Title: Lahnston v. Second Chance Ranch Co.

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Lahnston v. Second Chance Ranch Co.1998 WY 141968 P.2d 32Case Number: 96-326Decided: 11/30/1998Supreme Court of Wyoming

Frank 
LAHNSTON, Appellant (Plaintiff),

v.

SECOND CHANCE RANCH COMPANY, a Wyoming corporation; 
and George H. Nelson, Jr., Appellees (Defendants).

 

Appeal from the District Court, 
Hot Springs County, Gary P. Hartman, J.

 

Don W. Riske of Riske & 
Arnold, P.C., Cheyenne, WY, for Appellant.

John R. Vincent and Donald 
J. Keenan, Riverton, WY, for Appellees.

 

Before LEHMAN, C.J., and THOMAS, MACY, GOLDEN and 
TAYLOR,* JJ.

 * Chief Justice at time of oral argument; retired 
November 2, 1998.

 

LEHMAN, 
Chief Justice.

 [¶1] Frank Lahnston, a minority shareholder of a 
dissolved Wyoming corporation, the Second Chance Ranch Company (Corporation), 
challenges the district court's finding that loans of money, goods and services 
provided to the Corporation by George H. Nelson, Jr., the majority shareholder, 
were valid and enforceable corporate debts. We affirm.

 

[¶2] Appellant Lahnston 
presents the following issue for our review:

 

Whether the district court erred in holding that the 
loans made to the Corporation by appellee [Nelson] were valid and enforceable 
debts of the Corporation.

 

Nelson, as appellee, states 
the issue in the same way. By order of this court, the Corporation was not 
required to file a brief in this appeal.

 

                                              
FACTS

 

[¶3] In 1987, Lahnston and 
Nelson formed the Corporation for the purchase of a ranch. Lahnston was assigned 
100 shares for his investment of $100,000, while Nelson received 200 shares for 
his contribution of $200,000. Lahnston and Nelson were named as directors in the 
Articles of Incorporation. At the initial organizational meeting, Nelson was 
elected president, and Lahnston was elected to the positions of vice-president, 
secretary, and treasurer.

 

[¶4] The initial capital 
investment of $300,000 was used as a down payment on the ranch; the balance of 
the $1,000,000 purchase price was financed. Shortly after incorporation, the 
Corporation obtained two separate loans to purchase a cattle herd and to pay the 
operating expenses of the ranch. Nelson and Lahnston had discussed early on that 
labor, equipment and other resources from the nearby High Island Ranch, owned by 
Nelson, would be used to conduct the business of the Second Chance Ranch, and 
those goods and services would be paid for at the usual and customary rates. The 
parties contemplated that the Corporation would earn sufficient income from its 
cattle operation, lease of pasturage, and lease of hunting rights to make the 
loan payments and to operate the ranch.

 

[¶5] During each of the next 
five years, however, the Corporation experienced losses. Less than a year after 
the formation of the Corporation, Lahnston resigned his officer positions. 
Although he continued to be a director, he refused to participate in the 
management of the Corporation or to contribute additional capital to meet the 
financial obligations of the Corporation. Nelson made a series of loans of cash, 
goods and services from High Island Ranch to the Corporation, which, including 
interest, totaled approximately $255,000 by the end of 1991. When the Second 
Chance Ranch was sold in 1992, Nelson was paid $259,059.37 out of the sale 
proceeds in payment of the loans.

 

[¶6] In January 1995, 
Lahnston brought a derivative shareholders action pursuant to W.R.C.P. 23.1. 
Lahnston claimed that Nelson breached his fiduciary duties in winding up the 
corporate affairs by understating the assets and overstating the debts of the 
Corporation, and alleged that the loans made by Nelson to the Corporation were 
not legitimate corporate debts. After a three-day, unreported bench trial, the 
district court ruled generally in favor of Nelson. The court rejected Lahnston's 
claim that Nelson breached a fiduciary duty to the Corporation or to Lahnston, 
concluding instead that Lahnston breached his duties to Nelson and to the 
Corporation by refusing to participate in the management of the Corporation. The 
court found, among other things, that Lahnston and the Corporation authorized 
and ratified the loans by acquiescence and by retaining the benefits of those 
loans, and that the loans were in all respects fair to the 
Corporation.

