Opinion
No. 06-CA-392.
December 13, 2006.
ON APPEAL FROM THE TWENTY-FOURTH JUDICIAL DISTRICT COURT.
PARISH OF JEFFERSON, STATE OF LOUISIANA. NO. 589-231, DIVISION ''A''.
HONORABLE JOAN S. BENGE, JUDGE PRESIDING.
STEVEN J. KOEHLER, Attorney at Law Louisiana 70002, COUNSEL FOR PLAINTIFF/APPELLEE, METRO REDISCOUNT COMPANY, INC.
WILLIAM R. MUSTIAN, III, STANGA MUSTIAN, P.L.C., Attorney at Law, Louisiana 70002, COUNSEL FOR DEFENDANT/APPELLEE/SECOND APPELLANT, ANTHONY MASSIMINI.
ALBERT J. HUDDLESTON, Attorney at Law, Louisiana 70003, COUNSEL FOR DEFENDANT/APPELLANT, GERALD BURNSED.
Panel composed of Judges THOMAS F. DALEY, SUSAN M. CHEHARDY, and WALTER J. ROTHSCHILD.
AFFIRMED IN PART, REVERSED IN PART, AMENDED IN PART, AND RENDERED
This is a suit by a creditor to collect on a promissory note by a business entity and on continuing guaranties of the note by principals of the debtor. The guarantors appeal a jury verdict that cast them in judgment. We affirm in part, reverse in part, amend in part, and render.
Metro Rediscount Co., Inc., filed a petition for breach of contract against Base Distributors, Inc., Gerald Burnsed, and Anthony Massimini, alleging they were liable to plaintiff in the amount of $59,059.54, with interest at the rate of 1.5% per month from July 28, 2002, for all expenses incurred in collecting the debt including reasonable attorney's fees, and for all costs of bringing the action.
The petition alleged that Base Distributors ("Base") entered into a Business Manager Agreement with Metro Bank in 1997, in which Base sold receivables to Metro Bank at a discount. The agreement provided that if any of the receivables sold proved to be uncollectible, Base would repurchase those receivables from Metro Bank; that uncollected balances would accrue interest at the rate of 1.5% per month; and that the debtor would reimburse Metro Bank for all expenses incurred in collecting the balances owed, including reasonable attorney's fees.
The petition alleged further that in March 2001, Metro Bank assigned the Business Manager Agreement to Metro Rediscount, and Base thereafter entered into an additional Business Manager Agreement with Metro Rediscount, with identical terms.
According to the petition, on July 28, 2002, Base defaulted under the terms of the contract. At that time, the amount owed was $59,059.54.
The petition alleged that Burnsed and Massimini each had executed a Commercial Guaranty Agreement, under which they agreed to be personally and solidarily obligated for the obligations of Base Distributors. In addition, Burnsed and Massimini commingled corporate and shareholder funds, failed to follow statutory formalities required for incorporation and to transact corporate business, undercapitalized the corporation, and disregarded the corporate entity to such an extent that the corporation was indistinguishable from Burnsed and Massimini and Base Distributors became the alter ego of Burnsed and Massimini.
Alternatively, Metro Rediscount asserted that Burnsed and Massimini either withdrew funds from the corporation when it was insolvent, or their withdrawals made the corporation insolvent, such that those funds were a dividend or a disguised dividend.
Base Distributors, Inc. failed to answer the petition, and Metro Rediscount obtained a default judgment against the corporation.
In answer to the petition, Burnsed denied the existence of a valid, legally enforceable contract of personal guaranty signed by him for the benefit of Base. Further, he asserted that if such personal guaranty had ever existed, it was terminated on May 10, 2000 when he sold all of his shares in Base to Anthony Massimini and immediately paid off all outstanding corporate obligations due to Metro Bank.
Massimini filed a cross-claim against Burnsed. He sought contribution and indemnity from Burnsed in the event of a judgment in favor of the plaintiff. In addition, he claimed that Burnsed had depleted funds of Base for Burnsed's personal use, and thus had made it impossible for the company to fulfill its obligations to Metro Rediscount. He asserted that Burnsed had alienated the company's main asset, a contract with the state, which further deprived the company of cash flow to pay its obligations. He alleged that Burnsed commingled funds and disregarded corporate formalities so that Burnsed became the alter ego of the corporation and, as such, should be liable in solido for its debts. He asserted that Burnsed permitted a default judgment to be taken against the corporation.
Massimini claimed that Burnsed had violated a non-competition clause in the May 2000 agreement by which Massimini purchased the stock in Base from Burnsed, and therefore the agreement should be rescinded and the purchase price returned to Massimini. Massimini further asserted he was entitled to be repaid $20,000.00 for amounts loaned to Base Distributors by Massimini, which had not been repaid, and that Burnsed is liable for that amount as the corporation's alter ego.
