Hardwick Morrison Co. v. Albertsson

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                                 No. 90-079

 Hardwick-Morrison Co.                        Supreme Court

      v.                                      On Appeal from
                                              Bennington Superior Court

 Stig Albertsson                              September Term, 1991

 Francis B. McCaffrey, J.

 Peter H. Banse of Banse & McCoy, P.C., Manchester Center, for plaintiff-

 James B. Anderson of Ryan Smith & Carbine, Ltd., Rutland, for defendant-

 PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.

      Gibson, J.   Defendant Stig Albertsson appeals a jury award of the
 balance due, plus interest, on pumping equipment plaintiff sold to
 Albertsson-Hunter Corporation, a company controlled by defendant.  The jury
 found defendant Albertsson personally liable for the corporation's debt.  We
      At all times material, Albertsson-Hunter Corporation was in the
 business of selling water slides to amusement parks and recreation areas.
 It was owned by Albertsson Corporation, a holding company owned by defendant
 and his wife.  Albertsson Corporation provided administrative services for
 Albertsson-Hunter and four other subsidiary corporations, and paid many of
 their operating expenses, such as rent, heat, utilities, insurance, payroll
 and payroll taxes.  Defendant was a director of Albertsson Corporation and
 chairman of Albertsson-Hunter's board of directors.  It is fair to say that
 he controlled the finances of Albertsson-Hunter.
      In 1985, Albertsson-Hunter lost more than $200,000 on gross sales of
 $2,600,000.  In early March 1986, the company's directors were informed that
 sales for 1986 were projected to decline 50 percent because liability
 insurers would no longer provide insurance for use of the water slides.  The
 directors agreed the business had to be "reassessed."  At trial, defendant
 conceded that the company's outlook was "bleak" in March of 1986.
 Nevertheless, Albertsson-Hunter continued in operation, and by the end of
 May 1986, had sold six additional water slides incorporating approximately
 $60,000 worth of plaintiff's pumping equipment.  By mid July 1986,
 Albertsson-Hunter had completed work on all of its contracts, and by the end
 of that month, had been paid more than $580,000 for these six slides.  Its
 total receipts for June and July amounted to nearly $750,000, but through
 July, it had paid plaintiff only $21,451.
      In contrast, Albertsson-Hunter made substantial payments to Albertsson
 Corporation.  In June 1986, Albertsson-Hunter paid Albertsson Corporation
 $94,000, and in July an additional $125,000, to repay the parent
 corporation for operating expenses and cash transfers it had paid on behalf
 of Albertsson-Hunter.  At the end of July, Albertsson Corporation carried a
 balance due from Albertsson-Hunter of $77,963.  This figure included a
 charge of $51,330 for "administrative fees," the only time such a charge was
 ever made.  In addition to the payments to Albertsson Corporation,
 Albertsson-Hunter made substantial payments to the other four subsidiaries
 in June and July.  All told, out of total receipts of nearly $750,000 in
 June and July of 1986, some $327,500 went to Albertsson Corporation or its
 related subsidiary corporations.
      Fearing it would not be paid the balance owed to it, plaintiff
 threatened in August of 1986 to file liens against the projects containing
 its equipment.  The vice-president of Albertsson-Hunter asked plaintiff not
 to file the liens because they would delay payments from the projects to
 Albertsson-Hunter; he promised that defendant would provide a payment
 schedule forthwith.  Defendant did so in a letter dated August 13 that he
 signed as chairman of Albertsson-Hunter.  The letter set out a payment
 schedule running from August 31 through November 30.  Albertsson-Hunter made
 the first payment of $9,614 on September 2, and a $468.51 portion of the
 September 30 payment on September 5, (FN1) but made no other payments.
      On July 31, the books of Albertsson-Hunter showed losses of $116,765,
 cash on hand of $25,051, accounts receivable of $114,950, and trade debts of
 $307,760.  On August 31, the company's losses totaled $148,349, and there
 was no cash on hand.  Defendant decided in July or August that Albertsson-
 Hunter had to be liquidated, and in October he reached a tentative agreement
 to sell the business.  The deal fell through, however, and Albertsson-Hunter
 filed for bankruptcy in December.  By then the corporation had no assets of
 any value.
      In March 1987, plaintiff sued defendant, alleging defendant had
 constructively defrauded it by diverting money Albertsson-Hunter had
 received from water slide customers to Albertsson Corporation and its
 subsidiaries.  Plaintiff alternatively alleged that a Wisconsin statute
 required defendant to pay for labor and materials used in a project in that
 state before using funds received from such project for any other purpose.
 Wis. Stat. { 779.02(5).  Because we affirm the constructive fraud verdict,
