Smith v. Bear, Inc.
| Decision Date | 05 April 2013 |
| Docket Number | NO. 2010-CA-001803-MR,2010-CA-001803-MR |
| Parties | TONY SMITH and SMITH SERVICES, INC. APPELLANTS v. BEAR, INC. D/B/A LAKE EXPRESS APPELLEE |
| Court | Kentucky Court of Appeals |
TO BE PUBLISHED
APPEAL FROM LAUREL CIRCUIT COURT
Smith was the sole shareholder of Smith Services, a Kentucky corporation. Lake Express operates a gas station in London, Kentucky. Smith Services had an account at Lake Express and charged fuel to that account from 1999 to 2002, when Lake Express closed the account due to nonpayment. At the time the account was closed, there was an unpaid balance of approximately $26,000.00.
Neither Smith Services nor Lake Express memorialized in writing their understanding regarding the fuel account or what was to occur in the event of default. Moreover, Smith did not personally guarantee the Smith Services fuel account debt, and Lake Express required no security as collateral. Instead, in accordance with the operation of the fuel account, a Lake Express employee would simply write down the name of the Smith Services agent charging fuel and the amount of fuel purchased, and thereafter provide Smith Services a slip or receipt ofsorts with a purchase order number. All fuel purchases procured on the Smith Services' account were billed directly to Smith Services.
In February of 2002, after Smith Services stopped paying on its fuel account, Lake Express ceased accepting any further charges by Smith Services on the fuel account. Thereafter, Lake Express required Smith Services to pay all fuel charges on a monthly basis, which it timely did. However, Smith Services made no further payments to Lake Express on the $26,000.00 balance owed on the prior fuel account, and Lake Express began charging interest on the outstanding amount owed by Smith Services.
Smith closed Smith Services sometime in 2003. Smith testified the closure occurred after Smith Services was not paid on several contracts and creditors began to attach its liquid assets. The last tax return for Smith Services was filed in 2003. Smith did not file articles of dissolution, and did not inform Lake Express he had dissolved Smith Services. Yet, Smith continued to purchase fuel from Lake Express, under the guise of Smith Services, until 2005.
In 2006, Lake Express filed suit against Smith, Smith Services, and Smith Heating and Air Conditioning, LLC (Smith Heating), a company owned by Tony W. Smith, one of Smith's sons, seeking to collect the unpaid balance of the fuel account. By that time, however, Smith Services no longer had any assets. Months later, the Kentucky Secretary of State administratively dissolved Smith Services. Lake Express then amended its complaint to add claims of fraud in the inducement and by omission, and it sought to pierce the corporate veil of SmithServices as an alternate means of seeking liability against Smith, the sole shareholder of the dissolved Smith Services.
In October of 2007, Smith Heating moved to dismiss each of Lake Express's claims against it. Smith likewise moved to dismiss Lake Express's claims against him, including the claims of fraud and its action to pierce the corporate veil. The trial court, treating the motion as one for summary judgment, reviewed the evidence of record and dismissed Lake Express's claims against Smith Heating and Smith.
Lake Express appealed from the dismissal. On appeal, this Court affirmed the dismissal of the claims against Smith Heating. Bear, Inc. v. Smith, 303 S.W.3d 137, 147 (Ky. App. 2010). Further, because Lake Express could not prove Smith had never intended to pay, we also affirmed dismissal of the fraud claims against Smith.
However, we reversed the trial court's dismissal and remanded for further proceedings regarding the issue of Smith's direct liability, if any, stating "Kentucky law allows a creditor who timely files its claim to proceed directly against a shareholder of a dissolved corporation to the extent of the corporate assets received by that shareholder . . . ." Id. at 147. We held a genuine issue of material fact had been raised with respect to whether Smith had retained any assets of Smith Services for which he might be held individually liable, particularly because the 2003 tax return of Smith Services indicated shareholder loans totaling more than $173,000.00 were paid to Smith. We further held a genuine issue ofmaterial fact had been raised with respect to whether the corporate veil could be pierced. We noted evidence of abuse of the corporate form arising from Smith's admission that no shareholder meetings were held and no minutes of shareholder meetings were recorded or maintained. We further noted Smith had admitted he received no salary, no dividends were paid, and any annual reports had since been lost. Finally, we noted Smith filed no annual reports for Smith Services, which ultimately led to its dissolution by the Secretary of State.
