Hodde v. Nobbe

This is an action by Charles E. Hodde, as receiver of the Henseler Mercantile Oil Supply Company against the above-named defendants as directors of that company. No service was had upon Singleton or Thesieres and they did not appear, the case being dismissed as to them.

The petition was filed January 21, 1916. It avers the appointment of plaintiff, by the circuit court of the city of St. Louis, as receiver of the Henseler Mercantile Oil Supply Company, charging the latter with being an insolvent corporation. The action is to recover against the defendants, as directors, dividends aggregating $9225, declared and paid out by them to stockholders, which dividends, it is alleged, were paid out of the capital stock and not out of the surplus, the receiver being authorized by a supplemental order to bring this action. It is further alleged that claims aggregating slightly more than $27,000, have been allowed in the receivership proceedings and that the receiver has less than $1300 in his hands, none of which is applicable to the payment of dividends. Judgment is prayed for $9225 and interest, and general relief. The defendants served and appearing, after a general denial, set up, first, that at a date about one year prior to the receivership, the creditors of the corporation took charge of its affairs and tried to operate the business for the benefit of the creditors; that the assets of the corporation then exceeded its liabilities, and that the creditors by having so taken over the business were estopped from making any further demands against directors or stockholders; second, that any action for dividends paid more than five years prior to the filing of the petition herein and aggregating $5600, was barred by the Statute of Limitations; third, that at the time of bringing this suit against these defendants, as directors of the corporation, there had been brought and were pending in the same court separate actions against each of the defendants severally, seeking to recover from them, as stockholders, these same dividends.

The reply was a general denial.

The referee, making his report to the court, arrived at the conclusion that the plaintiff was entitled to a joint and several judgment for the amount of dividends paid subsequent to January 21, 1911, and amounting to $3625, together with interest thereon at 6 per cent. from the date of the payment of the dividends, to October 21, 1916, aggregating $1029.28, against all of the defendants except defendant Diesing, but that judgment should go against the latter for only the amount of dividends paid prior to February 27, 1913, when he ceased to be a director, the amount of such dividends, for payment of which Diesing is liable, being $2625, and interest thereon from date, that is from October 21, 1916, amounting to $832.69. The referee therefore recommended a joint and several judgment, of date October 21, 1916, against all the defendants, except Diesing, in the sum of $4654.28, and as against Diesing in the sum of $3457.69.

On the filing of the report and the accompanying transcript of the testimony taken before the referee, exceptions were filed by both parties, all of which were overruled.

The court, on May 7, 1917, entered a judgment for $3543.44, against all the defendants served and appearing, with an additional amount of $1229.25 against all of them except the defendant Diesing. The defendants Roach, Hahn, Grafeman and Diesing filed motions for new trial and in arrest, both of which were overruled, and all of these defendants prayed and were granted an appeal, with leave to file a bill of exceptions within a time named. Subsequently to that and before the filing of the bill of exceptions Grafeman died, but his death was not suggested in the circuit court nor any revivor had against his representatives, and the bill of exceptions was filed on behalf of Roach, Hahn, and Diesing alone. The defendant Nobbs filed neither motions for new trial, in arrest, nor bill of exceptions, and took no appeal. Subsequently the death of William Grafeman was suggested in our court, and his administrator, Charles Teutenberg, waived issue of citation and entered his appearance, the cause being revived as against Grafeman. When we refer to appellants in the case we refer to Roach, Hahn, Diesing and Teutenberg, the latter as the administrator of Grafeman.

In the brief filed on behalf of appellants Hahn, Roach Diesing, counsel make seven assignments of error, counsel for Teutenberg making four as applicable to his case. The assignments made by counsel for Hahn, Roach and Diesing are: First, to the action of the court in sustaining the finding and holding of the referee, that waiver and estoppel did not apply; second, sustaining the recommendations of the referees; third, in overruling defendants exceptions to the referee's report; fourth, in holding waiver and estoppel did not apply to defendant Diesing; fifth and sixth, in overruling the motions for new trial and in arrest; and, seventh, that the finding and judgment as to the defendant Diesing is excessive.

The assignments by counsel for Grafeman's administrator, as applicable to this case, are: First, that no cause of action exists in favor of the corporation against directors for the payment of dividends out of capital stock; second, that no cause of action exists in favor of creditors against directors for the negligent payment of dividends out of capital stock, and that this is especially true as to subsequent creditors; third, that to subject directors to the statutory liability, actual knowledge that dividends are paid out of capital must be shown as an ultimate fact, and that it is not sufficient that they might, by the exercise of diligence have ascertained the facts, and, finally, that interest is not allowable as part of damage in actions ex delicto, and to be recoverable must be prayed for, it being argued that in the case at bar interest had not been prayed from any specific date and could be allowed, if at all, only from the date of the institution of the suit.

Before taking up any of the assignments of error, it is as well to say that it appears that the plea of the five-year Statute of Limitations was sustained by the referee as to all dividends paid prior to the five years preceding the commencement of the action and they were eliminated and no appeal taken by plaintiff as to this.

