Soloman v. Western Hills Development Co.

• Decision Date: 07 October 1981
• Docket Number: Docket No. 47913
• Citation: 312 N.W.2d 428,110 Mich.App. 257
• Parties: Emily J. SOLOMAN and George C. Soloman, Plaintiffs-Appellees, v. WESTERN HILLS DEVELOPMENT COMPANY, Claude O. Darby, Jr., and Ivan A. MacArthur, Defendants-Appellants, and Darby & Son, Inc., a Michigan corporation; Claude O. Darby, Sr.; Dorothy J.MacArthur; Robert G. Banwell and Sheila T. Banwell, Defendants.
• Court: Court of Appeal of Michigan — District of US

Page 428

312 N.W.2d 428

110 Mich.App. 257

Emily J. SOLOMAN and George C. Soloman, Plaintiffs-Appellees, v. WESTERN HILLS DEVELOPMENT COMPANY, Claude O. Darby, Jr., and Ivan A. MacArthur, Defendants-Appellants and Darby & Son, Inc., a Michigan corporation; Claude O. Darby Sr.; Dorothy J.MacArthur; Robert G. Banwell and Sheila T. Banwell, Defendants.

Docket No. 47913.

Court of Appeals of Michigan.

Oct. 7, 1981.

Released for Publication Nov. 18, 1981.

Sanford Kesten, Flint, for plaintiffs-appellees.

Neithercut, Klapp, Shegos & Dillard, Flint, for defendants.

Before DANHOF, C. J., and MAHER and BEASLEY, JJ.

PER CURIAM.

Defendants Western Hills Development Company, Claude O. Darby, Jr., and Ivan A. MacArthur appeal by right the judgment of the trial court, entered following a bench trial, awarding plaintiff Emily J. Soloman damages in the amount of $4,100 for breach of a contract to sell land.

On October 15, 1969, Emily J. Soloman entered into a purchase agreement with Western Hills Development Company (Western) for the sale of lot # 141 in the proposed Western Hills Subdivision No. 5 located in Genesee County. The agreement stated that the purchase was to be consummated by delivery of a deed in exchange for the purchase price of $8,000 "when the plat is recorded". Mrs. Soloman paid a deposit of $100 when executing this agreement.

Western was incorporated and owned by two entities. Ivan A. MacArthur owned 50% of the stock, and the remaining 50% was owned by the Genesee Investment Corporation, of which Claude O. Darby, Jr., was a shareholder. Darby served as president of Western but was also a broker for Darby & Son, Inc. Darby & Son, Inc., was engaged in the real estate business and handled the sale to Emily Soloman. Gil V. Sabuco, an employee of Darby & Son, Inc., obtained the purchase agreement and testified that Mrs. Soloman was informed that the unplatted land was owned by Western. Claude O. Darby, Jr. signed the purchase agreement on behalf of Western, but did not indicate his agency status.

In June of 1972, Western decided not to proceed with development of the proposed plat. No formal meeting was held, and the decision to abandon the project was made by Darby and Ed Neithercut, another corporate officer. Western notified Darby & Son, Inc., and efforts were made to return Mrs. Soloman's $100 deposit. On June 29, 1972, Darby & Son, Inc., executed a check to Mrs. Soloman and mailed it to her husband, plaintiff George Soloman. Both plaintiffs testified that they never received the check.

On April 11, 1974, the tract of land comprising the proposed subdivision was conveyed to defendants Ivan MacArthur, Dorothy MacArthur, Robert Banwell, and Sheila Banwell for $55,000. As noted above, Ivan MacArthur was a 50% shareholder in Western. MacArthur testified that he "pretty much" authorized Darby to represent his interests in the corporation and paid the $55,000 purchase price at Darby's direction. MacArthur and Robert Banwell recorded a plat of the subdivision on December 18, 1974, and the land was eventually subdivided. The lot previously sold by Western to Mrs. Soloman was sold to a good faith purchaser, and a house was constructed on it. MacArthur testified that he had no knowledge of any claims held by plaintiffs at the time he purchased the land. Sometime after the land was sold to the MacArthurs and the Banwells Western merged with another corporation, the Elms Road Development Company, and ceased to exist as a separate corporate entity.

After the land was sold to the MacArthurs and the Banwells, efforts were again made to return Mrs. Soloman's $100 deposit. In June of 1974, Sabuco went to plaintiffs' restaurant and left them a check for the deposit. Plaintiffs indicated that Sabuco tendered a check to them but that they insisted on performance of the agreement. In any event, it is undisputed that the check was never returned or cashed.

