No. 88-283
INTHE SUPREME COURT OF THE STATEOF MONTANA

NORTHWEST PLATINGCO., a corporation, and K. H. HOEN, PlaintiffandAppellant,-vsIRENEH. HOFFMAN, inher capacity as PersonalRepresentative of the Estate of Ralph MacLarenHoffman,THE ESTATE OF RALPH YACLARENHOFFMAN and MURRAY MANUFACTURING COMPANY, Defendants,Respondents and Cross-Appellants.

APPEAL FROM: District Court of the Thirteenth JudicialDistrict, In and for the County of Yellowstone, TheHonorable G. Todd Baugh, DistrictJudge.
COUNSELOF RECORD:
ForAppellant: Pierre L. Bacheller, Billings,Montana
For Respondent:
Bruce E. Lee,Billings,Montana

- Submitted on Briefs: Sept. 23, 1988

C3 Filed: E Decided: October 20, 1988

### Mr. Chief Justice J. 

### A. Turnage delivered the Opinion of the Court.Plaintiffs appeal a judgment entered in the Thirteenth Judicial District, Yellowstone County, and defendants cross-appeal. Plaintiffsare K. 

### H. Hoen and Northwest Plating (Northwest), a corporationowned in equal sharesby Hoen and defendant Ralph Hoffman, deceased. Defendants are Irene Hoffman
as personal representative for the estate of Ralph Hoffman, her deceased husband, and Murray Manufacturing Co., a business solely owned by decedent Ralph Hoffman. Hoen and Hoffman incorporated their business (Northwest)in 1958 and were the only shareholders in the corporation until January 1984 when Hoffman died. This cases arises out of their business relationshipand the settling of Hoffman's estate. The issues on appeal and cross-appeal are numerous: 1. Did the District Court abuse its discretion in finding that Hoffman converted corporate money? 2. Ifnot, then did the District Court err in applying
a three-year statute of limitations for conversion, when plaintiffs urged that their claimwas for breach of a verbal agreement bearing a five-year statute and defendants urged theproper limitation for conversionwas two years? 3. 

### If the conversion finding is proper, are Hoen's claims stillbarred by his acquiescence and laches? 4. Did the District Court err in finding that plaintiffHoen's promissory notewas cancelled? 5. Did the District Court err in determining the buyout price for a deceased shareholder in Northwest Plating Company on January 1, 1984, was $55,000 rather than the alleged $28,000? 6. 

### Did the District Court err in failing to find an oral modification of 

### the written sublease agreement, and if

### not, are Hoen'sclaims to recover the excess rent barred, at least inpart,by the two-year statuteof limitations? We affirm inpart and reverse inpart. Hoen and Hoffmanmet in the late 1940s and became close friends. In 1949 they formed abusinesspartnership andwent into the industrialhard chromeplatingbusiness in Billings, Montana. The year before that, Hoffman's business, Murray Manufacturing Company (MMC) leased a parcel ofproperty from Northwestern Improvement Company, a subsidiary of Northern Pacific Railroad. Hoen and Hoffman located their new business on thatproperty. In 1958 Hoen moved to Salt Lake City, Utah. At that time, Northwest was incorporated and a shareholder's agreement was signed by both parties designating Hoffman as business manager. Likewise,an employment contractwas drawn up detailing Hoffman's powers, duties and his compensation for performance of his duties. Hoffman's complete compensation
as outlined in the contract was to be a salary, car and airplane lease payments and reimbursement for fuel and oil expenses incurred in business travel. Hoffman's duties included sole managerial control over Northwest, being responsible for the day-to-day operation, purchases, financial affairs, bookkeeping, and records. Hoffmanwas only limited in carrying out these duties in that any purchase over $10,000 required prior director's approval. About this same time,Northwest began leasing its space from MMC as a sublessee on the primary lease from Northern Pacific. Hoffman and Hoen reached an agreement whereby Northwest would pay to MMC one-half of the rent as establishedby Northern Pacific. Hoffman died Ja-nuary1, 1984, from injuries sustained in 

