BW Acceptance Corporation v. Spencer

149 S.E.2d 570 (1966) 268 N.C. 1

B-W ACCEPTANCE CORPORATION, Plaintiff,
v.
John K. SPENCER, Jr., and wife, Ann Lanier Spencer, Defendants, and
Norge Sales Corporation, Forrest Sam Rogers, Southeast Machinery Company and Borg-Warner Corporation, Additional Defendants.

No. 284.

Supreme Court of North Carolina.

August 26, 1966.

H. Glenn Pettyjohn, Winston-Salem, for original defendants Spencer, appellants.

Louis A. Bledsoe, Jr., and Joseph A. Moretz, Charlotte, for plaintiff and additional defendants Norge Sales Corp., and Borg-Warner Corp., appellees.

PARKER, Chief Justice.

G.S. § 1-14 provides "[a]n action is commenced as to each defendant when the summons is issued against him." The period prescribed for the commencement of the counterclaim for relief on the ground of fraud is three years after the cause of action has accrued. The action "shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud." G.S. § 1-15; G.S. § 1-46; G.S. § 1-52(9). The authorities are to the effect that in an action grounded on fraud, the statute of limitations begins to run from the discovery of the fraud or from the time it should have been discovered in the exercise of reasonable diligence. Brooks v. Ervin Construction Co., 253 N.C. 214, 116 S.E.2d 454; Wimberly v. Washington Furniture Stores, 216 N.C. 732, 6 S.E.2d 512. The period prescribed for the commencement of the counterclaim, after the cause of action has accrued, for relief on the ground of breach of warranties is three years. G.S. § 1-15; G.S. § 1-46; G.S. § 1-52(1).

Generally, a cause of action accrues to an injured party so as to start the running of the statute of limitations, when he is at liberty to sue, being at the time under no disability. City of Washington v. Bonner, 203 N.C. 250, 165 S.E. 683; Winstead v. Acme Manufacturing Co., 207 N.C. 110, 176 S.E. 304; Thurston Motor Lines v. General Motors Corp., 258 N.C. 323, 128 S.E.2d 413. When the statute of limitations begins to run, it continues until stopped by appropriate judicial process. Speas v. Ford, 253 N.C. 770, 117 S.E.2d 784.

The burden was on the original defendants to show that they instituted the counterclaim to recover $50,000 damages from Norge, Rogers, Southeast, plaintiff, and Borg, jointly and severally, within the time prescribed by the statute of limitations. Swartzberg v. Reserve Life Insurance Co., 252 N.C. 150, 113 S.E.2d 270.

Original defendants' argument in brief summary is as follows: (1) Plaintiff, Norge, and Borg are actually a single entity, that the corporate structure should be disregarded, and that a counterclaim against one of them is effective against all; (2) the statute of limitations had not run against their counterclaim when plaintiff instituted this action, and the institution of this action tolled the running of the statute against plaintiff's alter ego Norge, and plaintiff's alter ego Borg; and (3) if a counterclaim or set-off is not barred at the commencement of the action in which it is pleaded, it does not become so afterward during the pendency of the action.

Ordinarily, a corporation retains its separate and distinct identity where its stock is owned partly or entirely by another corporation. 18 C.J.S. Corporations § 5j, p. 375. See Troy Lumber Co. v. Hunt, 251 N.C. 624, 112 S.E.2d 132, 81 A.L.R. 2d 1317.

This is said in 19 Am.Jur.2d, Corporations, § 717:

"The fact that a corporation owns the controlling stock of another does not destroy the identity of the latter as a distinct legal entity; and, ordinarily, no liability may be imposed upon the latter for the torts of the subsidiary corporation. The facts that corporations have common officers, occupy common offices, and to a certain extent transact business for each other do not make the one corporation liable for the action of the other, except upon established legal principles. However, a corporation which exercises actual control over another, operating the latter as a mere instrumentality or tool, is liable for the torts of the corporation thus controlled. In such instances, the separate identities of parent and subsidiary or affiliated corporations may be disregarded."

In Whitehurst v. FCX Fruit and Vegetable Service, 224 N.C. 628, 32 S.E.2d 34, it was held that the mere fact that one corporation owns all the capital stock of another corporation, and the further fact that the members of the board of directors of both corporations are the same, nothing else appearing, is not sufficient to render the parent corporation liable for the contracts of its subsidiary. In order to establish liability on the part of the parent corporation on such contracts, there must be additional circumstances showing fraud, actual or constructive, or agency.

In 1 Fletcher, Cyclopedia Corporations, perm. ed., p. 204 et seq., it is said: "The control necessary to invoke what is sometimes called the `instrumentality rule' is not mere majority or complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is but a business conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place in order that the entities be disregarded at the time."

