John Paul Covington v. David Covington
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IN THE COURT OF APPEALS
OF THE
STATE OF MISSISSIPPI
NO. 1999-CA-01515-COA
JOHN PAUL COVINGTON
APPELLANT
v.
DAVID COVINGTON, NANCY COVINGTON, FORKLIFT AND
MACHINERY SALES, INC. F/K/A FARMERS MILLING-SUPPLY, INC. AND
D. M. N. COMPANY, INC.
APPELLEES
DATE OF JUDGMENT:
08/05/1999
TRIAL JUDGE:
HON. JOHN C. LOVE JR.
COURT FROM WHICH APPEALED: WINSTON COUNTY CHANCERY COURT
ATTORNEY FOR APPELLANT:
PAUL M. NEVILLE
ATTORNEY FOR APPELLEES:
NONE LISTED
NATURE OF THE CASE:
CIVIL - OTHER
TRIAL COURT DISPOSITION:
CORPORATION DISSOLVED JUDICIALLY AND
ASSETS DISTRIBUTED
DISPOSITION:
AFFIRMED IN PART, REVERSED AND RENDERED IN
PART - 03/20/2001
MOTION FOR REHEARING FILED:
CERTIORARI FILED:
MANDATE ISSUED:
4/10/2001
BEFORE McMILLIN, C.J., BRIDGES, AND MYERS, JJ.
McMILLIN, C.J., FOR THE COURT:
¶1. John Paul Covington (hereafter Paul) has appealed to this Court from a judgment entered in the
Chancery Court of Winston County regarding the dissolution of a closely-held corporation owned jointly by
Paul and his brother, David Covington (hereafter David). The corporation was named Forklift Machine
Sales, Inc. (hereafter FMS). As a part of the dissolution, the chancellor required David to reimburse the
corporation for various expenditures authorized by him which the chancellor found were not legitimate
corporate expenses. Paul, despite his relative success before the chancellor, has nevertheless appealed. His
principal contention is that the chancellor was improperly generous to David in determining the amounts due
back to FMS. Additionally, Paul urges that, rather than entering an order compelling David to reimburse the
corporation, the chancellor should have entered judgment directly in Paul's favor and against David. Paul
also complains that the chancellor failed to enforce repayment of the misappropriated funds against David's
wife, Nancy, because she was an officer of the corporation actively participating in the disbursements. Paul
also complains that the chancellor failed to grant any relief directly against a corporation established by
David and Nancy, named DMN Corporation, whose sole purpose appeared to be to assume ownership of
assets formerly owned by FMS and to pursue business opportunities formerly pursued by that corporation.
¶2. Our task in assessing the merits of this appeal is complicated by the fact that the appellees, David,
Nancy, and DMN have not filed a brief in this appeal. This failure invokes two competing considerations.
First, there is the proposition that an appellee's failure to file a brief on appeal may be considered as
confession of error. Snow Lake Shores Prop. Owners Corp. v. Smith, 610 So. 2d 357, 361 (Miss.
1992). However, there is additional authority that says, in such a circumstance, the presumption of
correctness that attaches to a ruling by a court of competent jurisdiction remains in play and that an
appellate court may uphold the trial court's order if a review of the record leaves the appellate court
convinced of the manifest correctness of the trial court's judgment. Shelton v. Kindred, 279 So. 2d 642,
644 (Miss. 1973). In this case, Paul, as the appellant, has raised nine separate issues which he claims to
constitute reversible errors by the chancellor.
¶3. Based on our review of the record and the judgment in this case, we conclude with a reasonable
measure of certainty that the chancellor did not err as to certain of these issues and that the chancellor
should be affirmed despite the absence of a brief from the appellees. These include matters upon which the
chancellor enjoyed a broad measure of discretion in fashioning a suitable remedy and for which we do not
find, even with the aid of the appellant's brief, the requisite abuse of that discretion that would compel this
Court to set aside the chancellor's ruling. However, as to the remaining issues, the chancellor failed to set
out the reasoning to support his ruling and, in the absence of any such explanation, we are forced to
conclude that the appellant's brief raises an arguable case for error. That being the case, we conclude that
the absence of an appellee's brief must be deemed as confessing error as to those issues. As a result, we
find ourselves compelled to affirm in part but to reverse and render in part.
I.
Issue One: The Proper Judgment Creditor
¶4. As his first error, Paul urges that the chancellor, under authority of Aqua-Culture Tech., Ltd. v. Holly,
677 So. 2d 171 (Miss. 1996), should have rendered judgment directly in his favor for his pro-rata share of
the sums determined to be owed by David to FMS instead of requiring David to reimburse the corporation.