On remand to the trial court, Smith and Smith Services elected to proceed pro se. A jury trial was set for August 18, 2010. On August 3, 2010, Lake Express filed a motion for summary judgment on the issue of liability. On August 13, 2010, a hearing was held on the motion, but Smith failed to appear or file any responsive pleading. On August 17, 2010, the trial court granted summary judgment on the issue of liability in favor of Lake Express. Specifically, the trial court held Smith was liable for debts owed by Smith Services to Lake Express to the extent he received, but failed to repay, shareholder loans from Smith Services.
On the August 18, 2010, trial date, because summary judgment had been granted regarding Smith's equitable liability, a brief hearing was held to determine the amount of restitution owed. Jeff Ison, president of Lake Express, testified the accumulated balance and accrued interest owed to Lake Express totaled $90,863.22, and attorney fees and costs incurred from commencement of the action amounted to $42,330.38. In representing himself and Smith Services pro se, Smith offered no contrary evidence, called no witnesses to testify, andintroduced no exhibits. Instead, even though the trial court explained liability had already been established by summary judgment, Smith's cross-examination of Ison continued to focus on the issue of liability.
On September 1, 2010, the trial court entered judgment in favor of Lake Express in the sum of $90,863.22, plus attorney fees in the sum of $42,330.38. This appeal followed.
On appeal, Smith argues the trial court erred: (1) by allowing the defendants to proceed pro se; (2) by granting summary judgment in favor of Lake Express; (3) by proceeding with a bench trial and disallowing him his constitutional right to a jury trial; and (4) in its award of damages.
First, Smith argues the trial court erred by allowing him to represent himself, individually, and Smith Services, the dissolved corporation for which he was the sole shareholder, pro se. Smith argues Smith Services, a separate legal entity, should have been represented by separate counsel. In essence, though he undertook to represent Smith Services pro se, Smith now argues Smith Services was unrepresented by counsel at trial and "easy prey for [Lake Express's] counsel." Yet, Smith apparently remained confident enough in his representation of Smith Services to file the Notice of Appeal, dated September 28, 2010, on behalf of both himself and Smith Services, prior to obtaining counsel.
Our former Court of Appeals has held "a corporation is an artificial person, not capable of performing any act except through the agency of others," and may not draw legal instruments or be represented in court through a nonprofessional officer or employee. Kentucky Bar Association v. Tussey, 476 S.W.2d 177, 179 (Ky. 1972) (citations omitted). Thus, to the extent Smith, a nonprofessional former shareholder of the administratively dissolved Smith Services, personally undertook to represent the defunct corporation, he is correct. It was improper for Smith to represent Smith Services in this action before the trial court. We are constrained, therefore, to reverse and remand the trial court's entry of summary judgment on August 17, 2010, holding Smith Services liable to Lake Express, and it's entry of monetary judgment on August 31, 2010, against Smith Services. However, if upon remand Smith Services again fails to obtain legal counsel to appear, answer, and defend the claim filed against it by Lake Express, the derelict and defunct corporation would be subject to default proceedings. CR3 55.01.
Conversely, there is no reason to set aside the trial court's entry of summary judgment and its award of damages against Smith, individually. A corporation is ordinarily a legal entity, separate and apart from its stockholders; and, as duly noted in the brief filed on behalf of Smith and Smith Services, Smith Services was a Kentucky corporation with a separate legal existence from Smith. Kentucky Electric Power Co. v. Norton Coal Mining, Co., 93 F.2d 923, 926(C.C.A. 6 KY 1938). Thus, Smith, acting in his individual capacity, was not precluded from representing himself, and did so.
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