mansfield v. Smithie, 615 S.W.2d 649 (Mo.App.1981), a case in which disregarding the corporate entity was held to be justified because of the principal shareholders' "total disregard" for that entity themselves. In Mansfield, a civil case for assault against nightclub owners for the brass knuckle beating of a customer by an employee, the individual defendants had operated the nightclub as a partnership prior to its incorporation as a not-for-profit corporation. The change in status was said to have been made to enable the defendants to sell liquor by the drink. Once that goal was accomplished, the defendants continued to operate the club as a partnership, regarding themselves as sole owners, sharing the profits as before (taking home the proceeds "if there was any left"), owning the facilities as individuals (leasing to the corporation only after the lawsuit was filed), and apparently failing to file corporate tax returns. This evidence indicated an improper...