Calkins v. Wire Hardware Co.

• Decision Date: 08 April 1929
• Citation: 267 Mass. 52,165 N.E. 889
• Parties: CALKINS v. WIRE HARDWARE CO. et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

267 Mass. 52

165 N.E. 889

CALKINS

v.WIRE HARDWARE CO. et al.

Supreme Judicial Court of Massachusetts, Suffolk.

April 8, 1929.

Appeal from Superior Court, Suffolk County; E. B. Bishop, Judge.

Suit by Grosvenor Calkins against the Wire Hardware Company and others, with crossbill by defendants Stuart G. Shepard and Perry M. Shepard against defendant company and defendant Reginald Washburn. From a decree for plaintiff against the individual defendants, and dismissing the cross-bill, defendants Shepard appeal. Affirmed.C. B. Rugg, of Worcester, for appellants.

Grosvenor Calkins, pro se.

G. K. Gardner, of Cambridge, and L. Wheeler, Jr., of Worcester, for defendants Wire Hardware Co. and others.

CROSBY, J.

This is a suit in equity brought by a creditor of the Wire Hardware Company, a Massachusetts corporation, to collect from the stockholders personally a judgment against the corporation. During the trial, the bill was amended so as to include allegations of employment of the plaintiff by the individual defendants, as well as by the corporation itself. The defendants Stuart G. Shepard and Perry M. Shepard filed a cross-bill seeking relief as minority stockholders of the Wire Hardware Company against the company and the defendant Reginald Washburn. The case was tried before a judge of the superior court. A stenographer was appointed in accordance with equity rule 29. The trial judge filed a document entitled ‘Findings of Fact,’ and ordered that a decree be entered directing payment by the individual defendants to the plaintiff of the amount claimed, and dismissing the crossbill. The defendants Stuart G. Shepard and Perry M. Shepard appealed from the final decree.

On November 26, 1924, the plaintiff, an attorney at law, was employed by the defendant Reginald Washburn, who was vice president of the Wire Hardware Company, hereinafter referred to as the company, to appear as counsel to obtain a reduction in the amount of a proposed additional federal income tax against the company in the amount of $6,806.21. As a result of the plaintiff's efforts, the proposed assessment was reduced to $1,113.68; this assessment was assented to by the defendants. On November 13, 1925, and shortly after the reduction was secured, the plaintiff rendered a bill to the company, for services and expenses in securing the reduction, of $952.86, together with a charge of $30 for services in another matter. It is agreed that the plaintiff's charges were fair and reasonable, and that, if he is entitled to recover, he is entitled to receive the full amount. The trial judge having found for the plaintiff against all the defendants individually, and no appeal having been taken from the decree by the defendants Charles G. and Reginald Washburn and William L. Walker, the sole question under the original bill relates to the individual liability of the defendants Shepard.

The company was organized in 1910 and continued in business as a manufacturing corporation until 1914, when it was merged with the Cassady-Fairbanks Company, another corporation. From 1914 to 1920 the company did no business, except to care for the real estate formerly used and occupied by it; this property was sold in 1920, and notes secured by a mortgage were given in part payment of the purchase price and held by the company until 1923, when the last payment was made.

The stock of the company was held as follows: Perry M. and Stuart G. Shepard owned two-fifths; the Washburn interests owned three-fifths. The individual defendants were both stockholders and directors, and there were no stockholders other than the directors except that Charles G. Washburn held certain shares issued to him as trustee. Perry M. Shepard was president and treasurer; Reginald Washburn was vice president and clerk of the company from 1921.

On April 4, 1923, the annual meetings of the stockholders and directors were held. Both the Shepards knew in advance the nature of the business which would be considered at these meetings, but neither was present in person nor represented by proxy. At the stockholders' meeting it was voted to ratify and approve the sale of the business of the corporation and of the real estate, and ‘to distribute as a final dividend on liquidation to stockholders of record this day the balance on hand in the treasury of the company.’ At both the stockholders' and the directors' meetings it was voted ‘that the executive officers of the corporation take whatever action they deem appropriate to secure dissolution of the corporation.’ At that time it was understood by the stockholders and directors that there might be a federal tax due from the company, based upon an audit for the years before 1923. The amount of such tax was at that time unknown. To provide for the payment of such tax, if found due, agreements were signed by which the Shepards were to pay two-fifths and Charles G. and Reginald Washburn three-fifths. On April 12, 1923, distribution of the assets was made pursuant to a vote of the stockholders. On November 26, 1924, the federal government made an additional assessment of $6,806.21, on account of taxes paid by the company for the year 1920. All the services charged by the plaintiff in the bill were performed after April 4, 1923, and the trial judge found that ‘on April 4, 1923, the petitioner's claim or debt against the Wire Hardware Company was not in existence.’

