Glenn Fast v. Northtown Auto Sales, Inc.; Fred Gibson; and Robbie Gibson

ca02-579

DIVISION I

NOT DESIGNATED FOR PUBLICATION

ARKANSAS COURT OF APPEALS

OLLY NEAL, Judge

CA02-579

DECEMBER 23, 2002

GLENN FAST AN APPEAL FROM BOONE COUNTY

APPELLANT CIRCUIT COURT

v. [E-2000-45-2]

NORTHTOWN AUTO SALES, INC.; HONORABLE ERNIE E. WRIGHT,

FRED GIBSON; and ROBBIE GIBSON SPECIAL CIRCUIT JUDGE

APPELLEES

AFFIRMED ON DIRECT APPEAL;

AFFIRMED ON CROSS-APPEAL

This appeal arises from a suit filed by appellant to collect a promissory note following the dissolution of a corporation, appellee Northtown Auto Sales, Inc. (Northtown). The trial court, finding that appellant did not follow the plan of dissolution and was guilty of unclean hands, denied relief. The trial court also denied appellees' request for attorney's fees. This appeal and cross-appeal followed. We affirm on both direct appeal and on cross-appeal.

Appellant Glenn Fast and appellee Fred Gibson1 were the shareholders in Northtown, a used-car dealership. Appellant testified that he and appellee agreed to incorporate Northtown in 1996. Appellant owned fifty-one percent of the shares, and appellee owned forty-nine percent. Appellant was the chairman of the board, chief executive officer, chief operating officer, president, secretary, and treasurer of Northtown. Appellant testified that he handled all financial matters for Northtown while appellee did the actual buying and selling of cars for the business. The written agreement provided that it would terminate "[a]ny time the executive is not performing to the full extent of his efforts and only for the exclusive business of the company for which he is a shareholder and operating officer."

On August 4, 1997, Northtown borrowed some $300,000 from the First National Bank of Green Forest, Arkansas (FNB), to purchase inventory. The one-year note was signed by appellant as president of Northtown and by the Gibsons as individuals. The note was partially secured by a second mortgage on appellee's home, as well as by the inventory and a second mortgage on appellant's home. The mortgage by appellee was given pursuant to the incorporation agreement. The note was extended on August 15, 1998, to become due on August 15, 1999. Appellant testified that appellee's home was released from the second mortgage so that the house could be sold and the Gibsons could purchase a second house. The Gibsons did not put a second mortgage on their new home.

Appellant testified that Northtown's financial condition was in disarray because none of the books balanced as of the July 1998 shareholder meeting. Appellant testified that appellee wrote checks for the company that bounced, that a substantial amount of cash was unaccounted for, and that there were no invoice records for a majority of the vehicle inventory even though appellee had entered the purchase price of the vehicles in the records. Appellant testified that he was greatly concerned that Northtown's financial condition would cause him to lose a great deal of money.

On September 21, 1998, appellant and appellee attended a joint meeting of Northtown's shareholders and board of directors. The minutes of that meeting reflect that appellant confronted appellee with allegations of theft and irregularities in company operations and accused him of seeking "kickbacks." Appellee left the meeting before its conclusion. At the meeting, appellant's wife was elected to the board of directors. Appellant then caused a letter to be sent to appellee, removing appellee as an officer, director, and employee of Northtown. Appellant testified that this action did not terminate his business relationship with appellee because appellee remained a shareholder in Northtown and was still obligated as a shareholder. Appellant testified that appellee's removal as manager of the business and as an officer and director of the corporation was because he was no longer performing to the fullest extent of his efforts and only for the exclusive benefit of Northtown. Appellant testified that this terminated the agreement with appellee and, in appellant's opinion, was consistent with the termination agreement. Appellant testified that, after September 21, 1998, he made, ratified, or allowed to happen all decisions concerning the business and assets and liabilities of Northtown.

