Agway, Inc. v. Brooks

Agway, Inc. v. Brooks (2000-407); 173 Vt. 259; 790 A.2d 438

[Filed 28-Dec-2001]


       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal  revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of  Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any  errors in order that corrections may be made before this opinion goes
  to press.


                                No. 2000-407


Agway, Inc.	                                 Supreme Court

                                                 On Appeal from
     v.	                                         Franklin Superior Court


John H. and Mark Brooks	                         September Term, 2001 
d/b/a Brooks Farm


Edward J. Cashman, J.

James C. Foley, Jr., of Deppman & Foley, P.C., Middlebury, for 
  Plaintiff-Appellee.

Craig Weatherly of Gravel and Shea, Burlington, for Defendants-Appellants.


PRESENT:  Amestoy, C.J., Dooley, Morse, Johnson and Skoglund, JJ.


       AMESTOY, C.J.   Plaintiff Agway, Inc. filed an action in Franklin
  Superior Court against  defendants John H. Brooks and Mark Brooks, owners
  of Brooks Farm, Inc., seeking to recover  amounts due from the Brooks Farm,
  Inc. account. (FN1)   Following a bench trial, the court found in  favor of
  plaintiff and entered judgment against defendants, personally, for the debt
  of the corporation  as well as prejudgment interest and attorney's fees. 
  On appeal, defendants argue that the trial court  erred in piercing the
  corporate veil and in awarding plaintiff attorney's fees and prejudgment
  interest 

 

  at the rate of 15%.  We affirm the court's judgment as to defendants'
  liability for the debts of Brooks  Farm, Inc., but reverse the award of
  attorney's fees and prejudgment interest. 

       Plaintiff is a farm feed, fertilizer and tool supplier with retail
  locations in Vermont.  In 1981,  plaintiff began supplying feed to John and
  Mary Brooks, for their dairy farm in St. Albans Bay.   Plaintiff provided
  credit to John and Mary Brooks, using a commercial credit agreement that
  listed  the Brooks as owners of a 225 acre farm (with an annual equity
  value of $300,000), farm equipment,  a truck, and a car.  This agreement
  was signed in 1982 and annually thereafter with the last  agreement in
  1987, and the last billing on this account in May of 1998. 

       In 1993, John Brooks and his brother, Mark Brooks, formed the "Brooks
  Brothers Farm"  partnership, and appointed John Brooks as the managing
  partner.  At approximately the same time,  John Brooks formed a corporation
  called "Brooks Farm, Inc." owned by the "Brooks Brothers Farm" 
  partnership.  John Brooks served as the president and managing director of
  Brooks Farm, Inc., which  issued fifty shares of stock to each of the
  brothers.  

       In 1994, plaintiff began supplying feed under a separate account to
  Brooks Farm, Inc.  The  account had originally been opened by Brooks Farm
  in 1984 with no separate credit agreement.  In  1994, a credit manager for
  plaintiff reviewed this account. The credit manager was unable to find a 
  credit application, and he therefore had "Inc." deleted from the account. 
  From 1994 until April of  1998, plaintiff supplied and delivered
  approximately $45,000 worth of feed and beet pulp per month,  under the
  Brooks Farm account, to John and Mary Brooks's farm.  

       In October of 1998, plaintiff filed suit against John and Mary Brooks,
  and later Mark Brooks,  as individuals, seeking the balance on the Brooks
  Farm account as of June of 1998 - approximately  $154,000 - plus interest. 
  Defendants answered the complaint claiming that the debt belonged to the 

 

  corporation and the suit against them as individuals should be dismissed. 
  The court held a bench  trial on January 24, 2000.  The court dismissed
  Mary Brooks as a party but found John and Mark  Brooks individually and
  jointly liable for the $154,000 debt, 15% prejudgment interest and
  attorney's  fees.  