[1] On November 19, 1925, the plaintiff wrote to Stuart G. Shepard, inclosing a memorandum of services rendered. Afterwards there was correspondence between these parties relating to the payment of the bill by the individual stockholders and directors. Shepard wrote the plaintiff that he in no way felt any legal or moral responsibility for the payment of the bill as a former stockholder or director, since the plaintiff had charged the company on his books and had rendered the services to the company. On February 15, 1926, the plaintiff brought an action at law on his claims for services, in the Central district court of Worcester, against the company, upon which service was made, but the company neither appeared nor answered and was defaulted. On March 10, 1926, execution was issued for $1,002.77 damages and $8.92 costs. On March 17, 1926, the plaintiff made demand for payment of the execution. Payment was not made and, the company having no assets, the plaintiff brought this bill to enforce payment from the individual defendants as stockholders and directors. The plaintiff amended his bill by adding an allegation that the defendants, individually, employed him to perform these services and that a contractual relation thereby was created. The defendants' execution to the allowance of the plaintiff's motion to amend the bill must be overruled. The allowance of the amendment was a matter within the discretion of the court. Tufts v. Waxman, 181 Mass. 120, 121, 63 N. E. 132;Reno v. Cotter, 239 Mass. 581, 583, 132 N. E. 271.

[2] The defendants are not liable as stockholders under G. L. c. 156, § 35. On April 4, 1923, when the stockholders voted to distribute all the assets, the plaintiff's claim or debt was not in existence; the services rendered by the plaintiff were not those of an operative and the judge correctly so ruled. There was no evidence which warranted a finding that there was a contractual relation between the plaintiff and the defendants Shepard.

[3][4][5][6] The defendants, however, are liable as directors under G. L. c. 156, § 37. That statute provides that: ‘The directors of every corporation shall be jointly and severally liable for the debts and contracts of the corporation. * * * For declaring or assenting to a dividend if the corporation is, or thereby is rendered, bankrupt or insolvent, to the extent of such dividend.’ On April 4, 1923, the stockholders voted to make distribution of what they called a final dividend in liquidation of the balance on hand in the treasury, and at the directors' meeting immediately following that of the stockholders it was voted that the officers should take whatever action they deemed appropriate to secure dissolution of the company. Both the defendants Shepard knew in advance of the proposed action of the stockholders and directors at these meetings. Perry M. Shepard, as treasurer, drew the checks effecting the distribution and they were accepted by him and his brother with knowledge of all the facts. It is plain that these acts constituted an assent by the defendants to the distribution. A distribution of the proceeds of the sale of all the property of a corporation is a dividend within the meaning of the statute. Pennsylvania Iron Works v. Mackenzie, 190 Mass. 61, 63, 76 N. E. 228. See Spencer v. Lowe (C. C. A.) 198 F. 961. The statutory liability of directors is not limited to debts which were in existence at the time a dividend was declared. G. L. c. 156, in terms includes all debts and contracts. This is apparent from reading the first clause of section 37 in connection with clause 2. By the latter clause the directors are made jointly and severally liable for debts and contracts, between the time of making or assenting to a loan to a stockholder and the time of its repayment, to the extent of such loan. By section 35 the statutory liability of stockholders is limited to debts and contracts existing at the time of the reduction of capital stock. If it were the intention of the Legislature to limit liability of directors to debts and contracts existing when a dividend is declared, it would have manifested such intention, as it did in those other sections. A statute imposing individual liability for corporate debts is to be construed strictly, and liability is not to be extended beyond the limits prescribed by those provisions of the statute. Gray v. Coffin, 9 Cush. 192, 199;Auld v. Caunt, 216 Mass. 381, 382, 103 N. E. 933.

[7] The evidence warranted a finding that the individual defendants as directors were liable, independently of the statute,...