SCHULZ DAVIS WARREN v MARINKOV

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No. 82-190 IN THE SUPREME COURT OF THE STATE OF MONTANA 1982 SCHULZ, DAVIS & WARREN, a partnership, et al.,, Plaintiffs and Respondents, -vsGEORGE P. MARINKOVICH, et al., Third-Party Plaintiff, GEORGE P. MARINKOVICH, et al., Third Party Plaintiff, -vsM & M ENTERPRISES, a Mont. Corp., Third Party Defendant. DOMINIC C. ORI, and individual and PATRICIA M. ORI, individually and as . I a shareholder and liquidating director of M & ?ENTERPRISES, Third Party Plaintiffs and Cross-Complainant, -vsM ENTERPRISES, a Mont. Corp., Third Party Defendant, and GEORGE P. MARINKOVICH, et al., Cross-Defendants. M & 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: Decided: Filed: September 2, 1982 February 24, 1983 f E B 2 q 1983 --------- Clerk F4r. Justice John C. Sheehy delivered the Opinion of the Court. Appeal by George T. Marinko~rich, Ann C. Marinkovich, and P4 & M Enterprises, from a judqment entered by the District Court, Fifth Judicial District, kaverhead awarding wage claims, m r t i e s in the action, County, penalties and s i t t i n q without and attomevs a jury, fees t o various from a judgment of qeneral damages Ann C. Phrinkovich, in favor of against reorge T. Marinkovich Patricia M. O r i . M & M Enterprises was incorporated in 1969. stmkholders, each with 125 shares of stock, I t had four 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 t o A l l i e ' s 1-25 shares. The a r t i c l e s of incorporation of M four directors. & M Enterprises provided for a Each of the st0c:kholders w s elected a director. The bylaws provided for officers, a president, two vice presidents, and a secretan-y-treasurer . was president, Ann C. In the beqinning, Ceorge T. Marinkovich Marinkrl~~ich and Al-lie McFadden were vice presidents, and Patricia M. O r i acted a s 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, h i s wife, each had 125 shares, and Patricia O r i had 250 shares. after The vacancy in the office of the director was not f i l l e d Al-lie &Fadden's president. death nor the vacant office of vice which give r i s e t o t h i s Thus a t the time of the ev~mts la~vsuit, although Patricia O r i held i n her name one-half outstanding shares of M & M of the 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 s sold by the corporation in 1979, the directors of M & M a Enterprises, and as well Dominic C Ori, Patricia's husband, acted . i various ways to look after the property, to maintain it, to enter n into leases, and even to operate it as a business in between lessees. Nothinq in the corporate records, or the court file, indicates that any corporate action was taken to provide for pamt to 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 and adopted a plan of corplete liquidations and dissolution, to accord with section 337 of the Fed.eral Internal Revp-nue Cx.e c3d. (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 acti1ritie.s. The directors them in office, and at their pleasure, the officers shall continue in office solely for the purpose of winding up the business and affairs of the corporation, and after such date shsll not take such action whatsoever which is 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 and the plan of li-quidation,the Dillon law firm of Schulz, Davis and Warren was desicpated. 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 by George T Marinko~rich for $2,142.75, against the corporation. The directors, by a two to one vote, rejected the claim of Dominic C. Ori for $500 for services to the corporation and the claim of Patricia M. Ori for services performed by 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 remain.ing corporate funds. As a result, the law firm as a stakeholder filed this interpleader action on April 15, 1980, naming a s defendants the individual directors of M & M Enterprises. George T. Mrinkovich and Ann C. Marinkovich f i l e d 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 o r Patricia O r i as successor t o Allie McFadden. In addition, George Marinkovich f i l e d a third party complaint against third party defendant M & M Enterprises f o r h i s wage claim of $2,142.75, plus penalties and attorneys fees. Dominic O r i and Patxicia M. O r i f i l e d a t h i r d part:7 and cross-complaint against M Ceorqe for +heir resFctive & M wage claims, and aqainst complaint and Ann Marinkovich for relinquishing the c o r p r a t e ownership t o stained glass windows which had been removed from the hotel build-ing and delivered t o Douglas Harvey. The Marinkovichs f i l e d an answer a s t h i r d party defendants i n 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 p r o p r l y a party t o the action. M & M Enterprises f i l e d an answer t o the O r i cross-complaint, in e f f e c t a general d m i a l of the claims of the O r i l s and a claim for attorneys fees. When +he cause came on for t r i a l , 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 t o intervene before joining i n h i s third party compl-aint. The D i s t r i c t Court denied the motion t o dismiss Dominic C. O r i as a party. After t r i a l Sefore +he court, s i t t i n g without a iury, the court mde findings of f a c t , conclusj.ons of law, and entered judgment as follms: For George T. Marinkovich i n the swn of $2,142.75 wages, attorneys fees of $2,337.63, and a penalty i n the s m of $2,142.75; u For the e s t a t e of =lie McFadden, K. the s m of u $1,600, attorneys fees of $1,291.70, and a penalty of $1,600; For Dominic C. O r i , the s m of $500 for wages, $1,291.70 for u attorneys fees, and a penalty7 of $500; A further judgment i n favor of Dominic C. O r i i n the s m of u $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 D i s t r i c t Court denied post-trial motions made by the Marinkovichs and this a p p a l followed.. The issues raised by the appellants Marinkovich are these: 1. Whether Dominic C. O r i is a proper party t o the action? ?. Whether the claim of Allie R. McFadden was barred by the statute of limitations? 