Mobridge Community Industries, Inc. v. Toure, Ltd.

• Citation: 273 N.W.2d 128
• Decision Date: 28 December 1978
• Docket Number: No. 12384,12384
• Parties: MOBRIDGE COMMUNITY INDUSTRIES, INC., a South Dakota Corporation, Plaintiff and Respondent, v. TOURE, LTD., a foreign corporation, Toure, a partnership, Anthony Spruck, JohnZwald, Ed Krohn, and Don Raby, Defendants, and Dr. Douglas L. Cook and Doug Bisbee, Defendants and Appellants.
• Court: South Dakota Supreme Court

Page 128

273 N.W.2d 128

MOBRIDGE COMMUNITY INDUSTRIES, INC., a South Dakota Corporation, Plaintiff and Respondent, v. TOURE, LTD., a foreign corporation, Toure, a partnership Anthony Spruck, JohnZwald, Ed Krohn, and Don Raby Defendants and Dr. Douglas L. Cook and Doug Bisbee, Defendants and Appellants.

No. 12384.

Supreme Court of South Dakota.

Argued Oct. 13, 1978.

Decided Dec. 28, 1978.

Newell E. Krause, of Lakeman & Krause, Mobridge, for plaintiff and respondent.

James Robbennolt, of Duncan, Olinger, Srstka, Maher & Lovald, Pierre, for defendants and appellants.

DUNN, Justice.

This case involves a breach of contract action brought by Mobridge Community Industries, Inc. (MCI), against Toure, Ltd. (Toure), an Illinois corporation, and its board of directors. The trial court ruled that MCI was entitled to recover the sum of $250,000 plus interest, advanced insurance premium, and costs from Toure and directors Cook, Bisbee, Spruck and Zwald, jointly and severally. Directors Cook and Bisbee appeal. We affirm the judgment.

The breach of contract centers around an agreement dated November 25, 1975, between MCI and Toure. The agreement provided for the sale to Toure of personal property and equipment located in a plastics plant in Mobridge, South Dakota, together with a lease and option to buy the plant building. The agreement required the payment of $250,000 in five equal annual installments, insurance on the property, and rental payments on the building. Toure further agreed that if any personal property or equipment were sold or removed from the plant building it would be replaced with personal property or equipment of equal value to retain the overall value of the plant.

At the time the agreement was executed, MCI was duly incorporated in the State of South Dakota and Toure was duly incorporated in the State of Illinois. Toure, however, had failed to register and qualify to do business as a foreign corporation in South Dakota prior to or subsequent to the execution of the agreement.

Toure failed to make the first annual installment of $50,000 for personal property and equipment in the plant. The entire property was not insured as required by the agreement. Toure also failed to make several rental payments to MCI. Over a period of time, various items of personal property and equipment were removed from the plant building and sold without replacement of items of equal value as agreed.

The fact that the agreement was breached is apparent from the record and is not in serious dispute. The real question is the attachment of liability for the breach. The trial court found Toure and its directors Cook, Bisbee, Spruck and Zwald to be jointly and severally liable for the breach ¹ on three basic theories as follows: (1) statutory liability under SDCL 47-2-59; (2) liability for negligent and wrongful acts resulting in piercing the corporate veil; and (3) the trust fund doctrine.

On our review of the appeal, the successful party is entitled to the benefit of his version of the evidence and of all inferences fairly deducible therefrom which are favorable to the judgment of the trial court. Cunningham v. Yankton Clinic, P.A., 1978, S.D., 262 N.W.2d 508. The findings of the trial court upon conflicting evidence are presumed to be correct, and we will not set such findings aside unless they are clearly erroneous. SDCL 15-6-52(a). In applying the clearly erroneous standard of review, the question is not whether we would have made the same findings that the trial court did but whether, on the entire evidence, we are left with a definite and firm conviction that a mistake has been committed. Cunningham v. Yankton Clinic, P.A., supra.

With the proper standard of review in mind, we address the trial court finding of liability under SDCL 47-2-59 which reads as follows:

"All persons who assume to act as a corporation without authority so to do shall be jointly and severally liable for all debts and liabilities incurred or arising as a result thereof."

