Case Title: Commonwealth Transportation Comm'r v. Matyiko

Citation: 

Docket Number: 

State: virginia

Court: Virginia Supreme Court

Date: 1997-01-10T00:00:00Z

Document:
Present:  All the Justices 
 
COMMONWEALTH TRANSPORTATION COMMISSIONER 
                                         OPINION BY 
v.  Record No. 960433 
CHIEF JUSTICE HARRY L. CARRICO 
                                      January 10, 1997  
JAMES E. MATYIKO, ET AL. 
 
 
FROM THE CIRCUIT COURT OF CHESTERFIELD COUNTY 
 
Herbert C. Gill, Jr., Judge 
 
 
Trial Court Proceedings  
 
In 
the 
aftermath 
of 
a 
condemnation 
proceeding, 
the 
Commonwealth Transportation Commissioner (the Commissioner) filed 
in the court below a motion for judgment against James E. Matyiko, 
John Matyiko, Jr., and Jerry B. Matyiko (the defendants), alleging 
that they were former directors of Matyiko Investment Corp. (the 
Corporation), which had been dissolved, and that they were jointly 
and severally liable for an unlawful distribution of assets under 
Code § 13.1-692.
1  The Commissioner sought recovery of $137,965, 
representing the excess resulting when commissioners in the 
condemnation proceeding awarded less than the amount previously 
paid the Corporation pursuant to a certificate of take.   
 
In a bench trial, the trial court entered judgment in favor 
of the defendants.  We awarded the Commissioner this appeal. 
 
Factual Background
                     
     
1Code § 13.1-692 provides in pertinent part as follows: 
 
 
Liability for unlawful distribution. -- A.  Unless he 
complies with the applicable standards of conduct described 
in § 13.1-690, a director who votes for or assents to a 
distribution made in violation of this chapter . . . is 
personally liable to the corporation and its creditors for 
the amount of the distribution that exceeds what could have 
been distributed without violating this chapter . . . . 
 
In 1985, the Corporation, which was closely held, owned a 
99.52-acre tract of land in Chesterfield County, constituting the 
Corporation's only asset.  On February 13, 1985, William S. Lee, 
right-of-way 
agent 
for 
the 
Department 
of 
Highways 
and 
Transportation, offered the Corporation $327,140 for an 8.05-acre 
parcel needed for highway construction, including $221,375 as the 
value of the needed land and $105,765 as damages to the 91.47-acre 
residue. 
 
The Corporation rejected the Highway Department's offer.  On 
March 28, 1985, the Commissioner filed a certificate of take in 
the Clerk's Office of the Circuit Court of Chesterfield County, 
certifying that the amount of $327,140 was estimated to be the 
fair value of the 8.05-acre parcel taken plus damages to the 
residue and that this amount would be paid by the Treasurer of 
Virginia pursuant to the order of the court.  
 
On April 15, 1985, the Corporation entered into a contract 
with the Midlothian Company for the sale and purchase of the 
99.52-acre tract, less that portion covered by the Commissioner's 
certificate of take, for a price of $32,000 per acre.  On April 
19, 1985, the Corporation's directors and stockholders voted to 
dissolve the Corporation and distribute all its assets.  The 
Corporation directed its counsel, N. Leslie Saunders, Jr., to file 
a statement of intent to dissolve the Corporation with the State 
Corporation Commission, in accordance with the provisions of Code 
§ 13.1-81.
2  Prepared by a member of Saunders' law firm, the 
                     
     
2Code § 13.1-81 has since been repealed.  See present 
Code § 13.1-743 (1993 Repl. Vol.), which requires the filing 
of articles of dissolution. 
statement of intent to dissolve was filed on June 4, 1985.  It 
listed Joseph G. Matyiko, Sr., James E. Matyiko, John Matyiko, 
Jr., Jerry B. Matyiko, and Saunders as directors of the 
Corporation. 
 
Some time prior to May 13, 1985, the Corporation filed a 
petition with the trial court for leave to draw down the sum of 
$327,140, set forth in the certificate of take as the estimated 
value of the 8.05-acre parcel and damages to the residue.  An 
order was entered on May 13 directing payment of $327,140 to 
Saunders on behalf of the Corporation.   
 
The check for the "drawdown" was issued to the Corporation on 
June 10, 1985.  Shortly thereafter, the Corporation disbursed to 
its shareholders all its assets, including the proceeds of both 
the "drawdown" and the sale of the 91.47-acre residue.  Joseph 
Matyiko held 45% of the Corporation's stock, James, John, and 
Jerry Matyiko each held 15%, and Saunders held 10%.  In the 
disbursement, Joseph Matyiko received $1,376,869, James, John, and 
Jerry Matyiko each received $458,956, and Saunders received 
$305,970. 
 