3. Whether the D i s t r i c t Court had the power t o 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 h i s failure t o procure an order qranting him 1-eave t o intervene in the action a s a co-plaintiff with Patricia O r i , b~howas 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 o r defense for which the intervention i s sought. Dominic O r i made no such motion, but f i l e d in the action a t h i r d party c m l a i n t a s a co-plaintiff w i t h Patricia O r i . Idhen M & M Enterprises responded to the Ori joint third party complaint, it moved to dismiss the complaint and cross-complaint merely upon general grounds. The P.larinkovichsresponse to the joint third party cross-complaint was "Answer to Cross-Complaint of Patricia M. Ori." No mntion was made i the pl-eadings by the Marinkovichs then or n later that made objection to the presence in the case of Dominic Ori as a party. When M & M Enterprises answered the Ori third party complaint, it was in the nature of a general denial, raising the defense of the statute of limitations. Thus Dominic Ori is in a position of a person whose cause has been heard by the District Court, but who has never intervened. It ha been held that the failure to file a f o m l moti-onto intervene is not fatal where the trial court has eventuallv granted leave to intervene (U.S. v. 1,830.62 Acres of Land (Western District Va. 1943), 51 F.Supp. 158) and that lack of service of a motion to intervene can be cured by a supple-mentalmotion later served (Perry v Godbe (C.C.D. Nev. 18971, 82 F. 141). . It is true generally, and was true i Montana &-fore the adoption of the Federal Rules of n Civil Procedure, that failure to m v e for intervention was fatal to ie the party's right to participate in the action. lbLtrich ~ r . Steam Dredge and Amalgamator (1894), 14 Mont. 261, 268, 3 P. 81. 6 See Spnqler v. Pasadena Board of Education (9th Cir. 1977), 552 F.2d 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.Civ.P.) The rule that failure to move for intervention is fatal to the right of a party to participate i the action is not iron-clad, however. In this case, n 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 o r subsequently advised the court o r Dcsninic O r i t h a t he was not properly a party i n 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 t r i a l . This was a cause where Dnmjnic O r i could intervene as a matter of right, because h i s claim for wages, i f p r o p r l v supported, could only be paid out of the remaining assets of the corporation then being liquidated. D i s t r i c t Court's The action i n overruling the objection raised by !4arinkovich a t t r i a l time i s equivalent t o authorizing i n t e ~ ~ e n t i o n by Dominic O r i . The f a i l u r e t o raise objection t o O r i ' s presence u n t i l the moment of t x i a l a u n t s t o a waiver of any objections t o h i s intervention. These factors hrinq t h i s case within the rules a\\ announced i n 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 m t i o n 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 o r equivalent authorization for intervention. On those bases w sustain the District Co~lrt's order denving the e objection of the Marinkovichs t o the presence of Dominic O r i i n the cause, but w warn, e Anti-trust Litigation, a s did the court i n In R e Beef Industrv supra, that "future l i t i g a n t s should not attempt t o use t h i s 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 t r e a t e 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 t h a t the D i s t r i c t Court had no power t o overrule the decisions of the liquidating directors. I t 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 winding up n the affairs of the corporation. Under the dissolution plan adopted by the corporation, a part of which we have quoted above, +_he corporation was not to "engage in any business activities," and "the directors then in office ... shall continue i office solely for the purpose of winding up the n 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 in the facts shown in Duval v. Cornnissioner of Internal Revenue (5th Cir. 1932), 57 ~ . 2 d496. There the corpration was dissolved on August 31, 1919. For income tax purposes, the corporation attempted to claim as a deduction salaries for officers based on entries m d e 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 taken before the dissolution of the corporation. After its dissolution in August, 1919, the corporation continued in existence as a bodv corporate for a prescribed time for the purpose of prosecuting or defmding suits, settling its business, disposing of its propertv, and 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 Pne -s incurred or paid by the corporation for which . . . . § 989) a l r s a deduction lcw the statute (26 U S C A that the disallmance from gross incow-. It follm~s of the deduction was not erroneous." 57 F.2d at 498. Although Duval, supra, is a tax case, under the principles enunciated therein and for the same reasons, none of the parties here have the r i g h t t o claim additional s a l a r i e s not provided bv corporate action before the dissolution. appropriate t o apply the Duval r u l e here, It is especially where two directors representing 50 percent of the stock ownership of the corporation, vote t o sustain their wage claims against the remining a s s e t s of the d i s s o l v d 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. 