Title: SCHULZ DAVIS WARREN v MARINKOV

State: montana

Issuer: Montana Supreme Court

Document:

No. 82-190 IN THE SUPREME COURT OF THE STATE OF MONTANA 1982 SCHULZ, DAVIS & WARREN, a partnership, et al.,, Plaintiffs and Respondents, -vs- GEORGE P. MARINKOVICH, et al., Third-Party Plaintiff, GEORGE P. MARINKOVICH, et al., Third Party Plaintiff, -vs- M & M ENTERPRISES, a Mont. Corp., Third Party Defendant. DOMINIC C. ORI, and individual and PATRICIA M. ORI, individually and as a shareholder and liquidating director of M & ?.I ENTERPRISES, Third Party Plaintiffs and Cross-Complainant, -vs- M & M ENTERPRISES, a Mont. Corp., Third Party Defendant, and GEORGE P. MARINKOVICH, et al., Cross-Defendants. Appeal from: District Court of the Fifth Judicial District, In and for the County of Beaverhead, The Honorable Frank Blair, Judge presiding. Counsel of Record: For Appellant: W. G . Gilbert, 111, Dillon, Montana Berg, Coil, Stokes & Tollefsen, Bozeman, Montana For Respondents Max Hansen, Dillon, Montana Submitted on Briefs: September 2, 1982 Decided: February 24, 1983 Filed: fEB2q 1983 - - - - - - - - - Clerk F4r. Justice John C. Sheehy delivered the Opinion of the Court. Appeal by George T. Marinko~rich, Ann C. Marinkovich, and P 4 & M Enterprises, from a judqment entered by the District Court, Fifth Judicial District, kaverhead County, sittinq without a jury, awarding wage claims, penalties and attomevs fees t o various mrties in the action, and from a judgment of qeneral damages against reorge T. Marinkovich Ann C. Phrinkovich, in favor of Patricia M. O r i . M & M Enterprises was incorporated in 1969. It had four stmkholders, each with 125 shares of stock, n m l y George T. Marinkovich, Ann C. Marinkovich, Allj-e McFadden, and her daughter, Patricia O r i . Upon the subsequent death of Allie McFadden, Patricia O r i succeeded to Allie's 1-25 shares. The articles of incorporation of M & M Enterprises provided for four directors. Each of the st0c:kholders w a s elected a director. The bylaws provided for officers, a president, t w o vice presidents, and a secretan-y-treasurer . In the beqinning, Ceorge T. Marinkovich was president, Ann C. Marinkrl~~ich and Al-lie McFadden were vice presidents, and Patricia M. O r i acted as secretary. After the death of Allie McFadden and the devolution of her corporate stock t o Patricia O r i , George T. Marinkovich and Ann C. Marinkovich, his wife, each had 125 shares, and Patricia O r i had 250 shares. The vacancy in the office of the director was not filled after Al-lie &Fadden's death nor the vacant office of vice president. Thus a t the time of the ev~mts which give rise t o this la~vsuit, although Patricia O r i held in her name one-half of the outstanding shares of M & M Enterprises, she was outvoted on the board of directors two-to-one. The principal asset and business of M & M Enterprises was the purchase and operation of the Andrus Hotel i n Dillon. Until the hotel w a s sold by the corporation in 1979, the directors of M & M Enterprises, a n d as well Dominic C . Ori, Patricia's husband, acted i n various ways to look after the property, to maintain it, to enter into leases, and even to operate it as a business i n between lessees. Nothinq in the corporate records, or the court file, indicates that any corporate action was taken to provide for pamt t o any of the directors for such services to the corporation. With the sale of the hotel on June 22, 1979 to one Douqlas Harvey, the stocfiolders met a n d adopted a plan of corplete liquidations a n d dissolution, to accord with section 337 of the Fed.eral Internal R e v p - n u e C c x 3 . d e . (26 U . S . C . 337.) The plan of liquidation adopted provided that ". . . from and after the date of sale anc3 transfer of the assets of the corporation, the corporation shall not engage in any business a c t i 1 r i t i e . s . The directors them i n office, a n d at their pleasure, the officers shall continue in office solely for the purpose o f winding up the business a n d affairs of the corporation, and after such date shsll not take such action whatsoever which i s or shall he constnled to be inconsistent with the status of liquidation, and such status shall be conthued until the date of the dissolution of the corporation." In connection with the sale of the hotel a n d the plan of li-quidation, the Dillon law firm of Schulz, Davis a n d Warren was d e s i c p a t e d . as the corporate trustee to hold the prmeeds from the