T W M Homes, Inc. v. Atherwood Realty & Inv. Co.

• Decision Date: 09 April 1963
• Citation: 214 Cal.App.2d 826,29 Cal.Rptr. 887
• Court: California Court of Appeals Court of Appeals
• Parties: T W M HOMES, INC., a corporation, Plaintiff and Appellant, v. ATHERWOOD REALTY & INVESTMENT COMPANY, Inc., a corporation, James C. Voiss, Lynn S. Voiss, Leon O. Balch, and Jeanne M. Balch, Defendants and Respondents. Civ. 20438.

Page 887

29 Cal.Rptr. 887

214 Cal.App.2d 826

T W M HOMES, INC., a corporation, Plaintiff and Appellant, v. ATHERWOOD REALTY & INVESTMENT COMPANY, Inc., a corporation, James C. Voiss, Lynn S. Voiss, Leon O. Balch, and Jeanne M. Balch, Defendants and Respondents.

Civ. 20438.

District Court of Appeal, First District, Division 1, California.

April 9, 1963.

Sheldon D. Durham, Redwood City, for appellant.

Roy W. Seagraves, Norman G. Meadows, Redwood City, for respondent Lynn S. Voiss.

Robert O. Wilhelm, Redwood City, for respondents Leon O. Balch and Jeanne M. Balch.

SULLIVAN, Justice.

This is an action brought against Atherwood Realty & Investment Company, Inc. (hereinafter called Atherwood), and four individuals who were its directors and shareholders, to recover the reasonable value of building materials furnished by the plaintiff and to set aside allegedly fraudulent conveyances made by Atherwood to the other defendants. Atherwood's default was entered prior to the case being called for trial. After a nonjury trial, the court below rendered judgment in favor of the plaintiff and against Atherwood for $5,950.41 principal, $2,000 attorney's fees and costs but denied plaintiff all recovery against the individual defendants. Plaintiff appeals from those portions of the judgment unfavorable to it.

Plaintiff's seven-count amended complaint on which the case proceeded to trial may be summarized as follows: Count one sought recovery from all defendants of $2,852.31 for building materials furnished to be used, and thereafter used, in the construction of a dwelling on a certain parcel of real property owned by the defendants, $1,000 attorney's fees and the foreclosure of a lien for such sums. Count two sought recovery of $3,098.10 for materials similarly furnished and used in the construction of a dwelling on another parcel of real property owned by the defendants, $1,000 attorney's fees and foreclosure. It is convenient to observe here that recovery was granted plaintiff on the first two counts against Atherwood only, the court finding that such corporate defendant was the sole owner of the two parcels of property involved therein. Because of the foreclosure prior to trial of liens senior to the materalmen's liens, plaintiff presumably did not request and the judgment did not include provision for foreclosure of plaintiff's liens. Count three sought to set aside conveyances of four parcels of real property made on August 10, 1959, by Atherwood to the defendants Leon O. Balch and Jeanne M. Balch on the alleged grounds that, Atherwood being then insolvent, such conveyances were fraudulent in that they were made (a) without any fair consideration and (b) with the intent to hinder, delay and defraud creditors. Said count also alleges that at the time the conveyances were made 'and at all times material herein,' the defendants Balch had notice and knowledge of Atherwood's fraudulent intent. Count four sought upon the same grounds the same relief as count three in respect to a conveyance of a parcel of real property allegedly made on July 20, 1959, by Atherwood to the defendants James C. Voiss and Lynn S. Voiss. For convenience we will refer to the property as the Page Street property. Count five sought, upon the same grounds, the same relief as counts three and four in respect to a conveyance of a parcel of real property allegedly made on August 28, 1959, by Atherwood to the defendants James C. Voiss and Lynn S. Voiss. For convenience we will refer to this property as either the Woodside property or the Bardet Road property. ¹ Count six, incorporating by reference all of the allegations of counts one and two, alleged in substance that Atherwood was the alter ego of the four individual defendants and that said corporation was used by them as an instrumentality to conduct their personal business and 'to effect a fraud upon their creditors and the creditors of said corporation.' Count seven, incorporating by reference all of the allegations of the first four counts, alleged that the four individual defendants, as directors and shareholders of Atherwood, 'authorized and ratified the conveyances of property' set forth in counts three and four, that the plaintiff was a creditor of Atherwood at the time such conveyances were made and that the value of the property conveyed exceeded plaintiff's claim against Atherwood. In substance, this count sought to impose liability on the individual defendants for an allegedly unlawful distribution of corporate assets to shareholders.