57 note from the record, 7e t h a t following the death of Allie K. McFadden, P a t r i c i a 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 P a t r i c i a O r i casting the dissenting vote. Although neither party raised the issue of the p w e r of t l ~ e dissolved corporation t o grant additional s a l a r i e s t o i t s o f f i c e r s , an action j n interpleader i s j equity and i n such case, n the provisions of section 3-2-204(5), iTA, come i n t o play: "In equity cases and i n matters of proceedings of an equitable nature, the Supreme Court shall review a l l questions of f a c t a r i s i n g upon the evidence presented in the record, whether the s m be presented bv specification of p a r t i c u l a r s i n which the evidence i s alleged t o be i n s u f f i c i e n t o r not, and determine the same, a s well a s questions of law . . ." The r e s u l t of our view of the p e r of the liquidating d i r e c t o r s here, i s t o deny t o a l l of the p a r t i e s t h e i r r e s p c t i v e wage claims, penalties and attorneys fees based thereon. t o require the stakeholder, The further e f f e c t is the p l a i n t i f f s i n inte-rpleader, t o disburse the funds i n their hnds without regard t o such wage claims. Our holding t h a t liquidating directors may not award s a l a r i e s t o i t s o f f i c e r s and shareholders f o r pre-dissolution services in the winding up process does not conflict. w i t h our s t a t u t e s on voluntary corporate o r shareholder dissolution. As noted above, the s e t t i n g of salaries for the conduct of corporate business pre-dissolution is . a business activity of the corpration. F ? h m 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 maj7 be necessarv for the b~inding up thereof.I' Section 35-1-905, MCA. The record in this case is barren as to what steps the liquidating directors had taken to camply with Montana statutes on corporate dissolution. Regardless, under the plan of dissolution adopted to comply with 26 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] encjage in any business activities." One of the aims of 26 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 certainty and stability into the_ corporate liquidation area. Central Tablet Wq. Go. v. U.S. (1974), 417 U.S. 673, 682, 94 S.Ct. 2516, 2522, 41 L.Fd.2d 398. There remains the judpnt against George T. Marinkovich and Ann C blarinkovich 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 ~nlindmswere delivered to Harvey by Dominic Ori and 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, i n considering t h i s matter, found t h a t the stained glass pieces m e d by the corporation was disposed of bv a vote of the directors, but if 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 i n the regular course of business, and t h a t the directors voting i n favor of the disposal without submitting the same t o a vote of the shareholders violated section 35-1-809, MCA (1979). On t h a t basis, awarded Patricia O r i damages equal t o one-half the District Court of its determined value of the stained glass windows, the sum of $3,000. The record sustains the judgment f o r damages i n favor of Patricia O r i . Accordingly, t h i s cause i s reversed a s t o the wage claims, and u s a l l s m i n judfpnent awarded i n the D i s t r i c t Court t o George T. Maridkovich, Dominic C. O r i , and the estate of Allie K. McFadden, for wages, penalties, o r attorneys fees are s e t aside; but the iudgment of $3,000 against C~orge Marinkovich and Arn C. Marinkovich in favor of Patricia O r i is affirmed. Justice W Concur: e iqe concur: ?&'& kg$& 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 American Bar Association. Corporation Act (1960) of Official comments to this Act are therefore useful in interpreting Montana statutes. 35-1-904 through the 906, MCA, dealing with Sections 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. serve as Directors no longer 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 35-1-111, MCA (1981). precede dissolution. to its shareholders." Section Liquidation and discharge of debts Dissolution occurs when the Secretary of State issues a certificate of dissolution, at which time the existence of 35-1-912 (2), MCA M & M the corporation ceases. (1981), formerly S15-2286, R.C.M. Enterprises was winding up Section . (1947) 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 holding that liquidating the 496 in support of its 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. Duval's wage claim was submitted 7 1/2 months after the corporation was dissolved. "ceased doing dissolved." Mr. business J. E. Duval Printing Company on August 31, Duval, 57 F.2d at 497. 1919, when it Mr. Duval assumed all the corporations's assets without paying any consideration and operated thereafter. the business as a sole proprietorship 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 tax deduction. salaries were claimed as a corporate 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 claims were directors, not but for for additional functions & M Enterprises. salaries generally as The corporate performed by employees, i.e., clerking at the hotel's front desk, doing maintenance work on the premises. the "claims were never The trial court found that 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.

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