Opinion
No. 48722-1-I.
Filed: January 6, 2003.
Paul R. Lehto, for appellant.
Bruce E. Jones (of Newton Kight, L.L.P.), for respondents.
Martin Noble appeals from a bench trial verdict involving the formation, operation, and dissolution of Evergreen Promotions, Inc., a corporation that he formed with Renato Lubrin. Noble assigns error to virtually all of the trial court's findings and conclusions, arguing (1) that Lubrin wrongfully appropriated a corporate opportunity or (2) breached a fiduciary duty by engaging in oppressive conduct; (3) that Lubrin's company, Sky Valley Productions (Sky Valley), was a successor corporation; and (4) Noble should have received an attorney fees award. He also asserts that (5) the findings do not support the court's order judicially dissolving the corporation and (6), the trial court was required to make findings about the monetary and non-monetary advantages Lubrin obtained by his actions. Lubrin cross-appeals, contending the trial court erred in ordering the sale of assets and an accounting and not awarding his attorney fees. We affirm the trial court's decision because there was no corporate opportunity for Lubrin to take and his actions did not constitute oppressive conduct. There is also substantial evidence supporting the finding that Sky Valley is not a successor corporation. The court properly ordered dissolution and an accounting because the corporation had ceased all activity and not distributed its assets at the time of trial. Nor did the court need to make findings about advantages Lubrin obtained because it correctly found that he did not breach a fiduciary duty. Finally, there is no basis for awarding attorney fees to either party.
FACTS
Noble and Lubrin formed Evergreen Promotions, Inc. (Evergreen), in March 1998. The closely-held corporation was formed to put on swap meets at Snohomish County's Evergreen Fairgrounds (the fairgrounds) in Monroe. Noble was vice-president and a 60 percent shareholder, Lubrin was president and a 40 percent shareholder, and both were directors of the corporation. Lubrin had prior business experience and good contacts at the fairgrounds where he had worked for 22 years. Noble had management experience and his wife, Nancy Noble, provided professional services in advertising placement and media services. Vicki Lubrin, Lubrin's wife, provided bookkeeping services for the company.
Evergreen Fairgrounds is not related to Evergreen Promotions, Inc.
Evergreen entered into two one-year leases with the fairgrounds, one for swap meets and the second for a Christmas fair. Neither contract had a renewal option. Evergreen also got some three-year sponsorships paid in advance by area businesses wishing to have their names displayed at the Christmas fair. Throughout the first year, the parties held swap meets and the Christmas fair. They purchased lights and related equipment for the Christmas fair's "one million lights" display. At the end of the year, the parties met to plan for the next year.
Several weeks after the meeting, Lubrin met with Noble and offered him $19,323.89 to terminate the agreements between them and let Lubrin retain Noble's stock and all assets of the corporation. The $19,323.89 figure represented the amount of Noble's loans to Evergreen without interest minus corporate debts that Noble had not paid. Noble did not accept the offer at the meeting; instead, he sent a letter stating that he would accept that amount plus his $4,000 investment. Lubrin declined.
The parties then began communicating only through their attorneys. They did not give notice of or hold a shareholder or director's meeting to dissolve Evergreen. The corporation's only assets were Christmas lights and swap meet equipment that they had divided for storage. By March 1999, Evergreen had accrued debts of $55,000, and the business had no market value. At that time, Vicki Lubrin returned the renewal of corporate registration with the word "dissolved" written on it based on advice from the Secretary of State's office about how to dissolve the corporation. On July 10, 1999, the Secretary of State administratively dissolved the corporation because Evergreen had not filed its annual registration.
Chapter 23B.14 RCW, the Washington Business Corporation Act chapter on corporate dissolution, establishes the procedures for dissolving a corporation.
Noble had lights and equipment originally purchased for $32,000, and Lubrin had lights and equipment originally purchased for $8,400. The trial court found their value was insignificant. It noted that "[e]veryone [had] testified that many of the lights would not work in subsequent years."
