Minich v. Gem State Developers, Inc.

• Decision Date: 16 February 1979
• Docket Number: No. 12468,12468
• Citation: 591 P.2d 1078,99 Idaho 911
• Parties: Barry C. MINICH and Donna J. Minich, husband and wife, Plaintiffs-Respondents, v. GEM STATE DEVELOPERS, INC., Frank E. Marcum and Bertha G. Marcum, Defendants-Appellants, and Thomas G. Smith and Thomas G. Smith, Inc., Defendants.
• Court: Idaho Supreme Court

Page 1078

591 P.2d 1078

99 Idaho 911

Barry C. MINICH and Donna J. Minich, husband and wife, Plaintiffs-Respondents, v. GEM STATE DEVELOPERS, INC., Frank E. Marcum and Bertha G. Marcum, Defendants-Appellants, and Thomas G. Smith and Thomas G. Smith, Inc., Defendants.

No. 12468.

Supreme Court of Idaho.

Feb. 16, 1979.

Dale G. Higer, of Eberle, Berlin, Kading, Turnbow & Gillespie, Boise, for defendants-appellants.

Harold Q. Noack, Jr., Boise, for plaintiffs-respondents.

McFADDEN, Justice.

This action was brought by plaintiffs-respondents Barry and Donna Minich, husband and wife, for specific performance of a contract to sell a suburban lot and custom-built house. Defendants-appellants are two corporations, Gem State Developers, Inc., and Thomas G. Smith, Inc., and three individuals, Frank Marcum, Bertha Marcum, and Thomas G. Smith. Gem State Developers, Inc. is an Idaho corporation engaged in residential real estate development. Thomas G. Smith, Inc., is an Idaho corporation engaged in constructing houses on property owned by Gem State Developers, Inc., with financing obtained by Gem State Developers, Inc. Frank Marcum and Bertha Marcum are officers, directors, and the controlling shareholders of both corporations. Thomas G. Smith, president and co-owner of Thomas G. Smith, Inc., at the time this dispute arose, has since left for California. He has never appeared in this action and is not involved in this appeal.

Two written contracts are involved here. The first was entered into in October 1974, and named as parties "Thomas G. Smith and Valana Sue Smith and Frank E. Marcum and Bertha Marcum" as the "Contractors" and respondents as the buyers. The contract was executed on behalf of the "Contractors" by Thomas G. Smith, Inc., without specifying which individual had signed it or in what capacity it had been signed. This contract provided for the construction of a custom-built home and the sale of the home and lot to respondents at the price of cost plus ten percent. The contract also provided for the sale to respondents of a "temporary" home, owned by Gem State Developers, Inc., for occupancy during the period of construction of the new house. When the new house was completed, respondents were to reconvey the "temporary" house back to the "Contractors." The second contract was entered into in April, 1975, when the new house was nearing completion. This contract was executed by respondents as buyers and by Thomas G. Smith, Inc., as seller. It provided for the sale of the house and lot at the price of $55,000, and set the closing date for the sale as May 1, 1975.

On May 1, 1975, the new home was not yet complete. But because the "temporary" house had already been sold to new owners who were to take possession May 1, 1975, respondents moved into the new house. In the attempt to finalize the transaction, respondents presented the April 1975 contract to Marcum. He repudiated this contract, contending that Thomas G. Smith had no authority to make such an agreement. Marcum instead insisted upon the earlier contract price of cost plus ten percent, which he claimed amounted to.$70,223.45. He then ordered all work on the house stopped and refused to close the sale. Respondent's lender thereafter cancelled its loan, and respondents brought this action to specifically enforce the April 1975 contract at its price of $55,000.

After a trial to the court sitting without a jury, the court found that respondents and Thomas G. Smith, Inc., had entered into both contracts, with the April 1975 contract setting the final selling price. The court found that Thomas G. Smith had authority to enter into the contracts on behalf of the corporation. Specific performance was refused, however, because of the difficulties of judicial supervision over the completion of the custom built home. Instead the court rescinded the entire transaction and restored the parties to their precontract positions. Respondents were awarded restitutionary damages in the amount of $9,012.81 less the amount of $3453.42 for the reasonable rental value for the period in which they occupied the new house. The court also awarded respondents attorney fees in the amount of $4,250.00. Judgment was entered against Thomas G. Smith and Thomas G. Smith, Inc.; against Frank Marcum and Bertha Marcum individually for failing to properly incorporate Thomas G. Smith, Inc.; and against Gem State Developers, Inc., as the alter ego of Frank and Bertha Marcum.