sale for the payment of the corporation debts and final disbursement among the stockholders in proportion to their ownerships. On April 2, 1980, the liquidatinq directors of the corporation approved paymemt of a vmge claim presented b y George T . Marinko~rich for $2,142.75, against the corporation. The directors, b y a two to one vote, rejected the claim of Dominic C . Ori for $500 for services t o the corporation and the claim of Patricia M . Ori for services performed b y her mther Allie McFadden for $1,600. Thereafter the law firm as corporate trustee, was given conflicting directions from the liquidating directors for disbursal of the r e m a i n . i n g corporate funds. As a result, the law firm as a stakeholder filed this interpleader action on April 15, 1980, naming as defendants the individual directors of M & M Enterprises. George T. Mrinkovich and Ann C. Marinkovich filed their answer t_o the complaint md interpleader, asserting the wage claim for George T. Marinkovich, and denying any wage claims should be paid t~ Dominic C. O r i or Patricia O r i as successor t o Allie McFadden. In addition, George Marinkovich filed a third party complaint against third party defendant M & M Enterprises for his wage claim of $2,142.75, plus penalties and attorneys fees. Dominic O r i and Patxicia M. O r i filed a third part:7 complaint and cross-complaint against M & M for +heir resFctive wage claims, and aqainst Ceorqe and Ann Marinkovich for relinquishing the corprate ownership t o stained glass windows which had been removed from the hotel build-ing and delivered t o Douglas Harvey. The Marinkovichs filed an answer as third party defendants in effect denying generally the claims of the O r i l s for wages, and denying any responsibility in damages for the relinquishment of the stained glass windows. In this pleading, the Marinkovichs did not raise the issue of whether Dominic C. O r i was proprly a party t o the action. M & M Enterprises filed an answer t o the O r i cross-complaint, in effect a general dmial of the claims of the O r i l s and a claim for attorneys fees. When +he cause came on for trial, counsel for the Marinkovichs raised for the f i r s t time whether Dominic C. O r i was a proper party in the action, since he had not obtained permission for leave to intervene before joining in his third party compl-aint. The District Court denied the motion t o dismiss Dominic C. O r i as a party. After t r i a l Sefore +he court, sitting without a iury, the court mde findings of fact, conclusj.ons of law, and entered judgment as follms : For George T. Marinkovich in the swn of $2,142.75 wages, attorneys fees of $2,337.63, and a penalty in the s u m of $2,142.75; For the estate of =lie K. McFadden, the s u m of $1,600, attorneys fees of $1,291.70, and a penalty of $1,600; For Dominic C. O r i , the s u m of $500 for wages, $1,291.70 for attorneys fees, and a penalty7 of $500; A further judgment i n favor of Dominic C. O r i in the s u m of $5,000; and a judgment in favor of Patricia M . O r i , against George T. Marinkovich m . d Ann C. Marinkovich for $3,000. Thereafter the District Court denied post-trial motions made by the Marinkovichs and this appal followed.. The issues raised by the appellants Marinkovich are these: 1. Whether Dominic C. O r i is a proper party to the action? ?. Whether the claim of Allie R. McFadden was barred by the statute of limitations? 3. Whether the District Court had the power to overrule the decision of the liquidatinq directors w i t h respect t o the wage claims of Dominic and Patricia Ori? The objection against Daminic O r i being regarded as a mop-r party is grounded upon his failure t o procure an order qranting him 1-eave t o intervene in the action as a co-plaintiff with Patricia O r i , b~ho was already a party t o the action. Rule 24 (c) , M. R.Civ. P . , requires a person desiring t o intervene to f i l e anrl serve a motion for leave t o intervene upon t h parties, stating the grounds t h r e f o r , accompanied by a pleadins setting forth the claim or defense for which the intervention is sought. Dominic O r i made no such motion, but filed in the action a third party c m l a i n t as a co-plaintiff w i t h Patricia O r i . Idhen M & M Enterprises responded to the Ori joint third party complaint, it m o v e d to dismiss the complaint a n d cross-complaint merely upon general grounds. The P . l a r i n k o v i c h s response to the joint third party cross-complaint was "Answer to Cross-Complaint of Patricia M . O r i . " No mntion was made i n the pl-eadings by the Marinkovichs then or later that made objection to the presence i n the case of Dominic Ori as a party. When M & M Enterprises answered the Ori third party complaint, it was i n the nature of a general denial, raising the defense of the statute of limitations. Thus Dominic Ori i s i n a position of a person whose cause has been heard b y the District Court, but who has never intervened. It ha been held that the failure to file a f o m l moti-on to intervene i s not fatal where the trial court has eventuallv granted leave to intervene ( U . S . v . 