Nursing Home Building Corporation v. DeHart

Washington Court of Appeals · Corporations

Corporationsclose corporationsshareholder ratificationbusiness judgment rulecorporate assetsclosely held corporationsole shareholderratification

Facts

Clausing and Deer sold all 3,000 shares of the nursing-home corporation to the DeHarts under an installment stock purchase contract. During the DeHarts' management, some installment payments to Clausing and Deer were made from corporate funds, and a corporate receivable known as the Southside Receivable was transferred to Clausing and Deer pursuant to the stock purchase contract; these transactions were approved or ratified by the relevant shareholders. The corporation also challenged management fees, fringe benefits, and other expenses incurred by the DeHarts, as well as the DeHarts' failure to pay federal withholding and social security taxes when the business was short of cash. After trial, the court found only $9,914.85 was used for purely personal purposes unrelated to corporate benefit and denied recovery on the remaining challenged amounts.

Issue

May a corporation recover from its former sole shareholders for payments of corporate funds and transfer of a corporate asset used in connection with the shareholders' personal stock-purchase obligation, and for management expenditures and unpaid tax amounts, when the transactions were unanimously approved or ratified by shareholders and the challenged management decisions were made in good faith? More specifically, do those uses of corporate assets constitute actionable misappropriation on these facts?

Rule

Limitations on corporate action may be waived by informed and unanimous shareholder consent, and if all stockholders consent and creditors are not harmed, officers in a closely held corporation may appropriate corporate assets without corporate recovery for misappropriation. Separately, the business judgment rule shields corporate management from liability for transactions within corporate power and managerial authority when there is a reasonable basis to indicate the decision was made in good faith; courts will not substitute their judgment absent bad faith or fraud.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Maple Glen Hospice, Inc., a closely held corporation in Spokane, has two shareholders, Elena Ruiz and Jonah Pike, who also serve as its only directors. With full knowledge of the facts, both approve using corporate cash to satisfy Elena's personal note owed to the former owner from whom they bought Elena's shares. At the time of the payment, the corporation is current on all debts, and no creditor is prejudiced.

If the corporation later sues Elena for misappropriation after control changes hands, which is the strongest argument against recovery?

Explanation. The majority rule is that limitations on corporate action may be waived by informed and unanimous shareholder consent, and if all stockholders consent and creditors are not harmed, officers in a closely held corporation may appropriate corporate assets without corporate recovery for misappropriation. The absence of creditor impairment is essential. (Derived from Nursing Home Building Corporation v. DeHart (n.d.).)