Opinion
No. 85-1354
Decided May 14, 1986.
Corporations — "Key man" insurance — Construction of employment agreement.
APPEAL from the Court of Appeals for Franklin County.
In 1963 appellant, Everett S. Preston, a registered professional engineer, founded an engineering firm which was incorporated in 1970 as E.S. Preston Associates, Inc., d.b.a. ESPA, appellee ("the corporation"). Preston was president and chief executive officer of the corporation until his retirement on January 1, 1977. The corporation was both owner and beneficiary of three "key man" insurance policies on the life of Preston. Before Preston retired, he had entered into an agreement which provided that the corporation would transfer to Preston ownership of the "key man" insurance policies. An insurance agreement dated January 31, 1978 and a demand promissory note were contemporaneously executed. The note was post-dated February 1, 1978, apparently to coincide with the corporation's fiscal year.
This agreement provided in pertinent part as follows:
"1. The policies owned by the Company and insuring Preston's life shall be transferred to Preston and Preston shall change the beneficiary designation with respect to the policies to provide that upon the death of Preston or upon the cancellation of the policies, the Company shall be entitled to the present cash values of the policies ($27,050) and any further cash value resulting from premium payments made by the Company, and the beneficiary or beneficiaries designated by Preston shall be entitled to the remaining benefits under the policies.
"2. From and after the date hereof, the Company will make no further premium payments with respect to the policies, or, if it makes any such payments, will be reimbursed therefor by Preston. It is Preston's intention to maintain the policies by paying the premiums when they are due or by reimbursing the Company for any premiums paid by it.
"3. Preston may, at his option any time before his death pay to the Company the sum of the cash values of the policies on the date hereof ($27,050) plus reimbursement for all premiums paid by the Company after the date hereof and such payment shall constitute full and final compensation to the Company for its total rights, interest and equity in the policies."
The promissory note executed by Preston reads in its entirety:
"I, Everett S. Preston, promise to pay, on demand, the sum of the following accounts as they may appear; for the transfer of Key Man Insurance, said amount to be the cash value on February 1, 1978 ($27,050); plus, any amounts advanced by E.S. Preston Associates, Inc. subsequent to that date for premiums and any other miscellaneous expenses."
Ownership of the "key man" insurance policies was thus transferred to Preston on January 31, 1978. The beneficiary of the policies was not, however, changed at that time and the corporation, rather than Preston, remained as beneficiary. The corporation's secretary-treasurer, Jeffrey A. Myers, stated that as an officer and director of the corporation he was unaware that the beneficiary had not been changed. The corporation continued to make premium payments for the next twenty months, in a total amount of $32,502.51, until Preston changed the beneficiary in October 1979.
A second transaction between Preston and the corporation occurred shortly after his retirement. On January 25, 1977, the parties executed an employment agreement which was later amended on January 10, 1978. The amended agreement provided in pertinent part:
"1. For the ten years beginning February 1, 1977, Preston shall serve as a member of, or advisor to the Board of Directors of the Company and shall also be available to advise and counsel with Company officers and employees and to engage in client relations and to represent and serve the Company as the management of the Company shall designate.
"2. The Company, at its option and for as long as the Company desires, may continue the use of Preston's name.
"3. Preston shall not engage in engineering for any other company without the prior approval of the Company.
"4. As consideration for the agreement herein contained and for services previously rendered, Preston shall receive deferred compensation from the Company in the amount of $120,000, which may be paid in installments at the Company's option. If Preston dies before the said compensation is fully paid, the amounts due hereunder not previously paid to Preston shall be paid in full to his designated beneficiaries within 60 days following his death. For future services after February 1, 1977, Preston shall receive annually from the Company the maximum amount that a self-employed person (under the age of 72) may earn that will not cause loss of benefits under the Federal Insurance Contributions Act. * * *"
The parties later agreed that the maximum amount Preston would receive for his future services under paragraph four of the agreement was five hundred dollars a month. It is not disputed that the $120,000 deferred compensation has been paid to Preston.