### aplane crash.Hoen discovered after Hoffman's death that inmanaging the business, he caused Northwest to pay the entire 100 percent of the rent on the Ml4C lease to Northern Pacific. Hoen made a claim with Hoffman's estate for that portion of the rent allegedlywrongfullypaid. Hoen also made claims for numerous expenditures by Hoffman during the course ofbusinesswhich were of a personal nature. These included among others, payments for club dues, flowers and magazine subscriptions. The rent claim, along with Hoen's other claims against the estate, were denied by IreneHoffman. Litigationof the matter ensued and
a bench trial was had August 3, 1987. The District Court foundHoffman tohave converted corporate money in the amount of $22,865.34 in personal expenditures and $3,925.00 in excess lease money paid. That amount for excess rent was also subject to prejudgment interest. Both parties appeal this award and dispute the applicable statute of limitations. Additionally, testimony was had at trial that inApril 1981 Hoffman executed a promissory demand note in favor of Hoen in the amount of $9,087.54. The original note is lost. Its whereabouts were disputed at trial, and no one was able to produce it. Hoen testified that it should have been placed with Northwest's attorney, Sid Kurth, for safekeeping and that iswhere Hoen assumed it tobe. Kurth testified that he did not have the note, that he could not locate the Northwest file, and that he had no recollection of the note being placed in his possession. Hoen came to trial with a carbon copy of the notewhich
was signed as an original. However, the signaturehad been physically cut off with scissors. Hoen testified that he intentionally cut offHoffman's signature so that Hoen's wife could not unfairly make demand on Hoffman. Hoen further testified that since he believed the original to be withKurth, he did not think that removing the signature on his copywould affect its enforceability. The District Court refused to enforce the note. It found the note tobe cancelled by Hoen's intentional mutilation of the document by removing the signature of the party tobe charged. Hoen assigns this as error. Lastly, Hoen disputes the correct dollar amount of a buyout of a deceased shareholder's stock in the Northwest company. The buyout price, which changed over theyears, was based on several documents. The court found the $55,000 price stated in the 1976 written agreement controlling. Plaintiff assigns that decisionas error. This Court affirms
on all but one issue. 

### A District Court's ruling on these issues will not be overturned when it is based on substantial credible evidence and is not an abuse ofdiscretion. Marriage ofWatson (Mont. 1987), 739 P.2d 951, 

### 44 St.Rep. 1167. Substantial evidence is any which a reasonable mind would accept as adequate to support a conclusion. State v. Lamb (19821, 198 Mont. 323, 696 P.2d 516.

I. CONVERSION The District Court specifically found that Hoffman's compensation was limited to that which was outlined above in the employmentcontract. Many of Hoffman's expenditures were scrutinized after Hoen received the corporate books. Hoffman's estate urged that they were all legitimate business expenditures. Hoen argued that they were compensation in
excess of that authorized by Hoffman's employment agreement and constituted a breach of contract. The court found the purchases to be personal in nature and a conversionofNorthwest's assets. We agree.Testimony at trial revealed that one of the questioned expenditures was Hoffman's authorization for Northwest topay all ofhis health insurance costs. The largestbill was for accumulated airplane repair, fuel and hangar rental. Although their agreement authorized Northwest to lease the airplane from Hoffman, he continued to use the plane for his
ownpersonal and MMC use aswell. He then reimbursedhimself with Northwest money for the fuel, repair and storage costs. These are clearly unauthorized corporate expenditures for personal expenses. They weremade without director's approval and without Hoen's knowledgeor consent. TheDistrict Courtproperly found these expenditures to be a conversion and had ample evidence on which to base such
a finding. The court award.ed compensation for Hoen's creditor's claim against the estate for these expenditures for theyears 1981, 1982 and 1983, but barred earlier claims. We disagree with the award for the year 1981 and reverse on this issue. The District Court made a specific finding of conversion. However, conversion is a tort bearing a two-year statute of limitations. Thus, the claim for damages in the year 1981 is barred, and it was reversible error for the judge to allow it. We reverseon this issue and remand for a new determinationof damages allowing only for the years 1982 and 1983. Mrs. Hoffman additionally asserts that these claimsare barred by laches or by Hoen's acquiescence. We disagree. The equitable doctrine of lacheswas fully explained by this Court in Schantz v. Minnow (1966), 147 Mont. 228, 411 P.2d 362, 372-373. See also Clayton v. Atlantic Richfield Company (Mont. 1986), 717 P.2d 558, 561, 43 St.Rep. 717, 720. It bars recovery to one who knows of an injury done to him but del-aysasserting his rights so as to prejudice or injurethe otherparty. It isbased on the concept of knowledgeand delay. Laches does not apply in this case. There was no evidence thatHoen had knowledgeof any of these unauthorized expenditures prior to Hoffman's death. Upon learning of them, Hoen made a detailed creditor's claim with Hoffman's estate within the allotted time, thus defeating the element of delay. Likewise, Hoen could not have acquiesced to conduct of which he had no knowledge. Based on the trial record, Mrs. Hoffman's assertion of laches and acquiescence must fail.

