Indiana Lumbermen's Mutual Insurance Company v. Phoenix Surety Group, Inc., et al.

ARKANSAS COURT OF APPEALS
NOT DESIGNATED FOR PUBLICATION
DIVISION I

INDIANA LUMBERMEN'S MUTUAL INSURANCE COMPANY

APPELLANT

V.

PHOENIX SURETY GROUP, INC., ET AL.

APPELLEES

CA03-202

October 8, 2003

APPEAL FROM THE PULASKI COUNTY CIRCUIT COURT, THIRD DIVISION [NO. CV 01-5528]

HON. JOHN C. WARD,

JUDGE

AFFIRMED

John Mauzy Pittman, Judge

Charles and Michelle Ray, as officers of appellee Phoenix Surety Group, Inc., entered into an agreement with appellant Indiana Lumbermen's Mutual Insurance Company in February 2000 to act as managing general agency for appellant for the purpose of selling surety bonds to construction contractors. Phoenix was to issue the bonds and collect the premiums. Under the terms of its agreement with appellant, Phoenix was liable for the amount of the premiums, less thirty-five percent commission, whether Phoenix actually collected the premiums or not. Charles and Michelle Ray had no personal liability under the agreement. Phoenix began issuing bonds, collecting premiums, and making payments to appellant. In November 2000, appellant notified Phoenix that it intended to withdraw from the market, and the agency relationship was to be terminated on February 17, 2001. Phoenix still owed appellant approximately $230,000 when it closed its business in April 2001. Appellant filed suit against Phoenix and against Charles and Michelle Ray, individually, alleging breach of contract and conversion. After a bench trial, the trial court found that Phoenix breached the agreement and granted appellant judgment for $230,714.64. The trial court further found that the Rays had no independent liability for the judgment and had not converted appellant's funds. From that decision, comes this appeal.

For reversal, appellant contends that the trial court erred by failing to find the Rays to be personally liable for the judgment, and in finding that the Rays did not convert appellant's funds. We affirm.

It is a nearly universal rule that a corporation and its stockholders are separate and distinct entities, even though a stockholder may own the majority of the stock. First Comm'l Bank v. Walker, 333 Ark. 100, 969 S.W.2d 146 (1998). In special circumstances, the court will disregard the corporate facade when the corporate form has been illegally abused to the injury of a third party. Enviroclean, Inc. v. Arkansas Pollution Control & Ecology Comm'n, 314 Ark. 98, 858 S.W.2d 116 (1993); Don G. Parker, Inc. v. Point Ferry, Inc., 249 Ark. 764, 461 S.W.2d 587 (1971). The conditions under which the corporate entity may be disregarded or looked upon as the alter ego of the principal stockholder vary according to the circumstances of each case. Winchel v. Craig, 55 Ark. App. 373, 934 S.W.2d 946 (1996). The doctrine of piercing the corporate veil is founded in equity and is applied when the facts warrant its application to prevent an injustice. Humphries v. Bray, 271 Ark. 962, 611 S.W.2d 791 (Ark. App. 1981). Piercing the fiction of a corporate entity should be applied with great caution. Banks v. Jones, 239 Ark. 396, 390 S.W.2d 108 (1965); Thomsen [Family] Trust v. Peterson Ent., 66 Ark. App. 294, 989 S.W.2d 934 (1999). The issue of whether the corporate entity has been fraudulently abused is a question for the trier of fact, and the one seeking to pierce the corporate veil and disregard the corporate entity has the burden of proving that the corporate form was abused to his injury. See National Bank of Commerce v. HCA Health Servs. of Midwest, Inc., 304 Ark. 55, 800 S.W.2d 694 (1990).

Rhodes v. Veith, 80 Ark. App. 362, 365-66, 96 S.W.3d 734, 737 (2003). Considering the facts of the present case in light of these principles, we cannot say that the trial judge clearly erred in finding that the corporate entity was not fraudulently abused. There is no evidence that appellees failed to hold corporate meetings or otherwise disregarded the corporate form. Although it is true that appellees continued to draw their salaries and pay operating expenses until they closed their business in April 2001, these appear from the record to have been legitimate business expenses. There is no evidence that the Rays used the corporate account for non-business purposes or otherwise treated the corporation as their alter ego.

Nor do we think that the trial judge erred in finding that the Rays did not convert funds belonging to appellant.

Conversion is a common-law tort action for the wrongful possession or disposition of another's property. McQuillan v. Mercedes-Benz Credit Corp., 331 Ark. 242, 961 S.W.2d 729 (1998). The tort of conversion is committed when a party wrongfully commits a distinct act of dominion over the property of another which is inconsistent with the owner's rights. Dillard v. Wade, 74 Ark. App. 38, 45 S.W.2d 848 (2001). The property interest may be shown by a possession or a present right to possession when the defendant cannot show a better right, since possession carries with it a presumption of ownership. Big A Warehouse Dist. v. Rye Auto Supply, 19 Ark. App. 286, 719 S.W.2d 716 (1986). The intent required is not conscious wrongdoing but rather an intent to exercise dominion or control over the goods that is in fact inconsistent with the plaintiff's rights. Grayson v. Bank of Little Rock, 334 Ark. 180, 971 S.W.2d 788 (1998); Tackett v. McDonald's Corp., 68 Ark. App. 41, 3 S.W.3d 340 (1999). The conversion need not be a manual taking or for the defendant's use. Big A Warehouse Dist. v. Rye Auto Supply, supra.

Buck v. Gillham, 80 Ark. App. 375, 379, 96 S.W.3d 750, 753 (2003). Here, appellant had the burden to show that the Rays intended to exercise dominion over funds belonging to appellant. See City National Bank v. Goodwin, 301 Ark. 182, 783 S.W.2d 335 (1990).

We think the trial court could reasonably conclude that appellant failed to meet that burden. Appellant was awarded judgment for the amount owed to it by Phoenix, $230,714.64. However, there is no evidence that Phoenix ever collected that sum. Under its agreement with appellant, Phoenix was liable to appellant for premiums whether Phoenix collected them or not. Therefore, the $230,714.64 figure represents the total outstanding premiums on the bonds, not the amount received by Phoenix. Appellant failed to show what portion of the outstanding premiums, if any, that appellees collected but did not remit to appellant. In contrast, Mr. Ray testified that there was approximately $170,000 in accounts receivable and $60,000 in the corporate bank account when the business was closed. If believed, this testimony indicated that Phoenix never collected - and therefore could not have converted - $170,000, and that it had in addition $60,000 in funds that were seized by the bank when it learned that Phoenix had gone out of business. Considering that Mr. Ray's testimony was an approximation, the sum of the amounts he testified to virtually equals the $230,714.64 awarded to appellant. Under these circumstances, we cannot say that the trial judge erred in failing to find that the Rays converted funds belonging to appellant.

Affirmed.

Griffen, J., agrees.

Hart, J., concurs.