Title: Kilpatrick Bros., Inc. v. Poynter
Citation: 205 Kan. 787, 473 P.2d 33
Docket Number: 45,793
State: Kansas
Issuer: Kansas Supreme Court
Date: July 17, 1970

205 Kan. 787 (1970)
473 P.2d 33
KILPATRICK BROS., INC., a Corporation, and MEMPHIS MOTEL FURNISHINGS, INC., a Corporation, Appellees and Cross-Appellants,
v.
W.R. POYNTER, Appellant, and ROSALLEE POYNTER, His Wife, Cross-Appellee; ECONOMOTELS, INC., STANDARD BUILDINGS, INC., and MODERN STRUCTURES, INC. (Defendants).
No. 45,793

Supreme Court of Kansas.
Opinion filed July 17, 1970.
Arthur E. Palmer, of Goodell, Casey, Briman, Rice &amp; Cogswell, of Topeka, argued the cause, and Ernest J. Rice of the same firm was with him on the briefs for the appellant and cross appellee.
Morris D. Hildreth, of Becker, Hildreth &amp; Lively, of Coffeyville, argued the cause, and Harold Medill, of Independence, was with him on the brief for the appellees and cross appellants.
The opinion of the court was delivered by
HARMAN, C.:
This is an action by creditors to "pierce the corporate veil" and establish personal liability of individuals for corporate debt.
Plaintiffs are two foreign corporations who furnished materials at different times to two Kansas corporations, Economotels, Inc., and Standard Buildings, Inc., the indebtedness for which was evidenced by a promissory note and in the form of open account, totaling approximately $13,000. When the indebtedness was not paid plaintiffs brought suit upon it, naming as defendants the two Kansas corporations, a successor third corporation, Modern Structures, Inc., and two individuals, W.R. Poynter and his wife, Rosalee Poynter. The amount of the indebtedness is not in dispute. Recovery was sought against the Poynters on the theory the corporations were mere shams for their individual business enterprises and the alter ego of each, and hence each was liable for the corporate indebtedness.
Trial to the court resulted in judgment for plaintiffs against Poynter for the amount claimed and a denial of recovery against Mrs. Poynter. Poynter has appealed from the judgment holding him liable and plaintiffs have cross-appealed from the judgment exonerating Mrs. Poynter.
The story may best be told by quoting the trial court's findings of fact and conclusions of law:
"FINDINGS OF FACT
"The Court finds from the evidence:
"25. Economotels, Inc., was undercapitalized.
"27. Modern Structures, Inc., was undercapitalized.
"CONCLUSIONS OF LAW
Suit was never brought and judgment obtained against the corporations prior to the filing of the suit against the Poynters wherein they were named as co-defendants with the corporations. Appellant *793 Poynter first contends he has no liability for debts of those corporations by reason of K.S.A. 17-4009, which provides:
Both the Poynters raised the issue at trial level by way of motion to dismiss. Appellant asserts the statute creates a condition precedent which must be performed, and performance so alleged in the petition, before a claim against him is good. He relies principally on our cases which hold that compliance with K.S.A. 12-105 is a condition precedent to a claim for relief against a city. K.S.A. 12-105 provides no action shall be maintained against a city on account of injury to person or property unless the person injured within three months thereafter files a written statement of the incident with the city clerk.
Appellees advance several reasons why failure to comply with 17-4009 should not bar this action. We need dwell upon only one aspect of the problem. The statute was first enacted in 1939 as a part of our general corporation code (Laws, 1939, Ch. 152, § 119). We are aware of only one case since then dealing with it. In Blair v. Mueller, 299 F.2d 385, (10CA, 1962), the action was brought by creditors of a bankrupt Kansas corporation to impose personal liability upon a corporate director. The suit failed for reasons not pertinent here. However, the court did hold that the bankruptcy adjudication of the corporation relieved the creditors of the necessity of compliance with 17-4009 as a condition precedent to maintenance of the suit against the director.
The general rule on the subject is stated in 13A Fletcher, Cyclopedia Corporations, perm. ed., as follows:
..............
Stocker v. Davidson, 74 Kan. 214, 86 Pac. 136, supports the foregoing. There the trustee in bankruptcy of an insolvent corporation brought suit against certain stockholders to enforce a statutory liability which was in the nature of a contractual obligation. Among other things the defendant stockholders asserted liability could be enforced against them only after judgment and unsatisfied execution against the corporation had been obtained. In rejecting that defense this court quoted approvingly the ancient maxim that the law does not require the doing of a vain thing.