11. THE PROMISSORY NOTE The District Court found that the promissory note produced at trial by Hoen was cancelled as a matter of law. We agree. Hoen testified that he produced a carbon copy of the original; however, the copy was also signed in ink. The copyhad Hoffman's signature physically cut off thebottom of the note. Itwas concededby all that the originalwas lost. Mrs. Hoffman testified that she believed her husband did not owe Hoen any money on the note. The court took this as some evidence tending to prove that Hoffman's signature was 

### removed as evidenceof cancellationof thedebt. Further,Hoen offered no explanation of his actions inmutilating the note. He stated that he did not want his wife to make an unfair demand on Hoffman when Hoen himself had been lenient with Hoffman. However, we fail to see how one can make an unfair demand on a demand note. Sections 28-2-1702 and -1703, MCA, control. These sectionsprovide that where a contract or a signaturethereon has been destroyed intentionally, a cancellation will be effected. Such is the casehere. Had Hoen fully expected to make demand on his note and be paid, he should not have cut off the operative signature from his note. Hoen fails toconvince this Court that the District Court's ruling on this issuewas an abuse of discretion.

111. THEBUYOUT Originally, the buyout price agreed on by Hoen and Hoffman inparagraph 15 of the 1958 shareholder agreementwas $28,000. However, in September of 1967,Northwest purchased a life insurance policy for each Hoen and Hoffman. This key
man insurance policy purchased from Western Life Insurance Company had a facevalue of $25,000. Theproceeds of thepolicy were dedicated to thebuyout of a deceased shareholderby written agreement in March 1972. The agreement stated that the $25,000 proceeds would be payment in full for 

### abuyout. 

### In February 1976, Northwest purchased an additional policy from Equitable Life Assurance Society. The policy insured the lives of both Hoen and Hoffman in the amount of $30,000. In March 1976, Hoen and Hoffman signed an agreement dedicating both policies to the buyout. Thus, $55,000would be payment in full for a deceased interest in Northwest. Then, onApril 27, 1981,Hoen and Hoffmanmet and added another addendum to their 1958 shareholders' agreement. In paragraph 15 during the discussion of a buyout the number $28,000 is handwritten in and initialed. Hoen asserted at trial that this is substantial credible evidence onwhich to base a finding that they both intended to reduce the buyout price to its 1958 original cost of $28,000,thereby rescinding all previous agreements to the contrary. We disagree. Nowhere in the 1981document are any previous documents rescinded or evenmentioned. Further,the additional $30,000 policy was never cancelled or otherwise dedicated. Lastly, at trial, Mrs. Hoffman testified that Hoen advanced her$5,500as 10 percent of the buyout and laterpaid thebalance of $49,500. No formalprotest came fromHoen until two years laterwhen itwasmentioned in his amended complaint. The evidence is confused even further by Hoen's trial testimony that hewanted thebalance of the $55,000paid into the court pending the outcome of the dispute but that his lawyer inadvertently paid it over directly to Mrs. Hoffman. The District Court found that the buyout was $55,000 and the 1976 agreement was not rescinded. Based on the foregoing evidence, Hoen fails topersuade us that the lower court's ruling was an abuse of discretion and not based on substantial credible evidence. Absent such a showingby the appellant, this Court will defer to the judgment of the District Court judge who heard the testimony and sat in a better position to determine the credibility of the evidence.



### IV. THE SUBLEASE AGREEMENT Mrs. Hoffman asserted an oral modification to the sublease agreement. Originally, Northwest was required to pay 50 percent of the lease payments of MMC to Northern Pacific. However, Mrs. Hoffman asserts that it was within Hoffman's corporate discretion to modify the lease, even 

### if he was negotiating with himself as lessor and sublessee, and that an oral modification would be valid. We are not persuadedby this argument;nor canwe see thatwaswhat Hoffman had in mind when he caused Northwest to pay the full MMC lease. His conductbears that out. He made no corporateminutes or records ofhis change,

nor did he tell Hoen about the change. Rather, without following any corporate procedure, Hoffmanmade unauthorized expenditures by unilaterally causing Northwest to pay his full obligation under the MMC lease from 1976 through 1983. The court properly found a breach of an indefinite term

### sublease agreement and awarded a 50 

### percent refund on the lease payments for those years plus prejudgment interest. For the foregoing reasons, we find that the District Courtdid not err in deciding the issuesraised on appeal and cross-appeal with the exception of the correct statute of limitations for conversion. We remand for a new determination of damages for conversion consistent with this opinion and affirm on all other issues.

We concur: /+ L 

### Chie? Justice