Watkinson v. Adams

This is an appeal by Rex Watkinson and G. Ed Warren, co-receivers of the Exchange National Company, a corporation, and Matie Center and M. Marguerite Day, creditors of said corporation, plaintiffs in the trial court, from a judgment of the district court of Tulsa county, Okla., sustaining the separate demurrer of the defendants Kate Chestnut, Margaret Genevieve Smith, and Alice Carmelita Quinlan to the amended petition of the plaintiffs in error and dismissing said amended petition when plaintiffs in error elected to stand thereon. This is an action to recover from the directors of said corporation or their executors or the distributees of their estates, if deceased, the sum of $60,000 alleged to have been paid out as a dividend in violation of the provisions of section 9763, O. S. 1931, 18 Okla Stat. Ann. § 106. The defendants herein are the distributees of the estate of Thomas Chestnut, who was a member of the board of directors of said corporation at the time the alleged illegal dividend was declared and paid.

The substance of plaintiffs' amended petition is that Thomas Chestnut was a director of the Exchange National Company from the date of its organization until his death in August, 1931; that the estate of said Thomas Chestnut was probated in the county court of Tulsa county, and distributed in September, 1932, to the defendants herein; that the assets of said estate so distributed in equal shares to the defendants aggregated approximately $2,000,000; that on November 26, 1929, a "Call and Waiver of Notice of Special Meeting of the Board of Directors of the Exchange National Company" was served upon each member of the board of directors of said company, including the deceased, Thomas Chestnut, stating one of the purposes of the meeting was to declare a dividend of $60,000; that pursuant to said notice a meeting of the directors was held, but that Thomas Chestnut was not present; that said dividend was declared and paid in violation of section 9763, O. S. 1931, 18 Okla. Stat. Ann. § 106, since there were no surplus profits out of which to pay said dividend; that the dividend was paid out of the capital stock of said corporation in violation of section 9763, supra; that the directors who were not present at the meeting of the board declaring the dividend had full and complete knowledge of the purpose of the meeting and that at a subsequent meeting of the board they were advised that the dividend had been declared and paid; that by accepting payment of the dividend and making no objections thereto at subsequent meetings the absent directors ratified and approved the action of the other directors in so declaring and paying said dividend; that the Exchange National Company was dissolved by order of the district court of Tulsa county in August, 1935.

It is necessary that we first determine whether, under the allegations of the amended petition herein, a cause of action was stated which could have been enforced against the deceased director, Thomas Chestnut, during his lifetime. The plaintiffs predicate their cause of action upon section 9763, O. S. 1931, 18 Okla. Stat. Ann. § 106, which provides:

"The directors of corporations must not make dividends except from the surplus profit arising from the business thereof, nor must they divide, withdraw, or pay to the stockholders, or any of them, any part of the capital stock; nor must they create debts beyond their subscribed capital stock, or reduce or increase their capital stock except as specially provided by law. For a violation of the provisions of this section, the directors under whose administration the same may have happened (except those who may have caused their dissent therefrom to be entered at large on the minutes of the directors at the time, or were not present when the same did happen), are, in their individual and private capacity, jointly and severally liable to the corporation, and to the creditors thereof, in the event of its dissolution, to the full amount of the capital stock so divided, withdrawn, paid out, or reduced, or debt contracted; and no statute of limitations is a bar to any suit against such directors for any sums for which they are made liable by this section. * * *"

The portion of the statute for our consideration is that which makes certain directors liable when dividends are made in violation of said statute. Under the provisions of the above statute all directors during whose administration such a dividend, as alleged in the petition herein, is made are jointly and severally liable to the corporation and its creditors for the full amount of the capital stock of the corporation so paid out as a dividend, except the directors who caused their dissent to be entered upon the minutes of the meeting at the time or who were not present at the meeting declaring such a dividend.