When Lubrin decided not to continue Evergreen with Noble, he and his wife started a partnership called Sky Valley Productions. Sky Valley entered into license agreements with the fairgrounds to hold swap meets and a Christmas fair in 1999 and 2000. Sky Valley honored the agreements that Evergreen had with local businesses, mentioning their names as promoters because they felt "a personal obligation to [do] so." Sky Valley used the lights Lubrin was storing to present Sky Valley's Christmas fair. In 1999, Sky Valley lost money, and in 2000, it made a profit of $1,500.
Noble brought a personal and derivative suit in superior court claiming that Lubrin breached his fiduciary duty as an officer by wrongfully appropriating a corporate opportunity to himself. He also sought injunctive relief ordering Lubrin to account for all expenses and income of the corporation, return all corporate assets he had taken from the corporation, and stop appropriating a corporate opportunity. He also sought damages of more than $90,000 and attorney fees.
The trial court concluded there was no corporate opportunity for Lubrin to usurp, the corporation had no value, and there was no good will. It ordered that the corporation be dissolved and wind up its affairs with an accounting of Evergreen's assets, which should be applied to its debts. The court made a finding that the corporation was not properly dissolved and awarded Noble $175.00 in statutory fees and costs. Finally, the court declined to award attorney fees to either party.
DISCUSSION
As a preliminary matter, we must determine whether Noble properly assigned error to the findings of fact and conclusions of law. Ordinarily, unchallenged findings of fact are treated as verities on appeal. Lubrin argues that we should apply that rule here because Noble assigned error to only three findings of fact: 1.22, 1.36, and 1.31. But the appellate court may excuse a party's failure to assign error where the briefing makes the nature of the challenge clear and the challenged finding is argued in the text of the brief. In this case, Noble correctly asserts that some conclusions of law were actually labeled findings of fact, and he need not assign error to those conclusions. And, although he did not assign error to all findings of fact that relate to the disputed issue, it is clear in the text of his brief that Noble challenges the court's determination that there was no corporate opportunity. In addition, he assigns error to conclusion of law 2.1, which states that "[d]efendants Lubrin did not wrongfully appropriate a corporate opportunity belonging to Evergreen Promotions, Inc." We conclude Noble has adequately raised the issue of whether the trial court erred in finding that there was no corporate opportunity.
State v. Hill, 123 Wn.2d 641, 647, 870 P.2d 313 (1994).
RAP 1.2(a); .
For example, finding of fact 1.32 includes the court's conclusion of law that the license agreements with the fairgrounds did not constitute a corporate opportunity.
Noble also raises the issue in the section of his brief addressing "Issues Pertaining to Assignments of Error."
I. Did Lubrin wrongfully appropriate a corporate opportunity?
The corporate opportunity doctrine prohibits directors or officers from appropriating to themselves business opportunities that rightfully belong to the corporation. Whether a particular business opportunity belongs to the corporation or is personal to an individual depends upon the facts and circumstances of each case. In Equity Corporation v. Milton, the Delaware Chancery Court defined the corporate opportunity doctrine as follows:
Wagner v. Foote, 128 Wn.2d 408, 413, 908 P.2d 884 (1996) (citing Equity Corp. v. Milton, 43 Del. Ch. 160, 221 A.2d 494 (1966)).
Id.
43 Del. Ch. 160, 221 A.2d 494, 497 (1966).
[W]hen there is presented to a corporate officer a business opportunity which the corporation is financially able to undertake, and which, by its nature, falls in the line of the corporation's business and is of practical advantage to it, or is an opportunity in which the corporation has an actual or expectant interest, the officer is prohibited from permitting his self-interest to be brought into conflict with the corporation's interest and may not take the opportunity for himself.
Equity, 221 A.2d at 497 (emphasis added).
Whether an opportunity is a corporate one is a conclusion of law which we review de novo. Washington courts have not adopted a test for deciding what a corporate opportunity is. In the only Washington case discussing the issue, Wagner v. Foote, the court cited Equity Corporation with approval and affirmed that
Dempere v. Nelson, 76 Wn. App. 403, 406, 886 P.2d 219 (1994), review denied, 126 Wn.2d 1015 (1995).
