Morgan v. Burks

• Decision Date: 22 May 1980
• Docket Number: No. 46376,46376
• Citation: 93 Wn.2d 580,611 P.2d 751
• Parties: Glenn M. MORGAN, a single person; Glenn L. Morgan and Jeanine Morgan, husband and wife, Respondents, v. Horace E. BURKS and Genevieve Burks, husband and wife; and their marital community; Bessie Harlow Burks, a single person; Henry Harlow and Jane Doe Harlow; and Harlow-Burks, Inc., a Washington Corporation, Petitioners.
• Court: Washington Supreme Court

Page 580

93 Wn.2d 580

611 P.2d 751

Glenn M. MORGAN, a single person; Glenn L. Morgan and Jeanine Morgan, husband and wife, Respondents, v. Horace E. BURKS and Genevieve Burks, husband and wife; and their marital community; Bessie Harlow Burks, a single person; Henry Harlow and Jane Doe Harlow; and Harlow-Burks Inc., a Washington Corporation, Petitioners.

No. 46376.

Supreme Court of Washington, En Banc.

May 22, 1980.

As Changed July 21, 1980.

Merrick, Hofstedt & Lindsey, Thomas Harris, Seattle, for petitioners.

Reed, McClure, Moceri & Thonn, Ron Perey, William Hickman, Seattle, for respondents.

HOROWITZ, Justice.

This case arose as a tort action for injuries suffered by plaintiff Glenn Morgan when he was shot by defendant corporation Harlow-Burkes' president. The plaintiff sought to recover his judgment against the corporation from two of the corporation's stockholders by disregard of the corporate entity. For the reasons stated below, we hold the defendant stockholders are not individually liable for the tort judgment against the corporation.

I.

Harlow-Burks, Inc. (Harlow-Burks), is a closely-held corporation formed in 1969. Horace Burks is its president and owns one-third of the corporation's shares. The other shares are owned by Burks' mother, Bessie Burk, who is secretary-treasurer of the firm, and by Burks' uncle, Henry Harlow. They each also hold one-third of the shares.

Harlow-Burks' main asset is a large tract of land in Kitsap County valued in 1971 to have a potential worth with improvements of $630,000. Horace Burks, Bessie Burks, and Henry Harlow were also partners in the Harlow-Burks Company, which originally owned this Kitsap County property. By the time the tort giving rise to this claim occurred, however, the Company had deeded the property to Harlow-Burks. Development of the land into a mobile home park was intended by the corporation.

On November 28, 1971, Horace Burks shot Glenn Morgan, paralyzing him from the neck down. Morgan was on the Kitsap County property at the time of the shooting. When Morgan sued for damages resulting from the shooting, the trial court jury found that Burks was acting within his employment for Harlow-Burks in the shooting and gave judgment to Morgan against Burks individually and against Harlow-Burks as his employer. At the same time, the trial court jury also specifically found that Bessie Burks and Henry Harlow were not engaged in a joint venture with Burks at the time of the shooting and were not individually liable for Morgan's damages.

On November 18, 1972, and again on August 23, 1975, Horace Burks, acting as Harlow-Burks' president, issued a total of $126,000 in corporate promissory notes, secured by mortgages on the corporation's Kitsap County property, to Bessie Burks and Henry Harlow. The latter transfer took place 12 days before trial on Morgan's tort claim. At the time of the 1975 conveyance, Burks also issued corporate notes and mortgages to himself individually and to his attorneys. No recorded consideration was received by the corporation for any of the notes; there was some question at trial as to whether Bessie Burks and Harlow, who were 86 and 84, respectively, at the time, were aware of the nature of the documents they signed in regard to the transfers. The corporation never paid any money on any of the notes.

The trial in the instant case was bifurcated. In the first portion, as noted above, the trial jury found Burks, individually, and Harlow-Burks, as a corporate entity, to be liable for Burks' actions. They returned a verdict of $2,350,000 against Burks and Harlow-Burks in August 1975.

Harlow-Burks subsequently, in September 1975, filed in federal court for bankruptcy. The notes and mortgages described above were declared fraudulent conveyances and void by a United States trustee in bankruptcy; the notes and mortgages were cancelled. The Kitsap County property accordingly is still a corporate asset, although subject to approximately $200,000 in notes and mortgages not involved here that were taken before the tort occasioning this suit. Their validity is not questioned by Morgan.

