Murphy v. Crosland

• Decision Date: 23 November 1994
• Docket Number: No. 930249-CA,930249-CA
• Citation: 886 P.2d 74
• Parties: Brian T. MURPHY and Shelly F. Murphy, Plaintiffs, Appellants, and Cross-Appellees, v. Todd CROSLAND; Jeff Crosland, Defendants, Appellees, and Cross-Appellants.
• Court: Utah Court of Appeals

Page 74

886 P.2d 74

Brian T. MURPHY and Shelly F. Murphy, Plaintiffs, Appellants, and Cross-Appellees, v. Todd CROSLAND; Jeff Crosland, Defendants, Appellees, and Cross-Appellants.

No. 930249-CA.

Court of Appeals of Utah.

Nov. 23, 1994.

Scott B. Mitchell, Salt Lake City, for appellants.

Ellen Maycock, David C. Wright, David W. Scofield, and Ronald F. Price, Salt Lake City, for appellees.

Before BILLINGS, GREENWOOD and JACKSON, JJ.

OPINION

JACKSON, Judge:

Brian and Shelly Murphy appeal a grant of summary judgment in favor of Todd Crosland. In addition, Jeff Crosland appeals the grant of summary judgment against him in favor of the Murphys. We reverse the summary judgment in favor of Todd Crosland and affirm the summary judgment against Jeff Crosland.

BACKGROUND

Crosland Industries, Inc. (CI) was properly incorporated in Utah on January 28, 1986. At all times relevant to this appeal, Todd Crosland was president, a director, and principal shareholder of CI, while Jeff Crosland was vice president and a director.

On March 1, 1987, CI's certificate of incorporation was suspended pursuant to Utah Code Ann. § 16-10-88.2 (1987) (repealed 1992) for failure to file its annual report.

The Murphys owned Granny's Buns, a cinnamon roll store in Las Vegas, Nevada. On January 8, 1988, the Murphys entered into a contract to sell Granny's Buns to Arnold Swenson. On that date, Mr. Swenson executed a promissory note in the Murphys' favor for a principal amount of $70,000. On that same date, and during the period of its suspension, CI agreed to guarantee Mr. Swenson's performance on both the sales contract and the note. Todd Crosland negotiated the guarantees on CI's behalf, and Jeff Crosland executed the guarantees in his capacity as an officer of CI.

Subsequently, Mr. Swenson defaulted under the terms of both the sales contract and the note, and CI failed to honor its guarantees. Having failed to remedy its suspended status and to restore its good standing, CI was involuntarily dissolved on March 1, 1988, pursuant to Utah Code Ann. § 16-10-88.2 (1987) (repealed 1992).

On July 27, 1989, the Murphys obtained a default judgment against CI in the amount of $72,987.46 plus interest, resulting from CI's failure to honor the guarantees. The Murphys then brought the present suit seeking to hold Todd and Jeff Crosland jointly and severally liable, under Utah Code Ann. § 16-10-139 (1987) (repealed 1992), for the judgment against CI. The Murphys claimed that by negotiating, authorizing, and executing CI's guarantees while the corporation was suspended, the Croslands "assumed to act as a corporation without authority so to do" in violation of Utah Code Ann. § 16-10-139.

The Murphys filed a motion for summary judgment against the Croslands. Judge Daniels granted summary judgment against Jeff Crosland for his role in executing the agreements, but denied the motion with respect to Todd Crosland. Later, Judge Iwasaki granted Todd Crosland's motion for summary judgment against the Murphys. The Murphys and Jeff Crosland appeal the respective grants of summary judgment against them.

ISSUE AND STANDARD OF REVIEW

The sole issue on appeal is whether Jeff and Todd Crosland, by negotiating, authorizing, and executing CI's guarantees while the corporation was suspended, assumed to act as a corporation without authority, and thereby became jointly and severally liable for the judgment entered against CI as a result of their actions. ¹ In order to address this issue, we must interpret sections 16-10-139 and 16-10-88.2 of the Utah Code to determine how and when these two statutes apply and whether they can properly interact and apply together.

Based on the undisputed facts, Judge Daniels held that section 16-10-139 applied to those who transacted business for the suspended corporation, while Judge Iwasaki held that it did not. "The correct interpretation of a statute is a question of law and is reviewed for correctness." State v. Larsen, 865 P.2d 1355, 1357 (Utah 1993); accord Ong Int'l (U.S.A.), Inc. v. 11th Ave. Corp., 850 P.2d 447, 455 (Utah 1993).

