Hoover v. Galbraith

• Decision Date: 12 July 1972
• Citation: 498 P.2d 981,102 Cal.Rptr. 733,7 Cal.3d 519
• Court: California Supreme Court
• Parties: , 498 P.2d 981 Myrl P. HOOVER, Plaintiff and Respondent, v. D. W. GALBRAITH et al., Defendants and Appellants. Sac. 7914. in Bank

Page 733

102 Cal.Rptr. 733

7 Cal.3d 519, 498 P.2d 981

Myrl P. HOOVER, Plaintiff and Respondent, v. D. W. GALBRAITH et al., Defendants and Appellants.

Sac. 7914.

Supreme Court of California,

in Bank.

July 12, 1972.

Daley, Brewer, Patridge & Garrett and James M. Garrett, Stockton, for defendants and appellants.

James F. Roach, Woodland, for plaintiff and respondent.

McCOMB, Associate Justice.

This is an action by a judgment creditor of a now defunct California corporation, Agriform Chemical Company, Inc., against the former directors to collect the debt represented by his judgment pursuant to the California Corporation Law (Corp.Code, §§ 100--6804), ¹ particularly sections 824, 826, and 5000. Defendants raise the single issue on appeal that the action is barred by the statute of limitations. They rely on section 359 of the Code of Civil Procedure which reads: 'This title does not affect actions against Directors or stockholders of a corporation, to recover a penalty or forfeiture imposed, or to enforce liability created by law; but such actions must be brought within three years after the discovery by the aggrieved party of the facts upon which the penalty or forfeiture attached, or the liability was created.' This is not an action to recover a penalty or forfeiture and the time of discovery is not therefore important. The inquiry on this appeal is to determine when the liability was created and whether this action was brought within three years thereafter, excluding any period of time in which the statute of limitations was tolled.

We first note the applicable statutes. Section 824 prohibits the directors of a corporation from distributing any part of the corporate assets among shareholders except as provided in the Corporations Code. Section 825 makes the directors jointly and severally liable to the corporation or its receiver for the benefit of the creditors of the corporation or any of them, in case of wilful or negligent violation of section 824. Section 826 authorizes any 'judgment creditor' of the corporation whose debt or claim arose prior to violation of section 824 by the directors to sue the corporation and any or all of its directors in one action and recover judgment for the amount due such creditor up to the amount of the unlawful distribution of corporate assets. Section 826 further provides insofar as here pertinent that an action against such directors for any violation of section 824 may be brought by the corporation or by its receiver for the benefit of all such creditors without the necessity of any prior judgment against the corporation for the recovery of the amount of the unlawful distribution as far as needed to satisfy such debts and liabilities to creditors.

A corporation may be dissolved in voluntary proceedings (§ 4600 et seq.) without court action. A certificate evidencing election to wind up and dissolve must be filed in the office of the Secretary of State (§ 4603). Thereafter the directors continue to act as a board, with full powers to wind up and settle the corporate affairs, and to defend suits brought against the corporation. (§§ 4800, 4801, subd. (d).) No action to which a corporation is a party abates by the dissolution of the corporation or by reason of proceedings for winding up (§ 5401).

Corporate existence ceases, except for the purpose of further winding up, upon the filing of a certificate of winding up and dissolution (§ 5201). This certificate must be verified by the affidavit of a majority of the board of directors stating, in effect, that the matters set forth in the certificate are true of their own knowledge. It must specifically state (a) that the corporation has been completely wound up; '(b) Whether its known debts and liabilities have been actually paid, or adequately provided for, or paid as far as its assets permitted, or that it has incurred no known debts or liabilities, as the case may be. If there are known debts and liabilities for payment of which adequate provision has been made, the certificate shall state what provision has been made. . . .'; and (c) whether its known assets have been distributed to shareholders '. . . or wholly applied on account of its debts and liabilities, or that it acquired no known assets . . . as the case may be.' (§ 5200.) After provision has been made for payment of creditors (see § 5001) the directors may distribute all of the remaining corporate assets among the shareholders (§ 5000). The Legislature could not have expressed more clearly its intention that debts and liabilities of the corporation to its creditors should be paid or adequately provided for in dissolution proceedings before the distribution of corporate assets to stockholders and to impose liability upon directors for misfeasance in this regard.

