Holi-Rest, Inc. v. Treloar

• Decision Date: 24 April 1974
• Docket Number: No. 56375,INC,HOLI-RES,56375
• Citation: 217 N.W.2d 517
• Parties: , Pearl Coll, Appellees and Cross-Appellants, v. Max B. TRELOAR, Appellant and Cross-Appellee.
• Court: Iowa Supreme Court

Page 517

217 N.W.2d 517

HOLI-REST, INC., Pearl Coll, Appellees and Cross-Appellants, v. Max B. TRELOAR, Appellant and Cross-Appellee.

No. 56375.

Supreme Court of Iowa.

April 24, 1974.

Arthur H. Johnson of Johnson, Burnquist, Erb. Latham & Gibb, Fort Dodge, for appellant, cross-appellee.

Claire F. Carlson, of Kersten, Opheim, Carlson & Estes, Fort Dodge, and Richardson & Handley, of Jefferson, for appellees, cross-appellants.

Heard before MOORE, C.J., and MASON, LeGRAND, REYNOLDSON and HARRIS, JJ.

REYNOLDSON, Justice.

This appeal arises out of a stockholder's derivative action initiated by shareholder Pearl Coll for the corporation Holi-Rest, Inc., and in her own right, against Max B. Treloar. Trial court rendered judgments against Treloar on behalf of the corporation for $10,500, on behalf of Mrs. Coll for $6750, and taxed the costs against him. Treloar appeals from those judgments. Holi-Rest and Mrs. Coll cross appeal from trial court's failure to award all of the relief prayed for. We affirm in part, reverse in part, modify and remand with instructions.

Treloar was reared in his father's restaurant business in Fort Dodge. He first started to manage a restaurant in 1950 and subsequently controlled three or four such businesses. Mrs. Coll started working for Treloar in 1957. She was a valuable employee, and when negotiations hereafter referred to occurred she was managing his place called 'Pancake Feast.'

In 1963 a Holiday Inn was under construction in Fort Dodge. In September 1963 Treloar became interested in acquiring the franchise for the restaurant and lounge portion of this operation. He testified he did not want to enter this venture without the management services of Mrs. Coll, and talked to her about making an investment in the facility.

Mrs. Coll testified Treloar approached her concerning an ownership share in the business, which was to be a partnership. She told him she could 'put in $10,000.' She further testified she contributed this sum to the venture in February 1964, after taking $5000 from a savings account, and borrowing $2000 from her sister and $3000 on the family car and pickup. The business began operation March 2, 1964. Articles of incorporation for 'Holi-Rest, Inc.' which Mrs. Coll signed as one of the incorporators, were filed March 2, 1964.

It is undisputed Mrs. Coll never contacted an attorney concerning any aspect of the venture. Treloar did that, and brought papers for her signature. Mrs. Coll claimed it was three months after the resturant opened when Treloar told her she could not invest $10,000 because she would then own more of the business than he did. He proposed to repay her through payroll checks of $500 per month. She received these payments, which were paid by the corporation and subject to income and social security tax deductions. She asserted she was unaware the enterprise was incorporated prior to commencing business and never read the papers presented for her execution.

Treloar testified he first told Mrs. Coll she could have any pro rata share in the corporation her investment would justify. Later, he claimed, he told her he would not 'get involved with anyone' unless he owned 75 percent. The fair import of his testimony is there later alleged conversations occurred before the business commenced operations when he first consulted an attorney about incorporation; ultimately the $10,000 Mrs. Coll advanced was a loan 'for the purposes of expenses and equipment and so forth' which he in fact gambled away; after the business opened and in March or April they discussed how she was to be repaid the money she was not permitted to invest in stock. Treloar claims at that time an agreement was made for $6000 to be repaid to Mrs. Coll, disguised as wages from the corporation.

Mrs. Coll's cancelled checks, placed in evidence, are payable to and endorsed by Max Treloar. The dates and amounts are: February 12, 1964, $3000; February 12, 1964, $2000; February 19, 1964, $5000. These were all cashed within two days of issue date. In evidence also is a check from Max Treloar's Pancake Feast to Pearl Coll, dated February 29, 1964, in the sum of $500 (conceded by Treloar to be a bonus for work at that cafe) and another from Treloar New Products Co. (owned by Treloar) to Pearl Coll dated March 24, 1964, for $3500. Upon receipt of these last two checks Mrs. Coll wrote still another check to Treloar dated March 24, 1964, in the amount of $4000. The last check, together with Treloar's check for $15,000 and eight small checks, all for $175 or less, were deposited by Treloar to the checking account of Holi-Rest, Inc. on March 25, 1964. The small checks were written as bonuses from Treloar's Inn (controlled by Treloar) to eight employees whom he wanted to acquired stock in Holi-Rest. The total deposit was $20,000 and purported to represent funds for the purchase of 800 chares in the corporation at $25 per share. Concerning the final check exchange, Mrs. Coll testified, 'I am not sure what the purpose of this transaction was except to show that this was what I invested into the business.' She received 160 shares, and claimed these shares were delivered in the fall of 1964. A stock purchase agreement Mrs. Coll signed in December of that year clearly set out her ownship of 160 shares and Treloar's ownership of 600 shares.