Saunders had received his stock in return for his agreement 
to 
represent 
the 
Corporation 
in 
matters 
involving 
the 
Corporation's 
land. 
 
Saunders 
and 
Richard 
Paul 
Pontynen 
(Pontynen), 
the 
Corporation's 
certified 
public 
accountant, 
recommended the dissolution in order to take advantage of § 337 of 
the Internal Revenue Code and avoid double taxation of the gain 
derived from sale of the Corporation's land.  According to 
Pontynen's testimony, § 337(a) allows such tax avoidance 
 
[i]f within a 12 month period beginning on the date on 
which 
a 
corporation 
adopts 
a 
plan 
of 
complete 
liquidation, all of the assets of a corporation are 
distributed in complete liquidation, less assets to meet 
claims, then no gain or loss should be recognized from 
such corporation from sale of or exchange by it of 
property within such 12 month period. 
 
In addition, Saunders expressed the opinion that there was "no 
chance 
of 
. . . 
getting 
less 
than 
the 
certificate 
in 
a 
condemnation case and . . . not . . . any risk in dissolving the 
Corporation."  Saunders also opined that he "thought they were 
looking realistically at [$]400,000" as a condemnation award. 
 
After the Corporation distributed its assets, Saunders 
continued to negotiate with Lee, the right-of-way agent for the 
Department of Highways, in an effort to settle the condemnation 
case.  The amount initially offered by the Highway Department was 
based upon an appraisal of $27,500 per acre for the Corporation's 
land.  When the Corporation contracted to sell the residue for 
$32,000 per acre, or $4,500 per acre more than the Department's 
initial appraisal, the Department took the position that the value 
of the Corporation's land had been enhanced by the highway 
project, rather than damaged.  Accordingly, Lee advised Saunders 
that the Department was willing to offer no more than $350,000 to 
settle the case.   
 
The $350,000 offer was rejected, and Saunders ceased 
representing the Corporation.  With different counsel representing 
the Corporation, the condemnation case went to trial before 
commissioners in March 1993, resulting in an award of $189,175, or 
$23,500 per acre, with no damages to the residue.   
 
By order dated March 10, 1994, the trial court confirmed the 
condemnation commissioners' report and also entered judgment in 
favor of the Commissioner against the Corporation in the amount of 
$137,965, plus interest, representing the excess of the amount 
previously drawn down by the Corporation over the amount of the 
condemnation award.  In the meantime, the Corporation had been 
terminated by order of the State Corporation Commission entered 
April 15, 1986, and, therefore, there were no corporate assets 
remaining to satisfy the judgment.  The Commissioner then filed 
the present motion for judgment against James, John, and Jerry 
Matyiko seeking to have them held personally liable for the amount 
of the excess.
3 
 
 
Applicable Statutory Provisions
 
As noted earlier, Code § 13.1-692(A) provides that "[u]nless 
he complies with the applicable standards of conduct described in 
§ 13.1-690, a director who votes for or assents to a distribution 
made in violation of [Chapter 9 of Title 13 of the Code] is 
personally liable to the corporation and its creditors for the 
amount of the distribution that exceeds what could have been 
distributed without violating [Chapter 9]."  (Emphasis added.)  
Under Code § 13.1-653, a violation of Chapter 9 may occur if, as a 
result of distributions made to shareholders, the corporation 
                     
     
3As noted previously in the text, the Corporation's 
statement of intent to dissolve listed Joseph Matyiko, James 
Matyiko, John Matyiko, Jerry Matyiko, and Leslie Saunders as 
directors.  However, Joseph Matyiko and Saunders were not 
named as defendants to the motion for judgment in which the 
Commissioner sought to recover the excess amount paid the 
Corporation in the "drawdown" order.  We are told in the 
Commissioner's brief that Joseph Matyiko filed for 
bankruptcy and received a discharge with respect to the 
Commissioner's claim against him. 
"would not be able to pay its debts as they become due," Code 
§ 13.1-653(C)(1), or its "total assets would be less than the sum 
of its total liabilities," Code § 13.1-653(C)(2). 
 
However, because Code § 13.1-692(A) conditions its imposition 
of personal liability upon a director's failure to comply with the 
standards of conduct described in Code § 13.1-690, a "safe harbor" 
is provided to a director who does comply with those standards.  
See Curley v. Dahlgren Chrysler-Plymouth Dodge, Inc., 245 Va. 429, 
433, 429 S.E.2d 221, 223 (1993).  Code § 13.1-690, embodying 
Virginia's "Business Judgment Rule," provides in pertinent part as 
follows: 
 
  A.  A director shall discharge his duties as a 
director . . . in accordance with his good faith 
business 
judgment 
of 
the 
best 
interests 
of 
the 
corporation.  
 
