Opinion ID: 1418760
Heading Depth: 1
Heading Rank: 2

Heading: Liability to Weiss, Individually, on His Guaranties

Text: Weiss alleged that because of Northwest's acts he was damaged individually in the amount of $1,500,000 because the value of his stock was destroyed and he remains liable for many of Fall Creek's debts. The jury returned a verdict for Weiss in the amount of $122,164.74, general damages, which the jury found represented the debts and taxes for which Weiss was liable and which Fall Creek would have been able to pay if Northwest had not defrauded Weiss. Northwest contends assuming the corporation, Fall Creek, had a cause of action against Northwest, that Weiss, as an individual, does not. The general rule is that a stockholder has no personal right of action against a third party for a wrong to the corporation which lowers the value of the stock. This court has adopted this rule. Smith v. Bramwell, 146 Or. 611, 615, 31 P.2d 647 (1934); Dant & Russell v. Ostlind, 148 Or. 204, 215, 35 P.2d 668 (1934). Conceptually, the rule is based upon the separateness of the corporate entity and its stockholders. See cases cited in Annotation, 167 A.L.R. 279, 280-284 (1947). Practically, it is based in part upon the rule that corporate creditors are entitled to be paid out of any recovery made to the corporation before the stockholders are entitled to payment. Smith v. Bramwell, supra (146 Or. at 615, 31 P.2d 647). The plaintiff Weiss acknowledges this to be the general rule, but contends he comes within a recognized and logical exception to the general rule. The exception is that a stockholder may have an individual cause of action against a third party if the third party breaches a duty directly owed to the stockholder as an individual. The stockholder may maintain such a cause of action although it is based upon the conduct of a third party which also creates a cause of action in the corporation. This exception was recognized by this court in Smith v. Bramwell, supra (146 Or. 611, 31 P.2d 647), but found not applicable, supra (146 Or. at 619-620, 31 P.2d 647). The exception is illustrated by one of the cases relied upon by Weiss. In Empire Life Insurance Co. of America Corp. v. Valdak, 468 F.2d 330 (5th Cir.1972), the plaintiff loaned Valdak Corporation $350,000. Valdak pledged stock of National Insurance Company in amount of $1,200,000 with plaintiff as security for the loan. Plaintiff had previously gained control of National Insurance and by fraudulent mismanagement drove the value of the stock down. Valdak defaulted and plaintiff sold the pledged National stock to itself for $150,000. The court held that if the defendant could prove these alleged facts, it would have a cause of action against plaintiff in addition to the cause of action by the corporation, National, against plaintiff. Valdak would have a cause of action independent of National because plaintiff had a duty to Valdak as the pledgor of stock not to deplete the value of the pledged property by intentional acts. Weiss contends Northwest breached a special duty owed to him as a personal guarantor of Fall Creek's obligations. These obligations were not obligations of Fall Creek to Northwest but to other creditors for fuel, taxes and a bank loan. Plaintiff Weiss relies upon two guaranty cases: Buschmann v. Professional Men's Association, 405 F.2d 659 (7th Cir.1959), and Sacks et al. v. AFNB, 258 Ind. 189, 279 N.E.2d 807 (1972). These cases hold that the guaranty created a special duty to the guarantor which enabled the guarantor to maintain a cause of action, independent of the debtor corporation, against the person to whom the guaranty was extended. Neither case, however, is persuasive as in both cases the individual was induced to enter into the guaranty by the fraud or misrepresentation of the defendant. For example, in the Sacks case the allegation was that the defendant bank represented to the individual plaintiff stockholder that if the plaintiff guarantied the loans to the corporation, the bank would provide continual financing of the corporation. The bank refused to continue financing and the plaintiff stockholder incurred a liability on his guaranty. In contrast to Sacks and Buschmann, Weiss was not induced by Northwest to enter into any new and separate relationship. Plaintiff Weiss guarantied the debts of Fall Creek long before any alleged fraud was perpetrated by Northwest. Weiss' guaranties were in no way induced by or in consideration for any misrepresentations or broken promises by Northwest. Any injury Weiss suffered was in no way separate and distinct from any loss suffered by Fall Creek. Weiss is in no different position than any other creditor of Fall Creek. Weiss gave credit to Fall Creek in the form of making a guaranty to the bank and to others. His action is similar to that of the bank or others in lending credit to Fall Creek. When, after the credit is extended, the value of the assets of Fall Creek are lessened allegedly by the fraud of Northwest and, therefore, Fall Creek is unable to pay its creditors, the bank and other creditors cannot maintain separate actions against Northwest. The right of recovery is solely that of Fall Creek. That is true of Weiss as well as other creditors. Weiss cannot recover for his liability on his guaranties of Fall Creek's obligations. That part of the judgment awarding plaintiff Weiss $122,164.74 must be reversed.