Case Name: CONTINENTAL SUPPLY CO., Appellant, v. ABELL et al., Respondents
Court: Montana Supreme Court
Jurisdiction: Montana
Decision Date: 1933-04-20
Citations: 95 Mont. 148
Docket Number: No. 7,018
Parties: CONTINENTAL SUPPLY CO., Appellant, v. ABELL et al., Respondents.
Judges: Mr. Chief Justice Callaway and Associate Justices Angstman, Stewart and Anderson concur.
Reporter: Montana Reports
Volume: 95
Pages: 148–173

Head Matter:
CONTINENTAL SUPPLY CO., Appellant, v. ABELL et al., Respondents.
(No. 7,018.)
(Submitted March 15, 1933.
Decided April 20, 1933.)
[24 Pac. (2d) 133.]
Mr. Louis P. Donovan and Mr. Henry McClernan, for Appellant, submitted a brief; Mr. Donovan argued the cause orally.
Messrs. Wdlchli & Korn, for Respondents W. G. Dewey and Henry Good, submitted a brief; Mr. Daniel J. Korn argued the cause orally.
Messrs. Murphy & Whitlock, of Counsel for Respondents on Motion for Rehearing.

Opinion:
MR. JUSTICE MATTHEWS
delivered the opinion of the court.
Appeal by the plaintiff, the Continental Supply Company, a corporation, from a judgment of dismissal entered on its refusal to further plead after the demurrer of the defendants W. G. Dewey and Henry Good to the complaint had been sustained.
The facts alleged in the complaint are substantially as follows: The Abell Oil Company was incorporated August 31, 1926, and has since "operated for profit"; it has a capital stock. During the year 1927 the defendants named were directors of the corporation and were charged with the duty to file with the county clerk of Flathead county, on or before March 1, 1927, a report of the financial condition of the corporation as it existed on December 31, 1926, under the mandate of section 6003 of the Revised Codes of 1921 "and the laws amendatory thereof and supplemental thereto." This duty the defendants failed to perform, either before the specified time or at all.
Between May and September, 1927, during which period the defendants were directors of .the Abell Oil Company, the plaintiff sold and delivered to the corporation, at its special instance and request, merchandise consisting of oil-well drilling supplies and equipment of the value of $6,162.32, for which the corporation agreed to pay, but only $1,227.75 was paid thereon. In September, 192'8, plaintiff brought action against the Abell Oil Company for the balance of $4,934.57, with interest, costs and attorneys' fees, for the foreclosure of a lien declared on certain oil and gas leaseholds, and secured judgment for a total of $5,808.86, and decree of foreclosure and sale. The sale was had and the net proceeds credited upon the judgment, and a deficiency judgment was entered against the Abell Oil Company for $5,711.11. No part of this judgment was paid, and on June 3, 1929, the plaintiff instituted this action against the directors.
The question presented is as to whether the defendant directors are liable under the law for the amount of the deficiency judgment based on a debt incurred in 1927, while the corporation and the directors were in default in failing to file the 1927 report.
1. Section 6003, Revised Codes of 1921, before amendment required such a corporation as the Abell Oil Company to file its annual account "by March 1, of each year hereafter," and that, if the report was not filed, "the directors shall jointly and severally be liable for all debts or judgments of the corporation then existing, or which may thereafter be in anywise incurred until such report shall be made and filed."
This statute was amended in 1927 by omitting the words "then existing or." (Chap. 5, Laws 1927.) The Act of 1927 provides that the required report shall be filed "by March 1 of each year hereafter." It was approved February 2, 1927, but, as it does not prescribe a different time, it did not take effect until July 1, 1927 (sec. 90, Rev. Codes 1921), and has no retroactive effect. Section 6003, above, was therefore controlling with reference to the default of 1927.
Although the company had been in existence but a few months, it was nevertheless required' to make a report on the first due date after the thirty-first day of December of the year in which it was organized. (Garrison v. Howe, 17 N. Y. 458.)
2. The defendants contend that, as our statute imposes liability upon the directors on default for "all debts or judgments" of the corporation, the reduction of the debt to judgment, which became final prior to the commencement of the action, fixed the time the liability would attach, and that the complaint is insufficient in that it fails to allege a default for the year 1928, or that the defendants were directors in 1929, when the judgment became due and payable by the corporation.
