Title: HAUPTMAN v EDWARDS INC

State: montana

Issuer: Montana Supreme Court

Document:

No. 13185 I N T H E S U P R E M E C O U R T O F T H E STATE O F M O N T A N A 1976 C H A R L E S M. H A U P T M A N , P l a i n t i f f and Appellant, EDWARD, INC. , a corpora tion, K E N N E T H E D V A R D S AND GARY E D V A R D S , Defendants and Respondents. Appeal from: D i s t r i c t Court of the Seventh J u d i c i a l D i s t r i c t , Honorable L. C. Gulbrandson, Judge presiding. Counsel of Record: For Appellant : Moulton, Bellingham, Longo and Mather, Billings, Montana Bruce Ennis argued, Billings, Montana For Respondents: Gene Huntley argued, Baker, Montana R. W. Heineman, Wibaux, Montana Submitted: T"I?rEh:5, 1976 Decided : AFK 2 8 1976 Filed : kpb 2 . 8 1 9 7 6 M r . J u s t i c e John Conway Harrison delivered the Opinion of the Court . This appeal i s from a p a r t i a l summary judgment granted i n the d i s t r i c t court, Dawson County, i n an action f o r specific performance of an option. Two issues a r e presented f o r t h i s c o u r t ' s consideration: (1) Did the d i s t r i c t court e r r by granting p a r t i a l judgment i n favor of Edwards, Inc., the corporate defendant, on the theory t h a t the corporate o f f i c e r s were not authorized t o execute an option on i t s behalf? (2) Did the d i s t r i c t court e r r i n refusing t o grant p l a i n t i f f ' s motion f o r judgment on the pleadings with regard t o defendants' cross-complaint? Charles M. Hauptman, a geologist and lease broker, was the p l a i n t i f f i n t h i s action in the d i s t r i c t court. Defendants were Edwards, Inc., a Montana farm corporation, and Kenneth Edwards and Gary Edwards, o f f i c e r s of the corporation. P l a i n t i f f obtained an option t o lease, signed by Kenneth Edwards and Gary Edwards, which was repudiated when p l a i n t i f f attempted t o exercise it. P l a i n t i f f then sued the corporation f o r specific performance of the option. In i t s answer the corporation alleged the option was not valid because it was not approved by the corporation's board of directors o r stockholders a s required by section 15-2272, R.C.M. 1947. Thereafter p l a i n t i f f amended h i s complaint t o join a s defendants Kenneth and Gary Edwards, o f f i c e r s of the corporation, who had executed the option on behalf of the corporation. Thereafter responsive pleadings by defendant corporation and defendants Kenneth and Gary Edwards brought about a second amended complaint, t o which a second amended answer and a cross- complaint was f i l e d by defendants. The second amended answer alleged the option was unenforceable because (1) it was subject t o an u n f u l f i l l e d condition precedent; (2) it was not properly exercised; and (3) it was obtained by fraud. The second amended answer a l s o a l l e g e d , a s a defense, t h a t t h e option w a s not v a l i d because t h e corporate o f f i c e r s who executed t h e option were n o t authorized t o do so and t h e corpora- t i o n did not r a t i f y t h e i r a c t s , The second amended answer i n a cross complaint requested damages f o r slander of t i t l e because of t h e f i l i n g of a l i s pendens by p l a i n t i f f . Both p a r t i e s f i l e d motions f o r summary judgment. The court on August 8, 1975, entered i t s findings of f a c t , conclusions of law and a p a r t i a l summary judgment which dismissed p l a i n t i f f ' s claim against t h e corporation on the ground t h e corporate o f f i c e r s had not been authorized t o a c t f o r t h e corpora- t i o n when they executed t h e option. The d i s t r i c t court denied p l a i n t i f f ' s motion f o r summary judgment on t h e pleadings, and denied summary judgment on t h e motion of Kenneth and Gary Edwards seeking r e l i e f individually. The f a c t s , f o r the most p a r t , a r e not i n dispute. O n /' May 19, 1973, Kenneth Edwards and Gary Edwards signed an option a s president and s e c r e t a r y respectively of