The clearest statement we have found with respect to this area of the law is in Lowendahl v. Baltimore & O. R. Co., 247 A.D. 144, 287 N.Y.S. 62, 76, affirmed 272 N.Y. 360, 6 N.E.2d 56, where the Court said:

"Restating the instrumentality rule, we may say that in any case, except express agency, estoppel, or direct tort, three elements must be proved:

"`(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; and

"`(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of plaintiff's legal rights; and

"`(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.' See Powell `Parent and Subsidiary Corporations,' chapters I to VI, passim, and numerous cases cited."

Quoted with approval in National Bond Finance Co. v. General Motors Corp., 238 F. Supp. 248 (D.C.1964), affirmed 8 Cir., 341 F.2d 1022. See also Fisser v. International Bank, 282 F.2d 231 (2 Cir.1960).

Original defendants allege in their counterclaim that the false warranties and false representations inducing the sale of the dry cleaners and washers to them were made to them by Southeast and Rogers, who held themselves out to original defendants as agents and representatives of Norge, and were permitted by Norge to do so. They further allege that plaintiff is an alter ego of Borg and that Norge is an alter ego of Borg. Original defendants' counterclaim alleges conclusions, but it does not allege facts to show that Borg had complete domination not only of the finances but of policy and business practice of plaintiff and Norge in respect to the transaction attacked so that the corporate entity of plaintiff and Norge had at the time no separate mind, will or existence of their own. A careful examination of the whole of original defendants' counterclaim cannot justify a disregard of the corporate identity of plaintiff and of Norge and of Borg under either the general or specific tests announced by the cases and textbooks as set forth above. Original defendants' argument that plaintiff, Norge and Borg are actually a single entity, that the corporate structure should be disregarded, and that a counterclaim against one of them is effective against all, and that the institution of this action tolled the running of the statute against plaintiff's alter ego Norge and plaintiff's alter ego Borg is unsound.

Plaintiff's action was commenced by the issuance of summons on 27 November 1963. On 4 December 1963 there was service on original defendants. On 5 March 1964 Norge, Southeast, and Rogers, on motion of the original defendants, were made additional defendants by the clerk of the Superior Court of Mecklenburg County, and the secretary or assistant secretary of Norge and Southeast, and Rogers individually were ordered to appear before a commissioner on the _____ day of the year 1964 as subpoenaed, for the purpose of being examined in this action in the manner prescribed by Chapter 1, Article 46, of the General Statutes of North Carolina, and the said secretary or assistant secretary of Norge and Rogers individually were ordered to bring with them the minute books of the corporations and paper writings containing the written contractual arrangements between themselves and between themselves and plaintiff. There is nothing in the record to show that any summons was ever issued against Norge, Southeast, and Rogers. G.S. § 1-14. "Due process of law" requires that a defendant shall be properly notified of the proceeding against him, and have an opportunity to be present and to be heard. "When the defendant has been duly served with summons personally within the State, or has accepted service or has voluntarily appeared in court, jurisdiction over the person exists and the court may proceed to render a personal judgment against the defendant. If there has been no service of summons and no waiver by appearance, the court has no jurisdiction and any judgment rendered would be void." 1 McIntosh, N. C. Practice and Procedure, 2d ed., § 933(1). When Norge under order of the court appeared for examination by original defendants to obtain information for original defendants to file an answer and counterclaim, that did not amount to a waiver of service of summons by appearance, because G.S. § 1-103 provides a voluntary appearance of defendant is equivalent to personal service of summons. The only summons in this case in the record before us against Borg is one issued on 1 February 1965 by the deputy clerk of the Superior Court of Forsyth County, which commands Borg through its duly appointed process agent in Durham, North Carolina, to appear before the undersigned clerk at his office in the courthouse in Winston-Salem, North Carolina, and file written answer to the complaint in this action within 30 days after the date of service of this summons. Such summons is, to say the least, highly irregular. Original defendants' answer and counterclaim to recover $50,000 damages, by reason of breach of warranties and fraudulent representations, from plaintiff, Borg, Norge, Southeast, and Rogers, jointly and severally, was verified on 30 January 1965, filed on 1 February 1965, and in this pleading original defendants moved that Borg be made an additional defendant. Borg was made an additional defendant on 1 February 1965. The original defendants' answer and counterclaim was filed in the office of the clerk of the Superior Court of Mecklenburg County on 1 February 1965. Norge's reply to original defendants' answer and counterclaim was verified on 18 February 1965. There is nothing in the record to show when it was filed in court. Borg's reply to original defendants' answer and counterclaim was verified on 18 February 1965. There is nothing in the record to show when it was filed in court. The same is true in respect to plaintiff's reply. The original defendants' answer and counterclaim clearly and affirmatively shows that during the months of March and April 1961 they had actual knowledge of the alleged breach of warranties and fraudulent representations in the sale of the dry cleaners and washers to them; that their spare parts account between February 1961 and December 1961 to purchase replacements for defective parts in the dry cleaners amounted to $2,487.24; that they made payments upon their note given for the dry cleaners and washers though they had actual knowledge of breach of warranties and fraudulent representations; and that they notified Norge and Southeast that the machines were defective and did not comply with their warranties and representations, and their expenses in attempting to use the machines were prohibitive, and that they were in danger of losing all their business.

