Park Terrace v. PHOENIX INDEMNITY COMPANY

85 S.E.2d 677 (1955)

241 N.C. 473

PARK TERRACE, Inc. v. PHOENIX INDEMNITY COMPANY (Original Defendant) and Park Builders, Inc. (Additional Defendant).

No. 741.

Supreme Court of North Carolina.

February 4, 1955.

*679 Brooks, McLendon, Brim & Holderness, Greensboro, for original defendant-appellant, and Womble, Carlyle, Martin & Sandridge, Winston-Salem, and Broaddus, Epperly & Broaddus, Martinsville, Va., for additional defendant-appellant.

Spry & White and Dallace McLennan, Winston-Salem, for plaintiff-appellee.

BARNHILL, Chief Justice.

There was no error in the order of the court below declining to strike the quoted excerpt from the further answers of the defendants. It was the duty of the architect in charge to exercise general supervision of the construction of the buildings contemplated by the building contract for the purpose of determing whether the builder was furnishing the type of building material and constructing the buildings in accordance with the plans and specifications. Consequently, the defendants will have the right to offer competent evidence in support of the allegation. Hence, inclusion of said allegation is neither irrelevant nor immaterial.

The appellants discuss in their brief the alleged error of the court below in declining to make McLean a party defendant. But there is no exception to sustain this assignment. Upon the signing of the order from which the defendants appealed, they elected to particularize their objections to the order in the following language: "The defendants * * * each excepts separately to so much of the foregoing order as strikes paragraphs 2 and 3 of their respective further answers and defenses, and the judgment entered, and each appeals to the Supreme Court." Thus the defendants, at the time, elected to direct their attack upon the order to so much thereof as struck paragraphs 2 and 3. They did not except to the refusal of the court to make McLean a party defendant. Currie v. Malloy, 185 N.C. 206, 116 S.E. 564. And, in any event, the refusal of the court to make McLean a party defendant was well advised. The purchase of the outstanding common stock from the then owners thereof was by McLean as an individual. He signed the socalled release as an individual. Hence, these defendants may not be permitted to try any action they may have against McLean in this suit.

The so-called release executed at the time and as a part of the contract of purchase and sale was executed by the then owners as parties of the first part and by McLean as the party of the second part, as individuals. Neither the vendors nor the vendee purported to act for the corporation.

While it is alleged that McLean, in executing the release, "was acting in behalf of and as agent of the plaintiff; that he had authority to so act and that the plaintiff, as principal, is bound by the acts of the said Malcolm P. McLean, Jr., in executing and delivering said contract to Park Builders, Inc.," the other specific facts alleged completely refute this allegation and make it nothing more than a conclusion. At the time McLean signed the release contract, he was not a stockholder, director, or officer of plaintiff corporation, and there is no allegation that he was an employee possessing any authority whatsoever to act in behalf of plaintiff.

Since McLean, in executing the release contract, did not purport to act as an agent *680 of plaintiff, the question whether he had authority to act in behalf of that corporation does not arise. That question does not arise until and unless he professes to contract for and in behalf of his alleged principal. General Air Conditioning Co. v. Douglass, 241 N.C. 170, 84 S.E.2d 828.

A corporation is bound by the acts of its stockholders and directors only when they act as a body in regular session or under authority conferred at a duly constituted meeting. "As a rule authorized meetings are prerequisite to corporate action based upon deliberate conference and intelligent discussion of proposed measures." O'Neal v. Wake County, 196 N.C. 184, 145 S.E. 28, 29; Tuttle v. Junior Building Corp., 228 N.C. 507, 46 S.E.2d 313, and cases there cited.

"The separate action, individually, without consultation, although a majority in number should agree upon a certain act, would not be the act of the constituted body of men clothed with corporate powers." Angel & Ames on Corporations, sec. 504. "Indeed, the authorities upon this subject are numerous, uncontradicted, and supported by reason." Duke v. Markham, 105 N.C. 131, 10 S.E. 1017; Tuttle v. Junior Building Corp., supra, and cases there cited; 13 A.J. 465; 3 Fletcher, Cyc. of Corporations, 2917; Ballentine, Manual of Corporation Law and Practice, 591.

It is apparent that at the time McLean acquired the stock of plaintiff corporation, the vendors were under the impression they might be liable individually in an action for breach of the building contract and were seeking to protect themselves against a suit for such breach. It would seem, therefore, that the release contract was made a part of the purchase and sale of the stock primarily for the protection of the vendors. In any event, the action of McLean in becoming a party to said contract was not binding upon plaintiff corporation. Whether Park Builders, Inc. has a cause of action against the vendors of the stock under said release contract will be determined by the verdict and judgment in this cause. If plaintiff recovers herein, Park Builders, Inc. may then assert its rights, if any, under said release contract.