Edwards, I n c . , t o l e a s e t o p l a i n t i f f c e r t a i n lands i n Dawson County, f o r t h e purpose of mining f o r c o a l , described a s : ownsh ship 15 North, Range 53 " 2 Fast M.P.M. I I Section 9: A l l "Section 11: A l l "section 1 7 : S-112." Such lands were owned and operated a s a farm by Kenneth Edwards f o r some 25 years. P r i o r t o t h a t they had been owned by h i s f a t h e r and mother. H e owned i n excess of 7,000 a c r e s of farm land. O n January 1, 1972, a corporation was formed with Kenneth a s president; Jeannie Edwards, h i s wife, vice-president, and Gary, h i s son, a s secretary. Of t h e 1,078 shares of stock issued f o r t h e corporation, Kenneth owns 932 shares, Gary 145 shares and Jeannie 1 share. I n addition t o t h e f a c t t h e corporation owns i n excess of 7,000 a c r e s of farm land, i t a l s o l e a s e s i n excess of 6,000 acres. I n l a t e 1972 and e a r l y 1973, p l a i n t i f f Hauptman was attempting t o put together options f o r a l a r g e a r e a , covering ten square miles, f o r a c o a l lease. A t t h e time he contacted t h e Edwards he had options on some 14,000 mineral a c r e s . O n March 14, 1973, Hauptman met with Kenneth and Gary Edwards a t t h e ranch house near Glendive, Montana. A t t h a t meeting t h e p a r t i e s a r r i v e d a t c e r t a i n agreements (the substance of which a r e i n d i s p u t e ) , and a document e n t i t l e d an option t o l e a s e was executed. A description of t h e lands and a copy of t h e proposed coal l e a s e were attached t o t h e option. The land described t o t a l e d l G O O acres. Kenneth and Gary Edwards i n i t i a l e d each page of t h e option t o lease. Neither Kenneth nor Gary Edwards t o l d Hauptman they were a c t i n g without a u t h o r i t y on behalf of t h e corporation a t the time they executed t h e option. The board of d i r e c t o r s never formally m e t t o consider whether the corporation should execute t h e option o r f o r the purpose of r a t i f y i n g . Hauptman n o t i f i e d t h e corporation by two l e t t e r s , dated J u l y 10, 1973 and September 8, 1973, of h i s exercise of t h e option on 960 a c r e s of the 1600 a c r e s covered by it. Hauptman had discovered t h e corporation did not own c o a l under 640 a c r e s of the lands described i n t h e option. Kenneth Edwards f i r s t informed Hauptman t h e reason the corporation would not perform t h e option was t h a t he d i d n o t l i k e t h e t e r m s of t h e transaction and he d i d not want t h e surface t o be involved. The lack of corporate a u t h o r i t y defense first appeared i n the corporation's answer. After t h e corporation repudiated t h e option, Hauptman sued t o compel t h e corporation t o i s s u e a l e a s e covering t h e 960 a c r e s under which i t owned coal. Before considering t h e issues r a i s e d on appeal, we note t h a t much of a p p e l l a n t ' s o r i g i n a l b r i e f was devoted t o e s t a b l i s h i n g t h a t n e i t h e r t h e corporate defendant nor t h e individual defendants could r e l y on Montana s t a t u t e s section 15-2271 and section 15-2272, R.C.M. 1947, t o j u s t i f y t h e corporation r e f u s a l t o perform t h e option. The a p p e l l a t e b r i e f of the corporation and Kenneth and Gary Edwards r e f e r s t o t h i s s t a t u t o r y a u t h o r i t y f o r support a s a "red herring", and then s t a t e s : "we have no q u a r r e l with t h e proposition t h a t t h e disposition of t h i s matter i s governed by s t a t u t e and the consistent construction of c o n t r o l l i n g s t a t u t e s placed upon them by t h i s Court and c o u r t s 5enerally. he s t a t u t e upon which we r e l y i s 915-2233 R.C.M. (1947) which reads a s follows: " ' ~ o a r d of d i r e c t o r s . The business and a f f a i r s 1 3 i a corporation s h a l l be managed by a board of d i r e c t o r s . Directors need not be r e s i d e n t s of t h i s s t a t e o r shareholders