1,830.62 Acres of Land (Western District V a . 1943), 51 F.Supp. 158) and that lack of service o f a motion to intervene can be cured b y a supple-mental motion later served (Perry v . Godbe ( C . C . D . Nev. 18971, 82 F. 1 4 1 ) . It is true generally, and was true i n Montana & - f o r e the adoption of the Federal Rules of Civil Procedure, that failure to mve for intervention was fatal to ie the party' s right to participate i n the action. lbLtrich ~ r . Steam Dredge and Amalgamator (1894), 1 4 Mont. 261, 268, 3 6 P . 8 1 . See Spnqler v . Pasadena Board of Education (9th Cir. 1977) , 552 F. 2 d 1326. The purpse of the motion for leave to intervene is to give the District Court the opportunity to determine whether the parties seeking intervention may intervene as a matter of right or bv permission of the court. (Rule 24, M . R . C i v . P . ) The rule that failure to move for intervention i s fatal to the right of a party to participate i n the action is not iron-clad, however. In this case, M & M Enterprises did not raise an objection to the presence of Dominic Ori in the case at the District Court level. The Marinkovichs answered the joint cross-complaint only as t o Patricia, and by no pleading then or subsequently advised the court or Dcsninic O r i that he was not properly a party in the action. The Marinkovich objection t o the presence of Daminic O r i in the cause was f i r s t raised a t the mment of the opening of trial. This was a cause where Dnmjnic O r i could intervene as a matter of right, because his claim for wages, i f proprlv supported, could only be paid out of the remaining assets of the corporation then being liquidated. The District Court's action in overruling the objection raised by !4arinkovich a t t r i a l time is equivalent t o authorizing i n t e ~ ~ e n t i o n by Dominic O r i . The failure t o raise objection t o O r i ' s presence until the moment of txial a u n t s t o a waiver of any objections to his intervention. These factors hrinq this case within the rules a\\ announced in Martindab v. International Tel. & Tel. Corp. (2d C i r . 1979) , 594 F. 2d 291, and In Re Beef Industry Anti-trust Litigation (5th C i r . 1979), 589 F.2d 786. In those cases though no formal mtion for intervention had been made by the parties invnlved, the appeals court ruled on the merits of the appeals on grounds of waiver, and de facto or equivalent authorization for intervention. -- On those bases w e sustain the District Co~lrt's order denving the objection of the Marinkovichs to the presence of Dominic O r i in the cause, but w e warn, as did the court in In Re Beef Industrv Anti-trust Litigation, supra, that "future litigants should not attempt t o use this opinion t o circumvent the clear r e q u i r ~ m t s of the rule." 589 F.2d a t 789. The remaining issues with respect t o the wage claims, w e treat as one, though appellants obiect t o the qrant of the O r i wage claims Qn the grounds of the statute of limitations and that the District Court had no power t o overrule the decisions of the liquidating directors. It is our view that. the wage claim issues can be decided by looking a t the pavers of liquidating directors generallv w i t h respect to their duties i n winding up the affairs of the corporation. Under t h e dissolution plan adopted by the corporation, a part o f which we have quoted above, + _ h e corporation was not to "engage in any business activities," and "the directors then in office . . . shall continue i n office solely for the purpose of winding up the business and affairs of the corporation." The only business of liquidating directors was the liquidation of the corporation. The grant of additional salaries not provided before the dissolution is not the proper business of the corporation in winding up. The sane situation