Thereafter, in the second part of the bifurcated trial, the court, acting without a jury, found Harlow-Burks to be a proper corporate entity and refused to impose personal liability for the $2,350,000 judgment on Bessie Burks and Harlow, the corporation's other stockholders. Although evidence of the fraudulent transfers was presented at trial, the trial court refused to consider the post-tort activities in determining whether to disregard the corporate entity.

There was some evidence of commingling of private and corporate funds by the officers/shareholders prior to the tort. Considering this pre-tort activity alone, however, the trial judge ruled that the stockholders had properly respected the corporate entity and thus could not be held personally liable on the judgment.

Morgan appealed to the Court of Appeals, Division I, on the issue of whether post-tort activities should be considered in determining if individual liability was appropriate. The appellate court reversed and remanded the case for a consideration of the stockholders' intent to disregard the corporate entity in light of both pre- and post-tort corporate and individual activities.

Bessie Burks and Henry Harlow sought and were granted review in this court. At oral argument before this court, plaintiff asserted that he had no more evidence to present regarding the appropriateness of assessing individual liability against the appealing defendants and urged this court to determine whether the corporate entity could be disregarded under the facts of this case. The issues thus raised in this appeal are:

(1) Can evidence of fraudulent conveyances, made after the tort giving rise to corporate liability and subsequently set aside as void, be considered in determining whether the corporate entity should be disregarded and personal liability for the judgment debt assessed against shareholders of corporation?

(2) Can the corporate entity be disregarded for purposes of acquiring a fund to satisfy a judgment against a corporation when the acts allegedly justifying disregard have not affected the liable corporation's ability to pay the debt?

II.

CONSIDERATION OF POST-TORT ACTIVITIES. The defendants contend that activities taking place after the incident creating corporate liability should not be considered in deciding whether to disregard the corporate entity and allow satisfaction of the judgment resulting from that liability through the assets of individuals involved in the corporation. They argue that since the corporate entity will not protect persons who do not respect the corporation before the litigated activity anyway, transfers out of the corporation after the tortious incident cannot affect their individual liability. Thus, defendants state, post-tort activities are immaterial in determining whether to disregard the corporate entity.

The defendants cite Harrison v. Puga, 4 Wash.App. 52, 480 P.2d 247 (1971), when discussing their claim that post-tort activities are immaterial in determining whether to disregard the corporate entity. In Harrison, the plaintiffs' recovery was limited to the $16,000 fraudulently taken by the defendant from a corporation jointly owned by plaintiffs and defendant. Defendants in this case assert that post-tort wrongful activities should always be dealt with by voiding transfers and transactions which affect recovery, and that Harrison limits the remedy for wrongful transfers to avoidance of the transactions.

However, in Harrison, the amount of recovery was limited only because $16,000 represented the sum taken from the corporation by the defendant. Because the case dealt with a tortious activity intrinsically involved with the operation of the corporation itself, the recovery was limited to those amounts actually defrauded from the organization. The case does not require the court to consider only pre-tort behavior in determining whether to disregard the corporate entity. In addition, it does not necessarily limit the personal funds available for satisfaction of a judgment once the corporate entity is disregarded to that amount actually taken from the corporation.

The corporate entity is disregarded and liability assessed against shareholders in the corporation when the corporation has been intentionally used to violate or evade a duty owed to another. Culinary Workers v. Gateway Cafe, Inc., 91 Wash.2d 353, 366, 588 P.2d 1334 (1979). This may occur either because the liability-causing activity did not occur only for the benefit of the corporation, and the corporation and its controllers are thus "alter egos," see e. g., J. I. Case Credit Corp. v. Stark, 64 Wash.2d 470, 392 P.2d 215 (1964); W. G. Platts, Inc. v. Platts, 49 Wash.2d 203, 298 P.2d 1107 (1956); or because the liable corporation has been "gutted" and left without funds by those controlling it in order to avoid actual or potential liability, see, e. g., Harrison v. Puga, supra, 4 Wash.App. at 63-64, 480 P.2d 247. In the latter case particularly, post-tort activities must be considered, and often will independently support disregard of the corporate entity, because it is only after the tort that the impetus to "gut" the corporation arises. Thus, the Court of Appeals was correct in holding that post-tort activities could be considered in making the determination whether to disregard the corporate entity.

Defendants also contend that a determination that they are individually liable as "de facto partners" through disregard of the corporate entity is precluded by the jury's decision in the first phase of the bifurcated trial that they were not involved in a joint venture with Horace Burks when he shot Morgan. Although this determination might prevent assessment of liability on the "alter ego" theory because the corporation was adequately respected before the tort, the lack...