of t h e corporation unless t h e a r t i c l e s of incorporation o r bylaws so require. The a r t i c l e s of incorporation o r bylaws may prescribe other q u a l i f i c a t i o n s f o r d i r e c t o r s . The board of d i r e c t o r s s h a l l have a u t h o r i t y t o f i x the compensation of d i r e c t o r s dnless otherwise provided i n t h e a r t i c l e s of incorpor- a t i o n . t " W e consider t h i s s t a t u t e t o be d i s p o s i t i v e of t h e i s s u e 5efore t h e court. * + c :k. I ' ',dich the considerations so focused,we discuss t h e issues. Issue (1). Did t h e d i s t r i c t court e r r by granting p a r t i a l sur1nlaz.y judgment i n favor of t h e corporate defendant on t h e theory Lhe corporate o f f i c e r s were not authorized t o execute an option Cor t h e corporation? W e find t h a t it did. W e have no argument with ~ o n t a n a ' s case and s t a t u t o r y auth- ~ i - i t y chat he business and a f f a i r s of a corporation s h a l l be alanaged by a board of d i r e c t o r s . I ' Pioneer Minerals Corp. v. k r a b i e Bros. Rankers, Inc., 99 Mont. 358, 43 P.2d 884; Raish v. .kchard Canal Co., 67 Mont. 140, 218 P. 655. However, i n the i n s t a n t case, the corporate defendant i s bound by t h e a c t s of i t s ~ f f i c e r s f o r several reasons: (1) t h e o f f i c e r s of t h e corporation had express o r implied a u t h o r i t y t o exercise the option, (2) t h e corporate o f f i c e r s a r e estopped t o deny t h e option, and (3) t h e o f f i c e r s of the corporation a r e not e n t i t l e d t o r e l i e f upon the corporation's separate existence i n order t o avoid t h e cor- poration's obligations under the option. Defendant corporation c i t e s numerous Montana cases i n support of i t s position t h a t t h e o f f i c e r s were without a u t h o r i t y t o a c t f o r the corporation. Major r e l i a n c e i s placed on Hanrahan v. Andersen, 108 Mont. 218, 90 P.2d 494. Hanrahan i s not f a c t u a l l y s i m i l a r t o t h e i n s t a n t s i t u a t i o n . There a general manager who was a d i r e c t o r and a l s o t r e a s u r e r , operated f a r beyond h i s a u t h o r i t y , nearly destroying t h e corporation, and a stockholder i n s t i t u t e d t h e s u i t t o undo a s e r i e s of questionable transactions. That i s not t h e f a c t s i t u a t i o n i n the i n s t a n t case. Other cases c i t e d a r e not f a c t u a l l y i n point with t h e i n s t a n t case. However, the most recent case of t h i s Court considering a corporate o f f i c e r ' s a c t u a l and implied a u t h o r i t y , was not c i t e d nor discussed by t h e corporate defendant i n i t s b r i e f on appeal. That case, Bentall v. Koenig Brothers, Inc., 140 Mont. 339, 372 P.2d 91, i s f a c t u a l l y s i m i l a r t o t h e i n s t a n t case and i t i s c o n t r o l l i n g . I n Bentall, p l a i n t i f f Bentall sued defendant Koenig Brothers, Inc. on a promissory note executed by Arne Poulsen a s ~ o e n i g ' s president. Poulsen had power t o exercise f u l l management and c o n t r o l of t h e corporation's a f f a i r s . The proceeds of t h e loan were used f o r corporate purposes. Koenig had t h r e e d i r e c t o r s : R. W. Brenneke, Alvin F. Koenig and Arne Poulsen. N o regular meeting of Koenig's board of d i r e c t o r s was held t o give formal a u t h o r i t y f o r execution of the note, b u t r a t h e r Alvin F. Koenig and Poulsen decided t o execute t h e note. In an e f f o r t t o avoid i t s obligations under t h e note, t h e corporation argued, a s i n t h e i n s t a n t case, t h a t the note i n question w a s executed and delivered by t h e president Poulsen, without d i r e c t authoriza- t i o n by any order o r r e s o l u t i o n of t h e corporation's board of d i r e c t o r s . This Court held t h a t Poulsen had both express and implied a u t h o r i t y t o execute t h e note. The f a c t s i n Bentall a r e s i m i l a r t o those now i n