 

[¶7] Lahnston timely appeals 
the Judgment entered by the district court.

 

                                       
STANDARD OF REVIEW

 

[¶8] The district court made 
express findings of fact and conclusions of law pursuant to W.R.C.P. 52(a). This 
court will not set aside a district court's findings of fact unless the findings 
are clearly erroneous. Resource Technology Corp. v. Fisher Scientific Co., 924 P.2d 972, 975 (Wyo. 1996). A finding is clearly erroneous when, although there 
is evidence to support it, the reviewing court is left with the definite and 
firm conviction that a mistake has been committed. Id. We review a district 
court's conclusions of law de novo. Id.

 

                                           
DISCUSSION

 

[¶9] On appeal, Lahnston 
focuses on the district court's ruling that the loans made by Nelson were valid 
obligations of the Corporation. He submits that, because the board of directors 
did not ratify the loan transactions with Nelson, they are void. Lahnston 
contends that the court erred by implying corporate ratification when the 
by-laws contain express requirements for ratification of contracts in which a 
director is a party.

 

[¶10] The by-laws of the 
Second Chance Ranch Company, adopted by the Corporation on October 19, 1987, 
include the following provision:

 

          
Section 12 - Contracts:

 

          
* * *

 

(b) Any director, personally and individually, may be 
a party to or may be interested in any contract or transaction of this 
Corporation, and no director shall be liable in any way by reason of such 
interest, provided that the fact of such interest be disclosed or made known to 
the Board of Directors, and provided that the Board of Directors shall 
authorize, approve or ratify such contract or transaction by the vote (not 
counting the vote of any such director) of a majority of a quorum, 
notwithstanding the presence of any such director at the meeting at which such 
action is taken. Such director or directors may be counted in determining the 
presence of a quorum at such meeting. This Section shall not be construed to 
impair or invalidate or in any way affect any contract or other transaction 
which would otherwise be valid under the law (common, statutory or otherwise) 
applicable thereto.

 

Disregarding for a moment 
the last sentence, we note that, despite the fact that Section 12 allows for 
transactions between the Corporation and its directors, ratification of such 
transactions by vote was impossible so long as the Corporation had only two 
directors. According to Section 6 of the by-laws, the presence of a majority of 
the Board, two in this case, was required to constitute a quorum. Ratification 
under Section 12 required the vote of a majority of the quorum, again, two. 
Because Nelson, as a director interested in the transactions, was disqualified 
from voting, ratification by vote could never occur.

 

[¶11] The last sentence, 
however, provides that Section 12 shall not invalidate or impair contracts or 
transactions otherwise valid under the law. We look, then, to the statutory and 
common law governing ratification to determine if the loans made by Nelson to 
the Corporation were valid. The Wyoming Business Corporation Act, 17-16-101 et 
seq., contains a provision specific to conflict of interest 
transactions:

 

(a) A conflict of interest transaction is a 
transaction with the corporation in which a director of the corporation has a 
direct or indirect interest. A conflict of interest transaction is not voidable 
by the corporation solely because of the director's interest in the transaction 
if any one (1) of the following is true:

 

        
  * * 
*

 

          
(iii) The transaction was fair to the corporation.

 

W.S. 17-16-831 (1997). After 
hearing witness testimony and reviewing the exhibits presented during trial, the 
trial court made detailed factual findings. Specifically addressing the fairness 
of the transactions, the court found:

 

6. 
Plaintiff and Defendant Nelson agreed to engage Dave Koerwitz as the certified 
public accountant for SCR [Second Chance Ranch] and Mr. Koerwitz established a 
method of bookkeeping which captured all the bartered transactions between SCR 
and High Island and accurately recorded all of the money and/or goods and 
services which Mr. Nelson loaned to SCR personally. * * *

 

7. 
The Court finds that the books and records of SCR prepared by Dave Koerwitz's 
certified public accounting firm accurately reflect the expenses and incomes of 
SCR on a monthly and yearly basis and the Court further finds that the 
accounting records completely and accurately reflect the balance due from either 
High Island or SCR for the trades of goods and services between the two ranches. 
The Court also finds that entries to the books and records * * * were made as a 
part of the regularly conducted business activities of SCR and that the entries 
were based on information provided from a person with knowledge of the 
activities, expenditures or operations.

