McLean Bank v. Nelson, 830888

• Decision Date: 26 November 1986
• Docket Number: No. 830888,830888
• Citation: 350 S.E.2d 651,232 Va. 420
• Parties: , 55 USLW 2355, 2 UCC Rep.Serv.2d 942 The McLEAN BANK v. Donald E. NELSON, Administrator c.t.a. d.b.n. of the Estate of Coleman C. Gore, et al. Record
• Court: Virginia Supreme Court

Page 651

350 S.E.2d 651

232 Va. 420, 55 USLW 2355, 2 UCC Rep.Serv.2d 942

The McLEAN BANK v. Donald E. NELSON, Administrator c.t.a. d.b.n. of the Estate of Coleman C. Gore, et al.

Record No. 830888.

Supreme Court of Virginia.

Nov. 26, 1986.

Stephen C. Price (Perkins, Price & Zimmerman, Leesburg, on briefs), for appellant.

James H. Chamblin, Leesburg, Alexander H. Slaughter, Richmond, (Robert E. Stroud, Charlottesville, Gregory B. Nevers, Richmond, Powell L. Duggan, Warrenton, Nalls, Chamblin & Chapman, Leesburg, McGuire, Woods & Battle, Richmond, Martin & Walker, P.C., Warrenton, on briefs), for appellees, Walter A. Radius and Howard P. Walker.

No brief or argument for appellee, Donald E. Nelson, Adm'r, etc.

Present: All the Justices.

THOMAS, Justice.

This appeal involves a suit on what purported to be a corporate note. The corporation, Isle of Eden, Incorporated (Isle of Eden), had been automatically dissolved, pursuant to statute, before the note was executed. The business entity was not reinstated as a corporation until after the note was executed. McLean Bank (Bank), the holder of the note, attempted to impose personal liability upon the stockholders, officers, and directors of Isle of Eden.

The trial court disposed of the case on demurrer, concluding that the Bank failed "to allege facts that would impose personal liability upon the corporate officers even though they might have executed a corporate obligation between dissolution for failure to file annual reports and reinstatement." We disagree with the trial court. Therefore, we will reverse its judgment.

Isle of Eden lost its corporate status on June 1, 1973, for failure to file its annual reports. The note in question was executed on June 20, 1974, during the period of dissolution. The note was in the amount of $63,359.33 payable to the order of L. Blaine Liljenquist. The note provided that it was "due and payable two (2) years from the date hereof." It contained the following recital: "IN WITNESS WHEREOF, ISLE OF EDEN, INCORPORATED, has caused this Note to be signed by its President and its corporate seal to be hereto affixed, duly attested by its Secretary." It was signed by William D. McKinney as "president" of "Isle of Eden, Incorporated." In the place marked "ATTEST," Howard P. Walker signed the note as "Secretary." Below the signatures of McKinney and Walker, the following language appeared: "This Note is hereby accepted this 20 day of June, 1974, pursuant to Paragraph 4 of the Contract of Settlement dated the 10th day of June, 1974, as to terms and amount." L. Blaine Liljenquist signed this acceptance. ^*

In March or April 1975, Liljenquist indorsed and transferred the note to McLean Bank. At the very bottom of the note in the handwriting of Liljenquist is the language "Pay to the order of The McLean Bank," followed by Liljenquist's signature. Prior to the date the note was transferred to the Bank, Isle of Eden had been reinstated as a corporation.

On December 2, 1980, the Bank filed suit on the note. The defendants were Howard P. Walker, Walter A. Radius, and the administrator of the estate of Coleman C. Gore. The Bank contended that Gore, Walker, and Radius "at all times pertinent to this suit, purported to be stockholders and either officers or directors, or both, of Isle of Eden, Incorporated." The Bank alleged further, among other theories of liability, that "[n]otwithstanding the dissolution of Isle of Eden, Incorporated, on June 1, 1973, Coleman C. Gore, Walter A. Radius, and Howard P. Walker, and also William D. McKinney continued to transact business as individuals under the trade style of Isle of Eden, Incorporated." The Bank further alleged that McKinney signed the note as agent for the other individual defendants. The Bank also alleged the personal liability of the defendants: "Plaintiff is advised that by virtue of the dissolution of Isle of Eden, Incorporated at the time the subject note was executed that the defendants are jointly and severally liable for the said indebtedness incurred in the name of Isle of Eden, Incorporated."