128 Wn.2d 408, 908 P.2d 884 (1996) (holding that the opportunity for a corporate shareholder/officer to enter into a non-competition agreement in conjunction with the sale of corporate assets is not a corporate business opportunity, but an officer breaches his fiduciary duty if such an agreement results in the corporation's receiving less than market value of the goods).
[t]he corporate opportunity doctrine prohibits directors or officers from appropriating for themselves business opportunities that rightfully belong to the corporation [and] [w]hether a particular business opportunity belongs to the corporation or is personal to the individual depends upon the facts and circumstances of each particular case.
Id. at 413 (citation omitted).
Courts have taken three different approaches to determining whether there is a corporate opportunity: the "line of business" test, the "interest-or-expectancy" test, or the "fairness" test. The line of business test is the most commonly applied. Under that test, "a new business prospect constitutes a corporate opportunity if it is deemed to fall within the firm's `line of business.'" A number of jurisdictions applying this test also recognize an incapacity defense when the corporation is financially unable to pursue the opportunity. The interest-or-expectancy test predates the line of business test and "proscribe[s] only those projects in which the corporation has an active commercial interest or expectancy." Finally, a few jurisdictions use the fairness test under which an opportunity belongs to the corporation if appropriating it would violate "ethical standards of what is fair and equitable [to the corporation in] particular sets of facts.'"
Eric Talley, Turning Servile Opportunities to Gold: A Strategic Analysis of the Corporate Opportunities Doctrine, 108 Yale L.J. 277, 289 (1998).
Id. at 291.
Id. at 292.
Id. at 293 (quoting).
In this case, the trial court apparently applied the interest-or-expectancy test. It concluded that the corporate opportunity Lubrin allegedly took over was the lease agreement with the fairgrounds. It found that without a lease of more than one year, Evergreen was as able as any other entity to obtain a new lease. The court concluded that there was no corporate "interest" because there was no existing contractual right after the original one-year leases, and there was no reasonable "expectancy" that Evergreen would acquire the license agreements in subsequent years. We affirm the trial court's decision, but apply a different test.
Noble cites Comedy Cottage, Inc. v. Berk, 145 Ill. App.3d 355, 495 N.E.2d 1006, 1011 (Ill.App.Ct. 1986) as specifically holding that there is a protectible expectancy in the renewal of a lease. Comedy is distinguishable from this case. There, (1) the business was well established, profitable, and negotiating a lease for the location from which it had operated for several years; (2) it was clear that the corporation was financially able to enter into the lease; and (3) the lease was under negotiation when the officer left the corporation to pursue the interest for himself.
Noble argues that the court erred in finding there was no evidence that Evergreen would have obtained contract renewals because Sky Valley actually got renewals and it had less financial backing than Evergreen. But Lubrin's testimony suggested that the fairgrounds could turn an applicant down for any reason, they would not give multiple-year leases, and that Sky Valley had to advance $7,500 to obtain the new lease. This evidence, which the trial court believed, along with the fact that the only lease in evidence was for one year, is substantial evidence supporting this finding of fact.
We adopt the line-of-business test derived from the rule in Equity Corporation. The first question is whether the complainant has shown the business opportunity is within the "line of business" of the corporation or whether the business already has an actual or expectant interest in the opportunity. The second question is whether the corporation has the financial ability to seize the opportunity. Because the party alleged to have appropriated a corporate opportunity generally has access to the relevant financial information, that party should bear the burden of proving financial inability. But the trial court may redistribute burdens among the parties when placing the burden of proof solely on one party is inequitable under the facts of a particular case. In this case, the first part of the test is met because the leases Lubrin pursued with the fairgrounds are squarely within Evergreen's line of business. However, because Evergreen had no financial resources with which it could pursue the leases, Lubrin has adequately established the incapacity defense. The lease was an opportunity that Lubrin could lawfully pursue on his own.
