Quality Wood Chips, Inc. v. Adolphsen

• Decision Date: 04 May 1982
• Docket Number: No. WD,WD
• Citation: 636 S.W.2d 94
• Parties: QUALITY WOOD CHIPS, INC., Appellant, v. Larry ADOLPHSEN and A. D. Crawford, Respondents. 32508.
• Court: Missouri Court of Appeals

Page 94

636 S.W.2d 94

QUALITY WOOD CHIPS, INC., Appellant, v. Larry ADOLPHSEN and A. D. Crawford, Respondents.

No. WD 32508.

Missouri Court of Appeals, Western District.

May 4, 1982.

Motion for Rehearing and/or Transfer to Supreme Court

Overruled and Denied June

23, 1982.

Weldon W. Perry, Jr., and Jeffrey B. Tonkin, Kansas City, for appellant.

Michael W. Manners and Robert H. Martin, of Paden, Welch, Martin, Albano & Graeff, P.C., Independence, for respondents.

Before CLARK, P. J., and KENNEDY and MANFORD, JJ.

MANFORD, Judge.

Action in equity for temporary and permanent injunction. The cause was tried to the court and judgment in the form of an order was designated as a final judgment. The judgment is reversed with instructions.

Two points are presented, which in summary allege the trial court erred in (1) refusing to issue the injunctions sought because the evidence established continued irreparable harm to appellant; and (2) applying the doctrine of subrogation.

Appellant is a Missouri corporation, incorporated on February 13, 1979. It manufactures and sells wood chips, which are in turn used in the production of paper products. It has as its president and sole director one Warren Hamilton.

Respondents are stockholders in appellant corporation. Neither respondent has ever held the position of officer or director. Appellant's main asset is a Mobark Wood Chipper with an approximate value of $166,000. Respondents acquired the chipper by purchase and the execution of their promissory note/security agreement with the Blue Ridge Bank and Trust Co. in the sum of $159,352.92 on February 5, 1979. There is no dispute between the parties that the note/security agreement predated appellant's incorporation. Respondents admit that at the time of purchasing the chipper, they contemplated no business relationship with Hamilton. They testified, however, that they intended to incorporate under the name of Quality Wood Chips and the note/security agreement were executed in the name of Quality Wood Chips. The note/security agreement carried a guarantee by respondents which personally obligated them. Respondents acknowledged this personal liability, but emphasized that the equipment orders sent to Mobark were prepared in the name of Quality Wood Chips. Hamilton testified that appellant corporation did not assume the debt incurred by purchase of the chipper by way of any corporate resolution or any act by himself in his capacity as director or officer of appellant corporation.

During the initial months of operation, appellant corporation earned a profit that was distributed to respondents in the form of equal dividend payments totaling approximately $2,250 per month. The treasurer for appellant corporation testified that respondent Adolphsen requested his share of the corporate profits be paid directly to the Blue Ridge Bank and Trust Co. The request was complied with, and payments forwarded to the bank were posted against the loan account of respondents and were never treated as corporate debts owed the bank.

In November, 1980, a dispute between the parties arose, although the record goes wanting for details of the dispute. The result was that respondents secreted the chipper. Hamilton made repeated demands for its return, but was refused. The consequence of the chipper not being returned was the inability of appellant corporation to continue operation and earn a profit since November, 1980. On January 7, 1981, appellant filed its petition for temporary and permanent injunctions, seeking the return of the chipper. The relief sought was denied following an evidentiary hearing.

The standard of review in the instant case is under Rule 73.01, as that rule has been interpreted by Murphy v. Carron, 536 S.W.2d 30 (Mo.banc 1976), and the judgment of the trial court will not be disturbed unless there is no substantial evidence to support the judgment, unless the judgment is against the weight of the evidence, or unless the judgment erroneously declares or applies the law.

In the instant case, the relief sought by appellant is in the nature of a mandatory injunction which is the request for an affirmative act. Appellant could have pursued an action in replevin, but that question has never been presented by the parties and does not come before this court.

The record reveals that the chipper was contributed to appellant corporation by respondents in exchange for equity stock. Hamilton contributed $86,777.00 in additional equipment to the corporation. The record also reveals that it is impossible for appellant corporation to continue in business and make a profit without the chipper.

In defense to appellant corporation's claim, respondents claimed they were subrogated to the rights of the bank creditor when appellant stopped making payments on the chipper. Appellant counters this defense with the claim that the underlying debt was created by respondents prior to appellant's corporate existence and obviously without its authority. Respondents counter that claim by asserting the debt was ratified by appellant corporation by the acts of appellant corporation making payments on the note.

The rule of subrogation has been addressed by our courts. In Kroeker v. State Farm Mutual Automobile Ins. Co., 466 S.W.2d 105, 110 (Mo.App.1971), this court stated:

Subrogation originated as a creature of the common law. Basically, it is classified as either legal or conventional. Legal subrogation arises out of a condition or relationship by operation of law, whereas conventional subrogation arises by act or agreement of the parties. (citation omitted) Subrogation is founded on principles of justice and its operation is governed by principles of equity. It rests on the principle that substantial justice should be attained regardless of form, that is, its basis is the doing of complete, essential and perfect justice between all parties without regard to form. (citations omitted) 'As a general rule, any person who, pursuant to a legal obligation to do so, has paid even indirectly, for a loss or injury resulting from the wrong or default of another will be subrogated to the rights of the creditor or injured person against the wrongdoer or defaulter, persons who stand in the shoes of the wrongdoer, or others who, as the payor, are primarily responsible for the wrong or default.' 83 C.J.S. Subrogation § 16.

The right of subrogation is not necessarily limited to those legally bound to make payment, but extends also to persons who pay a debt in self-protection upon the premise they might suffer loss if the obligation is not satisfied or discharged. 73 Am.Jur.2d Subrogation § 25 (1974). In support of taking possession of the chipper, respondents cite Lewis v. Paul Brown Realty & Investment Co., 193 S.W.2d 13, 15 (Mo.1946), which declared:

'If one secondarily liable pays a debt, he is entitled ... (there being no other facts in the case contra), to be subrogated to all the rights of the creditor, including securities held by him, and this, although there is no express agreement for subrogation; the right arises by operation of law.' Loewenstein v. Queen Ins. Co., 227 Mo. 100, 117, 127 S.W. 72, 76.

Although it is true that subrogation is designed to compel the ultimate discharge of a debt by one, who in justice, equity and good conscience should pay it; subrogation exists only against the principal debtor and not one secondarily liable. Street v. Lincoln National Life Ins. Co., 347 S.W.2d 455 (Mo.App.1961). Subrogation is not a self-help remedy and while characterized as a substantive right, the manner of asserting it is procedural. Giambelluca v. Missouri Pac. Railroad Co., 320 S.W.2d 457 (Mo.1959).

Respondents also assert that appellant corporation ratified the debt to the bank as a corporate obligation. In support of this assertion, respondents emphasize the application and payment of Adolphsen's dividend to the creditor bank. Respondents cite a general principle that ratification will be implied where "in addition to receiving the benefits of the unauthorized transaction, the...