Hanewald v. Bryan's Inc., 870324
| Decision Date | 20 September 1988 |
| Docket Number | No. 870324,870324 |
| Citation | 429 N.W.2d 414 |
| Parties | Harold E. HANEWALD, d/b/a Hanewald & Sons, Inc.; Plaintiff and Appellant, and Hanewald & Sons, Inc., Plaintiff, v. BRYAN'S INC., a North Dakota corporation; George D. Bryan; Keith L. Bryan; and Joan Bryan, Defendants and Appellees, and Camilla Larson, Defendant. Civ. |
| Court | North Dakota Supreme Court |
Mackoff, Kellogg, Kirby & Kloster, P.C., Dickinson, for plaintiff and appellant; argued by Ward M. Kirby. Appearance by Timothy A. Priebe.
Zuger, Kirmis, Bolinske & Smith, Bismarck, for defendants and appellees; argued by Jerry W. Evenson.
Harold E. Hanewald appealed from that part of his judgment for $38,600 plus interest against Bryan's, Inc. which refused to impose personal liability upon Keith, Joan, and George Bryan for that insolvent corporation's debt. We reverse the ruling that Keith and Joan Bryan were not personally liable.
On July 19, 1984, Keith and Joan Bryan incorporated Bryan's, Inc. to "engage in and operate a general retail clothing, and related items, store...." The Certificate of Incorporation was issued by the Secretary of State on July 25, 1984. The first meeting of the board of directors elected Keith Bryan as president and Joan Bryan as secretary-treasurer of Bryan's, Inc. George Bryan was elected vice-president, appointed registered agent, and designated manager of the prospective business. The Articles of Incorporation authorized the corporation to issue "100 shares of common stock with a par value of $1,000 per share" with "total authorized capitalization [of] $100,000.00." Bryan's, Inc. issued 50 shares of stock to Keith Bryan and 50 shares of stock to Joan Bryan. The trial court found that "Bryan's, Inc. did not receive any payment, either in labor, services, money, or property, for the stock which was issued."
On August 30, 1984, Hanewald sold his dry goods store in Hazen to Bryan's, Inc. Bryan's, Inc. bought the inventory, furniture, and fixtures of the business for $60,000, and leased the building for $600 per month for a period of five years. Bryan's, Inc. paid Hanewald $55,000 in cash and gave him a promissory note for $5,000, due August 30, 1985, for the remainder of the purchase price. The $55,000 payment to Hanewald was made from a loan by the Union State Bank of Hazen to the corporation, personally guaranteed by Keith and Joan Bryan.
Bryan's, Inc. began operating the retail clothing store on September 1, 1984. The business, however, lasted only four months with an operating loss of $4,840. In late December 1984, Keith and Joan Bryan decided to close the Hazen store. Thereafter, George Bryan, with the assistance of a brother and local employees, packed and removed the remaining inventory and delivered it for resale to other stores in Montana operated by the Bryan family. Bryan's, Inc. sent a "Notice of Rescission" to Hanewald on January 3, 1985, in an attempt to avoid the lease. The corporation was involuntarily dissolved by operation of law on August 1, 1986, for failure to file its annual report with the Secretary of State.
Bryan's, Inc. did not pay the $5,000 promissory note to Hanewald but paid off the rest of its creditors. Debts paid included the $55,000 loan from Union State Bank and a $10,000 loan from Keith and Joan Bryan. The Bryan loan had been, according to the trial court, "intended to be used for operating costs and expenses."
Hanewald sued the corporation and the Bryans for breach of the lease agreement and the promissory note, seeking to hold the Bryans personally liable. The defendants counterclaimed, alleging that Hanewald had fraudulently misrepresented the business's profitability in negotiating its sale. After a trial without a jury, the trial court entered judgment against Bryan's, Inc. for $38,600 plus interest on Hanewald's claims and ruled against the defendants on their counterclaim. The defendants have not cross appealed these rulings.