       In concluding that defendants had failed to respect the corporate
  form, the court noted that  John, Mary, and Mark Brooks owned the major
  business assets, including the land, livestock, farm  buildings, and
  equipment; and that the corporation owned no assets or leases of any real
  value.   Further, the court determined that John Brooks had moved money
  between his business and personal  account without corporate resolutions or
  documentation, loaned money from the corporation without  notes and repaid
  them with receipts.   The court did not find fraudulent intent; but rather
  determined  that John Brooks had failed to "make a distinction between John
  Brooks the person, and John Brooks  as president and managing director of
  Brooks Farm, Inc."  The court concluded that John Brooks had  "purposely
  set up the corporation without assets and ran it without a profit" had
  created an  undercapitalized corporation with the intention of isolating
  any business debt from his personal  assets; and consequently had given
  plaintiff the reasonable belief that John and Mark Brooks were  acting on
  their personal behalf rather than on behalf of a corporation.  Finally, 
  the court found that  the 15% prejudgment interest and attorney's fees were
  reasonable and that defendants had notice of  these provisions by virtue of
  the commercial credit agreements signed by John and Mary Brooks for  their
  personal accounts with plaintiff.

 
   
                                     I.

       Our standard when reviewing a trial court's findings of fact and
  conclusions of law is limited.  Rubin v. Sterling Enters., 164 Vt. 582,
  588, 674 A.2d 782, 786 (1996).  We will view factual  findings in the light
  most favorable to the prevailing party and will overturn such findings only 
  where there is no credible evidence to support them, not merely where the
  findings are contradicted  by substantial evidence.  Id. 

       A corporation is a legal construct, limited to the powers given it by
  the sovereignty that  creates it, Vt. Accident Ins. Co. v. Burns, 114 Vt.
  143, 146, 40 A.2d 707, 709 (1944), and generally  independent of the
  individuals who own its stock even when it is owned by a sole shareholder.  
  Roberts v. W.H. Hughes Co., 86 Vt. 76, 88, 83 A. 807, 812 (1912).  Although
  shareholders are not  generally liable for the debts of the corporation,
  shareholders can be held liable where the corporate  form has been used to
  perpetrate a fraud or to shield the shareholder's assets against legitimate
  claims  of a debtor.  See Winey v. Cutler, 165 Vt. 566, 567, 678 A.2d 1261,
  1262 (1996) (mem.); Roberts,  86 Vt. at 88, 83 A.  at 812; see also 11A
  V.S.A. § 6.22.  

       The Court will look beyond the corporation to its shareholders for
  liability, that is, pierce the  corporate veil, where the corporate form
  has been used to perpetrate a fraud, id., and also where the  needs of
  justice dictate.  See In re Vt. Toy Works, Inc., 135 B.R. 762, 770 (D. Vt.
  1991) (Vermont  courts will pierce the corporate veil where necessary to
  prevent fraud or injustice).  Although an  individual will not be held
  liable merely because he owns all the stock of the corporation, "in an 
  appropriate case, and in furtherance of the ends of justice, a debtor
  corporation and the individual  owning all its stocks and assets will be
  treated as identical, independent of any question of fraud."   Roberts, 86
  Vt. at 88, 83 A.3d 812.  In cases not involving fraudulent activity, the
  Court will look 

 

  to the facts and circumstances of each case to determine whether the
  corporate veil should be pierced  in the interests of fairness, equity, and
  the public need.  In re Vt. Toy Works, Inc., 135 B.R.  at 770  (D. Vt. 1991)
  (corporate veil can be pierced to prevent injustice where shareholder has
  made  personal use of corporate funds, where corporation is undercapitalized
  and where corporate formality  has been entirely ignored). (FN2)
  
       In this case, although the trial court did not infer that defendants
  acted with fraudulent intent,  the court found that the distinct corporate
  identity of Brooks Farm, Inc. was never respected.  Our  review of the
  record upon which the trial court based its findings supports its most
  critical  determinations, including that Brooks Farm, Inc. had nothing of
  value, that there was no credible  evidence of arms length negotiations or
  lease arrangements for business assets of the corporation  notwithstanding
  corporate resolutions to that effect; that the corporation "acted as a
  checkbook" to  run milk payments through to creditors, that corporate
  account deliveries were often paid with John  Brooks's  personal credit
  cards, and that loans were made to and from the corporate account without 
  notes and paid with receipts.  In sum, the evidence viewed in the light
  most favorable to the  prevailing party is a sufficient basis for the trial
  court's finding that defendant John Brooks purposely  undercapitalized
  Brooks Farm, Inc. with the intention of isolating his debt from business
  and  personal assets.       

