Dеfendant challenges the trial court’s findings and conclusions in sixteen questions
The trial court must identify the property owned, evaluate it, and order its distribution in an equitable distribution action pursuant to G.S. 50-20.
Capps v. Capps,
The finding and conclusion that neither party owned separate property constitutes error on the face of the record which we point out, despite the lack of an exception by either party, to guide the trial court upon remand. The evidence shows that plaintiff was a practicing dentist. G.S. 50-20(b)(2) classifies professional licenses as separate property. G.S. 50-20(c)(l) requires the triаl court to consider the property of each party when making a property division. Thus the trial court must identify plaintiffs dental license as separate property.
Poore v. Poore,
In the course of identifying and distributing the marital property, the trial court disregarded the corporate entity of B J & K Investments on the grounds that the corporation was a “sham.” The trial court then distributed thе assets of the corporation as marital property, but held defendant personally liable for $23,000 worth of notes and deeds of trust she had executed, apparently in the name of the corporation, after the parties separated. This part of the judgment constitutes reversible error because several of the reasons cited by the trial court for disregarding the corporate entity are unsupported by the evidence or are irrelevant.
As R. Robinson, North Carolina Corporation Law and Practice, § 2-12 (3d ed. 1983), observes,
Disrеgarding the corporate entity is an equitable remedy imposed in a particular case only to prevent or rectify an abuse of the corporate privilege or to avoid some other injustice. The remedy is exercised reluctantly and cautiously, and the burden of establishing a basis for invoking it rests on the party asserting the claim.
Robinson identifies four principal factors that support a decision to disregard a corporate entity: (1) inadequate cаpitalization; (2) noncompliance with corporate formalities; (3) complete domination
and control of the corporation so that it has no independent identity; and (4) excessive fragmentation of a single enterprise into separate corporations.
Id.
Other factors may exist, depending on the facts of the case.
See Glenn v. Wagner,
We fail to see how noncompliance with the corporate formalities mentioned above could justify disregarding the corporate entity in favor of plaintiff. Plaintiff acquiesced in the formation of the corporation. He knew what property belonged to the parties in their individual capacities and what property belonged to their corporation. As a direсtor, officer, and shareholder he bore responsibility for observance of corporate formalities along with defendant. The present case is thus distinguishable from the more typical situation where a person unassociated with a corporation and unaware of its existence may hold an agent of the corporation individually liable on the grounds that the plaintiff was led to believe he was dealing with the agent in an individual capacity rather than in a corporate capacity due to the noncompliance with corporate formalities.
See, e.g., Bone International, Inc. v. Brooks,
Furthermore, we do not see merit in plaintiffs contention that LaFayette Transportation Service is merely defendant’s alter ego. Plaintiffs evidencе establishes that defendant’s den is the corporate office, that defendant has not read the corporate by-laws, and that he is not familiar with the corporation’s tax matters. This is not sufficient evidence to show that the corporation was “ignored as a separate entity,” and it is insufficient to apply the alter ego doctrine and hold defendant personally liable.
Id.
at 333,
The trial court’s findings also refer to several instances of mismanagement and fraudulent activity by defendant as a basis for disregarding the corporate entity. These findings аre best categorized under the “principal factor” identified in Robinson, supra, as “complete domination and control of the corporation so that it has no independent identity.” The North Carolina Supreme Court has provided a broad rule applicable to this factor:
[W]hen . . . the corporation is so operated that it is a mere instrumentality or alter ego of the sole or dominant shareholder and a shield for his activities in violation of the declared public policy or statute of the State, the corporate entity will be disregarded and the corporation and the shareholder treated as one and the same person. . . . (Citations omitted.)
Henderson v. Finance Co.,
As one example of defendant’s domination through mismanagement, the trial court found that defendant had not fulfilled her fiduciary obligations with respect to accountability. The record is replete with evidence to support this finding. Generally,
The trial court also found that defendant mismanaged corporate property by allowing it to deteriorate and not realizing the full rental potential from it. Again, the trial court properly considered this as one of several factors demonstrating defendant’s domination of the corporation to thе detriment of plaintiff as a minority shareholder, although it is questionable whether this finding alone could justify piercing the corporate veil in equity since less drastic remedies are available at law under G.S. 55-125.1.
The trial court further found that, “Another piece of property on Buchanan Boulevard which had been acquired by the parties was somehow sold to the defendant’s mother for less than its fair market value without any authority whatsoever from plaintiff, either individually or as a principal of the corporation.” Presumably this piece of property had belonged to the corporation and was sold by defendant. Evidence in the record indicates this property was located at 811 Buchanan Boulevard, that it was sold to defendant’s mother at a foreclosure proceeding for $7,500, and that it was worth between $12,000 and $16,000. Neither this evidence nor the finding quoted above support the trial court’s decision to disregard the corporate entity. Nothing in the record shows that the sale was commercially unreasonable, that there was an usurpation of corporate opportunity, or that there was any overreaching on defendant’s part.
