First Nat. Bank of Council Bluffs v. One Craig Place, Ltd.

• Decision Date: 18 March 1981
• Docket Number: No. 64502,64502
• Citation: 303 N.W.2d 688
• Parties: FIRST NATIONAL BANK OF COUNCIL BLUFFS, Appellee, v. ONE CRAIG PLACE, LTD., an Iowa Corporation, Guy Craig, Diane K. Craig, Melvin D. Kvasnicka, Marvin E. Seibold, Helen Seibold, Carmen A. Craig, and Beverly J. Craig, Defendants. Melvin D. KVASNICKA, Marvin E. Seibold, Helen Seibold, Carmen A. Craig, and Beverly J. Craig, Appellants, v. FIRST NATIONAL BANK OF COUNCIL BLUFFS, Guy Craig, and Diane K. Craig, Appellees.
• Court: Iowa Supreme Court

Page 688

303 N.W.2d 688

FIRST NATIONAL BANK OF COUNCIL BLUFFS, Appellee, v. ONE CRAIG PLACE, LTD., an Iowa Corporation, Guy Craig, Diane K. Craig, Melvin D. Kvasnicka, Marvin E. Seibold, Helen Seibold, Carmen A. Craig, and Beverly J. Craig, Defendants.

Melvin D. KVASNICKA, Marvin E. Seibold, Helen Seibold, Carmen A. Craig, and Beverly J. Craig, Appellants, v. FIRST NATIONAL BANK OF COUNCIL BLUFFS, Guy Craig, and Diane K. Craig, Appellees.

No. 64502.

Supreme Court of Iowa.

March 18, 1981.

C. R. Hannan of Perkins, Sacks, Hannan & Hughes, Council Bluffs, for appellants.

A. W. Tauke of Porter, Lash, Reilly & Tauke, Council Bluffs, for appellee Bank.

Considered by REYNOLDSON, C. J., and LeGRAND, UHLENHOPP, McCORMICK, and McGIVERIN, JJ.

UHLENHOPP, Justice.

This appeal involves the fiduciary duty owed by promoters, officers, and directors of a corporation to minority stockholders. The proceeding is in equity and we find the facts anew. Rowen v. Le Mars Mutual Insurance Co., 282 N.W.2d 639, 645 (Iowa 1979). The facts are largely determinative of the case.

Midlands Corporation was a wholly owned subsidiary of First National Bank of Council Bluffs (the Bank). It was in process of constructing a shopping mall, and desired to lease space to tenants. Guy and Diane K. Craig, spouses (the Craigs), conceived the idea of operating a clothing store in the mall; Guy Craig had considerable previous experience in the clothing industry. They approached Stan Duysen, of the mall, and Dale Ball, president of the Bank. Under the mall's plan of operation, completed stores were constructed in the following way. The mall built the building itself and, when a building was rented, allowed a certain sum for finishing off the premises for occupancy by the tenant. The tenant then of course paid rent. The Craigs rented a space in the mall under a lease containing those terms.

The Craigs calculated that a store such as they contemplated would require about $100,000 capital. They had about $3000 in funds. Their tangible property consisted of their mortgaged home, "furniture, antiques, art works, jewelry, hobby collections," and cars, subject to a credit union loan. They reported their total net worth at $30,950.

The Craigs met with Robert Emerine, senior vice president of the Bank. He suggested that they apply for a Small Business Administration loan. They completed a loan application disclosing their financial situation, and presented it to Emerine. He filed it with SBA. Later the Craigs decided that their loan application would be fruitless, and they dropped it.

Realizing that they could not raise the necessary capital by a bank or SBA loan, the Craigs decided to form a corporation with a capitalization of $100,000, and to seek investors. The corporation would be named One Craig Place, Ltd. The Craigs obtained a certificate of incorporation they were the promoters, officers, and directors of the corporation, and eventually the ostensible majority stockholders. They prevailed upon four friends (one was also a relative) to invest $12,000 each for stock, or $48,000 for 48,000 shares. This left $52,000 for the Craigs to raise for 52,000 shares. The problem was that they had only $3000 in funds. The Bank would not lend them the necessary $49,000.

The minority stockholders Melvin D. Kvasnicka, Marvin E. Seibold, Carmen A. Craig, and John C. Williams actually deposited $12,000 each in the Bank. They knew that the Craigs had to borrow personally for their shares.

Emerine was the Craigs' financial adviser. The enterprise also needed legal assistance. In connection with its legal work on this business, the Bank used the services of Frank W. Pechacek, Jr., an associate in the firm which was the Bank's general counsel. Guy Craig testified:

Q. What transpired or what took place from that point on as far as your meeting with the bank and their directions to you? A. At that time we got Frank Pechacek as a lawyer.

Q. How did that come about? A. Through recommendations at the bank. I didn't know anybody in Council Bluffs, so it was a name from the bank.