As of September 30, 1998, Northtown had total assets of $372,436.50, total liabilities of $316,709.28 (of which $298,103.13 was the note payable to FNB), and shareholder equity of $55,727,22.

On October 23, 1998, another joint meeting of Northtown's shareholders and board of directors was held. At that time a "Plan of Complete Liquidation and Dissolution" was adopted, authorizing the liquidating committee to satisfy and pay all of Northtown's obligations. Appellant testified that he and his wife formed the "liquidating committee." Acorporate resolution adopted that day authorized the board to sell Northtown's assets under such terms and conditions as the board deemed advisable as being in the best interest of Northtown. The board was also authorized to make provisions for discharging Northtown's debts and liabilities. Appellant testified that appellee was sent copies of the minutes and the liquidation plan because appellee, as a shareholder, had the right to know what was happening and that appellee could rely on the minutes and the plan. Appellant testified that he complied with the Business Corporation Act and acted reasonably and prudently in Northtown's dissolution.

Appellant also testified that at the end of the dissolution, Northtown was credited with between fifty to seventy percent more than had been forecast. Appellant testified that he decided to keep Northtown as a going concern because he would lose a great deal of money through a straight liquidation, in part because they would be unable to collect the receivables because of the nature of Northtown's customers. He estimated the losses on the inventory at a liquidation of $200,000. He also said that, if the appearance of a going concern were given to both the banking community and the automotive community, collections would be greater and closer to the retail value. Appellant testified that, during the dissolution period, it was not possible to sell the vehicles at invoice price and use that money to reduce the principal on the note because there were insufficient proceeds to operate the business and reduce the principal owed.

Appellant testified that, in June 1998, he and appellee agreed to hire Ken Clagett to run Northtown's Berryville operations. The employment agreement with Clagett provided Clagett a $2,500 monthly draw against earned commissions and a bonus of twenty-five percent ofNorthtown's net operating profits. Clagett was responsible for purchasing inventory after appellee was terminated. Appellant could not testify as to the number of vehicles Clagett purchased for the Berryville operation.

Appellant testified that he and Clagett incorporated Carroll County Chrysler (CCC) in July 1999 to run the Chrysler/Dodge/Jeep/Plymouth dealership in Berryville. He testified that he and his wife owned seventy-five percent of the stock and that Clagett and his wife owned twenty-five percent. Appellant testified that he was the president, chairman of the board, and secretary-treasurer and that Clagett was general sales manager and shareholder.

Appellant testified that he signed an agreement on behalf of both Northtown and CCC, effective July 1, 1999, for CCC to operate Northtown during the liquidation and to be responsible for the liquidation. Appellant testified that CCC used a subsidiary company, Northtown Auto Plaza (NAP), owned by appellant and Clagett, to implement the agreement. Appellant testified that he did not know why a copy of the agreement was not sent to appellee until October 21, 1999.

Appellant testified that CCC took over the day-to-day operations of Northtown. He said that the operating agreement states that, as vehicles are sold, CCC will pay the lower of the invoice price or the sales price of the vehicle on the note. Appellant admitted that CCC did not remit money received from the sale of Northtown vehicles to the bank on the note. Appellant also testified that CCC continued to use Northtown's bank accounts to pay various operating expenses of Northtown, including insurance, employee expenses, vehicle repairs, advertising, utilities and telephone expenses, oil, gas, and parts, and office and shop expenses. Appellant testified that he did not use Northtown's money to pay the expenses of CCC or NAP.

Appellant signed the Articles of Dissolution on January 29, 1999, and they were filed with the Secretary of State on April 16, 1999.

On January 4, 2000, appellant paid the FNB note with $298,451.89 in funds he personally borrowed from the Bank of the Ozarks. In return, FNB assigned all of its interest in the note and the collateral to him, personally. After the note was paid, the mortgage on appellant's residence was released. Appellant testified that the loan from the Bank of the Ozarks was secured by the inventory, two buildings owned by appellant, and appellant's personal guarantees.

