Hartung v. Architects Hartung/Odle/Burke, Inc.

• Decision Date: 17 September 1973
• Docket Number: No. 1--1272A102,1--1272A102
• Citation: 157 Ind.App. 546,301 N.E.2d 240
• Court: Indiana Appellate Court
• Parties: , 13 UCC Rep.Serv. 308 Richard L. HARTUNG, Defendant-Appellant, v. ARCHITECTS HARTUNG/ODLE/BURKE, INC., et al., Plaintiffs-Appellees.

Page 240

301 N.E.2d 240

157 Ind.App. 546, 13 UCC Rep.Serv. 308

Richard L. HARTUNG, Defendant-Appellant, v. ARCHITECTS HARTUNG/ODLE/BURKE, INC., et al., Plaintiffs-Appellees.

No. 1--1272A102.

Court of Appeals of Indiana, First District.

Sept. 17, 1973.

Rehearing Denied Oct. 24, 1973.

Lewellyn H. Pratt, Applegate, Pratt & Ream, Bloomington, for defendant-appellant.

Robert D. Mann, Ronald L. Chapman, Baker, Barnhart, Andrews, Baker & Mann, Bloomington, for plaintiffs-appellees.

ROBERTSON, Presiding Judge.

The defendant-appellant (Hartung) is appealing the decision of the trial court awarding the plaintiff-appellees (Architects) $17,500 damages for breaching his fiduciary duty to the plaintiff corporation and requiring Hartung to contribute $1,362.32 as his co-guarantor's share of a note.

The corporation Architects Hartung/Odle/Burke, Inc., was organized under the Indiana General Corporation Act (IC 23--1--1--1, et seq. Ind.Ann.Stat. § 25--101 et seq. (Burns 1970)) in mid-February 1971. It was the successor to Richard L. Hartung and Associates, a sole proprietorship headed by Hartung, which had been in existence for approximately seven years prior to incorporation. Odle and Burke, architect employees of Hartung, joined with Hartung as incorporators. Each served as an officer, a director, and an equal shareholder in the new corporation. As the proprietor of the corporation's predecessor, Hartung was the 'contact' or 'front' man--the link between the firm and its clients. Upon incorporation, the clients of the proprietorship were assigned to the corporation, and Hartung, who was elected president, remained the 'front' man. The offices rented by the proprietorship were also assigned and became the corporate offices.

Discord arose shortly thereafter, with Hartung resigning as president and director approximately four months later.

Odle and Burke individually and as corporate officers filed suit against Hartung for the previously mentioned damages and contribution as well as other relief not involved in this appeal.

The first of the two issues urged by Hartung's overruled motion to correct errors is directed to his contribution as a co-guarantor on two corporate notes. On March 5, 1971, the corporation executed a promissory note for $6,000 payable to the Bloomington National Bank. Another note was executed to the bank on May 20, 1971, but only for $3,000. The funds borrowed with these notes were used for salaries of the three participants in the corporation and for operating expenses. Because the corporation was young and its survival capacity at least questionable, the bank reduced its risk by obtaining the personal guaranties of payment, as opposed to collection, of Hartung, Odle and Burke on the notes.

The notes became due on September 5, 1971, but the corporation defaulted and was unable to make payment at that time. Attempts at re-negotiation failed, and on December 22, 1971, the bank made a demand on the corporation and on the co-guarantors for payment. Further negotiations by Odle and Burke with the bank resulted in the two, in order to avoid a lawsuit, paying the bank of February 29, 1972, $1,478.79 in corporation money and $850 each from their personal funds. This satisfied the $3,000 note. As for the $6,000 note, Odle and Burke executed a note to a third party secured by a first mortgage on their real property. They paid off this debt with their own money on March 6, 1972. Hartung refused to contribute in the satisfaction of either debt even though he was a co-guarantor on both.

Hartung erroneously asserts that a co-guarantor of a note cannot be forced to contribute when the principal obligor has sufficient funds to pay the note. Indiana's Uniform Commercial Code disposes of the issue by saying:

"Payment guaranteed' or equivalent words added to a signature mean that the signer engages that if the instrument is not paid when due he will pay it according to its tenor without resort by the holder to any other party.' IC 26--1--3--416(1), Ind.Ann.Stat. § 19--3--416(1) (Burns 1964).

Under this statute, when the corporation failed to pay the notes when due, on September 5, the co-guarantors, Hartung, Odle and Burke, became liable for the amounts of the two notes. The liability attached regardless of the financial condition of the principal debtor-corporation and a demand by the bank on the corporation for payment was unnecessary. Case law prior to enactment of the UCC is not at variance with the UCC on this point. See Hamilton v. Meiks (1936), 210 Ind. 610, 4 N.E.2d 536; Taylor v. Taylor (1878), 64 Ind. 356; Stiefler v. McCullough (1931), 97 Ind.App. 123, 174 N.E. 823.