Noble argues that Lubrin cannot use the financial ability defense because he was a "material actor" in creating the insolvency of the corporation. He relies on Aqua-Culture Technologies, Ltd. v. Holly. We disagree. Although we recognize this is an important factor in determining whether a party can use the financial ability defense, Aqua-Culture is distinguishable from this case in two significant ways. First, the actions that led to Evergreen's insolvency did not rise to the level of misconduct present in Aqua-Culture. There, the officers "grossly violated [their] fiduciary duties" by "divert[ing] corporate funds [for their] own use, misused [the corporation's] money and time, and [were] engaged in forming a duplicate enterprise in the form of a new corporation . . . to divert all of the expertise, work product and good will" from the old to the new corporation. Although Noble states in his brief that Lubrin "pushed" the parties to invest additional sums of money in the Christmas lights, he fails to cite to any place in the record where this evidence was presented. The trial court made an uncontested finding that both Lubrin and Noble made decisions about how many lights would be needed, how many should be purchased, and where they should be placed. Second, unlike Aqua-Culture, the trial court here made an uncontested finding of fact that there was no evidence that Evergreen had any significant value or good will, and it did not find that Lubrin misappropriated any of Evergreen's assets. Under these circumstances, the evidence supports the conclusion that, unless the parties contributed additional capital, Evergreen did not have the financial ability to pursue the leases.
677 So.2d 171, 183 (Miss. 1996) (concluding that majority shareholders may not cause the corporation's insolvency and then argue that it lacked the financial ability to seize a corporate opportunity).
Aqua-Culture, 677 So.2d at 182.
II. Did Lubrin violate a fiduciary duty through oppressive conduct?
Washington has not adopted a specific test for determining whether there has been oppressive action against a shareholder. In Robblee v. Robblee, this court applied two different and often-used tests for oppressive action. The most common of the two tests is the "reasonable expectations" test, which defines oppression as a "violation by the majority of the `reasonable expectations' of the [minority]." "`Reasonable expectations' are those spoken and unspoken understandings on which the founders of a venture rely when commencing the venture."
68 Wn. App. 69, 841 P.2d 1289 (1992).
Robblee, 68 Wn. App. at 76 (quoting Gimpel v. Bolstein, 125 Misc.2d 45, 477 N.Y.S.2d 1014, 1018 (1984)) (alteration in original; internal quotations omitted). The other test, which has been called the "fair dealing" test, describes oppression as "`burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members; or a visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.'" (quoting Gimpel, 477 N.Y.S.2d at 1018). The two approaches are "not mutually exclusive, and will frequently be found to be equivalent. Often, however, it will be found that one or the other lends itself more nearly to the facts of the case as an appropriate analytical framework." Gimpel, 477 N.Y.S.2d at 1019. We need not apply these factors here because Noble's expectations were not reasonable.
Robblee, 68 Wn. App. at 76.
Noble argues that Lubrin's actions defeated his "reasonable expectation" that theirs was a long-term venture and thus breached his fiduciary duty to him. We cannot agree. If we were to accept Noble's argument, courts would have to find oppressive conduct whenever an officer/shareholder of a closely-held, insolvent corporation chose to end the corporation rather than contribute additional money to a failed venture. Under facts like these, it is not reasonable to expect an officer/shareholder to contribute more of his own money to a failed enterprise in order to avoid breaching a fiduciary duty. Because we hold Lubrin did not breach a fiduciary duty to Noble, we need not address the question whether the trial court erred in failing to make findings concerning the advantages Lubrin obtained, monetary and non-monetary, as a result of the breach.
We affirm.
The remainder of this opinion has no precedential value. Therefore, it will not be published but has been filed for public record. See RCW 2.06.040; CAR 14.
BECKER, C.J., and BAKER, J., concur.
III. Was Sky Valley a successor corporation?
The general rule in Washington is that a corporation purchasing the assets of another corporation does not, solely by reason of the purchase, become liable for the debts and liabilities of the selling corporation, except where: (1) the purchaser expressly or impliedly agrees to assume liability; (2) the purchase is a de facto merger or consolidation; (3) the purchaser is a mere continuation of the seller; or (4) the transfer of assets is for the fraudulent purpose of escaping liability. The exception at issue in this case is the "mere continuation" exception.