We set forth the pertinent facts. Atherwood was incorporated in California on March 17, 1958. The defendants Balch, husband and wife, and the defendants Voiss, husband and wife, were its incorporators and appointed in its articles of incorporation to act as the first directors. At the first meeting of directors held on April 3, 1958, Balch was elected president; Mrs. Balch, vice-president; and Mrs. Voiss, secretary-treasurer. The defendants remained as such directors and officers until August 12, 1959, when the resignations of Mr. and Mrs. Balch from all offices were accepted, two new directors were elected to fill their vacancies, and Voiss was elected president. Mrs. Voiss continued as director and secretary-treasurer.

Atherwood's authorized capitalization was $25,000, consisting of 250 shares at a par value of $100. On October 24, 1958, the Commissioner of Corporations issued its permit authorizing the sale of 20 shares at par for cash to the defendants Leon Balch and James Voiss, subject to the usual condition that the certificates when issued were to be deposited with an approved escrow holder. Ten shares were issued to each of the above persons. Each of them paid the corporation $1,000, which was obtained through a joint personal loan at a bank. Monthly payments on this loan were made by the corporation out of its own funds. Voiss, however, testified that such payments were 'charged on our salaries and * * * carried in our salary account * * *.' Balch gave similar testimony.

At the outset, Atherwood's operations were those of a real estate broker, Balch and Voiss acting as salesmen and receiving their compensation from the corporation in the form of commissions. Beginning in July 1958, Atherwood began to acquire real property and to engage in the business of developing real estate and constructing homes. It continued in this business until September 1959. According to the testimony of Voiss, it became obvious '[i]n the late part of the summer' of 1959 that the corporation was in severe financial difficulties. In September the corporation endeavored to enter into some working arrangements with its creditors and eventually ceased operating altogether. An assignment for the benefit of creditors authorized is September was made by Atherwood on November 11, 1959. Because of the lack of cooperation on the part of all creditors, such assignment never became effective. Finally on March 9, 1960, Atherwood filed its petition to be adjudicated a bankrupt. The schedules filed therewith listed debts in the sum of $272,603.81 secured by real property valued at $191,450 and unsecured debts in the sum of $86,374.27.

Atherwood appears to have entered the second phase of its operations on a gradual basis and with extremely limited resources. Beginning in July 1958 it acquired over a period of several months some 30 to 34 lots upon which it proposed to build homes. Although Voiss testified that in some instances the corporation used its own funds to make a deposit on the purchase of such parcels of land, in most cases the property was acquired by an arrangement under which the seller took back a note and deed of trust for the selling price, at the same time agreeing to subordinate such security to any construction loan which Atherwood would place on the property in order to improve it. It is a fair reading of the record that Atherwood was conducting its operations mainly on such borrowed capital and that, while so engaged, virtually its only income consisted of the proceeds of construction loans obtained by it in order to build homes on the parcels of real property thus acquired. The corporate books disclose that proceeds of construction loans were first received by Atherwood in October 1958 but that no proceeds from the sale of any completed houses were received until the summer of 1959. The corporation maintained one bank account in which all construction loan proceeds were deposited and from which all construction costs were disbursed.

Among the lots which Atherwood acquired in the fall of 1958 were two lots located in Woodside upon which the individual defendants contemplated building homes for themselves. The lot for Mr. and Mrs. Balch's home cost $10,000. The seller of the lot was paid $2,000 as a downpayment and took back (presumably from Atherwood) a note and deed of trust for $8,000 (presumably subordinated to the construction loan). Atherwood obtained a $23,000 construction loan on the property and it was from such proceeds that it paid the seller of the lot the above downpayment. There was testimony from an official of the lending agency making the construction loan on the Woodside property for Voiss that he suggested to Mr. and Mrs. Voiss that the home be thus financed through the corporation and that the parties assume the loan after the house was completed. The lot for Mr. and Mrs. Voiss' home cost $5,000. Voiss testified that he and his wife made the downpayment of $1,600 on the lot (more probably $1,500 and $100 closing costs). For the balance of the purchase price the sellers of the lot took back from Atherwood its note for $3,500 secured by a deed of trust.

At a meeting of the board of directors of Atherwood held on December 17, 1958, said directors being solely the four individual defendants herein, a resolution was passed to the effect that upon completion of Mr. and Mrs. Balch's home, the property be deeded to said parties 'with...