Q. Who would it have been? A. Well, I believe my first discussion was, again, with Stan Duysen, who was down the hall, who ultimately took me to Mr. Bob Emerine, and that is where the financial discussions started.

(Question and objection.)

Q. Had you filed any other financing or financial statements or documents with Mr. Emerine, other than the SBA? A. The SBA is the only thing I remember filing.

Q. Okay. And at that time you, I believe, testified you were still in the position of feeling that you had to have $100,000 to capitalize the corporation? A. I believe so, yeah.

Q. You so informed him of this need? A. I'm sure, yes, through the talks that is the figure that came to the top.

Q. He recommended that you see Mr. Pechacek? A. Yes.

Q. What happened following that? A. I met with Mr. Pechacek, and from day to day they worked together to get the $49,000 loan.

Eventually a plan was conceived for getting the Craigs their shares. Who conceived the plan is not completely clear although Carmen Craig testified:

Q. Did you have any knowledge of Guy borrowing $49,000 from First National Bank prior to August of 1976? A. Prior to August of '76, no. Guy called me at one period this was before I think before the corporate structure was legal and asked me if I had any idea of anyone who would be willing to cosign with him for his moneys that he needed to borrow to acquire his 49,000 shares of stock.

Q. Yes. A. I told him, no; I don't know of anyone who would be willing to do that. Several days later or a week later or sometime later he called me, and he said that Frank Pechacek had figured out a way that he and Diane would be able to borrow the money they needed to buy their 51 percent interest, or 52 percent, through the bank through the corporation. Only that is what I was told; that was fine, you know.

Q. You weren't aware that the corporate assets had been pledged? A. Absolutely not.

In any event, what actually happened is known. Two transactions would take place. In the first transaction, the Craigs would pay their $3000 toward their stock. Under the lease from the mall, the landlord was to provide $57,600 for finishing off the store for occupancy by the tenant. The Craigs would assign the lease to the corporation, and part of this $57,600 would be regarded as the equivalent of a payment of $49,000 by them to the corporation for their stock. The corporation would make its note for $8600 to the Craigs for the difference between $57,600 and $49,000. This transaction was carried out.

The parties (other than the minority stockholders, who were unaware of these happenings) apparently thought that the Craigs nonetheless had to raise $52,000 for their 52,000 shares, or at least that $52,000 had to be paid into and be held by the corporation along with the minority stockholders' $48,000, in order to have a capitalization of $100,000. Hence the second transaction was consummated. The Craigs had paid the corporation their $3000. Emerine verified that the Bank also actually had the minority stockholders' $48,000 on deposit. He then lent $49,000 on behalf of the Bank and had Mr. Pechacek prepare the documentation. Emerine did not, however, lend this money to the Craigs. He lent it to the corporation itself, taking a security interest in all of the corporation's assets and an assignment of the lease, as well as a personal guaranty by the Craigs and a security interest in their assets including a second mortgage on their home. Regarding this second transaction Guy Craig testified:

Q. So the corporation had no assets? A. No.

Q. Except for the money that the shareholders had contributed? A. Had sent down, right.

Q. You testified also that you told Mr. Emerine that you were borrowing this money to get your share of the corporation? A. I was borrowing $49,000, and yes; I needed to acquire 52,000 shares of stock.

Q. Did you make that fact known to Mr. Emerine? A. I believe I did.

Q. And the loan was consummated on that basis? A. Yes. Through Frank Pechacek.

As a result of this second transaction the corporation ostensibly had $100,000 in accordance with the stockholders' original intention. Actually, however, the corporation's note offset $49,000, leaving $51,000. The corporation issued 100,000 shares at one dollar per share 52,000 to the Craigs and 48,000 to the minority stockholders.

The landlord constructed the building, and the finishing was completed. The landlord provided funds for the finishing pursuant to its commitment and the funds went to the contractor. Guy Craig testified:

Q. If I may, to back up a little bit more, was any money ever transferred to One Craig Place (the corporation name) by Midlands Mall with regard to this construction credit commitment? A. Yes.

Q. How much money was given to them? A. I believe it was $57,500.

Q. When was that given to you? A. Shortly after the opening of the store. Again, it would have been probably in April; I would guess upon completion and upon satisfactory construction.

Q. Okay. And was that put into the One Craig Place account? A. It was either signed directly over to the Andersen Construction Company, or put in, and a check written; I don't recall which. It immediately the same day went to Herb Andersen of Andersen Construction, and I don't know whether I endorsed it over to him or whether I wrote a check for it and, in fact, put it into the checking account.

With the completion of the store, the corporation purchased inventory, fixtures, and equipment, and held a grand opening. One Craig Place embarked upon the clothing business on March 26, 1976.

Throughout the life of the corporation, however, from the formation through the operation to the liquidation, the Craigs practically disregarded the corporate entity and functioned as individuals. The Bank participated in this on occasion, as at the liquidation.

The store did not attract...