The Aqua-Culture case stands for the proposition that such a direct judgment may be appropriate in some
circumstances; however, in this case, the chancellor's ruling included a determination that certain of the
funds to be recovered from David were to be used to satisfy corporate obligations owed to third parties.
Certainly, as to those obligations, it would have been inappropriate to enter judgment directly in favor of
Paul. Only after those obligations to third parties were satisfied would any funds be available for distribution
to the shareholders under the chancellor's ruling. The judgment further permitted David the opportunity to
take credit against any amounts owed the corporation for that portion that he would ultimately have
received back upon final dissolution of the corporation. As we interpret the chancellor's ruling, this has the
effect of setting up a priority of payment that would require Paul to receive his entire pro-rata share of
amounts due him before David was relieved of his obligations to the corporation or before he was entitled
to receive any possible distribution of corporate assets. Finding that Paul suffers no prejudice if the
corporate assets recovered from David are distributed in that order of priority, we do not think that the
chancellor committed reversible error in entering judgment in favor of the corporation rather than directly in
favor of Paul for his pro-rata portion of the recovery.
II.
Issue Two: Credit for Back Salary
¶5. Another error urged by Paul is that the chancellor should not have given David credit against any
amounts he owed to the corporation for allegedly unpaid salary going back 218 weeks and totaling $43,
600. It is undisputed from the record that, for much of this 218 week period, David was not operating the
corporation in a manner consistent with his fiduciary duty as an officer of the corporation. In fact, his
management efforts during that period caused the ultimate demise of an apparently-profitable corporation
by the improper transfer of essentially all of the corporation's assets and business opportunities to a
separate corporation as to which Paul had no ownership rights. It is difficult to determine an equitable basis
to award David past due salary covering a time when he seemed intent on destroying the viability of the
business for his own private advantage. The applicable Mississippi statute charges a corporate officer with
an obligation to "discharge his duties . . . in good faith . . . in a manner he reasonably believes to be in the
best interests of the corporation . . . ." Miss. Code Ann. § 79-4-8.42 (Rev. 1996). There could hardly be
imagined a more egregious case of an abuse of those duties than the record demonstrates in this case.
Perhaps had David seen fit to file a brief and explain why, despite his adjudicated malfeasance, he should
nevertheless have the corporation's salary obligation to him honored, we might discover a legitimate basis to
affirm the chancellor on this point. Because no such reason is apparent to this Court in the absence of an
appellee's brief, this Court, as to this issue, follows the rule that the absence of any briefing constitutes
confession of error. We, therefore, reverse and render the chancellor's credit of $43,600 allowed against
the amounts otherwise due the corporation by David.
III.
Issues Three and Four: Corporate Real Estate
¶6. Paul raises two issues concerning the handling of certain real estate actually owned by the brothers but
used in the corporate business. Paul's dissatisfaction arises out of the relief afforded him based on proof that
David permitted the property to go through foreclosure and then reacquired the title to the exclusion of Paul
and put it to use in the newly-formed business owned by David under the name of DMN. The chancellor
provided a scheme by which Paul could reacquire his undivided interest in the land if he made certain
payments deemed by the chancellor to be equitably chargeable to him. That relief appeared to be based on
the rule announced in such cases as Conner v. Conner, 119 So. 2d 240, 259 (Miss. 1960) and Brown v.
Brothers, 97 So. 2d 642, 644 (Miss. 1957), that a co-tenant engaged in such activities cannot thereby
defeat the rights of his co-tenants, but, rather, reacquires the title in a constructive trust for those co-tenants.
Our review of the record convinces this Court that the chancellor dealt equitably with both parties in
resolving any disputes regarding the real property and we are unconvinced that Paul's arguments of error
have sufficient weight to require us to upset the chancellor's seemingly fair resolution of the issue. We,
therefore, decline to disturb this aspect of the chancellor's ruling.
IV.
Issue Five: Diversion of Corporate Opportunity
¶7. We are unconvinced that the chancellor erred in refusing to require David to account for certain
corporate funds allegedly improperly diverted to David's son for hauling fees connected with the business of
FMS. The chancellor found that these payments were in the ordinary course of business, undertaken at a
time when the volume of corporate business prevented FMS from performing all of the necessary hauling
work with its own internal resources. Paul's brief does not make a compelling case to the contrary and we
affirm this part of the chancellor's ruling.
V.