In the case at bar, prior to the time the petitions were filed, appellees were advised in writing by Mr. William K. Ong of the financial condition of Economotels and Standard Buildings. Mr. Ong, an attorney, was an officer or director and a full time employee of the two corporations. He also acted as attorney for the Poynters at trial level in this litigation. In the letter to appellees Mr. Ong reviewed the financial losses sustained by the two companies. His summation was: "This whole thing has been an unfortunate and disastrous mess." He concluded by saying, "In a nutshell, Morris, the company is defunct, and there is no hope of collecting a judgment. Several judgments have been taken and executions returned with `no goods found' endorsement. Most companies have gone ahead this far so that they can take their tax write-off."
At trial the court judicially noticed that in the same court in four separate suits judgments had been entered against the three defendant corporations and in each of the suits executions had been issued and returned unsatisfied.
Under these circumstances, of which appellees were fully aware when they commenced these actions, preliminary suits against the *795 insolvent corporations would have been useless and would only have added delay and expense.
We think that in enacting 17-4009 the legislature simply had in mind codification of the common law rules previously in vogue. The reason for the proviso, wherever found, is obvious  the creditor looking to the individual stockholder or director for recovery of corporate debt must first exhaust his remedy against the corporation and against corporate assets. But when the defunct nature of the corporation is fairly established and the futility of suit is apparent, then observance of the proviso serves no purpose and the extra expense and delay incident thereto can have no justification.
We hold that compliance with 17-4009 is unnecessary where it would be useless.
Appellant challenges the sufficiency of the evidence to support the trial court's findings No. 25, 26, 27, and 28. Here the trial court found the three corporations were undercapitalized, that they were operated under appellant's sole direction and control, were used by him as vehicles to carry out his personal business ventures and were his alter ego. Based on these and other findings, the trial court concluded appellant's conduct in the operation of his various corporations so that creditors were left no resources was in legal effect a fraud; the court further concluded the corporations were mere shams for the furtherance of appellant's individual purposes.
Appellant recognizes the well-established rule that undercapitalization may be a factor in a determination to disregard corporate entity (see anno. 63 A.L.R.2d 1051) but contends the evidence fails to support the trial court's findings. We cannot agree. A Parsons banker who did business with the Poynters testified on this point. He required the Poynters' personal signatures when dealing with the corporations. Although he concluded their capitalization was adequate, he prescribed a formula for determining adequacy of corporate capitalization, stating it to be between two or three times the monthly overhead expenses. Appellees produced pertinent figures on the subject, which we need not repeat. It is sufficient to say that from the beginning none of the corporations enjoyed robust financial health, and measured by the formula given, capitalization was inadequate, and the finding to that effect was amply supported in the evidence. It is apparent from the trial court's opinion that inadequate capitalization was only one circumstance given weight in the determination to disregard corporate *796 entity, and we are not called upon to decide whether it alone was sufficient to support the ultimate ruling.
Appellant also argues the evidence fails to support the alter ego finding of the court. First we should examine applicable law.
In 18 Am.Jur.2d, Corporations, the following appears:
"§ 14. Disregarding corporate entity, generally.
In 1 Fletcher, Cyclopedia Corporations, perm. ed., this discussion appears:
"§ 41.1.  Alter ego
Thus we see the doctrine of alter ego fastens liability on the individual who uses a corporation merely as an instrumentality to conduct his own personal business, such liability arising from fraud or injustice perpetrated not on the corporation but on third persons dealing with the corporation. Under it the court merely disregards corporate entity and holds the individual responsible for his acts knowingly and intentionally done in the name of the corporation (see 3 Words and Phrases, perm. ed., Alter Ego, p. 423, et seq.).
From the evidence we glean the following in support of the trial court's findings. The buildings in which all three corporations conducted their business was initially leased by appellant as an individual from the federal government. This lease was never transferred or changed by him throughout the corporations' tenure in the building. Corporate undercapitalization has already been mentioned. Appellant contributed what little capital there was. Apparently, as to one of the corporations, the capitalization consisted only of his promissory note. When each corporation ceased functioning, whatever assets it had on hand, including material and equipment, were transferred to the next successive corporation. All of them were engaged in building structures of the same general type. No consideration was paid for these transfers and no arrangement was made toward payment of unsecured creditors of the prior corporation. An airplane initially belonging to Economotels was thereafter used by Standard Buildings and Modern Structures and finally sold and the proceeds applied upon an S.B.A. loan which appellant had personally guaranteed. When Modern Structures ceased activities its remaining assets were sold and the proceeds turned over to Poynter Motors and used by it to pay on a bank loan personally guaranteed by appellant. He transferred funds back and forth at will between the various corporations, including Tower Bowl and Poynter Motors. This juggling of assets could scarcely have served the corporation whose funds were being diverted but would be strong indication appellant regarded all funds as his own. The rent for the building used by the three corporations was paid through Poynter Motors under some kind of vague arrangement made by him as president of Poynter Motors, Standard Buildings and Modern Structures. Appellant was an officer in all of the corporations involved, *798 set the policies and made all final decisions. He received varying amounts not in excess of $14,000 as salary each year. No board of directors' meetings of the corporations were held. Corporate reporting was largely disregarded. In his testimony, although he had difficulty in remembering which corporate office he filled in each, he stated he was the policymaking person; he described Economotels as a "vehicle" corporation.