As a basis for declaring the corporation a sham, the trial court also found,
[Defendant fraudulently caused the corporation to issue a note and deed of trust for $15,000.00 against the beach property to her mother. She also caused the fraudulent issuance of a note and deed of trust to her mother for $8,000.00 against the Albemarle Street property. In both instances, the deeds of trust evidencing the indebtedness were signed by a Gail Wheeler. Gail Wheeler is a legal secretary who has never been an officer of BJK Corporation and has never had any interest of any nature whatsoever in said corporation. Neither of said transactions was authorized by the plaintiff or other officer of the so-called corporation, and both transactions were conducted entirely by defendant.
This finding is not supported by the evidence. No evidence appears in the record to show that the notes and deeds of trust defrauded the corporation or plaintiff. Plaintiff has not presented any evidence that the loan proceeds were diverted for improper purposes, that corporate assets were encumbered without good reason, or that the notes and deeds of trust in any way harmed the corporation. We also note for purposes of remand that the issue of defendant’s authority to execute the notes and deeds of trust on behalf of the corporation may depend on the bylaws or the business practice of the corporation.
See
G.S. 55-34(b);
Tuttle v. Building Corp.,
In sum, several of the reasons relied upon by the trial court to declare the corporation a sham were not supported by the evidence, or were not relevant. Other reasons were supported by the evidence. The cause is remanded for a new hearing and consideration of whether to disregard the corporate entity based on all the relevant factors properly supported by the evidence. In reconsidering this issue the trial court should determine whether defendant’s domination of the corporation facilitated wrongful acts which were detrimental to plaintiff, and which can only be corrected by making defendant liable in equity for the notes and deeds of trust she executed in the corporation’s name. The North Carolina
It should be remembered that the theory of liability under the instrumentality rule is an equitable doctrine. Its purpose is to place the burden of the loss upon the party who should be responsible. Focus is upon reality, not form, upon the operation of the corporation, and upon the defendant’s re lationship to that operation. It is not the presence or absence of any particular factor that is determinative. Rather, it is a combination of factors which, when taken together with an element of injustice or abuse of corporate privilege, suggest that the corporate entity attacked had “no separate mind, will or existence of its own” and was therefore the “mere instrumentality or tool” of the dominant [shareholder].
Id.
at 458,
If the trial court finds that the corporate entity must be disregarded, the real property belonging to the corporation will still be marital property since it was acquired by the parties during their marriage. G.S. 50-20(b)(l). The corporation may nonetheless remain liable to defendant’s mother on the notes and deeds of trust executed by defendant in thе name of the corporation after the parties separated if defendant’s mother is an innocent third party creditor and the provisions of G.S. 55-36(e) apply.
See American Clipper Corp. v. Howerton,
If the corporate entity is not disregarded, then the ownership interest of each party in the corporation would be marital property subject to equitable distribution. Because equitable distribution must be based on the net value of the parties’ ownership interests at the time of separation, G.S. 50-21(b) and
Alexander v. Alexander,
With respect to the notes and deeds of trust issued by defendant in the corporаtion’s name to defendant’s mother, the trial court’s finding that they are null and void and its conclusion that they must be cancelled are error. Defendant’s mother was not a party to this action, and the trial court cannot deprive her of rights as a creditor without affording her the due process rights to notice and an opportunity to be heard.
Defendant contends the trial court erred in not identifying and treating plaintiffs dental practice as marital property. We agreе. The office building and equipment used by plaintiff in his dental practice were accounted for in the judgment, but there was no finding as to the value of the intangible aspects of the practice. This Court recently held that “goodwill is an asset that must be valued and considered in determining the value of a professional practice for purposes of equitable distribution.”
Poore v. Poore, supra,
at 420-21,
Regarding the goodwill value of my professional practice, if I would sell my dental practice to another dentist coming into the practice, I don’t know, I doubt if anybody would buy it right now. I don’t have a patient list for somebody to buy hoping that they would keep half of them. I really don’t know.
However, there was evidence as to the recent earning history of the dental practice, and plaintiffs age, health, and professional experience. Moreover, the trial court has the authority under G.S. 8C-1, Rule 706 to appoint an expert witness to apprаise the'goodwill and other value of plaintiffs practice. Use of G.S. 8C-1, Rule 706 may be necessary in this type of case since the trial court must value the goodwill of a professional practice for purposes of equitable distribution, and valuation of goodwill “should be made
with the aid of expert testimony.”
