Nursing Home Bldg. Corp. v. DeHart

• Decision Date: 12 May 1975
• Docket Number: No. 2569--I,2569--I
• Citation: 13 Wn.App. 489,535 P.2d 137
• Parties: NURSING HOME BUILDING CORPORATION, d/b/a Arden Nursing Home, Appellant, v. Phoebe DeHART, Individually, and as Personal Representative of the Estate of Richard L. DeHart, Deceased, Respondent, and H. P. CLAUSING et al., Third-Party Defendants.
• Court: Washington Court of Appeals

Page 489

13 Wn.App. 489

535 P.2d 137

NURSING HOME BUILDING CORPORATION, d/b/a Arden Nursing Home, Appellant, v. Phoebe DeHART, Individually, and as Personal Representative of the Estate of Richard L. DeHart, Deceased, Respondent and H. P. CLAUSING et al., Third-Party Defendants.

No. 2569--I.

Court of Appeals of Washington, Division 1.

May 12, 1975.

Rehearing Denied Sept. 29, 1975.

Casey, Pruzan, Kovarik & Shulkin, Martin A. Godsil, Seattle, for appellant.

Davis, Wright, Todd, Riese & Jones, Richard A. Derham, Seattle, for respondents.

SWANSON, Judge.

Nursing Home Building Corporation, doing business as Arden Nursing Home (hereinafter referred to as 'the corporation'), appeals from a judgment which awarded it only $9,914.85 of its $121,865 claim based upon alleged fraudulent misappropriation of corporate funds by Richard L. and Phoebe DeHart, the former sole shareholders of the corporation. ¹ In the event the judgment appealed from is reversed and modified, the DeHarts cross-appeal from the dismissal of their cross claim against Dr. Herbert P. Clausing and Dr. Glen E. Deer, from whom they had originally purchased the corporation and who received payments from the DeHarts.

The factual context in which this appeal arose is as follows: Two Seattle doctors, Dr. H. P. Clausing and Dr. G. E. Deer, were the sole owners of the corporation which in turn owned and operated the Arden Nursing Home located on Aurora Avenue in the city of Seattle. On January 20, 1970, the two doctors sold all of the outstanding stock (3,000 shares) of the corporation to the DeHarts on an installment contract for $700,000. The DeHarts made an initial down payment of $80,000 from their own resources and made subsequent payments on the stock purchase contract by checks totaling $34,089.64 drawn on the corporation checking account. In addition, as required by the terms of the stock purchase agreement, they transferred to Clausing and Deer a $29,099 account receivable asset of the corporation known as the 'Southside Receivable.' The payments from the corporate bank account and the transfer of the account receivable to Clausing and Deer were reflected in a loan account known as 'Owner's Receivable.' This account had a $45,563.45 loan balance due the corporation when the DeHarts were dispossessed of the nursing home in May, 1971.

During the 15-month period of the DeHarts' management of the corporation, it had serious cash flow problems so that by March, 1971, the corporation was unable to pay its creditors and keep current the payments on the building mortgage due the Bank of California as required by the sales contract. The DeHarts' breach of the mortgage obligation resulted in an action by Clausing and Deer to forfeit the stock purchase contract. See Clausing v. DeHart, 83 Wash.2d 70, 515 P.2d 982 (1973).

On August 6, 1971, Robert Thompson, who was named receiver pendente lite to manage the nursing home and to maintain the forfeiture action, sued the DeHarts to recover $121,865 in corporate funds he alleged were 'fraudulently misappropriated' and diverted to the DeHarts' personal use and benefit. At the outset of this litigation, the receiver obtained a writ of attachment without notice or hearing to secure his claimed creditor's lien on the DeHarts' real estate. This procedure was upheld in Thompson v. DeHart, 84 Wash.2d 931, 530 P.2d 272 (1975). The receiver Thompson was discharged prior to the trial of this action but the corporation, which was once again owned by the original owners Clausing and Deer, remained as a party plaintiff. After a trial to the court in which the DeHarts conceded an obligation to reimburse the corporation for $9,914.85 of corporate funds used for personal purposes unrelated to any corporate benefit, judgment was entered in that amount, but the court denied the corporation's claim for additional funds allegedly 'fraudulently misappropriated' as is reflected in the following conclusions of law:

The business expenses, salary, fringe benefits and reimbursed expenses were reasonable and proper exercises of business judgment by the DeHarts except as set forth in Finding of Fact VII. (Finding of fact No. 7 contains the $9,914.85 item upon which judgment was rendered.)

Conclusion of law No. 2.

