No. 88-529

INTHE SUPREME COURTOF THE STATE OF MONTANA
1989

HOVEN,VERVICK & AMRINE, P.C., petitioner andAppellant,-VSMONTANA COMMISSIONEROF LABOR, and MONTANA DEPARTMENTOF LABORAND INDUSTRY, Respondents and Respondents.

APPEAL FROM: ~istrict Courtof the First~udicial ~istrict, In and for the County of ~ewis & Clark, TheHonorable Henry Loble, Judgepresiding.

COUNSEL OF RECORD:

ForAppellant:

J. Daniel Hoven; Browning, Kaleczyc,Berry & Hoven, Helena, Montana

For Respondent: Elizabeth ~riffing, Dept. of Labor & Industry, Helena, Montana ~ilodragovich, Dale & Dye;LonJ. Dale,

### is sou la, Montana (Vervick) ~arlington, Lohn and ~obinson; ~illiam T.Wagner, Missoula,Montana (Amrine)

"-.

,> L) ..* SubmittedonBriefs: March 9,1989 Decided: June 15, 1989Mr. ~usticeJohn C. Sheehy delivered the opinion of the Court.

Hoven,Vervick and Amrine, P.C. appeals from a decision entered against it in the ~irst Judicial ~istrictCourt, ~ewis and Clark County. The District Court held that the July 31, 1987 order of the commissioner of Labor and Industry in favor of LarryVervick andWilliam Amrine be affirmed and awarded attorney fees and costs to ~ervick and Amrine. That judgmentawarded the respondents the following: LarryVervick: $56,919.15 representing unpaid wages of $26,015.05 and a statutory penalty of $26,015.05 pursuant to § 39-3-206, MCA plus costs and attorney fees of $4,889.15. Interest is to accrue on the wage and penalty award of $52,030.10 at a rate of 10% per annum from August 30, 1987 to the date of the district court judgment August 16, 1988. Interest is to accrueat 10%per annum on the entireamount, $56,919.25, fromand afterAugust 16, 1988.
BillAmrine: $25,472.27 representing wages of $11,681.07 and the statutory penalty in the same amount, $11,681.07, plus costs and attorney fees of $2,110.37 with interest to accrue on the $23,362.14 award at 10% per annum from August 30, 1987 to August 16, 1988 and to continue to accrue on the $25,472.27 at 10% per annum fromand after thatdate.

The court also awarded respondentsany future costs and attorney fees incurred in satisfying this judgment. We affirm. The issuesbefore this Court are: 1. 

### id the District Court err by applying a narrow standard of review which prevented it from examining undisputed facts and applying those facts to controlling statutes?2. Can owners/shareholders/directors of closely-held corporations,whomeet the applicable statutorydefinition of employer, recover wages under the Montana Wage PaymentAct? 3. Was the Department of Labor's finding that Vervick

was an employee and not a volunteer from October 7, 1985 to January 15, 1986 clearly erroneous? 

### 4. Did the Department of Labor and the District Court abuse their discretion when they failed to provide offsets to the awardsofwages topreventawindfall? 5. 

### id the Department of Labor violate its own regulations and the Montana ~dministrativeProcedureAct by designating the hearing examiner's decision as final without allowing for the filing of exceptions? 

### his case stems from a dispute which arose in Hoven v. Amrine (Mont. 1986), 727 P.2d 533, 43 St.Rep. 1977. That dispute culminated in an appeal to this Court inwhich Hoven received an award of attorney fees forhis attempt to enforce the provisions of an agreement whereby Amrine and vervick were to purchase stock from Hoven. Hoven served default notices on Amrine and ~ervickwho brought an action in ~istrictCourt to have the notices declared void. Hoven prevailed in that cause and forthwith dismissed ~mrine and ~ervickfrom employment. That dismissal is the subject of the present appeal which is based on the following circumstances: prior to July 1, 1979, Larry vervick and Vern Hoven operated a general partnership for thepractice of certified public accounting in 