  
 
  B.  Unless he has knowledge or information concerning 
the matter in question that makes reliance unwarranted, 
a director is entitled to rely on information, opinions, 
reports or statements, including financial statements 
and other financial data, if prepared or presented by:  
 
 
. . . ; 
 
 
  2.  Legal counsel, public accountants, or other 
persons as to matters the director believes, in good 
faith, are within the person's professional or expert 
competence; 
 
 
. . . . 
 
 
  C.  A director is not liable for any action taken as a 
director, or any failure to take any action, if he 
performed the duties of his office in compliance with 
this section. 
 
 
  D.  A person alleging a violation of this section has 
the burden of proving the violation. 
 
 
Discussion
 
In finding for the defendants, the trial court reviewed the 
evidence and applicable statutory provisions and stated in a 
letter opinion, as follows: 
 
 
Defendants obtained legal and accounting advice 
with regard to dissolution of the corporation.  They 
acted in good faith upon the recommendations of an 
attorney 
skilled 
in 
corporate, 
real 
estate 
and 
condemnation matters and upon the recommendations of a 
certified public accountant skilled in taxation matters. 
 Consequently, 
the 
Defendants 
are 
protected 
from 
liability for the debts of [the Corporation]. 
 
 
Quoting Quantum Development Co. v. Luckett, 242 Va. 159, 161, 
409 S.E.2d 121, 122 (1991), the defendants contend that a "'trial 
court's findings of fact are binding upon [this Court] unless they 
are plainly wrong or unsupported by the evidence.'"  Here, the 
defendants maintain, "the trial court's findings of fact that the 
directors 'acted in good faith upon the recommendations of an 
attorney . . . and . . . a certified public accountant' . . . 
[are] clearly supported by the evidence." 
 
However, we are of opinion that resolution of one of the 
assignments of error made by the Commissioner is dispositive as a 
matter of law of the question whether the defendants were entitled 
to rely upon the recommendations of the Corporation's attorney and 
accountant.  That assignment states: 
 
The trial court erred by ruling that a corporation's 
directors, 
who 
made 
large 
cash 
distributions 
to 
themselves and to the corporation's attorney, were 
entitled to rely on professional advice to make those 
distributions even though the funds the corporation had 
received from [the Commissioner] were, by order of the 
court endorsed by the corporation's attorney, subject to 
being 
refunded 
to 
[the 
Commissioner] 
upon 
final 
resolution of the condemnation case. 
 
 
With respect to this assignment of error, the Commissioner 
points to the following paragraph of the "drawdown" order: 
 
 
It is further ORDERED that in the event of an award 
in a condemnation proceeding being of a lesser amount 
than that deposited with the Court, the State Highway 
and 
Transportation 
Commissioner 
of 
Virginia 
shall 
receive the amount of such excess, and if any person has 
been paid a greater sum than that to which it is 
entitled as determined by the award, judgment shall be 
entered 
for 
the 
State 
Highway 
and 
Transportation 
Commissioner against such person for the amount of such 
excess. 
 
 
The wording of the order tracks the language of Code § 33.1-
128, which provides, in pertinent part: 
 
In the event of an award in a condemnation proceeding 
being of a lesser amount than that deposited with the 
court, the Commissioner shall recover the amount of such 
excess and, if any person has been paid a greater sum 
than that to which he is entitled as determined by the 
award, judgment shall be entered for the Commissioner 
against such person for the amount of such excess. 
 
 
The 
Commissioner 
contends 
that 
"the 
directors 
of 
a 
corporation that receive condemnation proceeds pursuant to an 
order of court that the funds are being drawn down subject to the 
outcome of the condemnation proceeding [may not] rely on a 
professional's recommendation that the corporation distribute all 
of its assets even though the condemnation proceeding is still 
pending."  The Commissioner argues that in this case the 
"drawdown" order placed the Corporation "on notice of the risks of 
receiving the drawdown money in advance of [the] trial on the 
matter," meaning "that if the condemnation award at trial is less 
than the amount drawn down, judgment will be entered against the 
landowner for the difference."   
 
Yet, the Commissioner complains, "[t]he directors ignored the 
drawdown order's language admonishing [the Corporation] of the 
risk" and "distributed all of [the Corporation's] assets to 
themselves and their attorney."  If directors can do "what these 
directors have done," the Commissioner cautions, "the drawdown 
order is completely meaningless."   
 