Original defendants had actual knowledge of the alleged false representations and of the alleged breach of warranties in March and April, 1961, and at that time the statute of limitations began to run against them as to their alleged counterclaim for damages against plaintiff, Norge, and Borg. This was more than three years prior to original defendants' filing their answer and counterclaim for damages on 1 February 1965; more than three years prior to the date when Norge, who had not been served with proper process, filed a reply to their answer and counterclaim, which reply was verified by Norge on 18 February 1965 which voluntarily brought Norge into this action; more than three years prior to the irregular process issued against Borg on 1 February 1965 ordering it to appear in the office of the clerk of the Superior Court of Forsyth County and answer the complaint in this action; and more than three years prior to the date when Borg, who had not been served with proper process, filed a reply to original defendants' answer and counterclaim. Since original defendants' answer and counterclaim was not filed until 1 February 1965, we assume that Norge's and Borg's replies were not filed before they were verified, and certainly they were not filed before original defendants filed their answer and counterclaim. Since the plea of the three-year statute of limitations by Norge and Borg is clearly established by facts alleged in the original defendants' answer and counterclaim, it follows that the judgments on the pleadings in favor of Norge and Borg are correct. Our view finds support in Speas v. Ford, supra. In that case, where defendant Ford in his answer alleges that he refused to comply with his contract on the contractual date because of his discovery of fraudulent representations inducing his execution of the contract, and files a cross-action against plaintiffs and the additional defendants for damages for such fraud more than three years after the contractual date, and when each of the parties thus brought into the action denied the alleged fraud and pleaded the three-year statute of limitations, judgment dismissing the cross-action as to the additional defendants thus brought in on original defendant's motion based upon their plea of the three-year statute of limitations was held without error.

In Erickson v. Starling, 235 N.C. 643, 71 S.E.2d 384, it is said:

"A court of record has inherent power to render judgment on the pleadings where the facts shown and admitted by the pleadings entitle a party to such judgment. [Citing authority.]

"A motion for judgment on the pleadings is in the nature of a demurrer. [Citing authority.] Its function is to raise this issue of law: Whether the matters set up in the pleading of an opposing party are sufficient in law to constitute a cause of action or a defense. [Citing authority.]

* * * * * *

"A motion for judgment on the pleadings is allowable only where the pleading of the opposite party is so fatally deficient in substance as to present no material issue of fact."

Original defendants assert in their counterclaim that Rogers and Southeast by false warranties and false representations—which are alleged in great detail in the counterclaim—induced them to purchase the dry cleaners and washers, and to execute the note and conditional sales contract plaintiff sues on in this action. They further allege that Southeast and Rogers were agents of Norge. We have held that neither plaintiff nor Norge is an alter ego of Borg. There is no allegation in original defendants' answer and counterclaim that plaintiff knew anything about the alleged false warranties and false representations or participated in them in any way. Neither does it allege any facts to show that plaintiff was responsible legally for the alleged torts of Southeast and Rogers. Original defendants' counterclaim is so fatally deficient in substance as against plaintiff that it presents no material issue of fact to support a recovery from plaintiff of damages in the amount of $50,000, or to operate as a set-off against plaintiff's claim. Consequently, it is subject to a judgment on the pleadings. The judgment on the pleadings should have been granted on the ground that the original defendants' counterclaim is fatally deficient in substance. Therefore, the granting of the judgment on the pleadings in favor of plaintiff was correct, though it was placed on the wrong ground. State ex rel. East Lenoir Sanitary District v. City of Lenoir, 249 N.C. 96, 105 S.E.2d 411; Hayes v. City of Wilmington, 243 N.C. 525, 91 S.E.2d 673.

Original defendants in their brief contend that equity should prevent appellees from pleading the statute of limitations as a defense against their counterclaim. This contention is not tenable. In the first place, defendants have not pleaded that the appellees are estopped to plead the statute of limitations, 2 Strong's N.C. Index, Estoppel, § 6, and second, "[e]quity will not afford relief to those who sleep upon their rights, or whose condition is traceable to that want of diligence which may fairly be expected from a reasonable and prudent man." Coppersmith & Sons v. Aetna Insurance Co., 222 N.C. 14, 21 S.E.2d 838. On a motion for judgment on the pleadings, we consider the pleadings, and nothing else. Consequently, the detailed facts set forth in original defendants' brief as to why appellees should be estopped to plead the statute of limitations cannot and will not be considered by the Court in considering the motion for judgment on the pleadings. Erickson v. Starling, supra.

All three judgments below are

Affirmed.

PLESS, J., took no part in the consideration or decision of this case.