existed i n the facts shown i n Duval v . C o r n n i s s i o n e r o f Internal Revenue (5th Cir. 1932) , 57 ~.2d 4 9 6 . There the corpration was dissolved on August 31, 1919. For income tax purposes, the corporation attempted to claim a s a deduction salaries for officers based on entries mde in the books of the business on December 31, 1919. The federal court ruled the attempt to claim such deduction was improper stating: ". . . the evidence negatived the conclusion that any corporate action with reference to additional salaries was t a k e n before the dissolution of the corporation. After its dissolution i n August, 1919, the corporation continued i n existence as a bodv corporate for a prescribed time for the purpose of prosecuting or defmding suits, settling its business, disposing of its propertv, a n d dividing its capital stock, but not for the purpose of continuing its business (Citing a state statute). The creation of liability for additional salaries was a business transaction requirins corporate action which could not be taken after the corpration ceased to exist for the purpose of continuing its business. An alleged liability for additional salaries of officers of the corporation which was not attempted to be created by any corporate action nor until after the corporation had been dissolved, was not a business P - n s e incurred or paid b y the corporation for which the statute (26 U . S . C . A . § 989) a l l c r w s a deduction from gross incow-. It follm~s that the disallmance of the deduction was not erroneous." 57 F . 2 d at 4 9 8 . Although Duval, supra, is a tax case, under the principles enunciated therein a n d for the same reasons, none of the parties here have the right t o claim additional salaries not provided bv corporate action before the dissolution. It is especially appropriate to apply the Duval rule here, where two directors representing 50 percent of the stock ownership of the corporation, vote t o sustain their wage claims against the remining assets of the dissolvd corporation, znd a t the sane time, vote t o deny the wage claims of persons related t o the ownership of the other 50 percent of the corpora-te stock though represented by one director. 5 7 7 e note from the record, that following the death of Allie K. McFadden, Patricia O r i raised the question of the a-win-t of another board member t o repla-ce her mother and there the vote was two-to-one against the appointment of a n.ew director, w i t h Patricia O r i casting the dissenting vote. Although neither party raised the issue of the pwer of tl~e dissolved corporation t o grant additional salaries t o its officers, an action j n interpleader is j n equity and in such case, the provisions of section 3-2-204(5), iTA, come into play: "In equity cases and in matters of proceedings of an equitable nature, the Supreme Court shall review a l l questions of fact arising upon the evidence presented in the record, whether the s m be presented bv specification of particulars in which the evidence is alleged t o be insufficient or not, and determine the same, as well as questions of law . . ." The result of our view of the p e r of the liquidating directors here, is t o deny t o a l l of the parties their respctive wage claims, penalties and attorneys fees based thereon. The further effect is t o require the stakeholder, the plaintiffs in inte-rpleader, t o disburse the funds in their hnds without regard t o such wage claims. Our holding that liquidating directors may not award salaries t o its officers and shareholders for pre-dissolution services in the winding up process does not conflict. w i t h our statutes on voluntary corporate or shareholder dissolution. As noted above, the setting of salaries for the conduct of corporate business pre-dissolution i . s a business activity of the corpration. F?hm a statement of intent to dissolve a corporation is filed with the Secretary of State, under Pbntana law, the corporation "shall cease to carm on its business, except insofar as m a j 7 be necessarv for the b~inding up thereof. I' Section 35-1-905, MCA. The record in this case i s barren as to what steps the liquidating directors had taken to camply with Montana statutes on corporate dissolution. Regardless, under the p l a n of dissolution adopted to comply with 2 6 U . S . C . 