Appellant testified that "Recommendations for Dissolution of the Corporation" were prepared on June 7, 1999, and included the goals of terminating the business, maximizing shareholder value, and attempting to satisfy all liabilities.

Appellant testified that, on June 7, 1999, Northtown had an inventory with a book value of $217,914. Appellant also testified that, in order to verify the value of the inventory, he had wholesalers to value the inventory, for which he received bids of $87,900 and $114,400.

Appellant testified that he informed FNB of the plans to repay the note and that he was trying to "wrap up" Northtown's business. Appellant testified that, between July 1, 1999, and the final dissolution of Northtown on January 4, 2000, Northtown did not pay any interest on the debt, rent, utilities, or insurance. All of these expenses were paid by another company, either NAP or CCC. Appellant testified that NAP assumed and honored Northtown's lease obligations.

Appellant brought suit seeking to collect the balance due on the note of $106,846 plus interest, together with a mandatory injunction requiring appellee to pledge his residence as security for payment of the note. Appellee answered, admitting that he and his wife signed the note and that he had not placed a "replacement" second mortgage on his home; he denied all other allegations. Appellee also asserted the affirmative defenses of estoppel, waiver, and unclean hands. After trial, the trial court issued a letter opinion finding that appellant was not a holder in due course; that appellant was guilty of unclean hands in that he did not follow the dissolution plan; and that appellant engaged in transactions with CCC and NAP that were of little value to Northtown, such as a five-year lease and the purchase of the remaining Northtown inventory for $37,643. Judgment in accordance with the letter opinion was entered on October 25, 2001. Appellant filed a motion for findings of fact on the same day, and the trial court entered supplemental findings on November 9, 2001. This appeal followed.

Appellant raises two related points on appeal: whether the trial court erred in applying Ark. Code Ann. § 4-26-903 (Repl. 2001) to the facts of this case, and whether the trial court erred in finding that appellant was guilty of unclean hands. The points are "related" because the trial court cited appellant's violation of section 4-26-903 as one of several examples of appellant's "unclean hands" conduct.

The trial judge cited Ark. Code Ann. § 4-26-903, which is part of the 1965 corporation act, in his findings of fact and conclusions of law. Based in part upon its view that appellant did not comply with this statute, the trial court found that appellant had "unclean hands" and therefore denied relief. This statute was not applicable to the corporation because the corporation was incorporated after December 31, 1987. See Ark. Code Ann. § 4-27-1701(Repl. 2001). Appellee concedes that application of section 4-26-903 was error but argues that the error does not necessarily afford appellant any··²SearchTerm²····²SearchTerm²·· relief.

The trial court found that appellant was not a "holder in due course" under Ark. Code Ann. § 4-3-302 (Repl. 2001) because appellant took assignment of the note "with" knowledge that the note was overdue. The trial court also found that because appellant was not a holder in due course under Ark. Code Ann. § 4-3-305(a) (Repl. 2001), appellant took the assignment subject to defenses "under simple contract." "Unclean hands" is such a defense. Merchants & Planters Bank & Trust Co. v. Massey, 302 Ark. 421, 790 S.W.2d 889 (1990). Unless a person is a holder in due course, the note is subject to all valid claims to it on the part of any party to the note, including all defenses, counterclaims and set-offs. Richardson v. Griner, 282 Ark. 302, 668 S.W.2d 523 (1984). Appellant also argues that the trial court erred in applying the "clean hands" doctrine because appellee was a maker of the note, rather than a surety. Richardson v. Griner, supra. Appellant does not challenge the trial court's conclusion that he is not a holder in due course.

