No. 88-283 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

NORTHWEST PLATING CO., a corporation, 

and K. H. HOEN, 

Plaintiff and Appellant, 

-vsIRENE H. HOFFMAN, in her capacity as 

Personal Representative of the Estate 

of Ralph MacLaren Hoffman, THE ESTATE 

OF RALPH YACLAREN HOFFMAN and MURRAY 

MANUFACTURING COMPANY, 

Defendants, Respondents and 

Cross-Appellants. 

APPEAL FROM: District Court of the Thirteenth Judicial District, 

In and for the County of Yellowstone, 

The Honorable G. Todd Baugh, District Judge. 

COUNSEL OF RECORD: 

For Appellant: 

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. 

Plaintiffs are K. H. Hoen and Northwest Plating (Northwest), a corporation owned in equal shares by 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 

relationship and 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. If not, then did the District Court err in applying 

a three-year statute of limitations for conversion, when 

plaintiffs urged that their claim was for breach of a verbal 

agreement bearing a five-year statute and defendants urged 

the proper limitation for conversion was two years? 

3. If the conversion finding is proper, are Hoen's 

claims still barred by his acquiescence and laches? 

4. Did the District Court err in finding that plaintiff Hoen's promissory note was 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's claims to recover the excess rent barred, at 

least in part, by the two-year statute of limitations? 

We affirm in part and reverse in part. 

Hoen and Hoffman met in the late 1940s and became close 

friends. In 1949 they formed a business partnership and went 

into the industrial hard chrome plating business in Billings, 

Montana. The year before that, Hoffman's business, Murray 

Manufacturing Company (MMC) leased a parcel of property from 

Northwestern Improvement Company, a subsidiary of Northern 

Pacific Railroad. Hoen and Hoffman located their new business on that property. 

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 contract was 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. 

Hoffman was 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 established by Northern Pacific. 

Hoffman died Ja-nuary 1, 1984, from in juries sustained 

in a plane crash. 
Hoen discovered after Hoffman's death that in managing 

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 allegedly wrongfully paid. 

Hoen also made claims for numerous expenditures by 

Hoffman during the course of business which 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 Irene Hoffman. Litigation of the matter ensued and 

a bench trial was had August 3, 1987. The District Court 

found Hoffman to have 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 in April 

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 is where Hoen assumed it to be. 

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 note which 

was signed as an original. However, the signature had been 

physically cut off with scissors. Hoen testified that he 

intentionally cut off Hoffman'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 with 
Kurth, he did not think that removing the signature on his 

copy would affect its enforceability. 

The District Court refused to enforce the note. It 

found the note to be cancelled by Hoen's intentional mutilation of the document by removing the signature of the party 

to be 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 the years, was 

based on several documents. The court found the $55,000 

price stated in the 1976 written agreement controlling. 

Plaintiff assigns that decision as 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 of discretion. Marriage of Watson (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 employment contract. Many of Hoffman's expenditures were 

scrutinized after Hoen received the corporate books. Hof fman'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 conversion of Northwest's assets. We agree. 
Testimony at trial revealed that one of the questioned 

expenditures was Hoffman's authorization for Northwest to pay 

all of his health insurance costs. The largest bill 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 

own personal and MMC use as well. He then reimbursed himself 

with Northwest money for the fuel, repair and storage costs. 

These are clearly unauthorized corporate expenditures for 

personal expenses. They were made without director's approval and without Hoen's knowledge or consent. 

The District Court properly 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 the years 

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 reverse on this issue and remand for a 

new determination of damages allowing only for the years 1982 

and 1983. 

Mrs. Hoffman additionally asserts that these claims are 

barred by laches or by Hoen's acquiescence. We disagree. 

The equitable doctrine of laches was 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-ays asserting his rights so as to prejudice or injure 
the other party. It is based on the concept of knowledge and 

delay. Laches does not apply in this case. There was no 

evidence that Hoen had knowledge of 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 

copy had Hoffman's signature physically cut off the bottom of 

the note. It was conceded by all that the original was 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 evidence of cancellation of the debt. Further, Hoen 

offered no explanation of his actions in mutilating 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 

sections provide that where a contract or a signature thereon 

has been destroyed intentionally, a cancellation will be 

effected. Such is the case here. 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 to 
convince this Court that the District Court's ruling on this 

issue was an abuse of discretion. 

111. THE BUYOUT 

Originally, the buyout price agreed on by Hoen and 

Hoffman in paragraph 15 of the 1958 shareholder agreement was 

$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 face value of $25,000. 

The proceeds of the policy were dedicated to the buyout 

of a deceased shareholder by written agreement in March 1972. 

The agreement stated that the $25,000 proceeds would be 

payment in full for a buyout. 

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, $55,000 would 

be payment in full for a deceased interest in Northwest. 

Then, on April 27, 1981, Hoen and Hoffman met 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 on which 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 1981 document are any previous documents 

rescinded or even mentioned. Further, the additional $30,000 

policy was never cancelled or otherwise dedicated. Lastly, 

at trial, Mrs. Hoffman testified that Hoen advanced her 
$5,500 as 10 percent of the buyout and later paid the balance 

of $49,500. No formal protest came from Hoen until two years 

later when it was mentioned in his amended complaint. 

The evidence is confused even further by Hoen's trial 

testimony that he wanted the balance of the $55,000 paid 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 to persuade us that the lower 

court's ruling was an abuse of discretion and not based on 

substantial credible evidence. Absent such a showing by 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 persuaded by this argument; nor can we see that was what Hoffman 

had in mind when he caused Northwest to pay the full MMC 

lease. His conduct bears that out. 

He made no corporate minutes or records of his change, 

nor did he tell Hoen about the change. Rather, without 

following any corporate procedure, Hoffman made 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 

Court did not err in deciding the issues raised 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