Under similar Acts imposing liability upon the directors for "all debts incurred," but omitting judgments, it is correctly held that the liability is for the "debt" voluntarily contracted, and that no action could be maintained on a judgment; that as to the directors the judgment does not exist and could not be used as even prima facie evidence of the existence of the debt. (Chase v. Curtis, 113 U. S. 452, 5 Sup. Ct. 554, 28 L. Ed. 1038, and cases cited therein.) But does the fact that our statute imposes liability for "all debts or judgments" render this rule inapplicable and require suit on the judgment whenever a debt has been reduced to judgment? We think not.
The purpose to be served in requiring the filing of a report showing the assets and liabilities of a corporation is to enable those contemplating dealing with the corporation to ascertain whether or not it is a good risk. On discovering that the corporation has not filed its report, a prospective creditor may still feel safe in extending credit by virtue of the directors' liability.
It seems that Montana is the only state imposing liability for "judgments." Up to 1907 the liability was for all "debts" then existing or thereafter incurred (sec. 451, Civ. Code 1895, amended by Chapter 63, Laws 1907). If defendants' construction of the Act correctly interprets the intention of the legislature, no additional liability was imposed by the Act of 1907, for all directors would be liable, under the old Act, for debts existing and which might be reduced to judgment. The reduction of a debt to judgment is analogous to the taking of a note for the amount of the debt; in either case the debt is merged in the new form of indebtedness, but is not paid or destroyed.
Where a corporation gave its note for a debt, the action on the directors' liability is held to be on the "debt," rather than the note, and the time the debt was incurred is controlling. (Williams v. Hilger, 77 Mont. 399, 251 Pac. 524; First Nat. Bank v. Cottonwood Land Co., 51 Mont. 544, 154 Pac. 582; see, also, Garrison v. Howe, supra.)
While a judgment constitutes a "debt" (14A C. J. 204), it is not a "debt incurred" at the time of its entry, within the meaning of the statute, but rather the evidence of that debt (Tabor v. Commercial Nat. Bank, 62 Fed. 383, 10 C. C. A. 429); consequently, while an action may be maintained on the basis of the directors' liability for a debt which has been reduced to judgment, the complaint must allege facts showing that the debt itself was incurred at a time fixing the liability during the period of default relied upon (Sherman v. J. S. Brown Mercantile Co., 78 Colo. 335, 241 Pac. 724; Weber v. Draper, 170 Mich. 550, 136 N. W. 596, Ann. Cas. 1914B, 149).
We must, therefore, look further for the reason for the amendment adding liability for "judgments" of the corporation. The reason is to be found in the discussion of Judge Davis, of the federal district of New Jersey, who declares that Montana is the only state imposing the liability for "judgments," and that a judgment does not change the character of the obligation which is simply merged in the judgment and, therefore, under a statute imposing liability only for debts incurred, the action is on the debt ex contractu, based upon a "voluntary transaction," citing Chase v. Curtis, supra; consequently, although a judgment is a "debt," a person securing a judgment in a tort action could not enforce liability therefor. (See, also, In re Putnam, (D. C.) 193 Fed. 464.)
When, therefore, the legislature of Montana added "judgments" to "debts," it intended to impose a liability other than that for judgments obtained in actions for debt,. and, as a judgment in a tort action would not support enforcement of directors' liability, we have a class of judgments which, by the amendment, constitutes an added liability and explains the action of the legislature. Thus analyzing the statute, Judge Davis sums up: "It was perfectly clear, before the addition of the word 'Judgments' to the statute, that directors were liable for the debts of the corporation and for judgments based upon its debts. It must have been intended to increase the liability of directors by adding judgments, including torts, to the liability already existing. The plain interpretation of the language forces this conclusion." (Northern Pac. R. Co. v. Crowell, (D. C.) 245 Fed. 668, 678.) Thus we have, under the statute, liability for the "debts" of the corporation, whether reduced to judgment or not, and liability for "judgments" based on causes of action other than upon debts incurred. The present asserted liability falls within the first class, and the plaintiff was required to show that liability, not at the time the judgment was secured, but rather at the time the debt was incurred; this it did by setting up the manner and time of its incurrence, in 1927.