5 337, the directors had agreed "from and after the date of sale and transfer of the assets of the corporation [not to] e n c j a g e i n any business activities." One of the aims of 2 6 U . S . C . § 337, is for tax purposes to establish a strict but clear rule, within a specified time limitation, 12 months, upon which planners might rely and bring c e r t a i n t y a n d stability into the_ corporate liquidation area. Central Tablet Wq. G o . v . U . S . (1974) , 417 U . S . 673, 682, 94 S . C t . 2516, 2522, 41 L . F d . 2 d 3 9 8 . There remains the judpnt against George T . Marinkovich and Ann C . b l a r i n k o v i c h prsonally , in favor of Patricia Ori in the sum of $3,000 for their alleged bad faith in relinquj-shing the corporation's claim to stained glass windows. The value of the stained glass windows in the evidence varied from $20,000 to $5,000, the latter sum at which Dominic Ori apparently offered them for sale to another party. Marinkovichs claim that the stained glass ~nlindms were delivered to Harvey by Dominic Ori a n d therefore the claim for damages on this ground is moot. Ori contends on the other hand, that the delivery of the stained glass windows by Dminic Ori was not an act of transferring the title of the corporation in the windows to the third party. At the meeting of the liquids-ting directors, the same meeting in which the wage claims were considered, the claim with respect to the stained glass windows was brought up. There the corporation's claim for the value of the stained glass windows was relinquished by the liquidating directors, again by a vote of two t o one. The District Court, in considering this matter, found that the stained glass pieces m e d by the corporation was disposed of bv a vote of the directors, but i f the vote had been made by the shareholders, the question of disposal of the stained glass wau1.d have keen "equally represented." The court concluded that such d-isposal of the stained glass was not in the regular course of business, and that the directors voting in favor of the disposal without submitting the same t o a vote of the shareholders violated section 35-1-809, M C A (1979). On that basis, the District Court awarded Patricia O r i damages equal t o one-half of its determined value of the stained glass windows, the sum of $3,000. The record sustains the judgment for damages in favor of Patricia O r i . Accordingly, this cause is reversed as t o the wage claims, and a l l s u m s in judfpnent awarded i n the District Court t o George T. Maridkovich, Dominic C. O r i , and the estate of Allie K. McFadden, for wages, penalties, or attorneys fees are set aside; but the iudgment of $3,000 against C~orge Marinkovich and A r n C. Marinkovich in favor of Patricia O r i is affirmed. Justice W e Concur: iqe concur: ? k & g ' $ & & Chief Justice Justices I dissent from the majority's holding that approval of certain wage claims was a "grant of additional salaries not provided before the dissolution." Montana's corporation statutes are based in large part upon the Model Business Corporation Act (1960) of the American Bar Association. Official comments to this Act are therefore useful in interpreting Montana statutes. Sections 35-1-904 through 906, MCA, dealing with liquidation and winding up, are counterparts to sections 85 and 87 of the Model Act. The comment to those sections provides in part: "Historically corporate dissolution resulted in realty reverting to the grantor, personalty escheating to the sovereign and choses in action extinguished with the death of the corporation. This is no longer true. Statutes now prescribe the general effects of dissolution and the procedures to be followed. "When dissolution has been authorized by the shareholders under section 83 or section 84, a statement of intent to dissolve the corporation is required by section 85 to be filed with the secretary of state. This constitutes notice to the state and public that dissolution proceedings have officially begun. After such filing the business of the corporation ceases except as necessary to wind up its business and affairs. Notice is given to creditors, assets are collected, liabilities discharged, and the remaining assets distributed to shareholders. The orderly liquidation of the corporation is assured and the corporation protected from a multitude of creditors' suits by dissatisfied shareholders by section 87 (c) which provides for liquidation under the supervision of the court on applicatin by the corporation. Many jurisdictions have adopted the Model Act procedure in preference to the older one of dissolving