The plaintiffs herein do not allege that the deceased, Thomas Chestnut, was present at the meeting declaring the dividend, but seek to bring themselves within the provisions of the statute by alleging that, since he knew the purpose for which the meeting was called and then subsequently accepted a portion of the illegal dividend declared at that meeting without objecting, he thus ratified the action of the other directors in declaring and paying the dividend.

The plaintiffs herein contend that section 9763, supra, is a remedial statute to be liberally construed and that under such a construction the allegations of ratification are sufficient to charge the director herein, Thomas Chestnut, with liability thereunder notwithstanding the fact that he was not present at the particular meeting of the directors when the illegal dividend was made.

Section 9763, supra, was adopted by this state from the statutes of Oklahoma Territory. Stevirmac Oil Gas Co. v. Smith, 259 F. 650. Prior to the adoption of the statute by the Legislature of this state, the Supreme Court of the Territory of Oklahoma had held in Rogers v. Bonnett,2 Okla. 553, 37 P. 1078, that this statute was penal in nature, at least, as to the directors and to be strictly construed. In Stevirmac Oil Gas Co. v. Smith, supra, Judge Williams, in construing this statute, pointed out that a statute of Oklahoma Territory continued in force by the state Constitution and afterward carried into the statutes of the state in their revision by the Legislature carries with it the construction placed on it by the Supreme Court of the territory. The view expressed in Rogers v. Bonnett, supra, that this statute is penal in nature as to the directors is more fully treated in Credit Men's Adjustment Co. v. Vickery (Colo.) 161 P. 297, wherein the Colorado court, in considering a statute of this nature, said:

"In some respects the statute is penal, while in others it is remedial in character; penal in its nature as to the directors for the purpose of determining their liability, and to be strictly construed. When the liability is clearly shown, it is remedial in character as to creditors and to be liberally construed in its enforcement."

This court, in Colcord v. Granzow, 137 Okla. 194, 278 P. 654, 64 A.L.R. 699, relied upon the above decision in holding that the assignee of a creditor could enforce the liability created by said section 9763, supra, since it was remedial as to the creditors. But, contrary to the contention of the plaintiffs herein, the above case did not determine whether the statute was penal or remedial as to the directors. The cause of action therein was predicated upon section 9763, supra, it is true, but a different factual situation was involved. In the opinion therein it is pointed out that all of the defendant directors had been present at the meetings when the excessive indebtedness was created and none of the directors entered a dissent to the creation of the debt. The question regarding the liability of an absent director was not involved nor considered by the court.

Since, therefore, the statute herein is penal in nature as to the directors, it is to be construed accordingly. The general principles of construction are set forth as follows in 25 R.C.L. sec. 301, P. 1081:

"It has long been the well-settled general rule that penal statutes are subject to the rule of strict construction. They will not be construed to include anything beyond their letter even though within their spirit, and nothing can be added to them by inference or intendment."

In accordance with the accepted principle of construction applicable to statutes penal in character, the plain meaning of the statute herein, section 9763, supra, is that directors who were present at the meeting of the board of directors at which the illegal dividend was made and failed to cause their dissent to be entered on the minutes of the meeting at the time are jointly and severally liable in their private capacity for the full amount of the capital stock of the corporation so paid out as a dividend. The statute as conclusively excludes from liability the absent directors as it creates liability on the part of those who were present at the particular meeting and did not enter their dissent. The Legislature has exempted the absent director and it is not for this court, by judicial interpretation, to impose limitations upon the express exemptions of such a penal statute. It is clear, therefore, that the deceased director, Thomas Chestnut, was not liable during his lifetime under the allegations of the petition herein, and since no cause of action was alleged against Thomas Chestnut, if he were living, it follows that the petition does not state a cause of action against the distributees of his estate, defendants herein.

The judgment of the trial court is affirmed.

BAYLESS, C. J., WELCH, V. C. J., and RILEY, CORN, HURST, DAVISON, and DANNER, JJ., concur. GIBSON, J., absent.

Supplemental Opinion on Rehearing.