Issue Six: Accounting for Misappropriated Funds
¶8. The chancellor undertook a detailed analysis of the income and disbursements of a bank account
individually owned by David, in which he deposited a large amount of funds actually owned by FMS. The
chancellor made findings regarding whether the disbursements out of that account were, in actuality, for
legitimate corporate purposes or were, instead, for David's own private purposes. Based on those
determinations, the chancellor ruled that David was liable to the corporation for those amounts found to
have been expended for purposes other than bona fide corporate undertakings. On appeal, Paul argues that
the chancellor erred in his efforts to divine the legitimacy of a number of checks written in 1995, when those
determinations had no basis other than the chancellor's inspection of the checks themselves. Paul argues
that, once it was established that the funds coming into the account were corporate assets, the burden
shifted to David to show that any disbursements out of the account were for legitimate purposes. He points
out that, by 1995, David had begun operation of DMN, so that merely identifying a check as having been
issued for a legitimate business purpose did not meet the burden of showing that it was an expense of FMS,
since it was equally as likely by that time that the funds were being expended to meet an obligation of
DMN.
¶9. We observe that the chancellor said in his ruling that "no one testified about the expenses paid from
[this] account in 1995." He further noted that no invoices to substantiate the purposes of the checks were
entered into evidence, but that he was forced to "exercise [his] best judgment to determine which are
proper corporate expenses and which are not." Without a response from David, we find merit in Paul's
assertion that David failed to carry the requisite burden to show that these corporate funds diverted to
David's own individual bank account were, in fact, subsequently expended for legitimate corporate
purposes of FMS. David's failure to refute that facially-valid assertion by factual or legal argument compels
us to conclude that, as to this aspect of the case, we must treat David's silence as a confession of error.
Thus, the credit given David in the amount of $29,200.87 for those checks itemized in the chancellor's ruling
is reversed and rendered.
¶10. On the other hand, the chancellor appeared to have come to a reasoned conclusion when he
essentially prorated the amount expended for insurance between the time FMS was in business and the time
DMN was in business and allowed David a credit of $7,700. As to that aspect of the ruling, we find its
presumptive correctness is not overcome merely by Paul's assertion of error. Nor do we find any
compelling legal or factual argument advanced in the appellant's brief to justify overturning that credit.
VI.
Issue Seven: Personal Liability of Nancy Covington
¶11. Paul urges us to find that the chancellor erred when he entered the judgment for repayment of various
funds solely against David and not against his wife, Nancy. The evidence is uncontradicted that Nancy was
an officer of FMS during the entire time that its assets were being improperly diverted to the sole control of
David or into DMN, the corporation owned jointly by David and Nancy. Paul points out that most of the
checks issued to accomplish this improper diversion of assets were signed by Nancy. The chancellor
excused her participation in the events by suggesting that she may not have understood the impropriety of
the various actions undertaken by David and was, therefore, nothing more than an unwitting accomplice, for
whom no liability ought to be attached. Paul argues that Nancy's fiduciary duty to the corporation cannot be
overcome by mere protestations - or even factual findings - of ignorance of the wrongful nature of David's
activities. We find that argument to have merit, especially in the situation where Nancy, a named appellee,
failed to file any brief in opposition to Paul's assertion. We would agree that a person occupying a position
of trust in a corporation has an independent duty to be informed of her obligations to that corporation that
cannot be met by blind reliance on the directions of another corporate officer. We, therefore, deem Nancy's
silence as a confession of error and direct that the decision of the chancellor, insofar as it ordered David to
repay any sums to the corporation (and insofar as that obligation is altered by this decision of this Court), be
amended such that it become the joint and several obligation of David and Nancy.
VII.
Issue Eight: Corporate Liability of DMN
¶12. Additionally, Paul alleges that the chancellor erred in not also entering the judgment against DMN
since it had wrongfully succeeded to substantially all of the assets and business opportunities of FMS. In
particular, Paul points out the potential difficulties of collecting any amounts alleged to be due back to FMS
based on the fact the very assets removed from FMS that form the basis for a substantial part of David's
indebtedness will remain under David's and Nancy's control in the new corporation, free and clear. To the
extent that the chancellor's judgment determined David's obligation to pay for corporate assets improperly
diverted from FMS to DMN, we would agree that Paul has made a facially-valid argument. In that limited
respect, therefore, we conclude that the portion of the judgment so designated (as modified by this opinion)
should be jointly against David, Nancy, and their wholly-owned corporation, DMN. For the limited
purpose of determining this amount to be reduced to judgment against DMN, this cause is remanded to the
trial court.