3. The question then arises as to the effect of the amendment of 1927, upon plaintiff's right to enforce the liability in the year 1929.
The directors' liability statute has been amended several times. Section 6003, Revised Codes 1921, is the Act as it appears in Chapter 189, Laws of 1919, amending Chapter 140, Laws of 1909; the effect • of this amendment has been twice passed upon by this court. Chapter 140, Laws of 1909, required the filing of the corporate report "annually, within twenty days from and after the thirty-first day of December." Chapter 189, Laws of 1919, declares that the existing law shall "be amended so as to read as follows"; and provides that the report must be filed "by March first of each year hereafter"; that "all Acts and Parts of Acts in conflict herewith are hereby repealed," and that it shall become effective on ap proval; it was approved on March 10, 1919.
In 1919 the First National Bank of Brockton brought action against the directors of the Lohmiller Mortgage Company on a note given by the corporation in 1918 and due April 20, 1919, alleging failure to file a report for 1919, either under the old or the new law. The trial court overruled the demurrer to the complaint, but was reversed on the authority of Continental Oil Co. v. Montana Concrete Co., 63 Mont. 223, 207 Pac. 116, 118, which this court held to be "identical in principle," though it dealt with the amendment of a different Code provision. (First Nat. Bank v. Cosier, 66 Mont. 352, 213 Pac. 442.)
In First Nat. Bank v. Barto, 72 Mont. 437, 233 Pae. 963, 964, this court declared that "Chapter 140, Laws of 1909, was repealed by Chapter 189, Laws of 1919, [which] deprived a creditor of any right he might have had to enforce a director's liability under the prior statute."
The basis for these decisions is found in the general rules .prevailing in all jurisdictions, in the absence of statutory mandate to the contrary, and declared by this court in prior opinions, to the following effect:
(a) Statutes imposing liability upon directors for the failure to obey the mandate of the law are penal in character (Butler v. Peters, 62 Mont. 381, 205 Pac. 247, 26 A. L. R. 560), or they are "penal" in their nature because they were not known to the common law (Gans v. Switzer, 9 Mont. 408, 24 Pac. 18), and, therefore, must be strictly construed (Wethey v. Kemper, 17 Mont. 491, 43 Pac. 716; Daily v. Marshall, 47 Mont. 377, 133 Pac. 681; First Nat. Bank v. Cottonwood Land Co., 51 Mont. 544, 154 Pac. 582).
(b) Under the rule of strict construction, when a statute is amended by an Act introduced by the declaration that it shall be "amended so as to read as follows," and closing with the provision that "all Acts and Parts of Acts in conflict herewith are hereby repealed," the legislature evinces "an intention to make the new Act a substitute for the old one and that so much only of the original Act as is repeated in the new one is continued in force, and all portions omitted from the new Act are repealed." (Continental Oil Co. v. Montana Concrete Co., supra; City of Helena v. Rogan, 27 Mont. 135, 69 Pac. 709; State ex rel. Jacobson v. Board of County Commrs., 47 Mont. 531, 134 Pac. 291; State ex rel. Paige v. District Court, 54 Mont. 332, 169 Pac. 1180.)
(e) The liability imposed by the statute is "penal in character; the plaintiff had no vested right therein; and it was competent for the legislature to repeal it and thereby deprive the plaintiff of a right which it had theretofore enjoyed under it. (Continental Oil Co. v. Montana Concrete Co., 63 Mont. 223, 207 Pac. 116)." (First Nat. Bank v. Barto, supra.)
(d) When a statute "of this character" is repealed (in the manner indicated above) without incorporating therein a saving clause as to the right to enforce liability incurred prior to the repeal, "it must be considered, except as to proceedings past and closed, as if it had never existed. ' ' (First Nat. Bank v. Barto, supra.)
Consequently, when the "new Act," effective March 10, 1919, declared that "every corporation shall by March first of each year hereafter, file a report," rights acquired by virtue of the failure to file such report "within twenty days from and after the thirty-first day of December," 1918, were blotted out as though the law theretofore existing "had never been."
