Lowry v. Lowry

• Decision Date: 20 April 1992
• Docket Number: No. 66A03-9109-CV-279,66A03-9109-CV-279
• Citation: 590 N.E.2d 612
• Parties: Irma LOWRY, Individually and as a Shareholder and Director of Lowry Farms, Inc., a Corporation; and the Farmers & Merchants State Bank, as Successor Personal Representative of the Estate of Emmett D. Lowry, Appellants-Defendants, v. Michael LOWRY, Linda DeMoss, Timothy Lowry, as Shareholders of Lowry Farms, Inc., a Corporation; and the First National Bank of Monterey, Receiver of Lowry Farms, Inc., Appellees-Plaintiffs.
• Court: Indiana Appellate Court

Page 612

590 N.E.2d 612

Irma LOWRY, Individually and as a Shareholder and Director of Lowry Farms, Inc., a Corporation; and the Farmers &amp Merchants State Bank, as Successor Personal Representative of the Estate of Emmett D. Lowry, Appellants-Defendants, v. Michael LOWRY, Linda DeMoss, Timothy Lowry, as Shareholders of Lowry Farms, Inc., a Corporation; and the First National Bank of Monterey Receiver of Lowry Farms, Inc. Appellees-Plaintiffs.

No. 66A03-9109-CV-279.

Court of Appeals of Indiana Third District.

April 20, 1992.

Rehearing Denied June 25, 1992.

Frank E. Tolbert, John S. Damm, Miller, Tolbert, Muehlhausen, Muehlhausen & Groff, P.C., Logansport, for appellants-defendants.

Lesley A. Meade, Lafayette, for appellees-plaintiffs.

HOFFMAN, Judge.

Appellants-defendants, Irma Lowry and The Farmers & Merchants State Bank as the successor personal representative of the Estate of Emmett Lowry, appeal an adverse judgment in favor of appellees-plaintiffs, Michael Lowry, Linda DeMoss, and Timothy Lowry. Appellees brought suit individually and derivatively to recover assets of the corporation, Lowry Farms, Inc. In their claim, appellees alleged, inter alia, that Emmett and Irma intentionally diverted corporate assets to their personal use, received excessive compensation, wasted corporate assets, and mismanaged the corporation. Appellees also sued to recover consequential damages to the corporation related to the wrongful acts of appellants. At trial, the action pending against the estate of Emmett Lowry was consolidated with the action pending against Irma.

The evidence relevant to the appeal ¹ discloses that Lowry Farms, Inc. is a close corporation which, until the time of its incorporation in 1964, was a family-owned farm business operated as a partnership. The corporation owned more than 900 acres of land.

Emmett's father, Merl Lowry, commenced the farming operation in approximately 1942. Merl died in 1967. In 1975, Merl's widow, Hazel Lowry, divided the shares of the corporation among Emmett and Emmett's children: Michael Lowry, Linda DeMoss, and Timothy Lowry, the appellees-plaintiffs herein. Michael, Linda and Timothy each received nine shares. Emmett received the balance of the 114 outstanding shares. Emmett gave 2.5 shares to his wife Irma, stepmother to Michael, Linda, and Timothy.

Michael was an employee of the farm from 1967 through 1975. After Michael became a shareholder in 1975, he continued to work full-time in the farming operation, until his dismissal by Irma in 1990. Timothy worked for the farm until 1980. Linda did not work in the farming operation. However, from the time they became shareholders in 1975, Michael and Linda were also directors of the corporation. Tim served as a director from 1975 until 1980. Emmett was president of the corporation, Michael served as vice president, Irma was elected secretary-treasurer, and Linda was assistant secretary-treasurer. Between 1975 and 1980, annual meetings were held. After 1980, no annual meetings were held.

Commencing in 1979, Michael had assumed the majority of the responsibility for operation of the farm; however, Emmett and Irma continued to control the finances. Until Emmett's death in 1989, Michael had never been allowed access to the corporation checkbook. Because the corporation had been organized as an S corporation, Michael, Linda and Tim were given only individual shareholder information each year for tax purposes. Emmett and Irma did not provide them with any corporate tax information. Further, evidence adduced at trial revealed that Emmett and Irma falsified information included on their personal tax returns, and that some corporate tax information regarding amounts which should have been included as dividends to Emmett and Irma in 1983 were never reflected in tax documents.

In 1981, Emmett and Irma executed a mortgage on the corporation's realty to secure a $75,000.00 promissory note. The proceeds of the loan were used to assist Irma's son in the purchase of a sawmill. Emmett and Irma did not inform Michael, Linda and Tim of the mortgage.