 we do not consider the applicability of the Wisconsin statute.
      On the constructive fraud issue, defendant contends that (1) the trial
 court improperly denied his motions for directed verdict and judgment
 notwithstanding the verdict, (2) the court improperly instructed the jury,
 and (3) the court erred in the interrogatories it submitted to the jury.
      Defendant argues that his motions for directed verdict and judgment
 notwithstanding the verdict should have been granted because the jury could
 not properly find him personally liable for the debt owed plaintiff.  He
 maintains that he derived no benefit from plaintiff's loss, which was
 simply an unfortunate consequence of Albertsson-Hunter's demise.  He claims
 Albertsson-Hunter paid plaintiff the same proportion of its account as it
 paid its other creditors, including Albertsson Corporation and its sub-
 sidiaries.  Thus, defendant asserts, he should not be held personally
 liable to plaintiff, just as the owner or director of a bankrupt corporation
 should not be personally liable to its creditors.
      In reviewing the grant or denial of motions for directed verdict and
 judgment notwithstanding the verdict, we view the evidence in the light
 most favorable to the nonmoving party and exclude the effect of modifying
 evidence.  Center v. Mad River Corp., 151 Vt. 408, 413, 561 A.2d 90, 93
 (1989).  Where fraud is alleged, proof must be made by clear and convincing
 evidence.  Bardill Land and Lumber, Inc. v. Davis, 135 Vt. 81, 82, 370 A.2d 212, 213 (1977).
      It is axiomatic that the shareholders, officers, and directors of a
 corporation ordinarily are not liable for its debts.  See Contractor's
 Crane Service, Inc. v. Vermont Whey Abatement Auth., 147 Vt. 441, 452, 519 A.2d 1166, 1174 (1986); Douglas v. O'Connell, 139 Vt. 427, 429, 429 A.2d 1310, 1311 (1981).  This basic protection enables corporations to take
 legitimate financial risks without exposing their stockholders, officers and
 directors to personal liability.  It does not, however, protect individuals
 from liability for their own wrongdoing.  Stuart v. Federal Energy Sys., 596 F. Supp. 458, 459 n.1 (D. Vt. 1984); Lyon v. Bennington College Corp., 137
 Vt. 135, 139, 400 A.2d 1010, 1013 (1979).  Thus, the outcome herein turns on
 whether the jury could properly find that defendant's personal conduct was
 wrongful; if so, plaintiff may be granted relief.
      Constructive fraud may occur where a wrongful act injures another but
 is done without bad faith or a malevolent purpose on the part of the
 perpetrator.  It may be found in cases involving misrepresentations that do
 not rise to the level of deceit, or actual fraud, e.g. Proctor Trust Co. v.
 Upper Valley Press, Inc., 137 Vt. 346, 354, 405 A.2d 1221, 1226 (1979), and
 in cases where a party in a position of superior knowledge or influence
 intentionally gains an unfair advantage at the expense of another person.
 E.g., Griffin v. Griffin, 125 Vt. 425, 437-38, 217 A.2d 400, 410 (1965)
 (bank president who had also been plaintiff's lawyer secured assignment of
 securities from plaintiff to bank, to bank's unfair advantage).
 Constructive fraud is an equitable claim that typically has not afforded
 relief in the form of monetary damages.  See Union Bank v. Jones, 138 Vt.
 115, 121, 411 A.2d 1338, 1342 (1980) (innocent or negligent
 misrepresentations may be grounds for rescission); Griffin, 125 Vt. at 445,
 217 A.2d  at 415 (securities restored to plaintiff).  In the present case,
 however, defendant did not argue that plaintiff could not recover damages if
 it proved its case, (FN2) but, rather, contended that plaintiff had failed to
 show wrongdoing.  Under these circumstances, we will review the case as it
 proceeded below.  See McDonald v. Roderick, no. 90-115, slip op. at 3-4 (Vt.
 Jan. 3, 1992) (defendants could not change nature of fraud claim on appeal).
      Plaintiff contends that defendant wrongfully diverted funds from
 Albertsson-Hunter to Albertsson Corporation and its subsidiaries under the
 guise of reimbursements and administrative fees when he knew Albertsson-
 Hunter was going out of business, and that defendant should first have paid
 the trade creditors who made completion of the projects possible.  Plaintiff
 relies primarily on the proposition that the directors of an insolvent
 corporation may not prefer their own claims to those of the corporation's
 creditors. (FN3) 15A W. Fletcher, Cyclopedia of the Law of Private Corporations
 { 7469 (Perm. ed. 1984); Boyd v. Boyd, 386 N.W.2d 540, 542 (Iowa Ct. App.
 1986); see Association of Haystack Property Owners v. Sprague, 145 Vt. 443,
 448, 494 A.2d 122, 126 (1985) (trial court improperly dismissed suit
 alleging breach of fiduciary duty owed by corporate directors to creditors).
      Defendant claims the flow of funds from Albertsson-Hunter to Albertsson
 Corporation repaid a legitimate debt in proportion to the repayment of other
 creditors.  In making this claim, defendant points to financial data
 covering the year 1986 as a whole.  The evidence, however, showed that in