Poore, supra,
at 421,
Defendant contends the trial court erred in dissolving a “writ of sequestration” in the parties’ marital home. In the 14 October 1983 order the trial court had granted a writ of possеssion in the family residence to the parties’ minor child until age 18. The equitable distribution order of 6 September 1984 terminated the writ of possession on the basis of the following finding of fact:
The Willowhaven home in which defendant and one 14-year-old child reside under a writ of possession, has 4,400 square feet. The monthly payments on the home are over $1,000.00. The date of separation equity in the home was $105,949.46, and the present equity is $116,501.27. It is neither reasonable nor feasible that this property cоntinue to be tied up under a writ possession for four more years for the benefit of one minor child.
The evidence does not support this finding with respect to the amount of the monthly house payment: plaintiff testified that the payment was $546 per month, while defendant introduced evidence that it was $568. Even if the $143 per month for taxes and insurance is added to these figures, they bear no reasonable relation to the $1,000 per month finding of the trial court.
More importantly, the trial court erred in altering the child support provision of a previous order in its equitable distribution judgment. The writ of possession was a child support provision intended to benefit the parties’ minor child. A child support order may be modified or vacated only
after
an equitable distribution. G.S. 50-20(f);
Capps v. Capps,
Finally, G.S. 50-20(f) provides that an order for child support, such as the writ of possession in the present case, may be modified or vacated after an equitable distribution pursuant to G.S. 50-13.7. G.S. 50-13.7 requires that there be a substantial change of circumstances before a child support order may be modified. The judgment terminating the writ of possession is not supported by any findings as to a change of circumstances, and therefore must be vacated.
Defendant next contends that the trial court erred in dividing the marital property without considering and assigning liability for all the parties’ marital debts. G.S. 50-20(c)(l) states that the court shall consider the liabilities of each party when making an equitable distribution. Without deciding
Defendant assigns error to the trial court’s decision holding her responsible for the $23,000 debt on the notes and deeds of trust to her mother, to the unfairness of the division of the parties’ marital property, and to the form of the judgment. We do not address these issues since they are unlikely to arise in the same manner on remand.
Defendant contends the trial court improperly considered marital fault because one finding states that the trial court considered the pleadings, including a complaint in a companion case that alleged fault on defendant’s part as a basis for divorce. We find no error. The parties stipulated that the cases could be consolidated, so the pleadings were properly before the trial court. The fact that it read the pleadings alleging marital fault in no way means that it found that allegation credible or relied upon it. Nothing in the findings or conclusions, and no comment by the trial сourt in the record, indicates that it relied upon marital fault as a factor in distributing the marital property.
Defendant excepted to the following finding:
Throughout the marriage, each of the parties participated in both the rearing of the family and the keeping of the home. Plaintiffs participation in child-rearing and home-keeping was in addition to his efforts in the practice of dentistry which led to the acquisition of practically all of the marital assets.
Defendant maintains that this finding erroneously credits plaintiff with рroviding the marital property when in fact the earnings from his dental practice, with which the parties obtained their property, were themselves marital property. This argument misconstrues the finding. The finding, which is supported by evidence in the record, focuses on plaintiffs greater contributions to the marriage. Under G.S. 50-20(c)(12) it is certainly within the trial court’s equitable powers to consider that one spouse worked outside the home and participated in child-rearing and homekeеping while the other spouse only participated in child-rearing and homekeeping. See also G.S. 50-20(c)(6), which requires the trial court to consider such efforts by a spouse when title to marital property is not in that spouse’s name.
Defendant objects to the part of the judgment ordering her “to cooperate immediately in the furnishing of information and filing of tax returns for 1981 and 1982.” She claims the trial court cannot force her to sign a joint return with plaintiff. She also argues that the findings to the effect that plaintiffs tax burden has been increased by her failure to provide information about the family corporation are not based on competent evidence. We disagree. First of all, we interpret the trial court’s order to mean that defendant must provide all information she has that will assist plaintiff in filing his 1981 and 1982 tax returns, but not that defendant must file a joint return with plaintiff. Second, there is sufficient competent testimony from plaintiff to support the findings that defendant’s refusal to share certain accounting information has prevented plаintiff from reducing his tax liability.
Defendant lastly contends that the trial court erred in forbidding either party from receiving a commission or broker’s fee on the sale of the marital home. This order is directed primarily at defendant since she is a licensed real estate broker. We find no error in this part of the judgment. If the parties can sell the home by themselves, without paying a real estate commission, then the net proceeds of sale will be greater and there will be more marital property for equitable distribution. This is an equitable factor that the trial court may consider under G.S. 50-20(c)(12).