It is further to be observed that objection was made to the admissibility in evidence of the books of the corporation in this action, brought by the receiver of the corporation against the directors for dividends alleged to have been improperly paid. The defendants insisted that while these books are admissible against the corporation, they are not admissible in favor of the corporation or its receiver as against the directors. The testimony in regard to these books was received subject to the objection. Learned counsel for appellants claim that the referee committed error in not passing instanter and definitely on the objections. A careful examination of the record fails to show that any such insistence was made before the referee. Learned counsel for appellant cite in support of their proposition Foege v. Woestendiek, 201 Mo. App. 382, 212 S.W. 411. What is said in that decision does not help appellants in any way as to this point. In that case we held that all the testimony in the case being before us, it was immaterial as to what ruling the referee or, for that matter, the trial court, had made about its admission, as we have all the testimony before us, and can examine and pass upon it ourselves. In the case at bar the referee specifically noticing this objection to the inadmissibility of the books and records in evidence and testimony in regard thereto, without discussing that question or quoting other authorities, reports that all objections on that theory were overruled, citing in support of this Lederer v. Morrow, 132 Mo. App. 438, 111 S.W. 902, and cases therein cited.

We agree with the conclusion of the referee on this.

On the question of estoppel raised by the defendants, the referee reports that he "finds himself unable to see the force of defendants' contention." To quote from the report of the referee,

"In their answer they allege that the assets turned over by the corporation to the trustee for creditors exceeded the then liabilities and therefore that said assets should have been used to meet such liabilities, and, since this was not done, that the receiver here, as successor of such trustee, should be estopped from recourse against defendants. But, as stated in the finding of facts, the evidence failed to sustain this position, and defendants thereupon shifted their position and now contend that irrespective of the value of the assets as compared to the liabilities, still the doctrine of estoppel should apply. But the trusteeship was first proposed by the corporation itself, and its attorney was sent to Philadelphia to present the matter to creditors. The transfer was made by the board of directors, and there is not a word of testimony to show that any of the defendants ever demanded immediate liquidation nor objected in any manner to the conduct of either trustee, nor is there any evidence to show that the affairs of the company could have been liquidated to better advantage at the time of the transfer for benefit of creditors than they were a year or so later by the plaintiff herein. Creditors would be placed in a decidedly unfortunate position if, when a debtor is willing to transfer its assets to a trustee for their benefit, they, by permitting such transfer lose all right to protect themselves otherwise, and limit themselves absolutely to the assets so transferred. This contention is not logical and is resolved against the defendants."

In this view of the referee we concur. An examination of the testimony in the case bears out the recital of facts and the conclusion in regard to them, and we hold that this assignment of error, based on estoppel, as well as the separate assignment of like import, made on behalf of Diesing, is untenable.

The second and third assignments going to the alleged error of the court in sustaining the recommendation of the referee and in overruling the exceptions to the report, are not tenable. We have carefully gone over the record of the hearing before the referee and find no error in the admission and exclusion of testimony by him materially affecting the merits of the case, nor as to his recommendation that judgment should go against the defendant. Nor did the court commit error in overruling the exceptions to the report. We think that the conclusion reached by the referee and the subsequent action of the court in approving it, are fully sustained by the testimony in the case. It would be of no service here or in other litigation to attempt to set out the testimony in detail, and it is sufficient to say of it, that it sustains the allegations of the petition in the case so far as the financial condition of the corporation and the acts of these defendants are concerned, and the payment of the dividends. Not only was the company not in a financial condition to pay dividends when it did, but it is clear that the payments were made, not out of any surplus, but really and in fact out of the capital, and the effect was to impair the capital stock of the company and divert from its assets funds that should have gone to the payment of its creditors. The exceptions of defendants were properly overruled.

While this point is not made in the assignment of errors before us, it is as well to say that the plea of the defendants, that at the time of bringing this suit against them as directors, there were pending in that court separate actions against each of them severally, seeking the return by them of so much of the dividends as they had received as stockholders. It may be said, as observed by the referee, that while defendants complain of the disallowance of this defense, they withdrew their motions in the nature of pleas in abatement and filed answers. We agree with the referee in his conclusion on this point, namely:

"There is no reason why this action should be abated because of the others referred to, as they are brought on an entirely different theory; in fact, are different causes of action. It is true that if plaintiff collected the full amount from one director he could not collect further from any other. But it is equally true that such paying director would then have a right of contribution against his co-defendants. [Cook on Corporations (2 Ed.), sec. 549.]"

We may add that this is not an action against these defendants as stockholders, but an action against them as directors for diverting funds of the company and turning them over to all of its stockholders, when the company was not in condition to make such payments without impairment of its capital and was insolvent at the time the payments were made; that as a body and individually they are responsible to creditors, or the corporation, or the receiver. What part of this fund each of the directors received as an individual stockholder, is another matter.

We are unable to find that the judgment against the defendant Diesing is excessive, as claimed in the seventh assignment. The referee very properly refrained from charging him with dividends which had been declared when he was not a director and declared without his authorization or consent. No protest appears to have been made by Diesing at any time to the declaration and payment of so-called dividends declared during his term of office, which, if made, might have exonerated him.

