Hill v. Hill, 811254

• Decision Date: 15 June 1984
• Docket Number: No. 811254,811254
• Citation: 318 S.E.2d 292,227 Va. 569
• Parties: Lois T. HILL v. Leon M. HILL, et al. Record
• Court: Virginia Supreme Court

Page 292

318 S.E.2d 292

227 Va. 569

Lois T. HILL v. Leon M. HILL, et al.

Record No. 811254.

Supreme Court of Virginia.

June 15, 1984.

Carl A. Eason, Norfolk (Edward W. Wolcott, Wolcott, Spencer, Rivers, Wheary, Basnight & Kelly, P.C., Norfolk, on brief), for appellant.

Robert R. MacMillan, Norfolk (Henry M. Schwan, S. Miles Dumville, Breeden, Howard & MacMillan, Norfolk, Thomas & Fisk, Richmond, on brief), for appellees.

Present: All the Justices.

RUSSELL, Justice.

This is a chancery suit for an accounting and related relief, arising out of a domestic dispute, brought by one who claimed wrongful denial of her interest in a corporation.

In 1978, Lois T. Hill sued Hill Transmissions, Incorporated (the corporation), and Leon M. Hill, individually and as president and director of the corporation. Her bill of complaint alleged that she had contributed one-half of the assets constituting the initial capital and operating funds of the corporation at its inception in 1968, that it was at all times the intention of the incorporators and original directors that the corporate stock would be issued in equal shares to her and to Leon M. Hill, that she had worked for the corporation for many years, thinking that she owned one-half of the stock; but that Leon M. Hill had wrongfully caused all the stock to be issued in his name, diverted and appropriated the corporate assets to his own use, excluded her from management and employment, and defrauded her of her interest in the corporation. The defendants filed pleas of laches and the statute of limitations. These were argued and overruled by order entered May 8, 1978. Defendants then answered, denying the allegations and again pleading laches and the statute of limitations, as well as the statute of frauds, waiver, and estoppel.

The cause was referred to Archie L. Boswell, a commissioner in chancery, who took evidence at ten hearings in 1979. In 1980, the commissioner reported to the court that Lois and Leon Hill had jointly contributed the acquisition and "start up funds" needed to organize the corporation, acquire its assets and begin its business; that the corporation was never "properly organized," due to its failure to issue stock, until an ineffectual effort was made by Leon Hill to issue all of the stock to himself in 1978; and that the parties had successfully operated the business as a de facto corporation, the effect of which was to vest equal interests in them as co-partners. The commissioner found that Lois' allegations were satisfactorily proved and recommended that certain real estate be sold and the proceeds divided between the parties, and that Lois have judgments against Leon for $59,687.96, as an adjustment for her share of compensation wrongfully withdrawn by him, for $50,015.67, to reimburse her for her share of loans improperly made by him from corporate funds, and for $322,901.98, representing her share of the value of the business as a going concern. A few days later, the court appointed a receiver to preserve the assets of the corporation pendente lite. The defendants filed exceptions to the commissioner's report.

In March 1981, after hearing counsels' argument on the exceptions and reviewing their memoranda of law, the trial court issued a letter opinion, stating:

As base or essence to the exceptions, defendants say the finding of the commissioner that Hill Transmissions, Incorporated is a de facto and not a de jure corporation is seminal error of law resulting in application of incorrect principles of law to the remaining issues decided by the commissioner. The court agrees.

On April 28, 1981, a final decree was entered, sustaining the defendants' exceptions, setting aside the commissioner's report, dissolving the receivership, dismissing the bill of complaint, and assessing all costs against Lois. We granted her an appeal.

The evidence is voluminous and equivocal, but the underlying facts are basically undisputed. Lois and Leon Hill were married in 1959. Lois had majored in accounting and business administration in college, and had worked for two active business firms as office manager, head bookkeeper, and assistant to the president. Leon had an eighth-grade education and had worked as a travelling salesman for two lock companies. He was inexperienced in business management.

In 1964, the Hills jointly borrowed money to establish a business known as Tidewater Lock and Key Supply. No partnership or corporate papers were ever prepared for this business, but its profits were used for the couple's personal living expenses and were reported on their joint individual income tax returns. When the business was sold in 1969, however, Leon represented to the purchaser that he was its sole owner, and he alone signed the contract of sale. ^* During this period, 1964-1969, Lois worked as secretary and bookkeeper for Tidewater, but listed herself as "homemaker" on tax returns, while Leon listed himself as "self-employed."