 

          
* * *

 

16. * * * The Court further finds that the cash, 
goods and services advanced to SCR by Nelson were required in order for SCR to 
continue in business and that the barter transaction[s] and loans of money were 
in the best interest of SCR and its shareholders[,] known of by both Nelson and 
Lahnston either at or near the time of each transaction and that without the 
advance of money and/or goods and services by Mr. Nelson, SCR would have 
suffered economic hardship.  The 
Court also finds that the barter transactions and loans of cash to SCR were 
transactions to have been fair and reasonable and in the best financial interest 
of SCR * * *.

 

          
* * *

 

21. That the Court finds by a preponderance of the 
evidence * * * that the loans were in all respects fair to the 
corporation.

 

The court's findings are 
supported by the record and are not clearly erroneous. As a result, the 
transactions are not voidable solely on the basis of Nelson's interest because 
they fall within W.S. 17-16-831(a)(iii).

 

[¶12] Lahnston directs our 
attention to J Bar H, Inc. v. Johnson, 822 P.2d 849 (Wyo. 1991), where this 
court, applying W.S. 17-16-801(b), determined that a loan to a corporation by a 
shareholder was not a valid corporate obligation. Wyoming Statute 17-16-801(b) 
(Dec. 1989 Rpl.) provides:

 

(b) All corporate powers shall be exercised by or 
under the authority of, and the business and affairs of the corporation managed 
under the direction of, its board of directors, subject to any limitation set 
forth in the articles of incorporation.

 

In J Bar H, Johnson, a fifty 
percent shareholder and director, was squeezed out of participation in the 
management of a closely held corporation. She did not authorize the corporation 
to incur the debt. Although a corporate resolution had been adopted allowing the 
corporation to borrow money from the shareholders, Johnson was not informed of 
the resolution, nor was it signed by her as corporate secretary. We held, 
therefore, that the board had not authorized the loan, and it was not a valid 
debt of the corporation.  Lahnston 
contends that this case is factually similar to J Bar H in that the board did 
not authorize Nelson's acts as a corporate officer.1 Specifically, he contends that 
Nelson was not authorized to enter into the loan transactions, to execute and 
deliver a mortgage of corporate property as security for the debt, or to approve 
the closing statement which contained a deduction from the proceeds to repay the 
debt.

 

[¶13] Without deciding the 
question, we assume for purposes of this appeal that Nelson exceeded his 
authority as president of the Corporation. If the officers of a corporation 
exceed their authority and the act is one that could have been authorized in the 
first instance by the board of directors, the act may be expressly or impliedly 
ratified and thus be rendered just as binding as if it had been authorized when 
done. 2A FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS §§ 752, 762 
(1992); Sea Lion Corp. v. Air Logistics of Alaska, Inc., 787 P.2d 109, 116-17 
(Alaska 1990). Implied ratification of a previously unauthorized act may result 
from 1) accepting and retaining the benefits of the act, 2) silence, 
acquiescence, or failure to repudiate, or 3) other affirmative acts showing an 
adoption of the act or contract. FLETCHER CYC. CORP., supra, § 762, Barnes v. 
Treece, 15 Wn. App. 437, 549 P.2d 1152, 1157 (Wash. App. 1976). Ratification 
requires full knowledge of all the material facts on the part of the corporate 
principal. FLETCHER CYC. CORP., supra, § 757; see also Farmers' State Bank v. 
Haun, 30 Wyo. 322, 346, 222 P. 45, 53 (1924).  Although actual knowledge of the act is required, 
directors are held to know that which they could have ascertained with slight 
diligence. Haun, 30 Wyo. at 349, 222 P.  at 54-55. A director is chargeable with 
knowledge of those corporate affairs which it is his duty to know. Id., 30 Wyo. 
at 349, 222 P.  at 55. Whether or not ratification exists is a question of fact 
where more than one inference can be drawn from the evidence. FLETCHER CYC. 
CORP., supra, § 781; Sea Lion Corp., 787 P.2d  at 117-18. Whether the evidence is 
legally sufficient to establish ratification is a question of law for the court. 
FLETCHER CYC. CORP., supra, § 781. Ratification occurs as a matter of law where 
reasonable persons could draw only one conclusion from the evidence. FLETCHER 
CYC. CORP., supra, § 781; Sea Lion Corp., 787 P.2d  at 
117-18.