       While it is doubtful that the Court would have equitable cause to
  pierce the corporate veil  merely because a closely held corporation did
  not follow corporate formalities, "[e]quity . . . will not

 

  blindly accept mere corporate form over the actual substance of the
  transactions involved."  In re Vt.  Toy Works, Inc., 82 B.R. 258, 305 (Bkr.
  D. Vt. 1987) (citing Chicago Milwaukee & St. Paul Ry. Co.  v Minneapolis
  Civic & Commerce Ass'n., 247 U.S. 490, 501 (1918)), rev'd on ground of
  insufficient  evidence, 135 B.R.  at 773.   In this case there was
  substantial evidence of not only a lack of corporate  formality, but more
  significantly, of the fact that Brooks Farm, Inc. was a mere corporate
  strawman  for the Brooks Brothers Farm partnership and John and Mark
  Brooks's personal businesses - without  assets, capital, or purpose beyond
  evading contract liability.   We will uphold a trial court decision to 
  pierce the corporate veil where it has done so, as in this case, to correct
  the use of the corporate form  to evade legitimate claims of judgment
  creditors.  See Winey, 165 Vt. at 568, 678 A.2d  at 1263.

                                     II.

       Defendants contend that the trial court erred in granting 15%
  prejudgment interest and  attorney's fees to plaintiff.  We recently
  articulated Vermont's standards for awarding attorney's fees  in D.J.
  Painting, Inc. v. Baraw Enterprises, Inc.: "[w]e apply the 'American Rule'
  with regard to  attorney's fees, which means that parties must bear their
  own attorney's fees absent a statutory or  contractual exception." __ Vt.
  __, __, 776 A.2d 413, 419 (2001) (citing Myers v. Ambassador Ins.  Co., 146
  Vt. 552, 558, 508 A.2d 689, 692 (1986)).   Nevertheless, D.J. Painting,
  Inc. also noted that,  in a case where neither statutory nor contractual
  terms dictate, courts may award fees on an equity  basis in exceptional
  circumstance where the needs of justice dictate.  Id. (citing In re Gadhue,
  149 Vt.  322, 327, 544 A.2d 1151, 1154 (1988); Sprague v. Ticonic Nat'l
  Bank, 307 U.S. 161, 167 

 

  (1939)).  Such exceptional cases include those instances where a party to
  the action behaves in bad  faith, or with vexatious intent.  Cameron v.
  Burke, 153 Vt. 565, 576, 572 A.2d 1361, 1367  (1990). (FN3) 

       The trial court order contains no mention of either exceptional
  circumstances or vexatious  acts.  Instead, the trial court ordered
  defendants to pay attorney's fees based on the fact that John  Brooks had
  understood and agreed to such terms in his dealing with plaintiff over the
  years, and  therefore fell under the contractual exception to the general
  rule that parties bear their own expenses.  The trial court stated in its
  findings, "[c]learly John Brooks bears personal responsibility for the 
  debt. . . . He understood the terms and conditions of the [commercial
  credit] agreements to include  interest charges and attorney['s] fees.  He
  agreed to those terms and conditions as a  corporation. . . . The Court
  will personally hold him to those conditions."  Plaintiff argues that both 
  the tallies, generally signed by the buyer at the time of delivery, and the
  commercial credit  agreements, which defendant John Brooks signed for his
  personal accounts, are evidence of the fact  that the corporation agreed to
  the interest and attorney's fees terms.  

       The tallies are not sufficient to bind the corporation to the terms
  specified on the back side,  including provisions for attorney's fees and
  interest.  Generally,  tallies or receipts are not contracts  and therefore
  do not stand as the exclusive evidence of the parties' intentions.  Drown's
  Guardian v.  Chesley's Estate, 92 Vt. 19, 23, 102 A. 102, 103 (1917).  In
  this case, there can be no doubt that the  tallies were not intended to be
  contracts.  Many of the tallies representing the feed deliveries 

 

  which make up the balance due on the Brooks Farm account were left at the
  farm unsigned if no one  was available at the time of delivery.  