The trial court, however, refused to hold the individual defendants personally liable for the judgment against Bryan's, Inc., stating:
Hanewald appealed from the refusal to hold the individual defendants personally liable.
Insofar as the judgment fails to impose personal liability upon Keith and Joan Bryan, the corporation's sole shareholders, we agree with Hanewald that the trial court erred. We base our decision on the Bryans' statutory duty to pay for shares that were issued to them by Bryan's, Inc.
Organizing a corporation to avoid personal liability is legitimate. Indeed, it is one of the primary advantages of doing business in the corporate form. See generally 1 W. Fletcher, Cyclopedia of the Law of Private Corporations Sec. 14 (1983); J. Gillespie, The Thin Corporate Line: Loss of Limited Liability Protection, 45 N.D.L.Rev 363 (1969). However, the limited personal liability of shareholders does not come free. As this court said in Bryan v. Northwest Beverages, 69 N.D. 274, 285 N.W. 689, 694 (1939), "[t]he mere formation of a corporation, fixing the amount of its capital stock, and receiving a certificate of incorporation, do not create anything of value upon which the company can do business." It is the shareholders' initial capital investments which protects their personal assets from further liability in the corporate enterprise. See Cross v. Farmers' Elevator Co. of Dawson, 31 N.D. 116, 153 N.W. 279, 282 (1915); Jablonsky v. Klemm, 377 N.W.2d 560, 566 (N.D.1985) (quoting Briggs Transp. Co. v. Starr Sales Co., 262 N.W.2d 805, 810 (Iowa 1978)) ["shareholders should in good faith put at the risk of the business unencumbered capital reasonably adequate for its prospective liabilities." ]; and J. Gillespie, supra, 45 N.D.L.Rev. at 388 []. Thus, generally, shareholders are not liable for corporate debts beyond the capital they have contributed to the corporation. See 1 F. O'Neal and R. Thompson, O'Neal's Close Corporations Sec. 1.09 (3rd ed. 1987).
This protection for corporate shareholders was codified in the statute in effect when Bryan's, Inc. was incorporated and when this action was commenced, former Sec. 10-19-22, N.D.C.C. 1 :
"Liability of subscribers and shareholders.--A holder of or subscriber to shares of a corporation shall be under no obligation to the corporation or its creditors with respect to such shares other than the obligation to pay to the corporation the full consideration for which such shares were issued or to be issued."
This statute obligated shareholders to pay for their shares as a prerequisite for their limited personal liability.
The kinds of consideration paid for corporate shares may vary. Article XII, Sec. 9 of the state constitution says that "[n]o corporation shall issue stock or bonds except for money, labor done, or money or property actually received; and all fictitious increase of stock or indebtedness shall be void." Section 10-19-16, N.D.C.C., allowed And only "[w]hen payment of the consideration ... shall have been received by the corporation, [can] such shares ... be considered fully paid and nonassessable." 2 Id. The purpose of these constitutional and statutory provisions is "to protect the public and those dealing with the corporation...." Bryan v. Northwest Beverages, supra, 285 N.W. at 694.
In this case, Bryan's, Inc. was authorized to issue 100 shares of stock each having a par value of $1,000. Keith Bryan and Joan Bryan, two of the original incorporators and members of the board of directors, were each issued 50 shares. The trial court determined that "Bryan's Inc. did not receive any payment, either in labor, services, money, or property, for the stock which was issued." Bryans have not challenged this finding of fact on this appeal. We hold that Bryans' failure to pay for their shares in the corporation makes them personally liable under Sec. 10-19-22, N.D.C.C., for the corporation's debt to Hanewald.
Drafters' comments to Sec. 25 of the Model Business Corporation Act, upon which Sec. 10-19-22 was based, sketched the principles:
"The liability of a subscriber for the unpaid portion of his subscription and the liability of a shareholder for the unpaid balance of...
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