The foregoing amply supports the challenged findings and conclusions of the trial court concerning alter ego. Certainly appellant conducted business with such unity of interest and ownership that the separate personalities of the corporations and of himself as an individual no longer existed. And if the acts were treated as those of the corporations alone an inequitable result would follow. Appellant himself disregarded corporate entity and we think the trial court was justified in doing the same.
We turn now to the cross-appeal. Appellees assert the trial court erred in its findings absolving Rosalee Poynter of liability. They argue the findings made, that she did not exercise any control over the corporations and her activities were those of an automaton, were not supported by substantial evidence. This is hardly the approach to be taken on appellate review. The burden of proof on this factual issue was on appellees. Here, upon evidence which was not wholly undisputed and which was subject to different interpretation, the trial court found appellees had failed to sustain that burden. There was some evidence in the record tending to support a different finding but it is not our province to weigh and redetermine the matter anew. Although Mrs. Poynter owned all the stock in the last two corporations, this fact is not of itself sufficient to treat those corporations as her alter ego and disregard the corporate entity (18 Am.Jur.2d, Corporations, § 13, p. 558; 1 Fletcher, Cyclopedia Corporations, perm. ed., § 41.3, pp. 189-190).
We have discussed the extent of control and domination of the corporations by Poynter. Mrs. Poynter's role in their operation and management seems limited at most. In informal family discussions Poynter would mention business affairs in a general way and about half the time would explain to her what was happening; he would tell her what papers to sign and she signed; she had nothing to do with the active management of the business carried on by the three corporations; she worked in the bowling alley operated by Tower Bowl and drew no salary or dividends from the three *799 corporations; the stock was placed in her name principally to avoid probate in case of her husband's death. It appears Mrs. Poynter had very limited information on the corporate activities and participated not at all in their direction, which was under sole control of her husband. All this supports the trial court's negative finding against cross-appellants in view of which it may not be set aside.
The judgment is affirmed.
APPROVED BY THE COURT.
FONTRON, J., concurring in part and dissenting in part:
I agree that the judgment of the court below should be affirmed as to the appeal, but am obliged to dissent so far as the cross-appeal is concerned. Lack of time precludes any lengthy discussion of my reasons for believing error was committed in entering judgment in favor of Mrs. Poynter.
A majority of the court appears to base its affirmance of the judgment as to Rosalee Poynter on the proposition that her ownership of the entire stock of Modern Structures, Inc., the last of the ill-fated Poynter corporations is insufficient, of itself, to impose liability.
Assuming that stock ownership, alone, is not sufficient to create liability, the record reveals far more than Mrs. Poynter's passive ownership of all the stock. She was authorized to and did countersign corporate checks by herself, signing those she wanted signed and returning others. She personally endorsed notes and signed an S.B.A. loan. And she signed the Annual Report for the year 1965  which proved to be false.
It is worthy of note that Mrs. Poynter was not only a director and the sole stockholder of Modern Structures, Inc., but of Poynter Motors, Inc., as well; that she was an officer both of Economotels, Inc. and Standard Buildings, Inc.; that she accompanied Mr. Poynter on trips, acquiesced in his decisions and was aware of the financial problems besetting the Poynter operations.
Overall, I believe the evidence clearly shows Mrs. Poynter's personal involvement in the unfortunate financial affairs of the Poynter companies and it is my feeling that she should be held equally liable with her husband. In my opinion the interests of justice would be well served in this case by piercing the corporate veil as to Mrs. Poynter as well as to her husband. (Coal Co. v. Nicholson, 93 Kan. 638, 653, 145 Pac. 571.)
*800 For the reasons given I would reverse the case as to the cross-appeal.
SCHROEDER and O'CONNOR, J.J., join in the foregoing concurring and dissenting opinion.