Undoubtedly the decisions announcing the foregoing rules of statutory construction are in harmony with the authorities generally (see 2 Thompson on Corporations, 3d ed., 999), but the legislature of this state has seen fit to impose upon the courts certain rules of construction which they, being without power to legislate, cannot ignore, repeal or nullify by their decisions.
The task before us, then, is to determine the soundness of the rules set out above, by comparison with the statutory provisions on the subjects discussed and in the light of the fact that the amendment of 1927 did not alter the wording of section 6003, in respect to the time when the report shall be filed — each reads "by March 1st of each year hereafter"— or the imposition of liability for all debts or judgments "which may thereafter be in anywise incurred."
Thus comparing the declarations of this court with mandatory provisions of our Codes, we find, first, that rule (a) above, running through and forming the basis of all of the decisions cited, from Wethey v. Kemper, supra, down to First Nat. Bank v. Barto, supra, is founded upon the declaration found in Gans v. Switzer, supra, decided before our laws were codified, and ignores and violates both the letter and spirit of section 4 of the Revised Codes of 1921, which has been in existence, with but slight modification, since the adoption of the Codes of 1895 (sec. 4, Pol. Code 1895), and which reads as follows: "The rule of the common law that statutes in derogation thereof are to be strictly construed has no application to the Codes or other statutes of the state of Montana. The Codes establish the law of this state respecting the subjects to which they relate and their provisions and all proceedings under them are to be liberally construed with a view to effect their objects and to promote justice."
Not even the declaration that the statute is "penal" in its character, in that it imposes a penalty for failure to obey the mandate of the law, justifies a strict construction in this state, for the "Penal Code" also declares: "The rule of the common law, that penal statutes are to be strictly construed, has no application to this Code. All its provisions are to be construed according to the fair import of their terms, with a view to effect its object and to promote justice." (Sec. 10710, Rev. Codes 1921; sec. 4, Pen. Code 1895.)
In Continental Oil Co. v. Montana Concrete Co., supra, the application of the rule of strict construction is declared to be compelled by the fact that we "borrowed" the liability statute from California and that such construction was placed upon it in that state prior to such borrowing, citing Irvine v. McKeon, 23 Cal. 472, and it is said "the language quoted above from Irvine v. McKeon was approved and adopted" in Moore v. Lent, 81 Cal. 502, 22 Pac. 875, 876. An examination of the cited cases discloses that the first thereof was decided before California adopted its Code provision requiring a liberal construction of all statutes, and in the second the court prefaced its quotation from the Irvine Case with: "It may be admitted that the true construction of the phrase under consideration [that 'the directors of corporations must not create debts beyond the subscribed capital stock'] is not very clear or satisfactory," and thereafter merely said: "Although the rule of strict construction does not apply under the Code, as we feel bound to construe the statute, to render the defendants individually liable, the corporation must have been indebted in an amount in excess of $10,000,000" (the subscribed capital stock of the corporation under consideration). The decision does not, therefore, support the rule of strict construction stated in the syllabus found in 81 Cal. 502, which, evidently, misled our court into the position taken; it will be noted that this syllabus does not appear in 22 Pac. 875.
Not only is rule (b) inapplicable because we are commanded to give the statute imposing the directors' liability a liberal, instead of a strict, construction, but the interpretation of the amendment as a "repeal" of the former law violates the express mandate of section 93, Revised Codes 1921, also in effect since 1895 (sec. 292, Pol. Code 1895), which declares that, "where a section or a part of a statute is amended, it is not to be considered as having been repealed and re-enacted in the amended form, but the portions which are not altered are to be considered as having been the law from the time when they were enacted, and the new provisions are to be considered as having been enacted at the time of the amendment." This is the general rule recognized by the authorities at the time of the adoption of our Codes in 1895, with reference to provisions not penal in character (State ex rel. Jacobson v. Board of County Commrs., 47 Mont. 531, 134 Pac. 291), and has been applied in all cases arising under amendments to such provisions (see State ex rel. Hay v. Hindson, 40 Mont. 353, 106 Pac. 362; Edwards v. Lewis & Clark County, 53 Mont. 359, 165 Pac. 297; State ex rel. Esgar v. District Court, 56 Mont. 464, 185 Pac. 157; State v. Yale Oil Carp., 88 Mont. 506, 295 Pac. 255; Snidow v. Montana Home, 88 Mont. 337, 292 Pac. 722).
