Jones v. Standard Sales, Inc.

• Decision Date: 16 August 1949
• Docket Number: 30923.
• Citation: 34 Wn.2d 546,209 P.2d 446
• Parties: JONES v. STANDARD SALES, Inc. et al.
• Court: Washington Supreme Court

209 P.2d 446

34 Wn.2d 546

JONES v. STANDARD SALES, Inc. et al.

No. 30923.

Supreme Court of Washington

August 16, 1949

Department 1

Action by Carl Jones against Standard Sales, Inc., a Washington corporation, H. D. Severson, and H. D. Severson, H. M Neighbor, Jr., Joseph P. McFarland, George W. Young, and R J. Martin, as directors of Standard Sales, Inc., for an accounting and other relief. From an adverse judgment plaintiff appeals.

Judgment affirmed.

Appeal from Superior Court, Spokane County; Louis F. Bunge, judge.

Keith & Winston, Spokane, for appellant.

George W. Young, Spokane, for respondent.

MALLERY Justice.

In 1931 H. D. Severson, as a sole trader, commenced a wholesale business called the Standard Sales Company. The business grew to the extent that his income tax for 1946 was $42,187.25. He received $650 in salary from another source during 1946, but otherwise, this tax was attributable exclusively to taxable income derived from the Standard Sales Company. December 30, 1946, $40,390.75 of this tax remained unpaid.

He divorced his wife in 1941, and by the property settlement became obligated to pay her $200 a month in return for a release of her community property interest in the business. This obligation was carried as a liability on the Standard Sales Company books for several years prior to this litigation. Originally it was a $15,000 liability but was reduced by payments over the years until, on December 30, 1946, the balance due was $2600.

The community property settlement liability and the 1946 income tax liability are the subjects of this litigation, as will later appear.

Informed in 1946 that Severson sought to sell his business, Carl Jones discussed with him a proposal whereby Jones would contribute capital to the business and would participate with Severson in its continued operation. In connection with these negotiations Jones examined the inventory and, on at least one occasion, spent an entire evening inspecting the books.

December 24, 1946 Jones and Severson executed a preincorporation contract providing for the formation of a corporation which would purchase Standard Sales Company. The parts of the contract determinative of the issues in this case read as follows:

'Party of the first part [Severson] agrees to subscribe to a number of shares of stock of said corporation at par value thereof, which will equal the net worth of said Standard Sales Company now operated by him, to the exclusion, however, of the real property upon and in which said business is now being conducted.'

'Party of the first part shall transfer, set over, and assign unto said corporation each, all and every property, right of franchise, buying contracts, selling contracts, and records of every kind, nature, or description now used in connection with said Standard Sales Company presently being conducted by him. And the parties hereto do agree that they will, following the organization of said corporation, cause said corporation to accept all of the benefits of said assignments and transfers, together with all of the liabilities incident thereto, and party of the first part shall be thereafter relieved from individual liability in connection with any and all such contracts transferred, assigned, and accepted by said corporation to be formed.' (Italics ours.)

December 27, 1946 Standard Sales, Inc. was incorporated. Pursuant to the contract the new corporation acquired the assets and assumed the liabilities of the business, December 30, 1946.

The net worth in the business which, according to the pre-incorporation contract, determined Severson's share of the ownership of the corporation, was $123,900, a figure arrived at by: (1) appraising its entire inventory at cost, an operation in which Jones participated, (2) adding all of its other assets and (3) by subtracting all of its liabilities, including those which are the subject of controversy here, from the total. No value was given to good will.

On January 2, 1947, Severson received 1239 $100-par-value shares. Jones paid $30,000 to the corporation and received 300 $100-par-value shares. Only 8 other shares were outstanding.

The closing statement of the sole proprietorship and the opening statement of the corporation were completed February 17, 1947. They included the community property settlement liability and the income tax liability and were submitted to Jones, individually, first and then, on February 26, were presented to the board of directors of which he was a member. At this directors' meeting the report was discussed and explained by the firm's accountant, particular reference being made to the unpaid income tax liability.

March 13, 1947 Jones, as a director, signed the corporation's check for $15,000 to pay the first installment on Severson's 1946 income tax liability. During 1947 the corporation paid the entire income tax liability with interest. Also, during 1947, the corporation paid to the former Mrs. Severson $2400 of the balance of $2600 remaining due her. Jones was a director of the corporation while these liabilities were being paid.

Jones claims that shortly prior to the July 28, 1947 directors' meeting he, for the first time, discovered the nature of the challenged liabilities. At this meeting he demanded that Severson pay to him, in exchange for his 300 shares, $60,000 within ten days, plus a penalty of $100 a day for each day the demand remained unsatisfied. Ninety days after this demand, Jones was discharged as vice-president-secretary of the corporation in which capacity he had received a salary of $650 a month.

At the July 28, 1947 directors' meeting Jones did not formally challenge the payment of the liabilities in question. He first formally challenged the payment of the liabilities in question five months later on December 20, 1947, when he served upon the directors written demand that the directors take action to recover from Severson the payments made by the corporation in satisfaction of the challenged liabilities.

December 26, 1947 the shareholders elected new directors, eliminating Jones. The next day, the new directors met and unanimously directed the secretary to communicate to Jones the decision to dispense with his services and the board's decision with regard to his demand. The minutes of this action are as follows: 'It was moved by Mr. McFarland and second [sic] by Mr. Neighbor that the secretary make reply to the Notice and Demand made by Carl Jones. The motion was regularly put and unanimously carried. * * *' (Italics ours.)

Pursuant to this direction the secretary wrote Jones that the directors refused to take the demanded action.

Jones commenced this action January 13, 1948 praying for accounting by Severson for the respective sums of $40,390.75, paid by the corporation on his 1946 income tax liability, and $2400 paid by the corporation on his obligation to his former wife, and further praying that Severson...