This statutory provision has been thoroughly analyzed in a well-reasoned opinion written by Federal District Judge Bogue in which he held that SDCL 47-2-59 does not require that the board of directors of a foreign corporation be held personally liable for the obligations of the corporation undertaken while doing business in South Dakota without a certificate of authority to do so. Cargill, Inc. v. American Pork Producers, Inc., 1976, D.C.S.D., 415 F.Supp. 876. The terms "corporation" and "foreign corporation" are defined separately in SDCL 47-2-1 and and context of Title 47 does not require the first term to be read as including the second term. ² SDCL 47-2-59 refers only to persons who purport to act as a corporation without incorporating and has the effect of negating the possibility of a de facto corporation. Cargill, Inc. v. American Pork Producers, Inc., supra.

The trial court attempts to distinguish the Cargill case on the fact that American Pork Producers, Inc., was a bona fide Iowa corporation and remained a recognized foreign corporation, even though its certificate of authority to do business in South Dakota had been revoked for a period of time, whereas Toure never did exist or function as a bona fide foreign corporation and never sought a certificate of authority to do business in South Dakota. The record contains a letter from the Illinois secretary of state to MCI's counsel stating that Toure was duly incorporated in that state on May 29, 1974, and had designated its registered agent along with his address pursuant to statutory dictates. Since SDCL 47-2-59 applies only to persons acting as a corporation without incorporating and Toure was duly incorporated in Illinois during all times pertinent to the misrepresentations made in this case, the trial court finding that appellants were personally liable under SDCL 47-2-59 is clearly erroneous.

The second theory of liability relied upon by the trial court is that of piercing the veil of the corporate entity. The general rule is that the corporation is looked upon as a separate legal entity until there is sufficient reason to the contrary. Such reason exists when retention of the corporate fiction would "produce injustices and inequitable consequences." Hayes v. Sanitary & Improvement Dist. No. 194, 1976, 196 Neb. 653, 244 N.W.2d 505, 511. See Miller & Miller Auctioneers, Inc. v. Mersch, 1977, D.C.Okl., 442 F.Supp. 570; 18 Am.Jur.2d, Corporations, §§ 14 and 15. In order to promote the ends of justice in appropriate cases, the corporate veil will be pierced and the corporation and its stockholders will be treated identically. DeWitt Truck Brokers v. W. Ray Flemming Fruit Co., 1976, 4 Cir., 540 F.2d 681. In deciding whether the corporate veil will be pierced, we recognize that "each case is Sui generis and must be decided in accordance with its own underlying facts." Brown Brothers Equipment Co. v. State, 1974, 51 Mich.App. 448, 215 N.W.2d 591, 593. See also, DeWitt Truck Brokers v. W. Ray Flemming Fruit Co., supra.

Disregarding the corporate entity or piercing the corporate veil may result from the occurrence of numerous factors. The primary factor considered by the trial court was the misrepresentation of Toure's financial condition by the directors during negotiations prior to execution of the agreement. Five basic requirements for the recovery from individual directors on the theory of fraudulent representation of financial condition are listed as follows: (1) a false representation of a material fact made by the directors; (2) the directors making the representation knew the fact was not true or made the statement recklessly with no reasonable grounds for believing it to be true; (3) the misrepresentation was made with the intent to induce MCI to act upon it; (4) MCI took action or refrained from acting in reliance upon the misrepresentation; and (5) MCI incurred damage from such reliance. Cargill, Inc. v. American Pork Producers, Inc., 1977, D.C.S.D., 426 F.Supp. 499, 503.

The trial court found that various representations were made by the directors as to the financial ability of Toure to improve and operate the Mobridge plant and the investment money that was forthcoming. The Toure financial statement exhibited by the directors to MCI during the negotiations showed a net worth of $90,000, and a second statement showed a net worth of $65,000. This discrepancy was explained as the good will factor of approximately $25,000. At the time the statements were exhibited to MCI, Toure had approximately $62.08 in its corporate account. Thus, the first requirement is satisfied. Regarding the second requirement of knowledge on the part of the directors, the trial court found that the directors were experienced in business affairs, were accompanied by a banker and, considering outstanding obligations, certainly knew that Toure was "broke." We find that this requirement is further satisfied due to the fact that...