### is sou la. On July 1, 1979, Hoven, ~ervickand ~mrineformed a corporation in which each held one-third of the shares. On that same date, vervick and Amrine entered into agreements as employees of the corporation. Hoven entered into a similar employment agreement.In 1985,David Green was added to the corporation as a shareholder, diminishing the ownership to 25% per shareholder. From July 1, 1979 to October 7, 1985,Vervick, Amrine and Green served on the board of directors, on the executive committee and as officers of the corporation. Hoven served in the same capacities fromJuly 1, 1979 through August, 1983. He resumed thosepositionsagain on October 7, 1985 as sole shareholder, sole director and president of the corporation after litigation in which he demanded the return of Vervick's and Amrine's shares to the corporation due to their failure to pay for the same among the four principal owners. Hovenv. Amrine, supra. Part of the initial disagreement emanated from a salary increaseVervick and Amrine made to themselves inMay, 1985. In a special meeting of the board of directors, the board approved staff raises including an increase in the owner's salaries from $40,000 to $44,000and declared previous loans to the owners to be bonuses. These raises were recommended by the executive committee consisting ofVervick,Amrine and Green. In August, 1985, the corporationwas experiencing cash flow problems. Because of this circumstance the four shareholders worked without salaries. Then problems arose between Hoven and the other three shareholders. Hoven regained absolute control of the corporation through court proceedings. He then terminated Amrine and Vervick as employees. He told ~ervickthat he was no longer a shareholder in the corporationbut offered a jointventure to him. Hoven, through a director's resolution, rescinded Vervick's and Amrine's salary increases retroactively. Vervick did not respond inwriting to Hoven's new offer,but continued to work under the HVA name and completed several large contracts that he had entered into as 

### a principal ofthe corporation. ~ervicklater took with him some of those contracts when he left HVA and formed his new corporation. The monies he generated prior to his leaving went into HVA and went to pay off debts that totalled $232,000.00 on October 7, 1986. ~ervick terminated his employment with the corporation on January 15, 1986. On October 3, 1986, he filed a wage claim with the Montana Department of Labor and Industry (Department). He claimed past wages in the total

sum of $16,015.05. Amrine filed awage claim on October 18, 1985 for $8,544.60. These claims were againstHVA. The wage claim was based on a salary of $44,000.00 per year. Green had issued a corporate check to himself for accumulated vacation pay when he was terminated by Hoven. HVA never pursued him to recover thatpayment. A hearing examiner appointed by the Department held a hearing on June 11, 1987. The hearing examiner issued the final order on July 31, 1987 in favor ofVervick and Amrine. It ordered HVA to render a cashier's check ormoney order in the amount of $75,392.24 as wages and statutory penalty in favor of ~ervick and Amrine, made payable to the Employment 

### elations ~ivision, no later than thirty days after service of the order. The amount ordered to be paid to Vervick was $52,030.10. HVA filed a petition for judicialreviewof the Department's final order. The ~istrict Court affirmed the Department's decision and issued a final judgment on August 17, 1988. ~otice of entry of judgmentwas filed on August 23, 1988. HVA then filed notice of appeal to this Court on October 21, 1988. Under Rule 5,M.R.App.P., a 60day period is allowed for appeal when a governmentalagency is a party. The first issue we must examine is whether the District Court erred by applying an incorrect standard of review. The standard of review of administrative decisions is set forth in § 2-4-704,MCA.

# . . . (2) The court may not substitute its judgment for that of the agency as to theweight of the evidence on questions of fact. The courtmay affirm the decision of the agency or remand the case for further proceedings. The court may reverse or modify the decision if substantial rights of the appellant have been prejudiced because the administrative findings, inferences, conclusions, or decisionsare:

(el clearly erroneous in view of the reliable, probative, and substantial evidence on the whole record;

(f) arbitrary and capricious or characterized by abuse ofdiscretion or clearly unwarranted exercise ofdiscretion;.

