LEWIS WESTCO COMPANY v. PEACE

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Court of Appeal, Fourth District, Division 3, California.

LEWIS–WESTCO & COMPANY, Plaintiff and Respondent, v. John F. PEACE, Defendant and Appellant.

G001462.

Decided: October 31, 1986

James W. Lundquist, Orange, for defendant and appellant. Leland, Parachini, Steinberg, Flinn, Matzger & Melnick, Steven B. Mains, San Francisco, for plaintiff and respondent.

The former director and sole shareholder of an insolvent corporation appeals from the judgment holding him personally liable for an unsecured corporate debt.

I

The trial court's comprehensive memorandum of intended decision establishes the following:  In 1978 John Peace was the sole shareholder of Desert Springs, Inc., a liquor distributorship.   He and his wife were the only officers and directors.   During that year the corporation bought and paid for $180,000 worth of inventory from Lewis-Westco & Company.   Additional purchases were made on credit.

In late 1978 Peace, through another corporation he controlled, John Peace Enterprises, acquired a Hawaiian distillery.   As federal laws prohibited his ownership of both a liquor distillery and a distributorship, he sold his stock in Desert Springs to a third party.   By that time, Desert Springs's business was reeling as the result of the California Supreme Court's invalidation of the liquor fair trade law (Rice v. Alcoholic Bev. etc. Appeals Bd. (1978) 21 Cal.3d 431, 146 Cal.Rptr. 585, 579 P.2d 476).

Peace then embarked on a new venture through another corporation, John Peace Enterprises, to ship brand name liquor from Oklahoma to California.   The parties refer to this opportunity as the “Oklahoma Connection.”   Before actual operations began, however, Peace sold all his stock in John Peace Enterprises to the same individual who purchased his Desert Springs interests.   He remained with the company as a consultant, earning an annual salary of $60,000.

In the meantime, Desert Springs had become insolvent—and Lewis-Westco an unpaid, unsecured creditor.   Lewis-Westco sued Desert Springs and John Peace on the debt.   Peace was named on the theory he was the alter ego of Desert Springs.   Lewis-Westco prevailed against both the corporation and Peace.

The memorandum of intended decision includes an exhaustive analysis of the bases for the court's conclusion that Peace was the alter ego of Desert Springs.1  The court specifically found Desert Springs was not undercapitalized, did adhere to corporate formalities, and was insolvent when the opportunity to initiate the “Oklahoma Connection” presented itself.

Nevertheless, the court determined Desert Springs was just as able as John Peace Enterprises to take advantage of the “Oklahoma Connection.”   The court reasoned that Peace's diversion of the opportunity away from Desert Springs, to the detriment of Lewis-Westco, made him the alter ego of Desert Springs and personally liable for the corporate debt.   Only Peace appeals.

II

The so-called “corporate opportunity doctrine” traditionally applies in the case of a controlling corporate director or shareholder who diverts a corporate asset to himself to the detriment of the corporation and, consequently, the minority shareholders.   The notion has a much less defined application in the case of a corporate director or shareholder who usurps a corporate opportunity to the detriment of a corporate creditor.

Generally, it has not been held to apply in the latter situation unless the controlling shareholder of a debtor corporation owes a fiduciary duty to the corporate creditors.   And a longstanding rule is that no fiduciary relationship exists between corporate debtors and creditors.  (New v. New (1957) 148 Cal.App.2d 372, 382, 306 P.2d 987.)   While acknowledging this principle, the court, relying on Commons v. Schine (1973) 35 Cal.App.3d 141, 110 Cal.Rptr. 606, did find a fiduciary relationship between Peace and Lewis-Westco.   In our view, however, Commons and the cases it relies upon are inapt.

In Commons, one G. David Schine “dominated and controlled” two corporations and a limited partnership.   The first corporation was the sole general partner of the limited partnership.   Schine and his second corporation loaned funds to the limited partnership.   Before filing a bankruptcy petition, the limited partnership sold some real property and repaid a portion of the debt owed to Schine and his second corporation.   In reversing a judgment on the pleadings in Schine's favor (and thus determining no more than that the creditors had stated a cause of action), the Court of Appeal noted Schine could be “liable to those creditors for any preference he [took] for his benefit and to their disadvantage.”  (Id., at p. 145, 110 Cal.Rptr. 606.)   The appellate court also observed that the complaint alleged Schine was the alter ego of the creditor corporation and, consequently, was personally enriched by the breach of his fiduciary duty.  (Ibid.)

 The two early California Supreme Court cases cited in Commons are similar.   In both Title Ins. etc. Co. v. California Dev. Co. (1915) 171 Cal. 173, 152 P. 563 and Bonney v. Tilley (1895) 109 Cal. 346, 42 P. 439, the directors of insolvent corporations were also corporate creditors who attempted to apply scarce corporate assets to the repayment of their own loans while ignoring the claims of other creditors.  (Id., at p. 351, 42 P. 439.)   The rule in these cases is the same:  A corporate director of an insolvent corporation who is also a corporate creditor owes a fiduciary duty to other creditors.

 This case is distinguishable.   Although Peace was a Desert Springs creditor, he did not pay himself from corporate assets, unless an inchoate idea in the brain of a corporate officer of a defunct corporation can be considered a corporate opportunity.   We find no authority for that startling proposition.   The determination that Peace was the alter ego of Desert Springs was erroneous.

 Moreover, that finding would not itself have been determinative.   Another critical finding—and one which clearly could not be supported on this record—was that Peace was also the alter ego of John Peace Enterprises, the entity which allegedly usurped Desert Springs' corporate opportunity.  (See, e.g., Commons v. Schine, supra, 35 Cal.App.3d 141, 145, 110 Cal.Rptr. 606.)   If Peace was not the alter ego of that entity, he can hardly be charged with its alleged conduct in usurping an opportunity potentially available to Desert Springs.

The judgment is reversed;  and, since all other potential bases of Peace's personal liability have been foreclosed by the trial court's findings, the matter is remanded with directions to enter judgment for Peace.   Peace is entitled to costs on appeal.

FOOTNOTES

1.   Curiously, at oral argument counsel for Lewis-Westco interpreted the court's ruling as a judgment that Peace was not the alter ego of Desert Springs.   If that were correct, Lewis-Westco would have no basis to prevail on appeal.   We are satisfied counsel was in error.   The court did find, although erroneously, that Peace was the alter ego of Desert Springs.

CROSBY, Associate Justice.

TROTTER, P.J., and WALLIN, J., concur.