The matter was tried for three days before a jury. Based on the jury's responses to interrogatories, the court rendered judgment in favor of Metro Rediscount and against Burnsed and Massimini. The judgment held Burnsed and Massimini liable in solido in the amount of $59,000.00, with legal interest from date of judicial demand; held Burnsed personally liable for the debts of Base Distributors, Inc.; and held Burnsed liable to Massimini in the amount of $9,000.00 on Massimini's cross-claim.
The trial court subsequently granted Metro Rediscount's motion for new trial and amended the judgment to provide the interest rate of 18% per annum from July 28, 2002 and attorney's fees of 25% of the principal and interest.
Burnsed appealed and Massimini answered the appeal.
FACTS
The testimony established that Gerald Burnsed formed Base Distributors, Inc., a computer manufacturing and servicing company, in the mid-1980s and owned one hundred percent of the stock. In 1997, Base Distributors entered into a series of agreements with Metro Bank called the Business Manager Program. The program includes a package of documents consisting of a principal agreement called Business Manager Agreement with Businesses and Professionals, a Commercial Security Agreement, a UCC-1 Financing Statement by which the business pledges its assets to secure the transaction, and a Commercial Guaranty by which the owner of the business personally guarantees the debts of the business.
In 1998 Metro Rediscount, Inc. was formed to take over the Business Manager Program from Metro Bank. Metro Rediscount was a separate corporation from Metro Bank and it acquired all the Business Manager assets from Metro Bank, including the Base Distributors account.
Anthony Massimini was an employee of Base Distributors. In May 2000 he approached Burnsed about buying the company. They reached an agreement in which Burnsed sold one hundred percent of the stock to Massimini for $200,000.00. The act of sale provided that Massimini was to pay $100,000.00 at the time of sale, with the remaining $100,000.00 financed through a promissory note to Burnsed, secured by a pledge of the stock to Burnsed.
The document also stated that Burnsed would be retained as an employee of Base Distributors, but included a non-competition clause in which Burnsed agreed not to compete with Base Distributors for two years after termination of his employment with the company.
In a separate agreement (apparently verbal, as there is no documentary evidence of it in the record), Massimini consented to continue to rent the premises on which the Base's office was located from Burnsed's private rental company.
On behalf of Base Distributors, on August 30, 2000 Massimini entered into a Business Manager Agreement with Metro Rediscount, Inc., under which Base sold its invoices for accounts receivable to Metro Rediscount and Base was required to repurchase any accounts that were uncollectible within a set period. Massimini signed a continuing guaranty of that agreement.
Base began experiencing significant financial problems in late 2001 and early 2002. By July 2002, the company was in arrears on its rental payments and other debts, and Massimini was in arrears on his payments on the promissory note to Burnsed.
By letter dated July 1, 2002, Burnsed's attorney notified Massimini the company would be evicted from the premises if all delinquent rent were not paid on or before July 31, 2002. That letter also made formal demand on Massimini for the entire balance due on the promissory note, on or before July 31, 2002, in default of which the stock would be sold "to a present and willing purchaser."
On August 1, 2002, Gerald Burnsed and his attorney, as notary, signed a Proces Verbal of Transfer of Stock of Base Distributors, Inc., reflecting that because the pledgee, Massimini, was in default on the promissory note, Burnsed had chosen to reacquire the pledged stock, for and in consideration of the balance due on the promissory note. The proces verbal conveyed the stock to Burnsed and his wife, and stated that the promissory note had been cancelled as full consideration for the retransfer of the stock.
By letter dated August 1, 2002, Burnsed's attorney notified Massimini that his shares of stock in Base had been sold to Gerald and Elizabeth Burnsed and, as the only shareholders and directors, they had removed Massimini as a corporate officer and as a member of the board of directors. The letter advised Massimini that he was no longer a shareholder and he no longer had any authority or right to control the assets of the corporation, and demanded that Massimini return to Burnsed various listed items that were property of Base.
Massimini took no countervailing action to attempt to reassert ownership of Base.
Thereafter Burnsed spent corporate funds for various personal purposes, among them paying off a default judgment that had been rendered against him personally, paying his personal attorney, and writing a corporate check as a birthday gift to his son.
On September 4, 2002, Burnsed transferred Base Distributors' most valuable asset, a contract with the State of Louisiana, to Best Technologies, Inc., a newly-formed company that was started after Burnsed took over Base Distributors from Massimini. Burnsed signed an agreement with Best Technologies to serve as a consultant/employee and received a salary from Best Technologies for several months.