McLean is not a necessary party to this action. The rights of plaintiff may be fully litigated without making him either a party plaintiff or defendant. The action of the court in declining to make him a party defendant cannot be held for error. The motion of the defendants for leave to amend their answers was interposed for the purpose of making allegations against McLean. Since McLean was not made a party, the motion to amend is clearly without merit. In any event, it was a matter of discretion resting in the presiding judge. His action in declining to grant leave to amend is not reviewable. Hooper v. Glenn, 230 N.C. 571, 53 S.E.2d 843; Handley Motor Co. v. Wood, 238 N.C. 468, 78 S.E.2d 391; Goode v. Barton, 238 N.C. 492, 78 S.E.2d 398.

Query: Since McLean has acquired all the stock of plaintiff, is it now a corporation? This question is not presented by this record.

The judgment entered in the court below is

Affirmed.

BOBBITT, Justice (dissenting).

In considering plaintiff's motion to strike, we deal with the facts alleged.

On 15 February, 1951, Pollard, Burge and Lester owned 199 shares of plaintiff's common stock. Bolich owned the remaining 101 shares. Pollard, Burge and Lester owned common stock of defendant Park Builders, Inc. They were interested, as stockholders, in both corporations. This was the state of affairs when McLean purchased the 199 shares from Pollard, Burge and Lester, and the 101 shares from Bolich.

The release was signed by McLean. It was executed as recited therein, "as a part of the consideration for the purchase of said stock." It provides that McLean "accepted the real estate and all improvements located thereon * * * owned by the corporation in its present condition." The release, by its terms, is in favor of defendant *681 Park Builders, Inc., as well as in favor of Pollard, Burge and Lester.

On 15 February, 1951, claims, if any, against Park Builders, Inc., "of any nature whatsoever because of defective workmanship, defective or inferior building materials in the structures located on said premises," vested in Park Terrace, Inc., the plaintiff. When McLean purchased the 199 shares of common stock in plaintiff he agreed, as expressly provided in the release, that no claim of this nature would be made against Park Builders, Inc.

The plaintiff, a corporate entity, neither received nor gave a consideration. But McLean became its sole common stockholder in consideration of his execution of the release. It is clear that McLean individually is precluded by his express agreement from asserting any claim against defendant Park Builders, Inc., or the surety on its bond, or Pollard, Burge and Lester, of any nature whatsoever because of defective workmanship or defective or inferior building materials in the structures located on said premises. The question for decision is whether, upon the facts alleged, Park Terrace, Inc., can assert such claims.

It is alleged that on 15 February, 1951, McLean became, and presently is, the owner of said 300 shares, the entire common stock of plaintiff; and that the only other stock outstanding is the 100 shares of preferred stock, having a par value of $1.00 per share, owned by the Federal Housing Administration.

The release is pleaded as a bar to plaintiff's action. The case has been presented as turning upon the question as to whether the release is to be considered the contract of the plaintiff, the contention being that McLean acted as agent for the plaintiff and by virtue of his authority as sole common stockholder. However, we consider the facts as alleged; and it is for this Court to pass upon the legal significance of the allegations. In so doing, we approach the question not to determine whether the release is in fact or in law the corporation's contract but rather to determine whether McLean can maintain under the guise of acorporation suit an action for his benefit as sole owner of the plaintiff's common stock.

A corporation is an entity, distinct from its stockholders, although one individual owns its entire stock, or all but qualifying shares held by directors. 1 Fletcher, Cyc. of Corporations, sec. 25; 18 C.J.S., Corporations, § 4.

Too, as stated in the opinion of the Court, "a corporation is bound by the acts of its stockholders and directors only when they act as a body in regular session or under authority conferred at a duly constituted meeting." Duke v. Markham, 105 N.C. 131, 10 S.E. 1017; Tuttle v. Junior Building Corp., 228 N.C. 507, 46 S.E.2d 313. These principles are well settled in this jurisdiction. Nothing said herein is intended to indicate that I would modify or impair the authorities cited.

But a corporation should not be permitted to serve as a device, instrument or agency to enable its beneficial owners, the stockholders, to accomplish by indirection that which their solemn covenant forbids.

Sanborn, J., in a statement often quoted, says: "If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons." United States v. Milwaukee Refrigerator Transit Co., C.C., 142 F. 247, 255; see 18 C.J.S., Corporations, §§ 6 and 7.

And Fletcher, op. cit., sec. 41, citing authorities, gives this summation: "A classification of the evidential facts on which the corporate entity will be disregarded is necessarily impossible beyond such categories as (a) fraud, (b) contravention of statute or law, (c) contravention of contract, (d) equitable titles or rights, (e) internal corporate transactions among all shareholders or members where third persons are not involved, (f) mere agencies and undisclosed *682 principalships, and the like." See, 13 Am. Jur., Corporations, sec. 7.