first and constituting the directors as trustees of the liquidation which follows." Under former Montana law, voluntary dissolution of a corporation occurred after application to the District Court where the principal place of business was situated. Section 15-1108, R.C.M. (1947) . Upon verification of the statements contained in the application, the District Court issued a. judgment declaring the corporation dissolved and naming the directors as trustees. Section 15-1113, R.C.M. (1947). These statutory trustees were required to wind up the defunct corporation's affairs by "settling with its debtors and creditors and appropriating the amount of profit or loss." Gilna v. Barker (1927), 78 Mont. 357, 365, 254 P. 174, 177, citing Rohr v. Stanton Trust & Savings Bank (1926), 76 Mont. 248, 251, 245 P. 947, 948. Montana repealed its statutes prescribing the trustee method of corporate dissolution in 1967. Directors no longer serve as statutory trustees, holding corporate assets in trust for the benefit of creditors. The process by which a corporation is dissolved requires that certain conditions precedent to dissolution he met. Filing of a notice of intent to dissolve and articles of dissolution are two such conditions precedent to voluntary dissolution. Articles of dissolution can be filed only after "all debts, liabilities, and obligations of the corporation have been paid and discharged or adequate provision has been made therefor and all of the remaining property and assets of the corporation have been distributed to its shareholders." Section 35-1-111, MCA (1981). Liquidation and discharge of debts precede dissolution. Dissolution occurs when the Secretary of State issues a certificate of dissolution, at which time the existence of the corporation ceases. Section 35-1-912 (2) , MCA (1981) , formerly S15-2286, R.C.M. (1947) . M & M Enterprises was winding up its business and affairs when the wage claims were presented. Dissolution had not taken place. The majority cites Duval v. Commissioner of Internal Revenue (5th Cir. 1932), 57 F.2d 496 in support of its holding that the liquidating directors lacked power to approve wage claims presented during the liquidation period. Duval addresses the issue of post-dissolution granting of officers' salaries. It is distinquishable on its facts. Mr. Duval's wage claim was submitted 7 1/2 months after the corporation was dissolved. J. E. Duval Printing Company "ceased doing business on August 31, 1919, when it dissolved." Duval, 57 F.2d at 497. Mr. Duval assumed all the corporations's assets without paying any consideration and operated the business as a sole proprietorship thereafter. In March, 1920, he filed a business tax return for the year 1919. The return indicated that Mr. Duval, his wife, and daughter had taken a sizeable salary increase for services rendered before and after the dissolution. The additional salaries were claimed as a corporate tax deduction. The Internal Revenue Service disallowed deduction of the retroactive salaries as a pre-dissolution business expense. The Ori and Marinkovich wage claims, on the other hand, were presented before dissolution of M & M Enterprises. The claims were not for additional salaries as corporate directors, but for functions generally performed by employees, i.e., clerking at the hotel's front desk, doing maintenance work on the premises. The trial court found that the "claims were never presented before because the corporation was not in a position to pay them until the hotel was sold." Trial Memorandum, March 11, 1982 at 7 . Payment of just debts of the corporation is an incident of the winding up process. The Ori and Marinkovich claims should not be automatically disallowed. " [A] lthough a director occupies a fiduciary relation to the stockholders, he is nevertheless entitled to demand payment for an honest debt due him from the corporation of which he is a director. (citation omitted) However, this rule must be tempered with the qualification that there are circumstances under which equity will not permit him to do so." Troglia v. Bartoletti and Casey (1969), 152 Mont. 365, 369-70, 451 P.2d 106, 108. To hold that approval of such claims by directors of a dissolving corporation is ultra vires regardless of the circumstances thwarts legislative intent that all debts be paid or adequately provided for in the winding up period prior to dissolution. Approval or disapproval of claims should be based on general legal principles.