Mrs. Coll was the manager of the Holi-Rest facility from March 1, 1964 until May 30, 1967, when she quit work pursuant to a written resignation. The pattern of her compensation was $500 per month, and a ten percent monthly bonus on profits. At the end of each fiscal year she was credited with 20 percent of the profit, which was the pro rata share her stock ownership in the 'subchapter S' corporation would warrant.

In 1964 Holi-Rest purchased an automobile for Mrs. Coll to use. It belonged to Treloar's brother and at the time a bank was threatening repossession. Mrs. Coll testified Treloar asked her to 'turn in' her car because he owned so much more stock it would not be fair otherwise. She complied and Treloar sold her car which she valued at $750. He kept the money. This evidence was not refuted by Treloar.

Accountant's reports disclose the Holi-Rest had net income of approximately $18,100 in its first year of operation; $55,800 the second, and $40,500 in the last year it was managed by Mrs. Coll. Treloar drew no compensation for services during those years. However, his subchapter S earnings on his 600 shares of stock totaled $13,665, $38,811 and $28,180 for those periods.

Following Mrs. Coll's resignation, Treloar hired other restaurant managers. But in the fiscal years ending in 1968 through 1971 he drew an annual officer's salary of $30,000 from Holi-Rest, except in the year ending 1970, when it was reduced to $25,000. The net income dropped to $4830 for the fiscal year ending in 1968. In the fiscal year ending in 1969 there was a loss of $846; in 1970, a loss of $3900; and in the fiscal year ending in 1971, on gross sales of $544,436, Holi-Rest produced operating earnings of only $2532. As a subchapter S stockholder, Mrs. Coll received no earnings after she left the corporation.

Treloar testified, 'Since the inception of this business, I have thought of this business as being my own and have pretty well dealt with it as my own.' This was no understatement. On several occasions he telephoned Mrs. Coll from Las Vegas to withdraw and send him corporate funds. She never knew how these were handled on the corporate books.

Equipment was purchased from Treloar New Products Co. (later Treloar Brokerage), a sole proprietorship owned by Treloar. He did not take bids, nor did he consult with Mrs. Coll, the manager and a corporate director, regarding these purchases. He conceded, 'I dealt with Holi-Rest while making a profit for myself.'

Food for Holi-Rest was purchased from Treloar's Inn, which the record shows treloar owned. Mrs. Coll testified Treloar told her 'it didn't really concern us what we paid for items.' She could not find out what the food had cost Treloar, but she did not know Holi-Rest paid over two or three cents a pound more than Treloar's cost for the hamburger he sold the corporation. This evidence was not refuted by Treloar.

The corporate books were kept by bookkeepers at one of the other Treloar enterprises. The accountant's 'non-opinion' report for the latest year in evidence (fiscal year ending February 28, 1971) stated: 'Treloar's Inn, Inc. and Treloar Brokerage, businesses in which Mr. Max B. Treloar has a controlling interest, are major suppliers of food, restaurant supplies and equipment.'

Without any evidence of corporate action, Treloar decided Holi-Rest should retain a portion of the net earnings of certain stockholders, including Mrs. Coll. Although Mrs. Coll was the corporate secretary, the few pro forma corporate minutes were all signed by Treloar, who admitted some of the purported meetings did not occur. He borrowed $30,000 of corporate funds in 1966 and consistently thereafter has been indebted to Holi-Rest. Treloar 'drew ahead' on his earnings and annual salary. Consequently, the operating capital was furnished by the retained earnings of Mrs. Coll and other stockholders.

Treloar initiated the plan that Holi-Rest should repay Mrs. Coll the $6000 which he claimed was his personal indebtedness to her. He became interested in life insurance to fund a stock buy-sell agreement which he proposed to enter into with Mrs. Coll. His lawyer told him, among other things, the premiums would not be a deductible corporate expense. Nonetheless, he had Mrs. Coll procure the insurance on his life in July 1964. Treloar thereafter raised her salary in an amount sufficient to pay the premiums. He then caused to be prepared, and Mrs. Coll signed, a mandatory stock purchase agreement in which, upon his prior death, Mrs. Coll was required to pay the insurance proceeds to his estate, heirs or beneficiaries to apply on the purchase price of his...