 June and July of that year, after plaintiff's work had been completed and
 Albertsson-Hunter had received substantial payments on its projects,
 Albertsson-Hunter paid Albertsson Corporation a considerably greater
 proportion of its outstanding balance than it paid plaintiff.  In addition,
 Albertsson-Hunter made other substantial payments to the subsidiary
 corporations.  In August, at about the same time he decided to liquidate
 Albertsson-Hunter, defendant promised to pay plaintiff according to a
 payment schedule that could not be met, inducing plaintiff to forego placing
 liens on the projects that incorporated its equipment.  We conclude that in
 the context of the case as it was argued at trial, the jury could properly
 find by clear and convincing evidence that defendant committed a fraud on
 plaintiff by wrongfully trying to recoup his own losses before paying
 plaintiff.  The trial court did not err in denying defendant's motions for
 directed verdict and judgment notwithstanding the verdict.
      With respect to the trial court's instructions to the jury, defendant
 argues, first, that the court should have instructed the jury on the law of
 guaranty, because plaintiff's president testified that he thought defendant
 was liable on the basis of the August 13 letter setting forth a specified
 payment schedule.  Plaintiff, however, neither pled nor argued that
 defendant was liable as a guarantor; as the court noted, the letter was
 relevant to the issue of the wrongfulness of defendant's conduct.  The court
 was duty-bound to charge on each issue essential to resolution of the
 controversy,  Allen v. Uni-First Corp., 151 Vt. 229, 232, 558 A.2d 961, 963
 (1988), but the law of guaranty was not part of the case.  We are satisfied
 that the court met its duty.
      Second, defendant argues that the court erred in instructing the jury
 that the definition of constructive fraud requires that the wrongdoer bene-
 fit from his wrongful act and that "benefit is described as an advantage
 going to profit or privilege including the pecuniary advantage of the
 alleged wrongdoer . . . ."   Defendant contends that this definition of
 "benefit" impermissibly relaxed the standard of liability because "benefit"
 should be limited to "some sort of pecuniary or material gain."  To support
 this contention, he asserts that Vermont law requires a constructive trust
 to be imposed whenever constructive fraud is found.  Because a constructive
 trust cannot be imposed on an unidentified res, defendant argues that the
 requirement that a trust be imposed indicates that a wrongdoer must obtain
 some material gain.  In the present case, there was no identifiable fund
 remaining, but because defendant owned the corporation to which the funds
 had been transferred, the jury could find that defendant had benefited from
 his conduct.  Because the case proceeded through trial as an action for
 damages, we do not address defendant's argument concerning constructive
 trusts.  The court's instruction was not error.
      Finally, defendant argues that, because of the complexity of the
 issues, the court erred in refusing to submit detailed interrogatories to
 the jury.  In cases involving overlapping and multiple theories of
 liability, this Court encourages the use of special interrogatories, as
 authorized by V.R.C.P. 49(b), Allen v. Uni-First, 151 Vt. at 232, 558 A.2d 
 at 963, but it is within the trial court's discretion to decide whether to
 do so.  English v. Myers, 142 Vt. 144, 150, 454 A.2d 251, 254 (1982).  The
 adequacy of interrogatories is determined by a review of the jury instruc-
 tions as a whole.  Brennen v. Mogul Corp., 151 Vt. 91, 95, 557 A.2d 870, 872
      In the present case, the court properly instructed the jury and
 submitted interrogatories sufficient to determine the issue of defendant's
 liability on both of plaintiff's theories.  Cf. Contractor's Crane Service,
 147 Vt. at 445, 519 A.2d  at 1170 (where no interrogatories are submitted in
 a case involving multiple theories, reviewing court cannot determine the
 basis of jury verdict).  Although the court's interrogatories were far less
 detailed than those proposed by defendant, the court did not abuse its
 discretion in proceeding as it did.

                                         FOR THE COURT

                                         Associate Justice

FN1.    This payment does not appear in the record as a cash disbursement,
 but plaintiff does not contest that it was made.

FN2.    Defendant's argument, infra, that the court erred in instructing the
jury on the meaning of the term "benefit" touches on this issue.  Defendant,
however, did not argue to the court that damages were unavailable under
plaintiff's theory, but rather that the jury had to be told that only a
material or pecuniary gain to plaintiff would entitle it to recover.

FN3.    Defendant claims plaintiff raised this theory for the first time on
appeal, denying defendant his right to a trial by jury.  We disagree; the
rule relied on by plaintiff simply recognizes as wrongful the type of
conduct plaintiff argued to the jury.