On October 14, 1975, plaintiffs filed suit against defendants, seeking specific performance of the purchase agreement or, in the alternative, damages for breach of contract. Defendants initially moved for summary judgment pursuant to GCR 1963, 117.2(1) on the ground that plaintiffs had failed to state a claim upon which relief could be granted. The trial judge granted defendants' motion and ruled that the purchase agreement was not an enforceable contract because it did not specify a time for performance. On appeal, this Court reversed and remanded, holding that the parties had entered into a valid contract requiring the seller to record the plat within a reasonable time. Soloman v. Western Hills Development Co., 88 Mich.App. 254, 276 N.W.2d 577 (1979).

A bench trial was conducted on remand at which the trial court found a valid contract between plaintiff Emily Soloman and defendant Western. The trial court further found that the contract was breached in April of 1974, when the still unplatted land, containing the land described in the agreement with Emily Soloman, was sold to the MacArthurs and the Banwells. Specific performance of the agreement was held not possible since the land since had been resold to a good faith purchaser, so the trial court entered a judgment for damages in favor of Emily Soloman against Western. Judgment also was entered against defendants Ivan A. MacArthur and Claude O. Darby, Jr., in their capacities as shareholders in Western. A judgment of no cause of action was entered against plaintiff George C. Soloman in favor of all defendants.

On appeal, the individual defendants argue that they should not be held personally liable and that the trial court erred in disregarding Western's corporate form. This Court has recently summarized the circumstances under which the corporate form may be disregarded:

"Generally, the law treats a corporation as an entirely separate entity from its stockholders, even where one person owns all of the corporation's stock. Bourne v. Muskegon Circuit Judge, 327 Mich. 175, 191, 41 N.W.2d 515 (1950). Complete identity of interest between sole shareholder and corporation may lead courts to treat them as one for certain purposes. Williams v. American Title Ins. Co., 83 Mich.App. 686, 269 N.W.2d 481 (1978). Where the corporation is a mere agent or instrumentality of its shareholders or a device to avoid legal obligations, the corporate entity may be ignored. People ex rel. Attorney General v. Michigan Bell Telephone Co., 246 Mich. 198, 205, 224 N.W. 438 (1929). A court may look through the veil of corporate structure to avoid fraud or injustice. Schusterman v. Employment Security Comm., 336 Mich. 246, 57 N.W.2d 869 (1953). The community of interest between corporation and shareholders may be so great that, to meet the purposes of justice, they should be considered as one and the same. L. A. Walden & Co. v. Consolidated Underwriters, 316 Mich. 341, 346, 25 N.W.2d 248 (1946). When the notion of a corporation as a legal entity is used to defeat public convenience, justify a wrong, protect fraud or defend crime, that notion must be set aside and the corporation treated as the individuals who own it. Paul v. University Motor Sales Co., 283 Mich. 587, 602, 278 N.W. 714 (1938). The fiction of a corporate entity different from the stockholders themselves was introduced for convenience and to serve the ends of justice, but when it is invoked to subvert the ends of justice it should be and is disregarded by the courts. Paul, supra. A court's treatment of a corporate entity clearly rests on notions of equity, whether it is an action at law or at equity. Each case involving disregard of the corporate entity rests on its own special facts. Brown Brothers Equipment Co. v. State Highway Comm., 51 Mich.App. 448, 215 N.W.2d 591 (1974)." Kline v. Kline, 104 Mich.App. 700, 702-703, 305 N.W.2d 297 (1981).

See also, United Armenian Brethren Evangelical Church v. Kazanjian, 322 Mich. 651, 34 N.W.2d 510 (1948), Gledhill v. Fisher & Co., 272 Mich. 353, 262 N.W. 371 (1935).

In the instant case the trial court noted that Western regularly ignored corporate formalities and that the line between the corporation and at least some of the shareholders was "very blurry". The record supports this finding. Disregard of corporate formalities alone is not, however, sufficient to justify piercing. In addition, fraud, illegality, or injustice need be shown as set forth in Kline. The trial court in the instant case specifically held on several occasions that no fraud or illegality had been shown in the individual defendants' use of Western's corporate form. Instead, the trial court held that Western's merger with Elms Road Development Company and its current nonexistence as a separate entity required a finding of individual liability in order to "do equity":

"So the Court is satisfied that the corporate veil can be pierced to hold Claude O. Darby, Jr., and Ivan A. MacArthur, individually, because of that failure to follow those lines, and also for the Court to be able to do equity in a situation where there's really some question of whether Western Hills Development Company now has any value left to it. And the Court deriving in part from what Mr. Darby has said about Western Hills has now merged into Elms Road Development, or some name that is now another corporation. So the Court has no problem in order to do equity to pierce the corporate veil."

In this regard we hold that the trial court erred. Although it is clear that the corporate form may be disregarded to prevent injustice and to reach an equitable result, we believe that the injustice sought to be prevented must in some manner relate to a misuse of the corporate form short of fraud or illegality. If the rule were otherwise, an equal injustice or inequity could result. The instant case provides an example. The trial court determined that Mrs. Soloman was entitled to damages from Western. Because Western no longer existed, the trial court held MacArthur and Darby liable,...