Hartung's argument regarding a fiduciary duty progresses in three parts. First he claims the evidence was insufficient to establish a fiduciary duty on his part. Secondly, if such a duty did exist, the evidence does not show it to be breached. Finally, if it was breached, the evidence was deficient in that it failed to show specific, non-speculative and non-conjectual damages.

As for the existence of a fiduciary duty, the evidence shows that Hartung was a director, an officer, and one of only three shareholders of the corporation. A fiduciary duty attached to Hartung in each capacity. A director has long been held to be a fiduciary in Indiana; Hill v. Nisbet (1885), 100 Ind. 341; Tower Recreation, Inc. v. Beard (1967), 141 Ind.App. 649, 231 N.E.2d 154; Schemmel v. Hill (1930), 91 Ind.App. 373, 169 N.E. 678; and so has an officer, Central Railroad Signal Co. v. Longden, 194 F.2d 310 (7th Cir. 1952); Leader Publishing Co. v. Grant Trust and Savings Co. (1915), 182 Ind. 651, 108 N.E. 121. In addition, the shareholders in a close corporation, also referred to as an 'incorporated partnership', stand in a fiduciary relationship to each other. She Helms v. Duckworth, 101 U.S.App.D.C. 390, 249 F.2d 482 (1957); Manis v. Miller (1967), 19 N.Y.2d 875, 280 N.Y.S.2d 675, 227 N.E.2d 596; H. Henn, Law of Corporations § 268 (2d ed. 1970); Conway, The New York Fiduciary Concept in Incorporated Partnerships and Joint Ventures, 30 Fordham L.Rev. 297 (1961).

The nature of the fiduciary duty is basically the same regardless of the capacity in which it arises. The fiduciary must deal fairly, honestly and openly with his corporation and fellow stockholders. He must not be distracted from the performance of his official duties by personal interests. Helms v. Duckworth, supra; Leader Publishing Co. v. Grant Trust and Savings Co., supra; Schemmel v. Hill, supra.

Hartung contends that the nature of the corporation--an 'incorporated partnership' comprised of professional people--prevented a fiduciary duty from arising. Professionals are involved in the service of clients as opposed to the manufacture of goods, and, as such, Hartung contends they must be given more leeway in their relationship with their associates. He argues that too strict a fiduciary duty would unduly restrict the freedom of action that a professional person needs to maintain. He points out that the corporation herein was formed by three professionals who previously had worked together in an employer-employee relationship, and further, that the corporation lasted only 126 days.

Hartung offers no authority for his proposition and this court is aware of none. The officer/director/shareholder of an 'incorporated partnership' composed of professional architects owes a fiduciary duty to the corporation and to his business or professional associates. The critical factor giving rise to such a duty should not be the nature of the work product of the corporation, rather it should be the relationship expected by the principals to exist between themselves and the corporation and each other. Regardless of the fact that one of the principals was the former employer of the other two, the duty to deal fairly, honestly, and openly is present; and perhaps, in view of the trust and reliance the two former employees are likely to place in their former employer, a higher standard of duty is owed by the former employer.

Hartung further contends that he did not owe a fiduciary duty to the corporation or his associates at the time of the alleged breach because he had resigned on June 15, 1971, before the occurrence of the acts constituting the alleged breach. On that date he first informed Odle and Burke that he desired to withdraw from the corporation.

The facts are clearly contrary to Hartung's contention of a june 15 resignation date. Hartung's handwritten letter of resignation was dated July 1, 1971. He testified on direct examination by plaintiffs that he resigned on July 1. Plaintiff Burke testified on cross-examination that on 'June 15 Mr. Hartung came in and said that he was leaving the corporation come hell or high water by the first of July . . ..' In addition, Hartung's activities subsequent to June 15 were not entirely consistent with severance from the corporation. The evidence shows that he continued to work on corporate projects at the corporate office after June 15, as did plaintiffs Odle and Burke. The evidence also shows that Hartung did not resign as a director until July 9.

Having found that Hartung did owe a fiduciary duty at the time of the occurrence of the alleged breach, we now examine the evidence supporting the trial court's finding of said breach.

On June 26, 1971, Hartung informed the landlady of the corporate office of the discord in the corporation, and stated his desire to retain the premises for his personal use. Before July 1, while still a corporate officer/directors/shareholders, he presented to her his personal check for the July rent.

In Leader Publishing Company v. Grant Trust and Savings Company, supra, defendant was president and owner of nearly all the stock of a publishing company. The publishing company, in order to secure the payment on a bond issue, executed its mortgage to the plaintiff-trustee. The terms of the mortgage provided that the property...