All the defendants demurred to the motion for judgment. The trial court sustained the demurrers. The trial court was of opinion that with regard to Gore and Radius there was "no allegation that they continued to operate the corporate business." Further, the court was of the view that each demurrer "should be sustained upon the ground that there are no factual allegations in the Motion for Judgment that would support the legal conclusion of the agency pleaded." The trial court gave the Bank leave to file an amended pleading.

The Bank filed its amended motion for judgment on February 16, 1982. Again, the defendants filed demurrers. Again, the demurrers were sustained. Again, the trial court stated that the facts alleged were insufficient to impose personal liability upon the defendants. The trial court concluded further that the Bank was not a holder in due course because it appears from the face of the note that "a separate document must be referred to in order to ascertain 'terms and amount.' " Because it held that the Bank was not a holder in due course, the trial court ruled that the Bank was subject to the defense that Liljenquist dealt only with the corporation, did not rely upon any officer or director individually, and could not, therefore, assert individual liability. The trial court also rejected a partnership theory that was advanced by the Bank to impose personal liability upon the individual defendants.

On appeal, the Bank challenges each of the rulings made by the trial court alleging, in essence, that it pled sufficient facts upon which personal liability could be imposed upon the defendants. Walker makes two assignments of cross-error. He contends the trial court should have ruled that he could not be personally liable on a note which he signed only in a representative capacity to attest the signature of the President of Isle of Eden. Walker submits further that the trial court should have ruled that the suit was barred by the applicable statute of limitations.

The threshold issue is whether, under Virginia corporate law, persons who act on behalf of a dissolved corporation can be held personally liable for their acts. To resolve this issue, we must consider several statutory provisions as they existed at the time of the events here under review. In 1974, Code § 13.1-52 set forth the effect of the issuance of a certificate of incorporation; it provided as follows:

Upon the issuance of the certificate of incorporation, the corporate existence shall begin. The certificate of incorporation shall be conclusive evidence that all conditions precedent required to be performed by the incorporators have been complied with and that the corporation has been incorporated under this Act.

(Emphasis added.) In 1974, automatic dissolution was controlled by Code § 13.1-91; it read in pertinent part as follows:

If any domestic corporation shall fail on two successive annual dates to file the annual report required by this Act ..., such corporation shall be thereupon automatically dissolved as of the first day of June and its properties and affairs shall pass automatically to its directors as trustees in dissolution.

Also pertinent is former Code § 13.1-92 which governed reinstatement of dissolved corporations; that provision read in relevant part as follows:

Upon the entry by the Commission of an order of reinstatement, the corporate existence shall be deemed to have continued from the date of dissolution except that reinstatement shall have no effect on any question of personal liability of the directors, officers, or agents in respect of the period between dissolution and reinstatement.

(Emphasis added.) Finally, it is significant for purposes of our analysis that former Code § 13.1-296 made it a misdemeanor for individuals to conduct business as a corporation without being so authorized.

The appellees argue that they cannot be personally liable under the foregoing statutory scheme because nowhere do the relevant statutory provisions expressly impose liability for conducting the affairs of a dissolved corporation. To illustrate their point, appellees refer to former Code § 13.1-119 which concerned foreign corporations and which provided in part as follows:

If a foreign corporation transacts business in this State without a certificate of authority, its directors, officers, and agents doing such business shall be jointly and severally liable for any contracts made or to be performed in this State and any torts committed in this State between the time when it began to transact business in this State and the date when it obtains a certificate of authority.

(Emphasis added.) The appellees argue, based on the foregoing provision, that had the General Assembly intended to impose personal liability upon individuals who act on behalf of a dissolved corporation it would have said so.

Moreover, the appellees contend that the "continued existence" language of former Code § 13.1-92 shields them from liability. They submit that since corporate status had been reinstated at the time Liljenquist transferred the note to the Bank, then the note was a corporate obligation and they have no individual responsibility for it.

Finally, the appellees submit that in states where personal liability has been imposed for acts done while the corporation was out of existence, invariably there was a statute imposing such liability. They reiterate that no parallel provision exists in Virginia with regard to domestic corporations. They argue that the criminal penalties provided in former Code § 13.1-296 either provide no basis for a private right of action or require proof of intent, an element of proof not alleged by the Bank.

The appellees argue that it would be a harsh rule if personal liability were automatically imposed on the officers, directors, and agents of a dissolved corporation without...