Hall v. Armstrong Cork, Inc., 103 Wn.2d 258, 261-62, 692 P.2d 787 (1984) (citations omitted).
Washington courts have indicated that to prevail on the theory of "mere continuation", proof of at least two elements is required. The first element is "a common identity of the officers, directors, and stockholders in the selling and purchasing companies." The second element is "the sufficiency of the consideration running to the seller corporation in light of the assets being sold."
Gall Landau Young Constr. Co. v. Hedreen, 63 Wn. App. 91, 97, 816 P.2d 762 (1991) (quoting Cashar v. Redford, 28 Wn. App. 394, 397, 624 P.2d 194 (1981)), review denied, 118 Wn.2d 1022 (1991).
Our cases also require transfer of "all or substantially all" of the seller corporation's assets to the successor. The purpose of the mere continuation theory is to render ineffective a transfer of the debtor corporation's assets when those assets could have been used to satisfy the corporation's debts.
Id. (citing Hall, 103 Wn.2d at 261).
Id. at 98.
Noble argues that the court erred in finding that Sky Valley was not a successor corporation and argues that the "mere continuation" exception should apply. He bases his argument on three assertions: with the exception of Noble, the officers, directors, and employees are the same, Lubrin has paid him no consideration, and Sky Valley assumed Evergreen's debt, honored their promotion contracts, and continued in the same line of business in the same location.
The trial court found that Sky Valley is not a successor corporation because (1) it did not expressly or impliedly assume Evergreen's liabilities, (2) the continuation was not a de facto consolidation or merger, (3) there is no identity of officers or directors between Sky Valley and Evergreen and (4) the limited transfer of assets was not for the fraudulent purpose of escaping liability. There is substantial evidence to support the trial court's finding that Sky Valley is not a successor corporation. First, the new business does not have the same officers, directors, and employees because Noble is not a director of Sky Valley, and neither he nor his wife is an employee. Second, Evergreen's assets and good will had no significant value, and there were no corporate interests or expectancies in future leases with the fairground. These "assets" are all that could have been transferred and, because they had little or no value, they could not have been used to satisfy the corporation's debts. And, where the assets have little value, there is no basis on which to find insufficient consideration running to Noble. Nor has there been transfer of substantially all of Evergreen's assets because there are no assets with any significant value. Therefore, we affirm the trial court's finding that Sky Valley is not a successor corporation to Evergreen.
See id. at 98-99 (where a successor corporation's assets had no significant value and were the only assets transferred, the "mere continuation" argument fails).
IV. Did the court err in ordering the corporation judicially dissolved?
RCW 23B.14.300(2)(e) provides that
[t]he superior courts may dissolve a corporation . . . [i]n a proceeding by a shareholder if it is established that . . . [t]he corporation has ceased all business activity and has failed, within a reasonable time, to dissolve, to liquidate its assets, or to distribute its remaining assets among its shareholders.
A trial court's decision dissolving a corporation is reviewed for abuse of discretion. Noble argues that none of the court's findings supported its order judicially dissolving the corporation, other than the legally insufficient finding that Lubrin no longer wished to work with Noble "for whatever reason." Lubrin argues that two facts were legally sufficient to trigger the trial court's dissolution authority: the equipment distribution was not intended as a distribution of assets and, under the storage agreement, Noble ended up with more than his share of the Christmas lights and equipment.
Interlake Porsche Audi, Inc. v. Bucholz, 45 Wn. App. 502, 525-26, 728 P.2d 597, review denied, 107 Wn.2d 1022 (1986).
We agree with Lubrin. Evergreen ceased all activity, failed financially, and had not dissolved or distributed its assets by the time of trial. There is no evidence that the court dissolved the corporation on Lubrin's whim as Noble alleges, and he does not cite to any evidence in the record to support his argument. The trial court correctly dissolved the corporation.
The court found that the assets (Christmas lights and equipment) were distributed only for storage, a fact that is undisputed. The court also found that Evergreen had ceased all business activity, which is supported by substantial evidence.
In its oral ruling, the trial court simply stated that the corporation was administratively dissolved, there seemed to be no reason why anyone would wish to reinstate it, and the court had authority to dissolve it. It concluded by ordering an accounting after which the corporate assets should be applied to its debts.