On appeal, appellants challenge the personal liability of Frank and Bertha Marcum, the corporate liability of Gem State Developers, Inc., and the award of attorney fees to respondents.

The first issue on appeal concerns the district court's conclusion that Frank and Bertha Marcum are personally liable for the obligations of Thomas G. Smith, Inc., under I.C. § 30-110, for failing to adhere to the statutory mandates regarding incorporation. I.C. § 30-110 provides that

Conditions precedent to beginning business Penalty for violation. 1. A corporation formed under this act shall not incur any debts or begin the transaction of any business, except such as is incidental to its organization, or to the obtaining of subscriptions to or the payment for its shares until a triplicate original of the articles of incorporation has been filed for record in the office of the county recorder as provided in section 30-108.

2. If a corporation has transacted any business in violation of this section, the officers who participated therein and the directors, except those who dissented therefrom and caused their dissent to be filed at the time in the registered office of the corporation, or who, being absent, so filed their dissent upon learning of the action, shall be severally liable for the debts or liabilities of the corporation arising therefrom.

The place of filing is controlled by I.C. § 30-108, which provides that a triplicate original of the articles of incorporation "shall then be filed for record in the office of the county recorder of the county in which the registered office of the corporation is situated . . . ." Appellants did not file a triplicate original of the articles of incorporation with the county recorder of Ada County, the location of the registered office of Thomas G. Smith, Inc. Nevertheless they assert three arguments to the effect that I.C. § 30-110 cannot form the basis of their individual liability.

The first argument is that I.C. § 30-110 is unconstitutional as applied to Frank and Bertha Marcum. It is contended that Art. 11, § 17 of the Idaho Constitution ¹ forbids imposition of the statutory liability upon appellants because they are shareholders of Thomas G. Smith, Inc., and therefore immune from any liability in excess of the amount of the unpaid portions of the par value of their stock subscriptions.

In ruling on this constitutional challenge to I.C. § 30-110, this court is guided by certain basic principles. In Caesar v. Williams, 84 Idaho 254, 263, 371 P.2d 241, 245 (1962), it was said:

In considering the question of the constitutionality of these acts, certain fundamental rules at all times must be kept in mind. The burden of showing the unconstitutionality of a statute is upon the party asserting it. Eberle v. Nielson, 78 Idaho 572, 306 P.2d 1083; Rich v. Williams, 81 Idaho 311, 341 P.2d 432. This court is without power to invalidate or nullify a constitutional act of the legislature; if the legislation does not clearly violate the Constitution, this court must and will uphold it. Padgett v. Williams, 82 Idaho 114, 350 P.2d 353. Every reasonable presumption must be indulged in favor of the constitutionality of a statute. Robinson v. Enking, 58 Idaho 24, 69 P.2d 603; Idaho Gold Dredging Co. v. Balderston, 58 Idaho 692, 78 P.2d 105.

The court in State ex rel. Brassey v. Hanson, 81 Idaho 403, 409, 342 P.2d 706, 709, quoting from other opinions, stated:

" 'It is fundamental that the judicial power to declare legislative action invalid upon constitutional grounds is to be exercised only in clear cases. . . .' (citation) Petition of Mountain States Telephone & Tel. Co., 76 Idaho 474, 480, 284 P.2d 681, 683.

" 'In the case of statutes passed by the legislative assembly and assailed as unconstitutional the question is not whether it is possible to condemn, but whether it is possible to uphold; and we stand committed to the rule that a statute will not be declared unconstitutional unless its nullity is placed, in our judgment, beyond reasonable doubt . . . . (citations)' Keenan v. Price, 68 Idaho 423, 433, 195 P.2d 662, 667."

In applying these principles to the case at bar, the court first notes that Idaho Const. Art. 11, § 17 relates only to stockholders, while the statute is narrowly drawn to impose liability only upon the directors and those officers who participated in the unlawful business. On its face, then, the statute could in no way be said to violate the prohibitions of Art. 11, § 17. But in those situations where, as here, the protagonists are at the same time officers, directors, and shareholders, the question arises as to the applied validity of the statute. Even in these situations, however, we conclude that I.C. § 30-110 is not repugnant to the Idaho Constitution. The statutory liability is predicated upon misconduct by a director or officer and is completely unrelated and irrelevant to ownership of stock in the corporation. The intent and purpose of the statute is to impose liability upon the officers and directors in their capacity as officers and directors for breach of their corporate duties regardless of whether or not they also hold stock. Accordingly, this court rejects appellants' constitutional challenge to the statute, and we hold that whenever shareholders elect to actively participate in the corporate affairs as officers or directors, they will be responsible for their actions as officers or directors.

Appellants' second argument in the assignment of error directed to ...