ANALYSIS

I. Development of the MBCA

"In the United States the granting of corporate franchises has been regarded from the beginning as a prerogative of the legislature. The early American corporations were chartered by special acts of state legislatures." Model Business Corp. Act Ann., § 1 cmt., at 2 (1971). Later, "a procedure for incorporating under laws of general application was developed." Id. at 2-3.

The general laws enacted throughout the country shared similarities, but varied from state to state in scope and structure. Indeed, several states began to take advantage of these differences, enacting competitive statutes intended to induce corporations to organize in their jurisdictions. Id. at 3.

In addition, several common law concepts developed in the area of corporate law, supplementing the statutes. For example, "[a]t common law, corporations could be either de jure, de facto, or by estoppel." American Vending Servs., Inc. v. Morse, 881 P.2d 917, 920 (Utah App.1994).

A de jure corporation is ordinarily thought of as one which has been created as the result of compliance with all of the constitutional or statutory requirements of a particular governmental entity. A de facto corporation, on the other hand, can be brought into being when it can be shown that a bona fide and colorable attempt has been made to create a corporation, even though the efforts at incorporation can be shown to be irregular, informal or even defective.

Corporations by estoppel come about when the parties thereto are estopped from denying a corporate existence. In other words, the parties may, by their agreements or conduct, estop themselves from denying the existence of the corporation.

Id. (quoting Harris v. Stephens Wholesale Bldg. Supply Co., 54 Ala.App. 405, 309 So.2d 115, 117-18 (1975)).

Beginning in the late 1920s, the states began to modernize their corporation laws by enacting entirely new statutes. Model Business Corp. Act Ann., § 1 cmt., at 3 (1971). As part of this revisionary movement, a committee of the American Bar Association drafted the Model Business Corporation Act (MBCA), first published as a complete act in 1950. Id. "The MBCA strove to codify a uniform set of laws regarding corporations and to provide some clarity and bright-line tests to previously clouded areas." Morse, 881 P.2d at 921. ² Furthermore, the MBCA eliminated the common law concepts of de facto corporations, de jure corporations, and corporations by estoppel. See 3A William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 1229 (1990) (Fletcher). ³

II. MBCA's Relevant Scheme

The provisions of the MBCA relevant to this case are sections 94, 135, and 146. Section 146 provides for individual liability for the unauthorized assumption of corporate powers, while sections 94 and 135 set forth the penalties imposed upon corporations who fail to file their annual reports.

Section 146 establishes that "[a]ll 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." Model Business Corp. Act Ann., § 146 (1971). The comment to section 146 indicates that

[t]his section is designed to prohibit the application of any theory of de facto incorporation. The only authority to act as a corporation under the Model Act arises from completion of the procedures prescribed in [the Act.] The consequences of those procedures are specified ... as being the creation of a corporation. No other means being authorized, the effect of section 146 is to negate the possibility of a de facto corporation.

Abolition of the concept of de facto incorporation, which at best was fuzzy, is a sound result. No reason exists for its continuance under general corporate laws, where the process of acquiring de jure incorporation is both simple and clear. The vestigial appendage should be removed.

Id. § 146 cmt., at 908-09 (1971). This comment clearly demonstrates the MBCA's underlying intent to abolish de facto corporations and to hold liable individuals who assume to act as a corporation before the corporation actually exists. ⁴

When a corporation fails to timely file an annual report, section 135 of the MBCA imposes a monetary penalty equal to ten percent of the franchise tax assessed against the corporation during the appropriate time period. Id. § 135. Section 94 of the MBCA, however, mandates a harsher penalty. This section provides that "[a] corporation may be dissolved involuntarily ... when it is established that ... [t]he corporation has failed to file its annual report within the time required by this Act." Id. § 94. In essence, this "procedure is a policing action that provides a means by which the state may insure compliance with and nonabuse of the fundamentals of corporate existence." Id. § 94 cmt.

Dissolution has always carried severe consequences, not the least of which is the end of the corporation. Furthermore, the directors, officers, and shareholders risk exposure to personal liability if the corporation continues to carry on business. Statutes and case law have traditionally held that after dissolution by operation of law, the corporation could continue to exist and operate for the limited purpose of winding up its affairs. See 72 A.L.R.4th 419, 425 (1989); Fletcher §§ 8166-8173. ⁵ However, the majority rule, which accords with the rule at common law, is that by continuation of the business without contemplation of liquidation, the directors and officers are held personally responsible for contract and tort liability incurred during the period following dissolution. Fletcher § 8132.1; see, e.g., Consolidated Mills & Feed Yards Co. v. Patterson, 62 Utah 506, 221 P. 159, 160 (1923) (holding directors who continued to transact business after forfeiture of corporate charter became personally liable for...