A third transaction is also relevant to the instant case. In 1982, appellee entered into a lease agreement for office space with Technical Services of Ohio, Inc. ("TSO"). Preston was the sole shareholder of TSO. The terms of the lease, later amended, specified that rental was to be paid by the corporation at a rate of six thousand dollars per month. TSO had extended rental credits to the corporation for the months of February through May 1982. Rental payments from the corporation to TSO were still due for the months of June through September 1982.
On August 15, 1983, the corporation filed a complaint demanding judgment on the promissory note signed by Preston in conjunction with the January 31, 1978 insurance agreement. The corporation claimed that under the terms of the agreement and note, Preston was liable for the cash value of the policy ($27,050), plus reimbursement for premiums paid by the corporation ($32,502.51) for the "key man" insurance policies owned by Preston, in the total amount of $59,552.51.
Preston denied any present liability for the cash value of the insurance policies. He further denied all liability for reimbursement of the premium payments. Preston alternatively contended a right to set off rental payments owed by appellee to TSO. Preston also filed a counterclaim demanding that the corporation be enjoined from continued use of his name. Preston asserted that under the amended employment agreement of January 10, 1978, the corporation was obligated to pay him five hundred dollars a month for the future right to use his name and that the corporation had not made such payments since January 1982.
The corporation replied that the five hundred dollar amount was consideration for Preston's future services and was terminated in January 1982 because Preston had not performed any service after that date. The corporation also contended that Preston had no right to set off rental payments due TSO.
The case was tried before a referee pursuant to Civ. R. 53. The referee, in his findings of fact and conclusions of law, granted judgment on the note to appellee, but allowed a setoff to Preston for rent due TSO. The referee denied appellant's counterclaim. The trial court adopted the referee's findings and conclusions in its judgment entry.
The court of appeals affirmed judgment on the note to appellee and the denial of appellant's counterclaim. The court of appeals, however, held that appellant, individually, was not a proper party to assert a right of setoff for monies owed to TSO. Accordingly, it remanded the case to the trial court with instructions to enter judgment against appellant in the full amount demanded.
The cause is now before this court pursuant to the allowance of a motion to certify the record.
Metz, Bailey Spicer and Kenneth J. Spicer, for appellee.
Rankin M. Gibson Co., L.P.A., Lucas, Prendergast, Albright, Gibson Newman and Rankin M. Gibson, for appellant.
This court is now asked to review the construction by the lower courts of the various contracts executed by appellant and appellee. It is well-settled that contracts must be given a just and reasonable construction in order to carry out the presumed intent of the parties. Germania Fire Ins. Co. v. Schild (1903), 69 Ohio St. 136, 139-140; First Natl. Bank of Van Wert v. Houtzer (1917), 96 Ohio St. 404.
The first issue for our consideration involves appellant's liability on the promissory note in which he promised to pay, on demand, the cash value of the insurance policies plus any amounts advanced by appellee for payment of the insurance premiums. Appellant argues that the payment on demand language in the note conflicts with the permissive language in the contemporaneous insurance agreement of January 31, 1978 which states that appellant "may, at his option any time before his death pay to the Company the sum of the cash values of the policies * * *." It is important to note, however, that Preston admitted at trial that he owed appellee the cash value of the policies as of the date of transfer of ownership, January 31, 1978. As such, a just and reasonable construction of the note and agreement is that in signing the demand note, appellant exercised his option to pay the cash value before his death.