# .. Traditionally, review of agency decisions is not intended to be a de novo consideration of findings of fact made by the agency. Because of the standard of review prescribedby the foregoing statute,the party appealing from

an agency decision to the ~istrictCourt has the burden of showing that his rights were substantially prejudiced by an arbitrary or capricious or a clearly erroneous agency decision. Carruthers v. Board of Horse 

### acing (1985), 216 Mont. 184, 700 P.2d 179. 

### A rebuttable presumption exists in favor of the agency decision. Thornton v. 

### omm mission of Labor and Industry (1980), 190 Mont. 442, 621 ~.2d 1062, 1065.The appellant contends that an issuewhich raises only a question of law determined by the District Court or by an agency is notbinding on this appellate court,which is free to draw its own conclusions from the evidence presented. Sharp v. Hoerner Waldorf Corp. (19781, 178 Mont. 419, 423, 584 P.2d 1298, 1300.To settle the issue forpurposes of this case,where the appellant disputes a finding of factmade by the agency, the action of the agency will be sustained unless the finding of fact is clearly erroneous in view of the reliable, probative and substantial evidence on the whole record; or unless the findings are arbitrary or capricious or characterized by an abuse ofdiscretionby the agency. Section 2-4-704,MCA. If the issue involvesa question of law,this Court isnotbound by the interpretation of law either by the agency or the ~istrict Court. Sharp,supra. The next issue raised by the appellant is indeed an issue of law. The appellant contends that since it is a professional corporation, it is absurd to construe the provisions of the Montana Wage PaymentAct, and particularly the definitions contained in 

### 5 39-3-201, MCA, so that shareholders, owners and directors who hold a proprietary interest in the companymay alsobe considered employees for the purpose of collection of wages under the Act. Under S 39-3-201, an "employer" includes any corporation acting directly or indirectly in the interest of an employer in relation to an employee; and "employee" is defined as any person who works for another forhire. In ~amrnillv. Young (1975),168Mont. 81, 540 P.2d 971, thisCourtheld that aprofessional, if truly an employee,is entitled to be covered as an employee under the Wage Payment Act. Here the appellant contends that Hammill can be distinguished because the professional was not a shareholder and held no ownership interest in the corporation. The District Court, however, concluded that in construing 

### 5 39-3-201, both Vervick and ~rnrinewere indeed employees of the professional corporation and that this entitled them to the benefits of theAct.We determine that the District Court correctly interpreted S 39-3-201 as it applies to this case. The professional corporation clearly falls within the definition of an employer under the section, which means that the corporation itself had a separateand distinct identity from its stockholders. Moats Trucking Company, Inc. v. Gallatin Dairies, Inc. (Mont. 1988), 753 P.2d 883, 885, 45 St.Rep. 772, 775. It is further clear that the definition of an "employee"within the meaning of the section covers Vervick and Arnrine. They had entered into contracts of employment with the professional corporation, a separate legal entity. The employment contract between the corporation and the employees specifically provided that their relationshipunder the contract was that of an employer and an employee. It would be idle for the ~istrictCourt or for this Court to disregard the clear language of the employment contracts or the clear language of the statute. Where clarity abounds,it is not the business of the courts to carve out exceptions. The next issue raised by the appellant corporation is whether the appellant Vervick is not entitled to any wages from October 7, 1985 to January 15, 1986. Hoven testified that he had terminated Vervick. Vervick claims that he was

