Opinion ID: 2571607
Heading Depth: 2
Heading Rank: 3

Heading: Use of Credit Line

Text: The trial court concluded that it was oppressive and a waste of assets for TSI to use $75,000 of the $125,000 credit line that was in Northwest's name, while Northwest paid interest on the entire amount. Scott's testimony indicates that when he became aware that Northwest was paying interest on the entire $125,000, having not used any portion of it according to him, he took the issue up with each of the other shareholders in Northwest. Scott claims that each gave him unsatisfactory justifications for the payment of interest. According to Scott, the four other shareholders were aware the credit line was being used entirely by TSI yet Scott, as director of Northwest, was unaware of the situation until he received a payment notice from the bank. This evidence creates a viable claim of overreaching by the majority shareholders. Since Scott has met his initial burden, the burden shifts to TSI to demonstrate legitimate reasons for the use of the credit line and Northwest's payment of the interest. TSI and Northwest shareholder Ted Rehwald testified that $50,000 of the credit line was treated as repayment of a loan from TSI to Northwest, upon which TSI charged no interest. The remaining $75,000 was used exclusively by TSI, yet Northwest paid the interest on that sum as well. Rehwald testified that the $75,000 was perceived as a loan from Northwest to TSI. Explaining the rationale behind having Northwest pay the interest, Rehwald testified as to his belief that the interest Northwest paid on its $75,000 loan to TSI was roughly equal to the interest Northwest should have been charged on the initial loan from TSI. TSI's testimony attempted to provide a rational business judgment for its conduct. In retrospect, Rehwald acknowledged that TSI should have been required to pay the interest on the $75,000 of the credit line it used. Statements by Oregon's Supreme Court in Baker assist in determining whether Rehwald's justifications are sufficient to refute a claim of oppression: [A] single act in breach of such a fiduciary duty may not constitute such oppressive conduct as to authorize the dissolution of a corporation unless extremely serious in nature and that even a continuing course of oppressive conduct may not be sufficient for that purpose unless it appears that, as a result, there has been a disproportionate loss to the minority or that those in control of the corporation are so incorrigible that they can no longer be trusted to manage it fairly in the interests of its stockholders. Baker, 264 Or. at 630, 507 P.2d 387 (footnotes omitted); see also Fix v. Fix Material Co., 538 S.W.2d 351, 358 (1976) (We do not mean that a single act in breach of such duty would be sufficient `oppressive' conduct to authorize dissolution of a corporation (unless extremely serious), absent evidence of irreparable injury, imminent danger of loss or miscarriage of justice.). Mistakes, inadvertence, or bad policy, if honestly pursued will not warrant the appointment of a receiver. Blinn, 190 Wash. at 163, 66 P.2d 1132. The credit line transaction should not be considered oppressive, warranting involuntary dissolution, as this appears to be isolated. Moreover, there is no indication TSI has routinely conducted business in this manner or that it will continue to do so. The public does not benefit from the dissolution of Northwest because it decreases its choices in schools. Without Northwest, the only other school in the Spokane area is Scott's company, National. Scott is therefore the only shareholder who stands to benefit from Northwest's dissolution; such action would be detrimental to the other four. Considering the severity of the conduct and the interests of the shareholders and the public, dissolution in this case is an overly harsh remedy. Alternative remedies exist that would rectify any wrongdoing while maintaining the corporate entity. Alternative Remedies to Dissolution Dissolution suits under Washington's dissolution statute are fundamentally equitable in nature. Henry George & Sons, Inc., 95 Wash.2d at 952, 632 P.2d 512. Relying on this equitable nature, both Oregon's Supreme Court and Missouri's [4] Court of Appeals stated that the court may consider alternative equitable relief besides dissolution. Fix, 538 S.W.2d at 357. In Baker, the court summarized the equitable remedies that various jurisdictions had used depending on the facts of the case, the most relevant of which include: (a) The entry of an order requiring dissolution... at a specified future date, to become effective only in the event that the stockholders fail to resolve their differences prior to that date; (b) The appointment of a receiver, not for the purposes of dissolution, but to continue the operation of the corporation for the benefit of all the stockholders, both majority and minority, until all differences are resolved or oppressive conduct ceases; (c) The appointment of a special fiscal agent to report to the court relating to the continued operation of the corporation, as a protection to its minority stockholders, and the retention of jurisdiction of the case by the court for that purpose; (d) The retention of jurisdiction of the case by the court for the protection of the minority stockholders without appointment of a receiver or special fiscal agent; (e) The ordering of an accounting by the majority in control of the corporation for funds alleged to have been misappropriated; . . . . (j) An award of damages to minority stockholders as compensation for any injury suffered by them as the result of oppressive conduct by the majority in control of the corporation. Baker, 264 Or. at 632-33, 507 P.2d 387 (footnote omitted); see also Fix, 538 S.W.2d at 357 n. 3; Sauer v. Moffitt, 363 N.W.2d 269, 275 (Iowa Ct.App.1984) (allowing courts ability to provide other equitable remedies pursuant to former Iowa Code § 496A.94(1) (now Iowa Code § 490.1430 (2002)), which is essentially the same as Washington's). Accordingly, alternative remedies are available that are far less severe than dissolution. For example, TSI could have been required to produce an accounting of the money it loaned to Northwest and the interest it would have charged as compared to the interest paid by Northwest on the line of credit used by TSI. If there was a difference in the interest amounts, the respective corporation could then repay that amount. Although the trial court suggested to the parties that they attempt to resolve the case themselves, after those attempts failed there is no indication that the trial court considered less severe equitable solutions that would effectively remedy the situation. The court instead judicially dissolved the corporation. However, the facts of this case do not rise to the level of egregiousness required to justify dissolution given the admonishments from courts in this state and around the country that dissolution is a drastic remedy that should be used with extreme caution. We find that the trial court abused its discretion in ordering the dissolution of Northwest without consideration of alternative relief.