In 1968, the Hills withdrew funds from their joint checking account to travel to Pennsylvania to negotiate the acquisition of an AAMCO Transmission franchise. Returning to Virginia, they jointly borrowed funds from several sources to enter into the automotive transmission repair business. They consulted Lee Kelberg, an attorney, who prepared Articles of Incorporation for Hill Transmissions, Incorporated, the corporation which is the subject of this suit. The incorporators were Leon, Lois, and Kelberg. The State Corporation Commission granted a charter to the corporation on February 17, 1969, and it thereupon began to operate the transmission business. Ultimately, the corporation repaid the joint loans with which the Hills had financed it.

When the AAMCO franchise agreement arrived in the mail from Pennsylvania, it listed "Lee M. Hill" as sole licensee. The Hills secured a lease in their joint names for the real property on which the corporation's business was conducted. This lease was never assigned to the corporation.

Mr. Kelberg testified that no organizational meeting of the incorporators or of the directors was ever held. In fact, he said, he never met with the Hills after their initial conference. He did recall, however, that he was instructed to issue all of the corporate stock to Leon. He could not recall the source of these instructions.

Leon was president of the corporation and managed the transmission business from the inception, but Lois was designated secretary-treasurer, set up the corporate financial records, and did all of the corporation's bookkeeping. The initial stock statement, prepared by Kelberg and filed with the State Corporation Commission in 1969, showed an initial issue of twenty shares of stock at $100 per share. The following month, Lois made entries in the Cash Receipts Journal and in the General Ledger reflecting that "Lee Hill" had made an "investment" of $2,044.12 for common stock in the corporation. Mr. Kelberg could recall no funds actually paid in for the stock, but Leon testified that he had paid for the stock with funds withdrawn from the Tidewater Lock and Key account. It is undisputed that no stock certificate was issued until nine years later, in 1978, after Lois had filed for divorce.

Joseph A. Canada, Jr., became attorney for the corporation in 1975. He had no knowledge concerning the initial capitalization of the corporation, but testified that he was under the impression, based upon the corporate records and Leon's statements to him, that Leon owned all the stock. In January 1978, when Mr. Canada was away, his secretary, at Leon's request, prepared a stock certificate showing twenty shares in the name of "Lee M. Hill." Leon signed the certificate as president. The space provided for the signature of the corporate secretary was left blank. No corporate seal was affixed. The certificate was dated June 26, 1975, but Mr. Canada believed that it was prepared at a much later date. Lois testified that she was at all times under the impression that she was the owner of one-half the stock, that she never knew of the existence of the stock certificate until litigation arose between the parties, and that her 1969 record entries, concerning Leon's "investment" of $2,044.12 for stock, had been made in error. In fact, she said that $2,044.12 was the sum withdrawn from the Hills' joint checking account to finance the parties' initial exploration of the feasibility of obtaining an AAMCO franchise.

William H. Old, a certified public accountant, prepared income tax returns for the corporation every year, with assistance from Lois. He had no knowledge whether Leon had actually paid any cash for stock as reflected by the 1969 ledger entries. The first corporate tax return, prepared in 1970, was left blank as to the stock ownership. Each return, however, after the first, showed that Leon owned 100% of the stock. Lois examined the tax returns and personally signed most of them.

Old testified that in most years the Hills shared equally in the corporate profits. The years in which Leon drew more compensation than Lois were those years in which the Hills were operating both the transmission business and Tidewater Lock and Key. Lois was president of Tidewater and drew greater compensation from it, offsetting Leon's greater compensation from the transmission business, which he served as president. When the parties engaged only in the transmission business, the compensation paid from the corporation was equally divided between the Hills.

The remaining evidence was equally equivocal. Willy L. Hudson, Lois' brother-in-law, testified that Leon told him in 1977 that he intended to give Lois "his half of the business" and leave her. Steven W. Wildey, another relative of Lois, testified that over a span of eight years, Leon often referred to the transmission business as "theirs," never claiming sole ownership. In 1973, the parties consulted Jerome P. Carr, II, an attorney, to discuss estate planning...