Appellant also contends that he is not liable to reimburse appellee for the premium payments it made on the "key man" insurance policies. Appellant argues that appellee was aware that the beneficiary of these policies was not changed after ownership was transferred and that appellee voluntarily made the premium payments in consideration for retaining its status as beneficiary. The referee, however, specifically found that appellee was unaware that it remained as beneficiary on the policies. Further, the insurance agreement of January 31, 1978 states that if the company makes any premium payments it " will be reimbursed therefor" by appellant. (Emphasis added.) The agreement recites appellant's "intention to maintain the policies by paying the premiums when they are due or by reimbursing the Company for any premiums paid by it." There is thus no ambiguity in the agreement regarding appellant's liability for the premiums. Where the terms of a contract are clear and unambiguous, this court cannot find a different intent from that expressed in the contract. Alexander v. Buckeye Pipe Line Co. (1978), 53 Ohio St.2d 241, 246 [7 O.O.3d 403]. The determination of the lower courts that appellant is liable on the note for the cash value of the policies and for the premiums paid by appellee is supported by competent and credible evidence and will not be reversed by this court. C.E. Morris Co. v. Foley Construction Co. (1978), 54 Ohio St.2d 279 [8 O.O.3d 261], syllabus. We therefore affirm the court of appeals' judgment that appellant is liable on the note for the full amount demanded by appellee.
The next issue for our consideration concerns appellant's counterclaim seeking to halt appellee's further use of his name. Appellant contends that the employment agreement as amended January 10, 1978 is severable in that the $120,000 deferred compensation was consideration for his past services to appellee, while the five hundred dollar a month payment was to be for his future services and for appellee's right to continue using his name.
We cannot agree that this is a just and reasonable construction of the employment agreement. The agreement provides that "[t]he Company, at its option and for as long as the Company desires, may continue the use of Preston's name." It further states that "[a]s consideration for the agreement herein contained and for services previously rendered, Preston shall receive deferred compensation from the Company in the amount of $120,000 * * *." The agreement reflects that the deferred compensation was paid in consideration for, inter alia, the right to continue using appellant's name. That compensation has been paid in full. There is no mention in the agreement of payment to appellant of five hundred dollars a month for the use of his name. Instead, it is stated that the five hundred dollar amount is specifically to compensate appellant for his future services. The referee found that appellant testified he had not rendered any services to the company after January 1982. Thus, there was competent and credible evidence to support the lower court's determination that appellant was not entitled to an injunction against further use of his name, was not entitled to be paid five hundred dollars a month for the continued use of his name, and was not entitled to payment for future services where none had been rendered. We therefore affirm the denial of appellant's counterclaim.
The final issue in this appeal concerns appellant's right to assert as a setoff in this action against him rental owed by appellee to appellant's wholly owned corporation, TSO. The referee in effect concluded that payments to appellant would be payments to TSO. The court of appeals, however, was unwilling to disregard the corporate entity on the facts of this case.
We agree with the appellate court. Courts have been reluctant to disregard the corporate entity and have done so only where the corporation has been used as a cloak for fraud or illegality or where the sole owner has exercised such excessive control over the corporation that it no longer has a separate existence. North v. Higbee Co. (1936), 131 Ohio St. 507 [6 O.O. 166]. It has also been stated that the corporate entity should be disregarded only when justice cannot be served in any other way. Auglaize Box Board Co. v. Hinton (1919), 100 Ohio St. 505, 518-519.
In the instant case, no fraud or illegality has been alleged by either party. There was also evidence at trial that at various times several officers of appellee corporation also acted as directors of TSO. Thus, appellant did not exercise excessive control over TSO. Further, since TSO may still bring an action in its own name to recover the rental amounts owed it by appellee, the ends of justice do not require us to disregard TSO's corporate entity in this case. The words of the Wisconsin Supreme Court are particularly appropriate:
"* * * In the present case, those who created the corporation in order to enjoy advantages flowing from its existence as a separate entity are asking that such existence be disregarded where it works a disadvantage to them. We do not consider it good policy to do so." Jonas v. State (1963), 19 Wis.2d 638, 644, 121 N.W.2d 235, 239.
We thus affirm the judgment of the court of appeals that appellant, individually, cannot properly set off monies owed to TSO by appellee against amounts appellant personally owes appellee.
Judgment affirmed.
CELEBREZZE, C.J., PARRINO, LOCHER, HOLMES, C. BROWN and WRIGHT, JJ., concur.
DOUGLAS, J., concurs in judgment only.
PARRINO, J., of the Eighth Appellate District, sitting for SWEENEY, J.