This argument brings into focus Code § l3.1-690(B), which, as 
noted previously, provides that a director is entitled to rely 
upon the recommendations of experts "[u]nless he has knowledge or 
information concerning the matter in question that makes reliance 
unwarranted."  The defendants insist, however, that they "did not 
know . . . there was even a legal possibility of any payback 
liability to [the Commissioner]," that "they were not on notice of 
the possibility of a payback liability," that they "did not sign 
the drawdown order," and that their signatures appear "on no 
documents 
[reflecting] 
imputed 
knowledge 
of 
any 
payback 
liability." 
 
But uncontradicted testimony at trial showed that the 
defendants had actual knowledge of the provisions of the 
"drawdown" order.  During trial, the Commissioner's counsel asked 
Saunders what advice he had given the "Matyiko brothers sitting 
here about the drawdown," obviously referring to the present 
defendants.  Saunders replied:  "We went over the drawdown, the 
drawdown order, what it said and so forth."  (Emphasis added.)  
While Saunders went on to express the opinion, as recited 
previously, that "there was no chance of . . . getting less than 
the certificate in a condemnation case and [no] risk in dissolving 
the Corporation," it is clear that the defendants were made aware 
of the existence of the contingent liability of the Corporation 
for a possible payback in the event the condemnation award was 
less than the amount paid pursuant to the "drawdown" order.  And, 
although it is not necessary for a corporation to satisfy 
contingent liabilities upon dissolution, it is required to make 
provision 
for 
the 
discharge 
of 
such 
liabilities 
before 
distributing its remaining assets to its shareholders.  16A 
William M. Fletcher, Fletcher Cyclopedia of the Law of Private 
Corporations § 8126 (perm. ed. rev. vol. 1995).  Yet, the 
defendants voted for or assented to a distribution of all the 
Corporation's assets without making provision for payment of the 
contingent liability. 
 
In an apparent effort to excuse their failure to make such 
provision, the defendants introduced the testimony of Neil H. 
Demchick, an accountant and financial consultant.  He testified 
that in 1985 the payback liability of the Corporation was 
contingent only and that under generally accepted accounting 
principles, this contingent liability could not have been properly 
recorded in financial statements.  But whether it is necessary to 
report a contingent liability in financial statements begs the 
question whether a corporation may dissolve and distribute all its 
assets to shareholders without making provision for the payment of 
a liability, albeit contingent, that is imposed as the result of a 
statutory provision and a court order.  It should not be necessary 
to 
say 
that 
general 
accounting 
principles 
cannot 
render 
meaningless the provisions of a statute and a court order. 
 
We conclude that, at the time they voted for or assented to 
the distribution of the Corporation's assets, the defendants had, 
within 
the 
meaning 
of 
Code 
§ 13.1-690(B), 
"knowledge 
or 
information" that the condemnation award possibly would be less 
than the amount distributed under the "drawdown" order.  And this 
knowledge or information was sufficient as a matter of law to make 
the defendants' reliance upon the opinions of Saunders and 
Pontynen unwarranted.  Since such reliance was the sole basis for 
the trial court's ruling that the defendants acted in good faith 
with respect to the distribution of the Corporation's assets, it 
follows that the ruling was erroneous. 
 
This results in reversal of the judgment of the trial court. 
 The defendants say that we should not enter final judgment in the 
event of reversal but should remand because a question remains 
whether James and Jerry Matyiko were directors of the Corporation. 
 However, no such question remains. 
 
In their brief in opposition, the defendants assigned cross-
error asserting only that "[t]he trial court erred in receiving as 
prima 
facie 
evidence 
against 
appellee 
Jerry 
Matyiko" 
the 
Corporation's statement of intent to dissolve, but we refused that 
assignment of cross-error at the time we awarded the Commissioner 
an appeal.  So Jerry Matyiko is seeking to revive a dead issue.  
No cross-error was assigned with respect to James Matyiko, which 
is understandable.  In his capacity as corporate secretary, he 
signed the statement of intent to dissolve, which listed him as a 
director.  So, beside being late, James Matyiko seeks to raise 
what, in the most charitable of terms, may be described as a 
meritless claim.  In any event, none of this offers any reason for 
this Court to refrain from entering final judgment. 
 
In his motion for judgment, the Commissioner sought recovery 
of $137,965, which equals the amount of the excess payment in the 
"drawdown," plus 8% interest from March 28, 1985, the date the 
certificate of take was filed, until paid, plus costs.  However, 
the Commissioner now asks for judgment in the lesser amount of 
$105,765, which equals the amount included in the "drawdown" for 
damages to the residue, plus the same provisions for interest and 
costs.  Accordingly, we will enter final judgment against the 
defendants in favor of the Commissioner for $105,765, plus 8% 
interest from March 28, 1985, until paid and costs.  
 
Reversed and final judgment.