 

[¶14] It is uncontested that 
the transactions between Nelson and the Corporation were not authorized or 
ratified by formal action of the Board. Nevertheless, the district court found 
that the Corporation and Lahnston, by knowledge and conduct, ratified the loans. 
The court's findings included:

 

4. 
* * * Prior to the purchase, both Lahnston and Nelson were aware that the ranch 
provided summer and fall pasturage and that the cattle which SCR intended to 
purchase would need to be kept for the winter and spring at another location. 
  * * *

 

5. 
Because the purchase price of the Gardner place did not include any livestock or 
equipment, Plaintiff and Defendant Nelson agreed to use men, equipment and other 
resources of High Island ranch to conduct the business of SCR. SCR would pay for 
those goods and services at the usual and customary rates and any exchanges or 
barters would be reported accordingly. * * *

 

6. 
* * * Koerwitz's [accounting] firm provided monthly financial statements to the 
First National Bank of Thermopolis, Defendant George Nelson and Plaintiff Frank 
Lahnston beginning in July, 1987 and said financial statements included a 
monthly profit and loss statement and a balance sheet. Koerwitz's firm also 
prepared year-end financial statements, a federal income tax return and K-1 
statements for each of the years of the corporation[']s existence, which were 
also provided to First National Bank and Plaintiff Lahnston and Defendant 
Nelson. * * * The financial statements also set forth the amount of the barter 
transactions which occurred on a monthly basis, the amount of money loaned to 
SCR by Mr. Nelson, the amount of revenues earned by SCR by virtue of its cattle 
operations and its lease of hunting rights together with pasture leasing. * * * 
Mr. Lahnston admitted he knew from the financial statements and year end 
financial statement of 1991 that Defendant Nelson claimed to be owed money based 
upon his loans of cash to SCR for the goods and services Defendant Nelson 
provided to SCR via High Island.

 

          
* * *

 

10. That Plaintiff, after giving notification of his 
intent not to be an officer or director of the corporation, refused to 
participate in the management of SCR, to discuss loans of money in order to keep 
the corporation solvent or to obtain hunters for SCR. That Plaintiff Lahnston 
refused to attend Board of Directors meetings, refused to appoint a third 
director when it became apparent there was a deadlock in 
management.

 

          
* * *

 

15. That the year-end financial statement for SCR for 
the year 1991, which showed an amount due to Nelson of $254,919.27, was provided 
to Plaintiff on the K-1 for the year 1991. Plaintiff did deposit the checks made 
payable to him from the closing proceeds in the amount of $69,991.47. That 
Plaintiff Lahnston did not attempt to prevent the closing or require that the 
proceeds from closing be placed in escrow and did nothing in general to object 
to the sale of the ranch or the payment to Nelson of the sums due him for goods 
and services advanced to SCR from 1987 through 1991.

 

The court's factual 
findings, which are supported by the record, demonstrate important differences 
between this case and J Bar H. Here, Lahnston was not squeezed out of his 
management role in the Corporation; rather, he resigned his officer positions 
and chose not to participate as a director. The parties contemplated trades 
between High Island Ranch and the Corporation at the outset, and the 
transactions were accounted for in the financial statements. Further, the facts 
in J Bar H apparently did not raise the issue of whether the board, or Johnson 
in particular, had ratified the loans. The facts in this case support the 
court's conclusion that Lahnston had full knowledge of the transactions between 
Nelson and the Corporation and that Lahnston and the Corporation impliedly 
ratified the transactions both by acquiescing in the transactions and by 
accepting the benefits thereunder.

 

                                           CONCLUSION

 

[¶15] The loan transactions 
between Nelson and the Corporation were valid under both statutory and common 
law and, consequently, were not in contravention of the corporate by-laws. The 
district court did not err when it determined that the loans were enforceable 
debts of the corporation. Affirmed.

 

FOOTNOTES

  1At the time of the questioned 
transactions, Lahnston and Nelson were the sole directors; and, therefore, 
unanimity was required for board action. The issue, then, is whether the 
transactions were ratified by Lahnston so as to effect authorization by the 
board.