       In contrast, the commercial credit agreements used by plaintiff did
  create a binding  agreement with respect to attorney's fees and interest
  charges, but that agreement was with John  Brooks for his personal account. 
  The trial court declined to attach the commercial credit agreements  that
  John Brooks had signed for his personal accounts to the Brooks Farm
  account: 

    Agway must bear responsibility for its own record keeping.  Those 
    agreements attach to a separate and current account. . . . The
    Court  finds that Agway did contract with the Brooks Farm, Inc.
    for the feed  in question.  But, the Court has not recognized the
    corporate status.   Thus the liability attaches to those who owned
    and managed the  corporation at the time in question.

  Insofar as the Court found that plaintiff cannot attach liability through
  commercial credit agreements  on John Brooks's personal account, we agree.  
  Plaintiff was aware that the Brooks Farm account had  signed no commercial
  credit agreement, and we concur with the trial court that it falls on
  plaintiff to  require customers to sign a commercial credit agreement if it
  intends to hold them to the terms  therein.  

       While the trial court did not impose liability through John Brooks's
  personal account, it found  that he had agreed to the interest and
  attorney's fees terms as a corporation by imputing  Brooks  Farms, Inc.
  with the knowledge of those terms contained in the commercial credit
  agreements signed  on the personal account.  This was error.   The relevant
  question is not whether John Brooks, and  therefore the corporation, had
  knowledge of those terms; or whether John Brooks agreed to those  terms; it
  is whether the corporation contractually agreed to them.  The trial court
  found that the  corporate account had not filed a commercial credit
  agreement.  Because the trial court 

 

  found Brooks Farm, Inc. to be the contracting party on the debt owed, and
  found defendants liable  through piercing the corporate veil, defendants'
  liability for the debt on the corporate account is  limited to that for
  which the corporation was liable.  See Morris v. Dep't of Taxation and
  Fin., 603 N.Y.S.2d 807, 810 (N.Y. Ct. App. 1993) ("The concept [of
  piercing the corporate veil] is equitable in  nature and assumes that the
  corporation itself is liable for the obligation sought to be imposed. . . . 
  Thus, an attempt . . . to pierce the corporate veil does not constitute a
  cause of action independent of  that against the corporation.").          

       The evidence does not support the conclusion that Brooks Farm, Inc.
  contractually agreed to  pay 15% prejudgment interest and attorney's fees,
  nor did the Court find that defendants acted  vexatiously or in bad faith. 
  Absent evidence to support such findings we apply the American Rule,  and
  plaintiff therefore must bear its own attorney's fees. 

       The court's judgment as to the defendants' liability for the debts of
  Brooks Farm, Inc. is  affirmed.  The award of attorney's fees and
  prejudgment interest of 15% is reversed.  




                                       FOR THE COURT:



                                       _______________________________________
                                       Chief Justice



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                                  Footnotes


FN1.  Plaintiffs originally filed suit against Mary Brooks, but the trial
  court dismissed the case  against her in its July 12, 2000 findings and
  order.  

FN2.  See also R. B. Thompson, Piercing the Corporate Veil: An Empirical
  Study, 76 Cornell L.  Rev. 1036, 1039 (1991) (the question of veil piercing
  is contextual); S. M. Bainbridge, Abolishing  Veil Piercing, 26 J. Corp. L.
  479, 509 (2001) (most jurisdictions do not provide a bright line standard 
  but rather compare the facts of the case to a laundry list of factors).    

FN3.  Plaintiff contends that attorney's fees are only awarded in
  exceptional circumstances or  where the court pierces the corporate veil
  based on the alter ego doctrine, citing Winey v. Cutler, 165  Vt. at
  567-68, 678 A.2d  at 1262-63.  When we upheld the award of attorney's fees
  in Winey;  however, we cited previous decisions holding that a court may
  grant attorney's fees "in exceptional  cases as justice requires," and did
  not rely on the alter ego doctrine in affirming the award.  Id., 678 A.2d 
  at 1263.