In Home Fire Ins. Co. v. Barber, 67 Neb. 644, 93 N.W. 1024, 1031, 60 L.R.A. 927, the facts, in brief, were these: An individual purchased all of a corporation's outstanding capital stock, the sellers being stockholders, directors and officers of the corporation. After ownership and control had passed to the purchaser, a suit was brought by the corporation to recover from one of the sellers on the ground of alleged prior mismanagement of the corporation's affairs. Upon the premise that stockholders who acquire their shares and interest in the corporation from the alleged wrongdoer have no standing to complain thereof (with which we are not concerned), the court, opinion by Pound, C., says: "Conceding, then, that all of the present stockholders are so circumstanced that no relief should be afforded them in a court of equity, may the corporation recover, notwithstanding? We think not. Where a corporation is not asserting or endeavoring to protect a title to property, it can only maintain a suit in equity as the representative of its stockholders. If they have no standing in equity to entitle them to the relief sought for their benefit, they cannot obtain such relief through the corporation or in its own name. (Citations.) It would be a reproach to courts of equity if this were not so. If a court of equity could not look behind the corporation to the shareholders, who are the real and substantial beneficiaries, and ascertain whether these ultimate beneficiaries of the relief it is asked to grant have any standing to demand it, the maxim that equity looks to the substance, and not the form, would be very much limited in its application. `It is the province and delight of equity to brush away mere forms of law.' Post, J., in Fitzgerald v. Fitzgerald & Mallory Construction Company, 44 Neb. 463, 492, 62 N.W. 899. Nowhere is it more necessary for courts of equity to adhere steadfastly to this maxim, and avoid the danger of allowing their remedies to be abused, by penetrating all legal fictions and disguises, than in the complex relations growing out of corporate affairs. Accordingly, courts and text-writers have been in entire agreement that equity will look behind the corporate entity, and consider who are the real and substantial parties in interest, whenever it becomes necessary to do so to promote justice or obviate inequitable results."

The distinguished jurist (later known to us as Dean Pound), concludes: "To permit persons to recover through the medium of a court of equity that to which they are not entitled, simply because the nominal recovery is by a distinct person through whom they receive the whole actual and substantial benefit, and that nominal person would, in ordinary cases, as representing beneficiaries having a right to recover, be entitled to relief, is perversion of equity. It turns principles meant to do justice into rules to be administered strictly without regard to the result. It is contrary to the very genius of equity. When the corporation comes into equity and seeks equitable relief, we ought to look at the substance of the proceeding, and, if the beneficiaries of the judgment sought have no standing in equity to recover, we ought not to become befogged by the fiction of corporate individuality, and apply the principles of equity to reach an inequitable result."

"Thus it has been held that where a corporation was but the instrumentality through which an individual for convenience transacted his business, all of the authorities, not only equity, but the law itself, would hold such a corporation bound as the owner of the corporation might be bound, or conversely, hold the owner bound by acts which bound his corporation. Llewellyn Iron Works v. Abbott Kinney Co., 172 Cal. 210, 214, 155 P. 986; Industrial Research Corp. v. General Motors Corp., D.C., 29 F.2d 623, 625. In the case of Clark v. Millsap, 197 Cal. 765, 782, 242 P. 918, 925, the court states: `The doctrine of corporate entity is not so sacred that a court of equity will hesitate to look through form to the substance of the thing, and it may, in proper cases, ignore it to preserve the rights of persons imposed upon or circumvented by fraud. In such cases, corporate fiction is disregarded.' That this rule is not limited to equity is clearly stated in Llewellyn Iron Works v. Abbott Kinney Co., supra, and the *683 cases there cited." Mirabito v. San Francisco Dairy Co., 1935, 8 Cal. App. 2d 54, 47 P.2d 530, 532.

In North Carolina, legal and equitable rights and remedies are determined in one and the same action. Constitution of N. C. Art. IV, sec. 1; Reynolds v. Reynolds, 208 N.C. 578, 182 S.E. 341.

The foregoing principles have been applied to diverse factual situations in a multiplicity of cases in other jurisdictions. It is generally accepted that "disregarding corporate entity" does not connote that the corporation has ceased to exist. Nor will corporate entity be disregarded when to do so would prejudice the corporation's creditors or other third parties. It is fundamental that the court will look behind the corporate entity only in relation to the facts of an appropriate case and to further the ends of justice.

If it should appear, when the evidence is developed, that McLean would be the beneficiary of any recovery by the corporation herein, the corporation in such case would in reality, prompted by McLean's ownership and control, be acting as his device, instrument or agency to reap for him an unjust gain. A court of equity should not permit the concept of corporate entity to aid him in such conduct.

It should be noted, however, that we are concerned now only with pleadings. The evidence, of course, may cast a different light both upon the questions presented and the legal principles applicable thereto.

In my view, the challenged allegations are relevant. The defense, in substance, is that the plaintiff cannot maintain this action because McLean, the beneficiary of the recovery, has contracted that such claim will not be made. Unless McLean is barred, the corporation is not barred. Hence, it seems to me that McLean is a necessary part. Therefore, I would reverse the ruling striking the challenged allegations and remand the cause with instructions that McLean be made a party.

JOHNSON, J., concurs in dissent.