Base Distributors, Inc. was never formally dissolved, but by the time of trial it had ceased doing business and had no significant assets.
In his testimony, Burnsed denied that he ever signed a continuing guaranty of any debts or accounts of Base Distributors that are the subject of this litigation. He admitted he signed personal guaranties, but asserted that any such personal guaranty was terminated on or about May 10, 2000, with the knowledge, approval and consent of Metro Bank, upon payment of all outstanding credit balances attributable to Base Distributors, charged during the period that Burnsed was its owner and chief corporate officer. May 10, 2000 was the date on which he sold his stock in Base Distributors to Massimini.
Burnsed testified that Metro Bank had returned to him any loan documents for the paid-off debts and that he had destroyed them. He said if there had been any continuing guaranty, it would have been returned to him and destroyed with the rest of such papers.
Burnsed admitted that after taking Base Distributors back from Massimini, he had used income from he company to repay himself for monies he paid out on behalf of the company. He also admitted he did not attempt to repay the company's debt to Metro Rediscount.
A bank officer from Metro Bank and an executive from Metro Rediscount each testified that Burnsed had signed a continuing guaranty of the debt of Base Distributors, Inc. Metro Rediscount was unable to locate the continuing guaranty in its files and, thus, could not produce the document at trial. The witnesses were unable to say what had happened to the actual document, but each testified that such a document always accompanied the type of financing arrangement that Base Distributors had with Metro Bank and, subsequently, with Metro Rediscount, and that neither Metro Bank nor Metro Rediscount would have released him from the guaranty without a written cancellation agreement.
APPEAL OF GERALD BURNSED
I. Continuing Guaranty
Burnsed contends, first, there was no evidence to support the jury's finding that he signed a continuing guaranty in favor of Metro Rediscount Co., Inc.
The party who demands performance of an obligation must prove the existence of the obligation. La.C.C. art. 1831; Suire v. Lafayette City-Parish Consol. Government, 2004-1459 (La. 4/12/05), 907 So.2d 37, 58.
"A contract of guaranty is equivalent to a contract of suretyship, and the terms may be used interchangeably." Guaranty Bank and Trust Co. v. Jones, 489 So.2d 368, 370 (La.App. 5 Cir.1986). "Suretyship is an accessory contract by which a person binds himself to a creditor to fulfill the obligation of another upon the failure of the latter to do so." La.C.C. art. 3035.
"Suretyship must be express and in writing." La.C.C. art. 3038. "Parol evidence is inadmissible to establish . . . a promise to pay the debt of a third person . . . ." La.C.C. art. 1847; Southern Air Conditioning of New Orleans, Inc. v. Cumberland Homes, Inc., 418 So.2d 745, 747 (La.App. 5 Cir. 1982). However, "[w]hen the law requires a contract to be in written form, the contract may not be proved by testimony or presumption, unless the written instrument has been destroyed, lost or stolen." La.C.C. art. 1832.
The instructions to the jury regarding the existence of a continuing guaranty from Burnsed included a direct quotation of La.C.C. art. 1832.
Jury Interrogatory No. 1 was, "Did Gerald Burnsed sign a continuing guaranty with Metro Rediscount Company, Inc., to act as guarantor for the debts of Base Distributors, Inc.?" The jury responded, "Yes." Jury Interrogatory No. 1A was, "If you find that Gerald Burnsed signed a continuing guaranty, was that continuing guaranty canceled?" The jury responded, "No." Those responses constitute factual findings by the jury.
Findings of fact are accorded great deference by appellate courts and can be overturned only for manifest error. Siverd v. Permanent General Insurance Company, 2005-0973, p. 3 (La. 2/22/2006), 922 So.2d 497, 500. Where there is a conflict in the testimony, the issue to be resolved by the reviewing court is not whether the trier was right or wrong, but whether the decision reached by the trier was reasonable. Id., 2005-0973 at p. 5, 922 So.2d at 501.
The existence of a continuing guaranty signed by Burnsed was a credibility question. The jury specifically found that Burnsed had signed a continuing guaranty and that it had not been cancelled. After reviewing the evidence in light of the entire record, we find no ground for reversal of the finding by the jury on this issue.
Although we do not find a case in which parol evidence was permitted to prove a continuing guaranty, we find several cases that allowed parol evidence to prove other contracts that are required to be in writing, where the original documents were missing: Kite v. Carter, 03-378 (La.App. 3 Cir. 10/1/03), 856 So.2d 1271 (title to improvements on immovable property); Commercial Bank Trust v. Sciortino, 394 So.2d 673 (La.App. 4 Cir. 1981), writ denied, 399 So.2d 622 (La. 1981) (promissory note); Tri-State Ins. Co. v. Elmore Labiche Plumbing Co., 212 So.2d 255 (La.App. 4 Cir. 1968) (indemnity agreement).