VIII.
Issue Nine: Attorney's Fees and Punitive Damages
¶13. The chancellor awarded Paul judgment in the sum of $43,508.13 representing accounting and legal
fees and expenses associated with the successful prosecution of this action. The chancellor ordered that this
amount be recovered from the assets of FMS. Paul now urges that as error, contending that the judgment
for attorney's fees should have been entered directly against David. He relies once again upon AquaCulture Tech., Ltd. v. Holly as authority. Aqua-Culture Tech., Ltd. v. Holly, 677 So. 2d at 184.
¶14. In that case, the court awarded attorney's fees directly against the improperly-acting shareholder. The
shareholder appealed on that issue contending that attorney's fees are not a proper element of damage
under the "American rule" regarding attorney's fees in litigation. Id. The Mississippi Supreme Court upheld
the award on the basis that the shareholder's conduct was so egregious that it would have supported an
award of punitive damages, even though such an award was not made at the trial level, and that attorney's
fees are proper in cases where punitive damages are justified. Id.
¶15. In this case, the chancellor declined Paul's request for punitive damages on the basis that his prolonged
inattention to the daily operation of the business helped create the atmosphere where David was able to
accomplish his improper aims. Assuming the correctness of the chancellor's ruling on this aspect of the case,
the Aqua-Culture case would have no application. We have reviewed the chancellor's detailed findings of
fact and discussion of the law on the matter of punitive damages and find that aspect of the judgment to be
presumptively correct in the face of Paul's short and largely conclusory argument, unsubstantiated by
citation to relevant authority, contained in his brief. We, therefore, affirm the chancellor's largely
discretionary decision that punitive damages would be inappropriate in this case.
¶16. The chancellor's award of attorney's fees, rather than relying upon David's egregious misconduct, was
based upon statutory provisions regarding corporate dissolutions. Section 79-4-14.34(e) of the Mississippi
Code provides that
[i]f the court finds that the petitioning shareholder had probable grounds for relief under paragraphs (ii)
or (iv) of Section 79-4-14.30(2), it may award to the petitioning shareholder reasonable fees and
expenses of counsel and of any experts employed by him.
Miss. Code Ann. § 79-4-14.34(e) (Rev. 1996).
¶17. Section 79-4-14.30(2)(ii) involves cases where "those in control of the corporation have acted . . . in
a manner that is illegal, oppressive or fraudulent." Miss. Code Ann. § 79-4-14.30(2)(ii) (Rev. 1996).
¶18. We find these statutes adequately support the chancellor's decision to award attorney's fees against the
corporation in dissolution rather than directly against David. Applying the principle of presumptive
correctness to the chancellor's thorough assessment of this aspect of the case, we decline to reverse his
decisions to deny punitive damages and to award attorney's fees against FMS rather than against David
directly.
¶19. THE JUDGMENT OF THE CHANCERY COURT OF WINSTON COUNTY IS
AFFIRMED IN ALL ASPECTS EXCEPT THAT CREDITS ALLOWED TO APPELLEE,
DAVID COVINGTON, IN THE AMOUNTS OF $43,600 FOR BACK SALARY AND $29,
200.87 FOR PURPORTED CORPORATE-RELATED EXPENDITURES ARE REVERSED
AND RENDERED AND THE APPELLEE, DAVID COVINGTON'S OBLIGATION TO
FORKLIFT MACHINE SALES, INC. IS INCREASED BY THOSE AMOUNTS.
ADDITIONALLY, THE JUDGMENT IS MODIFIED SUCH THAT ALL AMOUNTS OWED
BY DAVID COVINGTON TO SAID FORKLIFT MACHINE SALES, INC. SHALL, IN
ADDITION, BE THE JOINT AND SEVERAL OBLIGATION OF THE APPELLEE, NANCY
COVINGTON. ADDITIONALLY, THAT PORTION OF THE AFORESAID SUM THAT
REPRESENTS REIMBURSEMENT TO FORKLIFT MACHINE SALES, INC. FOR
PERSONALTY AND EQUIPMENT DIVERTED FROM FORKLIFT MACHINE SALES, INC.
TO DMN CORPORATION IS REDUCED TO JUDGMENT AGAINST DMN
CORPORATION. COSTS OF THIS APPEAL ARE ASSESSED TO THE APPELLEES.
KING AND SOUTHWICK, P.JJ., PAYNE, BRIDGES, THOMAS, LEE, IRVING,
MYERS AND CHANDLER, JJ., CONCUR.
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