Under the mandate of the Codes requiring a liberal construction of all statutes alike, the rule must be applied to the amendment of statutes providing penalties, as well.
Under the plain mandate of section 93, above, therefore, the unaltered provisions of section 6003, that the report shall be filed "by March first of each year hereafter," and that, on failure to file the report, the directors shall be liable for all debts or judgments "which may thereafter be in anywise incurred," must be considered as having been the law since the amendment of 1919 and in spite of the amendment of 1927, and the only part of the statute which was repealed is that imposing liability for debts or judgments "then existing." Under this interpretation, liability incurred at the time of the amendment of the Act was not affected, and it was unnecessary to incorporate a "saving clause" in the amended Act.
Our conclusion in this regard is fortified by the provisions of section 6013, Eevised Codes 1921, which declares that the amendment or repeal of any part of the Code regulation of corporations does not "take away or impair any remedy given against any such corporation, its stockholders or officers, for any liability which has been previously incurred."
While the liability discussed is of a penal nature and is not based upon contract (National Supply Co. Midwest v. Abell, 87 Mont. 555, 289 Pac. 577), these statutes are not penal within the strict meaning of the word, but are remedial, in that creditors are permitted to resort to the liability as a remedy or means of collecting a debt. (3 Thompson on Corporations, 3d ed., 486; Huntington v. Attrill, 146 U. S. 657, 13 Sup. Ct. 224, 36 L. Ed. 1123.) Mr. Thompson declares that "a sound view" of this liability is that the legislature grants to the members of a corporation an immunity from a personal liability for the debts created in tbeir behalf, on condition that they will create a sufficient joint stock or joint fund to stand in the place of their personal liability, and that they will keep the public advised by stated reports of the condition of the fund; and the legislature simply withholds the immunity from the managing members unless this latter condition is complied with. It does not take away any right conferred upon them, either by the common law or statute law, but simply withholds from them a franchise or privilege which is contrary to common right — the privilege of not being personally answerable for- their own debts — unless they will comply with a condition subsequent which is easy of compliance. It is simply a case where the grant of a franchise is with a qualification, and where the qualification reads itself into the grant. (Thompson, supra, 486.)
Colorado has a statute (C. L., sec. 6519) similar to our section 6013, but which goes a step further by declaring that the amendment or repeal shall not affect liabilities already incurred "unless the Act shall so expressly provide." This addition does not render the statute different in effect from our own, for, as section 6013 is merely a declaration of the legislature, that body is in nowise restrained from expressly providing in an amendment for the relief from liabilities already incurred, if it sees fit to do so. Here it did not see fit to do so. Recognizing the general rule, rule (d) above, the supreme court of Colorado has declared that their statute abrogates that rule. (Cavanaugh v. Patterson, 41 Colo. 158, 91 Pac. 1117.)
Section 6013, above, read in connection with section 93, clearly abrogates the rules announced heretofore by this court; these sections were evidently not brought to the attention of the court and were wholly overlooked by both court and counsel in Continental Oil Co. v. Montana Concrete Co., First Nat. Bank v. Cosier, and First Nat. Bank v. Barto, supra, and, on the authority of the statutes, each of those opinions is expressly overruled.
Cause re-argued June 26, 1933, on Motion for Rehearing, by Mr. Mans Walchli and Mr. A. N. Whitlock, for Respondents, and Mr. Louis P. Donovan, for Appellant. Both parties submitted additional briefs.
(Opinion filed July 25, 1933.)
The amendment of 1927 did not change the wording of the amended Act with reference to the time of filing the annual reports or the necessity therefor, nor as to the liability of directors on such failure, for the debts or judgments of the corporation thereafter incurred, and these provisions must be construed as having been in existence from the time of their first enactment. The complaint herein, therefore, is not vulnerable to the attack made upon it.
The judgment is reversed and the cause remanded to the district court of Flathead county, with direction to overrule the demurrer.
Mr. Chief Justice Callaway and Associate Justices Angstman, Stewart and Anderson concur.