Hilzendager v. Skwarok, s. 10309-10311
| Decision Date | 24 June 1983 |
| Docket Number | Nos. 10309-10311,s. 10309-10311 |
| Citation | 335 N.W.2d 768 |
| Court | North Dakota Supreme Court |
| Parties | John L. HILZENDAGER, Plaintiff and Appellee, v. Walter S. SKWAROK, Defendant and Appellant, Monroe Chase, Kenneth Reed, C.H. Oldenburg, Ernest R. Morgan, Robert Chase, Holiday Leasing & Investment, Inc. and Holiday Air of America, Inc., Defendants. John L. HILZENDAGER, Plaintiff and Appellee, v. Walter S. SKWAROK, Monroe Chase, Kenneth Reed, Ernest R. Morgan, Robert Chase, Holiday Leasing & Investment, Inc., and Holiday Air of America, Inc., Defendants, C.H. Oldenburg, Defendant and Appellant. John HILZENDAGER, Plaintiff and Appellee, v. Walter S. SKWAROK, C.H. Oldenburg, Ernest R. Morgan, Holiday Leasing & Investment, Inc., and Holiday Air of America, Inc., Defendants, Monroe Chase, Kenneth Reed and Robert Chase, Defendants and Appellants. Civ. |
William J. Daner, Bismarck, for plaintiff and appellee, John L. hilzendager.
Ronald Schwartz, Hebron, for defendant and appellant Walter S. Skwarok.
Benjamin C. Pulkrabek (argued), of Pulkrabek & Tuntland, Mandan, for defendants and appellants Monroe Chase, Robert Chase, and Kenneth Reed.
Alfred C. Schultz, Bismarck, for defendant and appellant C.H. Oldenburg.
This is an appeal from a judgment of the District Court of Burleigh County entered on August 9, 1982. 1 The district court awarded the plaintiff, John L. Hilzendager, the sum of $36,000 plus interest at the rate of nine percent per annum as well as costs and disbursements against the corporate defendants Holiday Air of America, Inc. [Holiday Air] and Holiday Leasing & Investment, Inc. [Holiday Leasing]. The court further found the individual defendants Walter S. Skwarok, Monroe Chase, Kenneth Reed, C.H. Oldenburg, Ernest R. Morgan, and Robert Chase jointly and severally liable to the above-named corporate defendants for the same amount. We affirm in part, reverse in part, and remand the case to the district court for the purpose of entering the judgment in a manner consistent with this opinion.
The facts of this case, as found by the trial court, may be summarized as follows:
Holiday Air was granted its corporate charter by the Secretary of State of North Dakota on September 19, 1967. One of its corporate purposes was to provide travel opportunities to qualified individuals. The incorporators and first directors of Holiday Air were Kenneth Reed, Monroe Chase, and Ernest R. Morgan. The total authorized capitalization of the corporation was to be $25,000 and the aggregate number of shares which the corporation had authority to issue was 25,000 shares of common stock.
Before Holiday Air could operate and provide travel opportunities, an "FAA 123 Certificate" for carrying passengers was required, along with the lease of at least one airplane. Holiday Air purchased the "FAA 123 Certificate" for $40,000. Federal regulations, however, required that the airplane and the certificate could not be owned by the same organization. Thus, Holiday Leasing was organized on April 26, 1971. The pre-incorporation agreement for Holiday Leasing was signed by C.H. Oldenburg, Ernest R. Morgan, Monroe Chase, Robert Chase, Kenneth Reed, and Walter Skwarok. Such agreement provided for a subscription of $28,000 by each of the signers and in return for each signer paying $28,000, he would receive 28,000 shares of Holiday Leasing stock. Holiday Leasing was chartered and capitalized, however, at $200,000 with 200,000 shares of stock. Although the stock transfer ledger of Holiday Leasing lists each individual as having paid in $28,000, the money was never actually paid into the corporation.
The manner in which Holiday Leasing was to conduct business was for it to own and operate the airplane and to lease the airplane to Holiday Air. Holiday Leasing was to own 80 percent of Holiday Air. The corporate record book for Holiday Air, however, has since disappeared.
On April 19, 1971, shortly before its corporate charter was issued, Holiday Leasing purchased an airplane, a Vickers Armstrong Viscount 745D, from Capitol Aviation Equipment Corporation for $95,000. Before the airplane could be used for passenger service, refurbishment, engine repair, and pressurization of the aircraft was required. These costs exceeded $190,000 and were paid for mainly by Skwarok and Oldenburg. In order to obtain additional funding, Holiday Leasing hired and paid commissions and fees to James Collins and Carl Weiser to find individuals who were willing to loan money to the corporation. One of the individuals found who was willing to loan money to the corporation was John L. Hilzendager. Hilzendager agreed to loan Holiday Leasing the sum of $36,000 in return for a three-year corporate debenture bond at an interest rate of 9 percent per annum and with a due date of May 1, 1975. The corporate debenture, dated April 13, 1972, made Hilzendager a preferred creditor over any of Holiday Leasing's general creditors and stockholders and subordinate only to lending institutions as creditors.