question i n t h e i n s t a n t case. W e f i n d no d i s t i n c t i o n between signing a promissory n o t e by Poulsen and t h e signing of an option by Kenneth Edwards. I n t h e i n s t a n t case, t h e option was granted Hauptman who had no p r i v i t y t o t h e i n t e r n a l a f f a i r s of t h e corporation. The f a c t s , a s disclosed by depositions, r e v e a l t h a t Kenneth Edwards had controlled t h e land f o r over 25 years p r i o r t o incorporation and was t h e c o n t r o l l i n g f a c t o r s i n c e i t s corporation. The corporation defendant gives much emphasis t h a t Hauptman knew t h e land was owned by a corporation. He d i d , and responded reasonably t h a t he held an option executed by two offi-cers of t h a t corporation who held themselves out t o a c t on behalf of t h e corporation. W e f i n d Alley v. Butte & Western Mining Co., 77 Mont. 477, 251 P. 517, i s c o n t r o l l i n g a s t o a corporate p r e s i d e n t ' s s p e c i a l authority. See a l s o : Yucca Mining & Petroleum Co. v. Howard C. P h i l l i p s O i l Co., 69 N.M. 281, 365 P.2d 925, 929; P h i l l i p s Petroleum Co. v. Roclc Creek Mining Co., 449-F.2d 664, I n addition, i n t h e i n s t a n t case, t h e corporation i s estopped t o deny t h e e f f e c t of t h e option under t h e recent holding i n Howeth v. D. A . Davidson & Co., 163 Mont. 355, 365, 517 P.2d 722. There t h i s Court s a i d : f 1 +< -1- 8b t h e stockholders o r d i r e c t o r s and corporation may be estopped t o deny t h e v a l i d i t y of t h e i r a c t i o n where it i s t h e custom o r usage of t h e d i r e c t o r s t o a c t separately o r where b e n e f i t s have been received o r t h e actions subsequently acquiesced i n o r r a t i f i e d by t h e d i r e c t o r s . I I Clearly, w e have here a case f o r estoppel, because a r e f u s a l t o enforce t h e option could sanction a fraud and r e s u l t i n an i n j u s t i c e . Here, a s i n Bentall, where t h e corporation receives t h e b e n e f i t s it i s estopped from a s s e r t i n g t h e alleged defenses Issue (2). The t r i a l court tired in refusing plaintiff's ?ioiloii for summary judgment on t h e corporation ' s c r o s s complaint. 9nJer t h e f a c t s of t h i s case the p l a i n t i f f ' s publication of a !-is pendens was privileged and not subject t o a slander of t i t l e ac tion. Defendants c i t e and r e l y upon West Investment Co. v. ,morhead, 120 Cal.App.2d 837, 262 P.2d 322. The holding there was overruled by a l a t e r California case, Albertson v. Xaboff, 46 Cal.2d 375, 295 P.2d 405. I n AIbertson t h e court - held a l i s pendens f i l e d under a California s t a t u t e nearly i d e n t i c a l t o ~ o n t a n a ' s section 93-3005, R.C.M. 1947, was absolutely privileged without reference t o t h e merits o f , t h e ? [ + (,Fyg~ ,& 1 ) underlying action. See: Kropp v. Prather (Texas 1975), 526 S.W.2d 283, 287; Stewart v. Fahey, 14 Ariz.App. 149, 481 P.2d 519; Zamarello v. Yale, (Alaska 1973), 514 P.2d 228. For the foregoing reasons, we reverse the d i s t r i c t c o u r t ' s p a r t i a l judgment i n favor of the corporation and d i r e c t t h a t court t o grant p l a i n t i f f ' s motion f o r summary judgment on t h e corporation's c r o s s complaint. !de Concur: - - Hon. ~ ~ b e ? - t Keller , ~ i s t r i c t - - Judge, s i t t i n g f o r Chief J u s t i c e James T. Harrison. Hon. Peter G. Meloy,District Judge, s i t t i n g i n place of M r . J u s t i c e Frank I. Haswell, and M r . J u s t i c e Gene B. Daly, dissenting i n p a r t and concurring i n p a r t : The majority opinion grounds t h e r e s u l t t h e r e i n reached on t h e case of Bentall v. Koenig Brothers, Inc., which approves a c l e a r r u l e t h a t t h e o f f i c e r s have no power t o a c t u n i l a t e r a l l y except i n instances where management a u t h o r i t y i s placed i n such o f f i c e r and h i s a c t s a r e i n t h e ordinary course of t h e corporate business. The opinion