V. Did the court properly require an accounting and sale of assets?
Lubrin argues on cross appeal that the trial court erred in ordering an accounting when the accounting provided to the court was undisputed, and in ordering that the corporate assets be sold and added to the accounting when the court found that they were of insignificant or minimal market value. He also asserts that the court should have considered a partnership agreement, which both parties agreed existed, requiring that losses be shared 60/40 and would result in Noble's paying Lubrin $2,963.24. Neither party's argument is particularly relevant. First, the trial court did not abuse its discretion in ordering the sale of assets and an accounting that included their value as part of the court-ordered dissolution. It stated that the corporate assets had "minimal value," which indicates that they do have some value. A new accounting would simply include the value of the assets, which was unknown at the time of trial.
Both parties testified about a debt agreement based on a 60/40 split. However, Lubrin does not provide any legal basis on which the court could enforce it.
Second, the trial court properly found that Noble and Lubrin formed a corporation, not a partnership. Whether the corporate form should be disregarded is a question of fact. In this case, there was substantial evidence that the parties did indeed form a corporation, neither party would receive profits until the corporation had a reserve account of $10,000, and afterward profits would be distributed on a 60/40 basis according to an addendum to the corporation's bylaws. The bylaws did not include any provision that included sharing corporate debt beyond each party's initial investment. There was no basis in the record for disregarding the corporate form the parties chose to use.
Truckweld Equip. Co. v. Olson, 26 Wn. App. 638, 643, 618 P.2d 1017 (1980).
VI. Is either party entitled to attorney fees?
Generally, a court will only award attorney fees when they are authorized by statute or contract. Washington courts have recognized limited exceptions to the rule, among them the rule that equity may allow reimbursement of attorney fees from a fund created or preserved by a litigant for the benefit of others, as well as himself. This rule has been expanded to include situations where a litigant confers some other substantial benefit on an ascertainable class, such as corporate stockholders. In limited situations, the court may invoke its inherent equity powers to award fees.
Weiss v. Bruno, 83 Wn.2d 911, 523 P.2d 915 (1974).
Id.
Id.
Seattle Trust Sav. Bank v. McCarthy, 94 Wn.2d 605, 613, 617 P.2d 1023 (1980).
Noble argues that the trial court should have awarded attorney fees to him based on an exception to the common fund doctrine developed in Hsu Ying Li v. Tang. There, the court awarded attorney fees when the common fund class consisted of only one person and there was a finding of constructive fraud. He argues that Tang "follows directly from the principle that a fiduciary not benefit or keep advantages and that a minority shareholder not suffer losses as a result of a breach of fiduciary duty." But because we conclude that the trial court properly decided that Lubrin did not breach a fiduciary duty, Tang does not apply here, and we decline to reverse the trial court or award fees on appeal.
87 Wn.2d 796, 801, 557 P.2d 342 (1976). The Tang Court also stated, "A partner should share the expense of a lawsuit when he breaches his fiduciary duty to the other partners." Id. (citing 68 C.J.S. Partnership § 448 (1950)).
On cross appeal, Lubrin contends that he should be awarded attorney fees under RCW 23B.07.400(4), which provides that
[o]n termination of the proceeding the court may require the plaintiff to pay any defendant's reasonable expenses, including counsel fees, incurred in defending the proceeding if it finds that the proceeding was commenced without reasonable cause.
He asserts that Noble brought the action against him with full knowledge that Evergreen had no market, good will, or asset value and it needed more contributions to continue in business. Therefore, he argues the proceeding was commenced without reasonable cause. As our discussion of the corporate opportunity issue demonstrates, Noble's claim is not completely lacking reasonable grounds for dispute. We decline to award attorney fees to Lubrin.
Lubrin also argued in his cross appeal that the court erred in naming Noble as the prevailing party on his claim seeking injunctive relief to stop Lubrin's use of corporate assets and order an accounting. Because there is no basis for awarding attorney fees to either party, we do not reach this question.
BECKER and BAKER, JJ., concur.