Following the issuance of Hilzendager's corporate debenture, Holiday Air and Holiday Leasing continued to meet with financial difficulties. Debts kept accumulating despite an almost constant influx of capital from Skwarok and Oldenburg. Skwarok testified that his investment eventually exceeded $300,000. Oldenburg invested approximately $40,000 and Reed invested $2,500 personally.
During this period of time the corporate minute books of both corporations were not kept current. Money was routinely transferred between or deposited in either Holiday Air's or Holiday Leasing's accounts, as is evidenced by Hilzendager's $36,000 loan being deposited in Holiday Air's account although the loan was actually made to Holiday Leasing. Many of the corporate records have since disappeared, together with defendant Ernest R. Morgan. As the trial court noted, the corporate problem at the time was a complex one:
"... the corporation could produce no income without members, there could be no members without a 123 certificate utilization, and there could be no certificate utilization until the plane was operational."
In 1973, the corporate businesses of Holiday Air and Holiday Leasing continued to flounder. In an apparent attempt to recoup some of his losses by controlling the spending so that none of the money "would be flimflammed away", Skwarok entered into several agreements with the two corporations with the knowledge and participation of defendants Reed, Robert Chase, Monroe Chase, and Oldenburg, who were the other officers and directors of Holiday Air and Holiday Leasing.
Skwarok was permitted signature control over both checkbooks. It was also agreed at a board meeting in Hebron at which Reed, Robert Chase, Monroe Chase, Oldenburg, and Skwarok were present, that title to the airplane would be transferred from Holiday Leasing to Skwarok. At the time, the airplane, despite its many outstanding costs, was the sole significant asset of Holiday Leasing. According to the agreement, the airplane would be transferred to Skwarok on May 27, 1973, conditioned on the following: (1) that Skwarok would refinance the airplane using his personal guarantee and credit with a bank in Michigan; (2) that the airplane would again be leased to Holiday Air in order to keep the "FAA 123 Certificate" valid; and (3) that Holiday Leasing would have a "buy-back" agreement with Skwarok regarding the airplane. 2
The trial court found that at this time the sole significant assets of Holiday Air were the "FAA 123 Certificate" and the lease it had on the airplane. Holiday Air, however, never made the monthly lease payments on the airplane. In addition, although all of the directors agreed to the eventual return of the airplane to Holiday Leasing, the "buy-back" agreement was apparently never signed by either Holiday Leasing or Skwarok. Testimony indicated that Skwarok later refused to sign the agreement and the document itself was never introduced in evidence.
In 1974, the financial conditions of both Holiday Air and Holiday Leasing worsened, so Skwarok began seeking a buyer for the airplane. It is evident that the fact that Skwarok was seeking a buyer for the airplane was known to at least Monroe Chase, who served as president of Holiday Leasing and as director of Holiday Air. In a letter dated May 6, 1974, Monroe Chase in his capacity as an owner and operator of Commander Aviation offered to consign the aircraft for sale at $425,000. Kenneth Reed was also a stockholder and operator of Commander Aviation.
On May 1, 1975, Hilzendager's $36,000 corporate debenture with Holiday Leasing became due, almost two years after the transfer of the airplane to Skwarok. However, Holiday Leasing had no funds with which to repay Hilzendager.
Skwarok eventually sold the airplane to John Wesley College in Michigan on November 14, 1975. The bank in Michigan financed the transaction and retained a chattel mortgage in the amount of $333,743.21. The purchase price of the airplane was $240,000. Of this selling price, $174,000 was paid to Skwarok when the airplane was delivered to the college and the balance of $66,000 was to be paid at a later date. Skwarok used the $174,000 to pay indebtedness and expenses incurred on the airplane. However, the $66,000 owed to Skwarok by the college was never paid because the college went bankrupt.
Thus, at this point, the sole asset of Holiday Leasing, i.e., the airplane, no longer existed as such; and the sole assets of Holiday Air, i.e., the "FAA 123 Certificate" and the lease on the airplane, were likewise nonexistent.
No action was ever undertaken by the defendants as directors and officers of the corporations to enforce Holiday Leasing's agreement or by Holiday Air and Holiday Leasing to prevent Skwarok's sale of the airplane to the college. Monroe Chase testified that, had the airplane been retained by the defendants, its present value would be approximately $3.5 million.
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