never terminated as an employee of HVA. Hoven contended that he offered to ~ervick a joint venture relationship to finish existing contracts which were required to be fulfilled by HVA. The hearing officer found thatVervick remained after October 7, 1985 as an employee. Moreover, the hearing officer found that therewas no jointventure. The findings with respect to this issue are clearly supported by substantial evidence in thewhole record. ~ervick was not a volunteerbutworked as an employee during the time following October 7, 1985, and the corporation was paid for the work done by Vervick during that period of time. As acorporation, the employer received the benefits of the contracts through the effortsof its employee,Vervick. The next issue raised by the appellant corporation is that if wages are to be awarded in this case, reductions should have been made by the Department to avoid an inequitableresult. The contention of the appellanthere is a bit involved. The Department awarded wages based on a yearly salary of $44,000.00 to each of the employees. The $44,000.00 was premised on an action takenby theboard ofdirectors inMay, 1985, whenVervick andAmrine werebothmembers of theboard. The corporation contends that the award of these salaries placed HVA inviolation of loan provisions establishedby the Small Business Administration. Also inMay, 1985, the board of directors declared loans, which Vervick and Amrine had previously received fromHVA,as bonuses. When Vern Hoven became the sole shareholder in October, 1985, the board of directors rescinded the corporate actions taken inMay, 1985. The Department and the District Court recognized the yearly wage of the employees to be $44,000.00 pursuant to the earlier actions of the board of directors and gave no legal import to the later action of the board of directors rescinding those actions. The corporation contends, on appeal here, that the Department and the DistrictCourt thus sanctioned the actions taken by the board of directors when Vervick andArnrine weremembers of the board, and disapproved of the actions takenby the board when theywere not members and Hoven was the sole shareholder. The appellant corporation contends that it is arbitrary and capricious for the Department to recognize one set of actions taken by the board of directors and to refuse to acknowledge a second set of actions takenby the board.The District Court determined that upon of the adoption of the resolution increasing the salaries to $44,000.00, the resolution then became the obligation of the corporation to those employees and a subsequent action by the board of directors could not rescind a previous action if the rescission would disturb vested rights. We determine that once the corporation obligated itself to pay thewages at an annual rate of $44,000.00, the same corporation could not retroactively, by an action of a different board of directors, take back what had become the obligation of the corporation. A sub-issue on this point is that both Vervick and Amrine, aswell as Hoven,hadmade personal guarantiesto the Small ~usiness ~dministration of loans made by that Administration to the professional corporation. The appellant corporation contends that since ~ervick and Amrine were personal guarantors of those loans, the award of wages to them without a reduction for their personal guarantees results in a doublebenefit. Obviously,this contention has

no merit. The obligations ofVervick and Amrine aspersonal guarantors of loans made to a third party, in this case, the SmallBusiness~dministration, has no affect on the amountof wages owed by the corporation to ~ervick and ~mrine. 

### heir obligations as personal guarantors are separate and apart from their status as employees entitled to payment ofwages by the corporation under the Montana Wage PaymentAct. The appellant corporation has shown no legal basis upon which a reductionof thewages should have beenmade by the agency or theDistrictCourt. The last contention made by the appellant corporation is that since the order of the hearing examiner before the agencybecame the finalorder,thedesignation of thehearing examiner's decisionas "final" violatesS 2-4-621,MCA.Section 2-4-611, MCA authorizes a hearing and an appointment of a hearing examiner under the Administrative Procedure Act. Appellant corporation contends that nothing in S 39-3-210, MCA, or any other provision allows the Commissioner of Labor to delegate the final decision-making authority to an appointed hearing examiner. The appellant points to the Department's regulation, S 24.2.101(1) (b), A.R.M., which reads: Ifamajority of the officialsof an agencywho are to render the final order were not present at the hearing of a contested case or have not read the record, a proposed order if adverse to a party to the proceeding other than the agency, including findings of fact and conclusions of law, shall be served upon the parties. An opportunity to file exceptions, present briefs and make oral argument to the officials who are to render the decision shallbe granted to allparties adverselyaffected. If no appeal is taken within twenty (20)days, the decision of the hearing examiner shall be final. The District Court determined that the Commissioner of Labor and Industry is charged with the responsibility of investigating wage claims and holding hearings in the enforcement of the Wage Payment Act under S;S 39-3-209 and 39-3-210, MCA. Further, under S 2-15-112(2)(b), MCA, the Commissioner, as the head of the Department of Labor and Industry, may delegate these functions to a subordinate employee. Section 24.2.101, A.R.M. allows the decisionof an appointed hearing examiner to be a final order. Therefore, the District Court declared that there is no error in the designation of the hearing examiner'sorder as final. The District Court correctly determined the issue. It should be further noted that the statutory authority of the Commissioner of Labor and Industry refers to a single individual and not to a number of officials, who in other agencies, may be required to reach a final decision. Thecited section of ~dministrativeRules of Montana is not applicable towage payment cases and the Department of Labor and Industry and its ~omrnissioner have established a workable procedure for determining issues inwage payment claims under theprovisions of the applicable acts. We therefore affirm theDi