Equity cases are tried de novo on appeal, and the appellate court resolves all of the issues of law and fact on the record made in the trial court, and the fact that the trial judge based his decision upon an erroneous conclusion does not preclude an appellate court's reviewing the entire case de novo and entering such judgment as the trial court should have entered on the undisputed facts in the record. Burnette v. Perkins & Assocs., 343 Ark. 237, 33 S.W.3d 145 (2000); Ferguson v. Green, 266 Ark. 556, 587 S.W.2d 18 (1979). Appellant, having chosen to file suit in the then chancery court, is in no position to complain when the case is tried as an ordinary action in chancery and equitable principles and procedures areapplied. Hemphill v. Lewis, 174 Ark. 224, 294 S.W. 1010 (1927); Sledge-Norfleet Co. v. Matkins, 154 Ark. 509, 243 S.W. 289 (1922). See also M.L. Sigmon Forest Prods., Inc. v. Scroggins, 250 Ark. 385, 465 S.W.2d 673 (1971) (Fogleman, J., dissenting); Childs v. Magnolia Petroleum Co., 191 Ark. 83, 83 S.W.2d 547 (1935).

The clean hands doctrine is based on the equitable maxim that he who seeks equity must do equity. Grable v. Grable, 307 Ark. 410, 821 S.W.2d 16 (1991). The purpose of invoking the clean hands doctrine is to protect the interest of the public on the grounds of public policy and to protect the integrity of the court. Id. It is within the trial court's discretion whether to apply the doctrine. Id.; Reid v. Reid, 57 Ark. App. 289, 944 S.W.2d 559 (1997); Laroe v. Laroe, 48 Ark. App. 192, 893 S.W.2d 344 (1995). This doctrine has traditionally not been used to punish the complainant nor to ··²SDU_6²····²SDU_6²··favor the defendant, but to prevent the complainant from using the court's powers to bring about an inequitable result. Estate of Houston v. Houston, 31 Ark. App. 218, 792 S.W.2d 342 (1990). In determining whether the clean hands doctrine should be applied, the equities must be weighed. Bramlett v. Selman, 268 Ark. 457, 597 S.W.2d 80 (1980); McCune v. Brown, 8 Ark. App. 51, 648 S.W.2d 811 (1983).

Although the principle is broad in its operation, it has its limitations and does not attach to every unconscionable act or inequitable act on the part of a plaintiff. Batesville Truck Line, Inc. v. Martin, 219 Ark. 603, 243 S.W.2d 729 (1951). The wrong that may be invoked to defeat the suit must have an immediate and necessary relation to the equity which the plaintiff seeks to enforce against the defendant, or it must in some measure affect the equitable relations between the parties in respect of something brought before··²BestSection²····²BestSection²·· the court for adjudication. Id. Ifthe wrong is shown to be merely collateral to the plaintiff's cause of action, it does not constitute a defense. Id. Also, the maxim may not be successfully invoked if the alleged wrongful conduct of the plaintiff appears not to have injured or prejudiced the defendant. Id. Hence, the party to a suit complaining of a wrong must have been injured thereby in order to justify the application of the principle of unclean hands to the case of his opponent. Id.

Appellant argues that the "Business Judgment Rule" and Ark. Code Ann. §§ 4-27-830 and 4-27-842 (Repl. 2001) apply to prevent the courts from second-guessing the decisions of corporate officers and directors in conducting the business of the corporation. See Smith v. Leonard, 317 Ark. 182, 876 S.W.2d 266 (1994); Hall v. Staha, 303 Ark. 673, 800 S.W.2d 396 (1990). These standards require the corporate officials to act in good faith, with reasonable care, and in the best interest of the corporation. Smith, supra. Appellant also argues that these statutes allowed him, acting as part of the liquidation committee, to rely on the advice of other professionals, such as attorneys and accountants.