The payments to Drs. Clausing and Deer were authorized by all shareholders and, in addition, Drs. Clausing Deer and the corporation ratified and accepted the payments. The corporation is not entitled to recover these payments from the DeHarts.

Conclusion of law No. 3.

The transfer of the Southside Receivable was pursuant to a contract which the corporation approved when Drs. Clausing and Deer controlled the corporation. In addition, the transfer was approved by the sole shareholders of the corporation at the time the transfer took place and was ratified and accepted by the present shareholders, Drs. Clausing and Deer. The corporation is not entitled to recover the value of the contract from the DeHarts.

Conclusion of law No. 4.

On appeal, the corporation contends the trial court erred in failing to enter judgment for $92,996.61 in additional funds which it contends were misappropriated by the DeHarts. The corporation assigns error to the quoted conclusions of law and to these findings of fact:

All other disbursements presented to the Court were proper business expenses.

Finding of fact No. 12.

The funds which would have been used for taxes were applied to other business expenses, such as staeff salaries and trade accounts necessary to keep the nursing home open and provide patient care.

Finding of fact No. 14, in part. The corporation's assignments of error focus primarily upon three categories of alleged misappropriation of funds: (1) Loans by the corporation to the DeHarts as reflected by the $45,563.45 balance shown in the Owner's Receivable; (2) corporate funds totaling $21,000 used in the management of the corporation; and (3) corporate funds totaling $26,433.16 which the corporation claims should have been used by the DeHarts to pay federal taxes.

In considering the first category, we note that the $45,563.45 loan balance item primarily consists of two items, (1) the corporate funds used to make the installment payments to Clausing and Deer on the stock purchase contract, and (2) the transfer to Clausing and Deer pursuant to the stock purchase contract of the Southside Receivable. The corporation asserts that such payments from corporate funds or by transfer of corporate assets amounts to money borrowed from the corporation for a personal obligation which must be repaid. As to the first item, the court found in an unchallenged finding that the obligation to make the installment payments was the personal obligation of the DeHarts but also found that

(i)t was understood by all parties at the time the contract was signed that payments would probably come from the earnings of the business distributed to DeHarts if possible.

Finding of fact No. 9, in part. In addition, the court entered the following significant findings to which no error is assigned:

Payments were made to Drs. Clausing and Deer by checks dated April 16, 1970, of $5,000.00 each, drawn on the account of Arden Nursing Home at The Bank of California; and checks dated January 20, 1971, of $7,500.00 each, February 8, 1971, of $2,272.41 each, and March 3, 1971, of $4,544.82 total, all drawn on the account of Nursing Home Building Corporation, d/b/a Arden Nursing Home at Pacific National Bank, Everett Banking Center. Drs. Clausing and Deer received and cashed all such checks. On March 30, 1971, Dr. Clausing wrote DeHarts formally demanding that all future payments be paid by DeHarts from their personal funds.

Finding of fact No. 10.

All existing shareholders of the corporation, being the DeHarts, approved and ratified the payment of the above amounts to Drs. Clausing and Deer from corporate funds.

Finding of fact No. 11. The trial court concluded that because all shareholders of the corporation approved the payments and Clausing and Deer ratified and accepted them, there can be no recovery by the corporation. We agree.

The corporation argues that the receipt by Clausing and Deer of these payments could not operate as an estoppel against it because they had no control over it but were merely creditors of the DeHarts with a pledgee's interest in the corporate stock. ² Thus, it is the corporation's theory of recovery that despite the facts that the DeHarts were the sole owners of the corporation when the payments were made and that Clausing and Deer, the recipients of the funds, had regained sole ownership of the corporation at the time of trial, the corporation's identity remained separate and apart from that of the individual stockholders and therefore it could recover the payments from the DeHarts through its right to an accounting and repayment of loans. In support of this argument, the corporation cites the following rule governing the conduct of corporate officers:

As a general rule, the corporate officers or agents have no right or authority to use, divert, or appropriate corporate funds or property for their own individual interests or purposes, and they are responsible for the wrongful use or diversion of the corporate property and are accountable for any profits made thereby. Thus, it is generally held that a corporate officer has no authority to use corporate funds for payment of his his own debts. . . .

(Footnotes omitted.) 19 Am.Jur.2d Corporations § 1235 (1965).

Further, the corporation contends that ownership by a borrower of all the shares of stock in a corporation does not prevent the corporation from recovering the balance due on a loan to the corporation. In making this argument, the corporation relies primarily upon W. D. Miller Lbr. Corp. v. Miller, 225 Or. 427, 357 P.2d 503 (1960), where the court held that ownership of all except qualifying shares of stock of the corporation did not of itself justify disregarding the...