Theberge v. Darbro, Inc.

684 A.2d 1298 (Me. 1996)

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Nature of the Case

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Facts

P owned seven rental properties. P transferred to the Worden Group the seven properties for a total of $900,000 and the Worden Group executed a promissory note payable to Ps for $180,000 secured by a mortgage on the property. D entered into an agreement with the Worden Group for the sale and purchase of the properties for $970,000. Prior to the closing, the Worden Group was informed that Horton Street Associates, a newly formed corporation, and D, was to be the purchaser of the properties. To finance the purchase of the seven buildings, Horton Street (1) executed a promissory note to Casco Northern Bank in the amount of $720,000 secured by a first mortgage on the premises; (2) assumed the $180,000 promissory note to Ps, secured by a second mortgage on the premises; (3) executed a promissory note to Casco Northern for $120,000, secured by a third mortgage on the premises, with Albert as co-maker; and (4) executed a $20,000 note payable to the Worden Group with Albert as co-maker. Ps explicitly refused to release the Worden Group from liability. Horton Street quickly began to lose money. Albert loaned money to D which in turn loaned the money to Horton Street. D loaned additional monies to Horton Street. Horton Street sold two of the seven buildings. P were paid to partially discharge the second mortgage, and the third mortgage to Casco Northern was retired. The net balance was applied to reduce the Casco Northern first mortgage. By May 1989, D had loaned to Horton Street approximately $225,000 and had received only 'a couple small payments.' Albert then informed Mitchell that D would not loan additional monies to Horton Street. Albert also advised P that he could not make any further payments and that he wished to negotiate 'a solution.' A deal could not be reached. Casco Northern sent a letter to Horton Street demanding payment of the $682,049.47 then due on the promissory note secured by the first mortgage, together with demands to D and Albert for $450,000 and $330,000, the respective amount each had guaranteed. Pursuant to the terms of an agreement dated November 17, 1989, Casco Northern agreed to loan D $700,000 secured by mortgages on Albert's real property, and the assignment by Albert of a $200,000 certificate of deposit, 1000 shares of Coca-Cola common stock, and his municipal bonds. Casco Northern assigned to Albert, or his nominee, the existing Horton Street promissory note and mortgage on the condition that foreclosure proceedings on that mortgage be commenced within 30 days of the assignment. Pursuant to this agreement, Albert assigned the promissory note and mortgage to D which instituted foreclosure proceedings resulting in the sale of the remaining five buildings at public auction for $320,000. The P second mortgage was, accordingly, extinguished. P and the Worden Group sued D, Albert Small and Mitchell Small, seeking a judgment obligating them to pay the Worden Group any amounts they were obligated to pay P by reason of a default on the August 19, 1986, promissory note. P alleged that Horton Street is the alter ego of D, Albert and Mitchell; the sale to Horton Street was based on representations made to the Worden Group that Albert would 'stand behind' the P mortgage; and Ds manipulated the application of the proceeds from the sale of the two buildings prior to the foreclosure sale of the remaining five buildings in an effort to obtain release of their personal guarantees and to avoid liability on the P mortgage. The court found that Ps failed to establish that D acted illegally or fraudulently and also found that none of the defendants had guaranteed the payment of the P promissory note. The court found that Horton Street had no separate offices, utilities or employees; maintained no corporate records or books; co-mingled its business with that of the other defendants; and failed to conduct formal corporate meetings. Both Horton Street and D were, in essence, Albert because Albert 'unilaterally assumed full control of Horton Street on his own initiative' and acted to Ds' own benefit and the detriment of the Ps. The court concluded that 'notions of equitable estoppel ought to preclude' Ds from asserting Horton Street's corporate status as a defense and that Ds were liable to Ps for the outstanding balance on the P promissory note. Ds appealed.