Both the Commercial Bank case and the Tri-State case arose under a prior version of Article 1832. However, the Official Comments to the 1984 revision state that the revisions do not make any change in the law.
Burnsed challenges the language of Jury Interrogatory No. 1, which referred to Metro Rediscount rather than Metro Bank. Burnsed asserts any continuing guaranties he signed were in favor of Metro Bank, not Metro Rediscount. He testified that any such guaranties had been satisfied and returned to him, and that he had destroyed them.
The unchallenged testimony of the plaintiff's witnesses was that Metro Rediscount took over the Business Manager program from Metro Bank in 1997, that Base Distributors signed a Business Manager Agreement and that Metro transferred all the paper having to do with that program to Metro Rediscount. It is undisputed that Burnsed did not sell Base Distributors to Massimini until 2000.
Again, we find no error in the jury's determination on this point.
II. Personal Liability
Burnsed next argues the trial court erred in holding him personally liable for all outstanding debts of Base Distributors, because there was no proof of fraud against him that would support the imposition of personal liability.
To the contrary, the evidence established that after Burnsed repossessed Base Distributors, he undertook to transfer its assets to benefit his own interest and without regard to the corporation's secured creditors. Burnsed's own testimony established that he distributed corporate funds to himself, while ignoring the corporation's obligations to Metro Rediscount. His testimony was impeached by his own actions, as well as by conflicts with his deposition testimony.
Our jurisprudence has historically recognized that corporate principals have a fiduciary relationship not only to the corporate entity but also to its creditors and are, thus, under a certain obligation to see that creditors are paid. Hooper v. Maruka Machinery Corp. of America, 525 So.2d 1113, 1117 (La.App. 5 Cir. 1988).
The jury's findings on this point are factual findings, and must be upheld on appeal absent manifest error. Sivard, 2005-0973 at p. 3, 922 So.2d at 499.
Further, although Burnsed asserts that the finding is beyond the scope of the pleadings, in fact it is not. Not only did the plaintiff's petition allege that Burnsed was the alter ego of the corporation and had diverted funds of the corporation, but also there was no objection to the evidence offered at trial, so the pleadings are tacitly amended to include the claims. La.C.C.P. art. 1154.
III. Noncompetition Agreement
Third, Burnsed contends the jury erred in awarding Massimini damages against Burnsed for violation of the noncompetition clause in the purchase contract between Burnsed and Massimini.
The non-competition clause states:
The parties hereto acknowledge that vendor, Gerald Burnsed, will be retained as an employee of the corporation. Upon termination of his employment, for any reason, Gerald Burnsed and his wife, Elizabeth Burnsed, agree that, for a period of twenty-four consecutive months from the date of termination of such employment, neither shall, directly or indirectly, for their benefit or the benefit of others, call upon, communicate or attempt to communicate with any customer or prospective customer, or any representative of a customer or prospective customer of Base Distributors, Inc., with whom either Burnsed has had any contact, communication, or for which either has had supervisory responsibility, if such contact is for the purpose of selling, offering for sale or influencing the purchase of, or otherwise providing and [sic] product, service or equipment competitive with any product, service, or equipment sold, offered for sale, provided, or under development by Base Distributors, Inc.
Further, neither Gerald nor Elizabeth Burnsed, during the twenty-four consecutive months from the date of termination of each, shall accept employment with or as a self-employed person, act as a competitor of Base Distributors, Inc., in any capacity, within the geographical limits of Jefferson, Orleans, St. Bernard, St. Tammany, or Washington Parishes, in the State of Louisiana.
La.R.S. 23:921(C) permits agreements not to compete as long as they do not exceed a period of two years from termination of employment. Obviously, Burnsed's activities as a consultant with Best Technologies, for which he contacted customers of Base Distributors to enable Best Technologies to carry on the same business as Base, took place within two years from termination of his employment with Base.
However, the agreement containing the noncompetition clause was between Burnsed and Massimini, not Burnsed and Base. By the time Burnsed contracted with Best Technologies, he was once again the owner of Base. Massimini no longer had an interest in the company.
La.R.S. 23:921(H) provides that a noncompetition agreement covered by the statute "shall be considered an obligation not to do, and failure to perform may entitle the obligee to recover damages for the loss sustained and the profit of which he has been deprived." The obligee on the noncompetition agreement here was Massimini, not the company itself.