There was no reversible error in the action of the trial court in overruling the motions for new trial. The finding of the referee is amply supported by the testimony in the case.

Nor was there any error in overruling defendants' motion in arrest. The petition stated a good cause of action. Certainly after the finding of the referee, which, in effect, is a special verdict, and the judgment of the trial court, that petition states a good cause of action.

These cover all the assignments of error made by learned counsel for the appellants Hahn, Roach and Diesing.

Taking up the assignments made by counsel for Grafeman's administrator, most of them are covered by what we have said above.

Referring to them specially, we will add that the proposition, to the effect that no cause of action exists in favor of corporations or its creditors against directors for the payment of dividends out of capital stock, is not maintainable. If we are to be controlled exclusively by sections 3002 and 3348, Revised Statutes 1909, the liability is fixed on directors who knowingly pay dividends when the corporation is insolvent, equally in favor of the corporation and its creditors.

It is settled that a receiver of an insolvent corporation may sue directors to recover dividends unlawfully paid. [2 Thompson on Corporations (2 Ed.), sec. 1347.]

In support of the first proposition counsel cite Kritzer v. Woodson, 19 Mo. 327, l.c. 329. That in no manner meets this proposition. Under the second point they cite Union National Bank et al. v. Hill et al., 148 Mo. 380, 49 S.W. 1012; Utley v. Hill,155 Mo. 232, 55 S.W. 1091; Stone v. Rottman, 183 Mo. 552, 83 S.W. 76; Lyons v. Corder, 263 Mo. 539, 162 S.W. 606, and others of like tenor. These are cases where it was sought to charge the directors of banks for negligent loss or wasting of its assets, loss generally occurring from the fraudulent act of an officer, such as a cashier. That is not this case. Nor does the decision in Fusz v. Spaunhorst, 67 Mo. 256, apply here. Our statute expressly provides that any director who "shall knowingly declare and pay any dividend" while the corporation is insolvent shall be liable for the amount of the dividend. That is what is charged here and that is what was proved, either affirmatively, that is, the directors knew the company was not in condition to pay the dividends out of any surplus, or from the circumstances present knowledge must be imputed to them. This is enough to fix their liability.

Referring to what is now section 3348 (and the like remarks apply to section 3002), it is said by our Supreme Court in Shields v. Hobart et al., 182 Mo. 491, l.c. 517, 72 S.W. 669:

"Independently of this statute, which gives creditors an additional security against directors, it is a fundamental rule that dividends can be paid only out of profits or the net increase of the capital of a corporation and can not be drawn upon the capital contributed by the shareholders for the purpose of carrying on the company's business.

"Neither the directors of a corporation, nor even the majority of the stockholders, have any authority to diminish the prescribed capital of the corporation by distributing a portion of it among the shareholders in the shape of dividends, for this would be a fraud upon creditors contracting with it on the faith of its capital stock.

* * * * * "Dividends can only be properly declared from the profits over and above the capital stock and the debts of the company."

It is further argued that the proposition made by counsel as to the non-liability of the directors to the creditors is applicable only to subsequent creditors. While our Supreme Court, in Coleman v. Hagey, 252 Mo. 102, 158 S.W. 829, seems to so hold a later decision of that court in Coleman v. Booth, 268 Mo. 64, 186 S.W. 1021, disposes of the contention the other way. [See also, 2 Thompson on Corporations (2 Ed.), sec. 1369.]

Sections 3902 and 3348 of our statutes make like provision. The act of directors in ordering dividends to be paid, is an entirely different one from the supervision of the directors over the officers of the corporation or their duty of inquiry into the ordinary run of business of the corporation. It is not a mere negligent act and the reasoning in the cases relied on by learned counsel for the appellant Grafeman's administrator, does not apply.

It is argued that as the corporation and stockholders assented to the payment of these dividends, plaintiff cannot complain. But he, as receiver, represents as well the creditors as the stockholders and corporation, and as representing creditors he surely can recover.

But it is argued that interest is not allowable because it does not appear that any demand was made for the repayment of the dividends at the time they were made and that the demand for interest in the petition can only relate to the time of the filing of the petition; furthermore that this being an action exdelicto, interest is not recoverable.

As to the demand not having been made when the dividends were declared, it is to be noted that the persons who could then have made a demand and who represented the corporation were these same directors who had declared the dividends. Creditors who were then advised of the fact of the declaration of the dividend might have made it, but there is no proof that they were then advised of the fact. Even if this action is ex delicto these directors were trustees not only for the corporation but for its creditors. The corporation and its creditors were entitled to have the money at the time it was diverted by the wrongful act of the directors in declaring and paying dividends when the corporation was insolvent. We hold that under the facts in this case interest was properly chargeable.

Our conclusion upon the whole case is that the judgment of the circuit court is for the right party, that no reversible errors were committed, and that that judgment should be affirmed.

Allen, J., concurs. Becker, J., not sitting.