i n t h e Bentall case s p e c i f i c a l l y holds t h e note t h e r e i n involved w a s i n t h e usual and ordinary course of t h e corporate business. I n t h e case under consideration here t h e majority opinion f i n d s no d i s t i n c t i o n between t h e note i n t h e Bentall case and t h e option here. With t h i s conclusion w e disagree. The ordinary course of t h e business of Edwards, Inc., is t h a t of a g r i c u l t u r e and i n no sense can we understand t h a t t h e granting of a l e a s e of acreage t o "look f o r , test, work, mine, excavate, raise, clean, c a r r y away and sell coal", is i n t h e usual course of t h e corporate business. W e are mindful of t h e f a c t t h a t i n t h e case under consider- a t i o n t h e corporate o f f i c e r s signing t h e l e a s e owned almost a l l of t h e corporate stock but they chose t o a c t i n a corporate form which would require, i n our opinion under t h e f a c t s of t h i s case, a corporate a u t h o r i t y which i s not present. To hold otherwise thwarts t h e l e g i s l a t i v e i n t e n t of t h e s t a t u t e and is not consis- t e n t with t h e r u l e of t h i s Court i n such instance. The majority opinion, i n our view, adopts a r u l e t h a t t h e o f f i c e r o r o f f i c e r s holding a majority of t h e stock i n a corporation can act f o r t h e corporation i n any instance without a c t i o n by t h e Board of Directors. W e do not concur with t h e majority opinion's a p p l i c a t i o n of t h e doctrine of estoppel. We concur in the majority opinion's conclusion that the publication of a lis pendens was privileged and not subject to a slander of title action. ..................................... Hon. Peter G. Meloy, district judge, sitting in place of Mr. Justice Frank I. Haswell Justice #13,185 Hauptman v. Edwards, Inc. I concur i n the r e s u l t s , but solely on the basis of estoppel, and a d i f f e r e n t estoppel than t h a t r e l i e d upon i n the majority opinion. When Kenneth and Gary Edwards, a s owners of 99.9 per cent of the stock of the corporation, and constituting two-thirds of the board of d i r e c t o r s , entered i n t o a contract f o r the corpora- t i o n , they a r e bound under principles of estoppel t o affirm the contract, 19 C.J.S. 485, $1012. This court held similarly, with- out r e f e r r i n g t o estoppel, i n Bentall v. Koenig Brothers, Inc., (1962), 140 M 339, 372 P2d 91, 94: "In the instant case, the defendant corporation's Articles of Incorporation provided f o r three members t o a c t a s d i r e c t o r s of the corporation. A t the time of the execution of the note i n question, R.W. Brenneke, Alvin F. Koenig, and Arne Poulsen were i t s directors. It is undisputed t h a t Alvin Koenig and Arne Poulsen authorized the execution of the note i n question. They constituted a quorum and t h e i r action, which was not contrary t o law nor contrary t o the a r t i c l e s of incorporation o r by-laws of the defendant corporation, was binding on the defendant corporation." The point of the dissent i s well made, and f o r t h a t reason, I am not willing t o r e l y upon apparent o r ostensible authority (which, i n turn, i s dependent upon the i n s t a n t transaction being i n the usual o r ordinary course of business). A t the same time, I am not s a t i s f i e d t h a t corporate o f f i c e r s a r e l i a b l e individually f o r a c t s done a s corporate o f f i c e r s , even though without authority, absent fraud, i . e . , t o uphold the t r i a l court would be t o dismiss the corporation from t h i s action, leav- ing the two defendants individually, and they may well not be l i a b l e , having acted a s corporate o f f i c e r s . I concur i n the majority opinion's conclusion t h a t the pub- l i c a t i o n of the l i s pendens was privileged and not subject t o a slander of t i t l e action. UL!. L- Hon. Robert S. Keller, D i s t r i c t Judge, s i t t i n g f o r chief J u s t i c e James T. Harrison