Because Massimini no longer had an interest in the company, he sustained no damages from Burnsed's violation of the non-compete clause. Accordingly, the jury's award of $9,000.00 to Massimini for Burnsed's breach of the noncompetition agreement was clearly wrong and must be reversed.
IV. Interest and Attorney's Fees
Burnsed also seeks reversal of the part of the judgment that assessed interest at the rate of 18% and an attorney's fee of 25 percent. He argues he did not sign any agreement that contains those terms. That issue, however, like those discussed above, turns on credibility and the jury's determination that he did sign an agreement that bore the same terms as the one signed by Massimini, as well as the jury's determination that Burnsed is liable for the debts of the corporation.
The corporation is liable on the Business Manager Agreement pursuant to the default judgment against it. La.C.C. art. 2000 establishes that interest accrues from the date the debt arises, not the date of judicial demand, and that when there is a contractual interest rate, that rate shall be applied. The Agreement establishes in Section 11 that upon default, the interest rate will be the maximum interest rate allowed by law. La.R.S. 9:3509(B)(1)(a) provides that for commercial loans under $250,000.00, the maximum rate shall be 18 percent per annum.
Thus, the judgment correctly holds that interest will accrue at 18 percent per annum from July 28, 2002, the date on which the petition alleges the loan became delinquent.
The Agreement also provides for reasonable attorney's fees. Considering the extent of the litigation in the trial court, encompassing extensive discovery as well as three days of jury trial, followed by this appeal, we find that 25% of the principal and interest is a reasonable fee.
APPEAL OF ANTHONY MASSIMINI
A. Burnsed's Liability for Massimini's Loan to Corporation
Massimini contends the jury erred in failing to award him $20,000.00 for money he lent to Base, because the jury found Burnsed was the alter ego of the corporation and personally liable for its debt. He also contends the trial court erred in failing to rule on the issue of the $20,000.00 loan, pursuant to La.C.C.P. art. 1812.
Although Massimini testified he lent money to Base, his claim was supported only by his own testimony. After reviewing the evidence, we conclude that this was a credibility question that the jury decided adversely to Massimini. As such, we find no manifest error and, hence, will not reverse it.
La.C.C.P. art. 1812 provides for a special verdict by a jury in the form of a special written finding on each issue of fact. That was the procedure used in this case. Paragraph (A) provides, in pertinent part:
The court shall give to the jury such explanation and instruction concerning the matter submitted as may be necessary to enable the jury to make its findings upon each issue. If the court omits any issue of fact raised by the pleadings or by the evidence, each party waives his right to a trial by jury of the issue omitted unless, before the jury retires, he demands its submission to the jury. As to an issue omitted without such demand the court may make a finding, or if it fails to do so, it shall be presumed to have made a finding in accord with the judgment on the special verdict." [Emphasis added.]
Massimini did not object to the jury interrogatories, nor raise the issue when the interrogatories were discussed by counsel with the court. Accordingly, he waived any further rights in that respect.
B. Indemnity and Contribution
Massimini asserts he specifically demanded contribution and indemnity as to any judgment rendered against him in favor of Metro Rediscount Co., Inc. in his supplemental answer and cross-claim. He argues that he was entitled to language in the judgment stating that Burnsed owes him contribution.
Burnsed did not seek contribution from Massimini.
"Among solidary obligors, each is liable for his virile portion. If the obligation arises from a contract or quasi-contract, virile portions are equal in the absence of agreement or judgment to the contrary." La.C.C. art. 1804. "A solidary obligor who has rendered the whole performance, though subrogated to the right of the obligee, may claim from the other obligors no more than the virile portion of each."Id.
La.C.C. art. 1805 provides,
A party sued on an obligation that would be solidary if it exists may seek to enforce contribution against any solidary co-obligor by making him a third party defendant according to the rules of procedure, whether or not that third party has been initially sued, and whether the party seeking to enforce contribution admits or denies liability on the obligation alleged by plaintiff.
We agree with Massimini that he is entitled to have the judgment protect his right to contribution from Burnsed. We amend the judgment accordingly.
DECREE
For the foregoing reasons, we reverse that portion of the judgment that found Gerald Burnsed liable to Anthony Massimini in the amount of $9,000.00 as awarded by the jury for Burnsed's breach of the noncompetition clause. We amend the judgment to provide that Anthony Massimini is entitled to contribution by Gerald Burnsed in virile shares for payment of the award to Metro Rediscount Company, Inc. In all other respects, the judgment is affirmed. Gerald Burnsed is cast for costs of this appeal.
AFFIRMED IN PART, REVERSED IN PART, AMENDED IN PART, AND RENDERED