The trial court found that appellant engaged in self-dealing by (1) selling seventeen of Northtown's vehicles with a book value of $68,866.12 to CCC for $37,643; (2) allowing CCC and NAP to use Northtown's bank accounts to pay operational expenses because appellant did not want First National Bank to learn of the dissolution and call the note; (3) paying himself a consultant's fee of $15,000 for his services during the dissolution period, in addition to his salary; (4) not taking the money received for sales of vehicles and making payments on the note; (5) not informing appellee of modifications to the plan of dissolution; (6) selling accounts receivable and office furniture and equipment to one of appellant's other corporations atsubstantial discounts. Further, Larry Keeter, Northtown's accountant, testified that he prepared certain documents based solely on information supplied by appellant and that, had he known that the dissolution period started in October 1998, rather than July 1999, the information in the documents would have been significantly different. Keeter also testified that appellant omitted other material information ordinarily included in financial statements. This indicates a lack of good faith. The trial court's finding of self-dealing by appellant is an implicit rejection of application of the business judgment rule to this case.

Whether the parties are within the application of the unclean hands maxim is primarily a question of fact. Word v. Remick, 75 Ark. App. 390, 58 S.W.3d 422 (2001). Basically, appellant is asking this court to re-weigh the evidence to conclude that the trial court erred in determining that appellant was guilty of "unclean hands." We cannot say that the trial judge's findings are clearly erroneous.

On cross-appeal, appellees assert that the trial court erred in denying their motion for attorney's fees under Ark. Code Ann. § 16-22-308 (Repl. 1999). Appellees sought attorney's fees in the amount of $16,150.00.2 The trial court denied the motion without explanation. A trial court is not required to award attorney's fees and, because of the trial judge's intimate acquaintance with the trial proceedings and the quality of service rendered by the prevailing party's counsel, appellate courts usually recognize the superior perspective ··²StarPage²····²StarPage²····²citeas((Cite as: 344 Ark. 153, *160, 40 S.W.3d 230, **235)²····²citeas((Cite as: 344 Ark. 153, *160, 40 S.W.3d 230, **235)²··of the trial judge in determining whether to award attorney's fees. Jones v. Abraham, 341 Ark. 66, 15 S.W.3d 310 (2000); Chrisco v. Sun Indus. Inc., 304 Ark. 227, 800 S.W.2d 717 (1990). The decision to award attorney's fees and the amount to award are discretionary determinations that will be reversed only if the appellant can demonstrate that the trial court abused its discretion. Nelson v. River Valley Bank & Trust, 334 Ark. 172, 971 S.W.2d 777 (1998); Burns v. Burns, 312 Ark. 61, 847 S.W.2d 23 (1993). Section 16-22-308 provides that the court may award reasonable fees to the prevailing party in an action to recover on an account, to recover on a promissory note, or in an action for breach of contract. The operative word in this statute is "may." The word "may" is usually employed as implying permissive or discretional, rather than mandatory, action or conduct and is construed in a permissive sense unless necessary to give effect to an intent to which it is used. Jones, supra; Chrisco, supra.

Appellees argue that the trial court may have abused its discretion in failing to award fees and, therefore, the denial of the fees should be reversed or, pursuant to Little Rock Wastewater Utility v. Larry Moyer Trucking, Inc., 321 Ark. 303, 902 S.W.2d 760 (1995), at least remanded to the trial court for an explanation of its decision. However, appellees did not request findings of fact or a further explanation of the trial court's decision, as they could have under Arkansas Rule of Civil Procedure 52(b). See Farm Bureau Mut. Ins. Co. v. David, 324 Ark. 387, 921 S.W.2d 930 (1996). We believe that appellee's failure to seek relief under Rule 52 precludes the argument that the case should be remanded for findings on this point. See Mega Life & Health Ins. Co. v. Jacola, 330 Ark. 261, 954 S.W.2d 898 (1997); David, supra; Brown v. SEECO, Inc., 316 Ark. 336, 871 S.W.2d 580 (1994).

Affirmed on direct appeal; affirmed on cross-appeal.

Stroud, C.J., and Baker, J., agree.

1 Although both Fred Gibson and Robbie Gibson signed the note and agreed to the pledge of their residence as security for repayment of the note, for convenience, we refer to Fred Gibson as the appellee.

2 Appellees also sought costs in the amount of $470.00, which were granted by the trial court.