In 1983, Emmett and Irma mortgaged corporate property to secure personal indebtedness. The proceeds of the $126,000.00 mortgage were used to retire a $104,500.00 debt owed by Emmett's trucking company to Peoples State Bank. The balance of the proceeds were paid to Emmett. Again the mortgage was executed without the knowledge of the other shareholders, Michael, Linda and Tim.

Michael became aware of the 1983 mortgage during the summer of 1986 when a neighbor inquired about an 80-acre tract of farm property for sale. Michael then read in a newspaper that Peoples State Bank was foreclosing on the land. Desiring an explanation of the foreclosure, Michael discussed the matter with Roger Cummings of Peoples State Bank. Michael learned of the 1983 mortgage and that the corporation was somehow involved in a sawmill project. Also in 1986, Michael visited the county courthouse and discovered the 1981 mortgage on the property.

Upon discovery of the mortgages, Michael asked Emmett for information regarding those mortgages. Emmett refused to respond to the inquiries. Michael, Linda and Tim sought legal advice.

In December 1986, Emmett and Irma filed a Voluntary Petition for Bankruptcy on behalf of the corporation. Appellees learned of the filing after it was accomplished. Subsequently, the trustee dismissed the petition. Although they had no knowledge of the details, appellees became aware that the corporation had suffered substantial losses.

After they became aware of the corporation's financial difficulties, appellees began a concerted effort to gain pertinent corporate information. In a 1987 meeting held at the office of counsel for the corporation, appellees' attorney asked for information regarding the proceeds from the loans which resulted in the mortgages. In response to the request, Irma and Emmett left the meeting. By the time of the filing of the original complaint in December 1989, appellees had still not been apprised of the purpose of the loans.

During discovery, appellees learned that in 1982, Emmett and Irma had amended the Articles of Incorporation for Lowry Farms and had filed the amendment with the Secretary of State. The amendments altered the corporation to a C corporation. The stock was divided into two classes. Appellees' shares became non-voting common stock, and the shares held by Emmett and Irma became voting preferred stock. The Articles of Amendment state that the action was taken July 30, 1982 by unanimous written consent of the directors. Also, the Articles recite that all 114 outstanding shares voted in favor of the amendment. However, appellees were unaware of the amendment. They had not voted their shares and did not give consent to the amendment.

When Emmett died in 1989, Irma gave Michael the corporate checkbook and the corporate minute book. Through the information gathered from those sources, coupled with the information gained through discovery after litigation was filed, appellees assessed the damage to the corporation.

Although the salaries for Emmett and Irma were set as reflected in the corporate minute book, each had received amounts greatly in excess of the set amounts. At the trial held between September 26, 1990 and October 1, 1990, an agricultural and financial manager testified that 10% of the gross income of a farm would be a reasonable management fee. Between 1979 and 1985, Emmett and Irma paid themselves $130,320.00 in excess salaries.

The testimony of a certified public accountant was presented to establish the damage to the corporation. He testified that the $130,320.00, compounded yearly at a conservative interest rate of 10%, represents $277,045.00 which could have been used to reduce the debt of the corporation. Further, the excessive compensation and the conversion of corporate assets to personal use, including the outstanding loan balances, resulted in a loss of $533,753.64.

After appellees filed the present lawsuit and just prior to trial, Irma unilaterally embarked upon a course to further raid corporate assets, to foreclose appellees' participation in the corporation, and to indemnify herself from liability for any of her actions. A special shareholder meeting was held in March 1990 at the offices of Miller, Tolbert, Muehlhausen & Muehlhausen. The minutes of the meeting stated that Irma was the only shareholder present because she held all shares entitled to vote. Irma purported to elect herself sole director, president and secretary of the corporation. Irma called a director's meeting to follow.

Acting upon the authority that she had voted herself, Irma as the sole director of the corporation was the only director present at the director's meeting. The minutes recite that, acting upon advice of counsel and an accountant, the Board resolved that, due to the illiquidity of Emmett's estate and in order to retire debts for taxes and other obligations of the estate, the corporation would adopt a "Plan of Complete Liquidation." Miller, Tolbert, Muehlhausen & Muehlhausen, P.C. would be employed exclusively as corporate counsel. Blue & Company, certified public accountants, an employer of Irma's sister, would be employed exclusively as the accounting firm for the corporation. Further, the minutes state that due to "the problems encountered with Michael D. Lowry, who, as an employee of the corporation, was residing on the premises of the corporation, with respect to his conduct or the lack of knowledge thereof occurring since May 1989, in all matters including the assertion of unauthorized control over the checkbook, the representation of ownership in corporate assets, and it was thought that the employement [sic] of Michael D. Lowry should be terminated instanter and counsel for the corporation was instructed that immediate action should be taken with respect to his tenancy as the farm resident and his assertion of unauthorized...