Looking at the record before us we note that Hoover has an unpaid judgment based on a debt owed to him by the defunct corporation, which debt arose prior to the dissolution of the corporation. In 1962 he filed an action against the corporation to collect a debt of approximately $11,000. In April 1964 while discovery proceedings were in process the corporation was wound up and dissolved in voluntary proceedings. Thereafter in answer to certain interrogatories, propounded before dissolution, the directors, who were representing the corporation in that litigation, advised Hoover that the corporation had been dissolved, that all creditors' claims had been satisfied, that the remaining assets had been distributed to the shareholders, and that no reserve was established for the 'alleged claim of the plaintiff herein.' In their Certificate of Winding Up and Dissolution they alleged that 'all known debts of the corporation were paid.' They made no reference therein to the debt claimed by Hoover, of which they had knowledge, or of the lawsuit based thereon in which as directors they were representing the defendant corporation. Assets distributed by the directors to the shareholders exceeded the sum of $20,000. They were the sole shareholders. ²

Judgment in the former action was rendered in favor of Hoover in the sum of $11,326 on December 9, 1966. The directors appealed on behalf of the corporation. The remittitur on appeal, affirming the judgment, was not filed until March 19, 1969, (Hoover v. Agriform Chemical Co., 268 Cal.App.2d 818, 74 Cal.Rptr. 325; Yolo County Super. Ct., action No. 18076). Less than three weeks thereafter, on April 4, 1969, Hoover filed the present action in the same superior court against the former directors. Judgment was for Hoover and defendant directors appealed.

In the present action the court took judicial notice of the record in the prior action. It ruled against the directors on their motion for summary judgment. It found that the directors knew of the pending suit, that they did not determine that all known debts and liabilities had been paid or adequately provided for as required by statute; that no part of the judgment debt had been paid by the corporation or by any of the defendants; and that Hoover did not delay an unreasonable time in bringing this action.

Question: One. When was the liability of the directors to Hoover created?

This liability was created in June 1964 when the directors dissolved the corporation and, with knowledge of the claim of Hoover against the corporation, distributed the corporate assets to shareholders without making provision for payment thereof and did not disclose the existence of the claim in the Certificate of Winding Up and Dissolution.

Hoover urges that liability was not created until March 19, 1969; that three conditions were necessary to the 'creation' of this liability, namely: 1. a creditor's claim arising prior to the violation of section 824; 2. violation of section 824; and 3. a final judgment in favor of the creditor. In this regard he cites Richardson v. Craig (1938) 11 Cal.2d 131, 77 P.2d 1077. Under the law there applicable creditors had no direct right of action against shareholders of a bank, but if the bank was insolvent they could present a claim to the Superintendent of Banks who could declare an assessment against the shareholders and specify the due date thereof. Liability of the shareholders was not for the corporation debt but for the assessment. Liability was created at the time the assessment was made and if not paid when due the Superintendent could bring an action against them. While there were preconditions to the making of the assessment, an entirely new liability was created and it ran in favor of the Superintendent of Banks, not the creditors of the bank.

Richardson v. Craig, supra, is analogous to this case in a different respect, however, and that is in distinguishing between the time when the statutory liability is created and the time when the cause of action accrues in the application of the provisions of section 359 of the Code of Civil Procedure. It properly held that the limitation period of section 359, Code of Civil Procedure, commences when the 'liability was created' not when the cause of action thereon accrues. That liability 'may be absolute or contingent; it may be unconditional or limited; it may be presently enforceable by action, or there may be time given for its performance; but, whatever its character, it is created by the consummation of the contract, act, or omission by which the liability is incurred.' (Chambers v. Farnham (1920) 182 Cal. 191, 193, 187 P. 732, 733; Hunt v. Ward (1893) 99 Cal. 612, 615, 34 P. 335. See also, Coulter Dry Goods Co. v. Wentworth (1915) 171 Cal. 500, 502--504, 153 P. 939.) As in Richardson v. Craig, supra, the liability of the corporation and its directors under section 824 is a new liability, independent of the underlying debt or claim. It arose, however, not when Hoover obtained his judgment or when the judgment became final, but when the directors distributed the assets of the corporation without making provision for the payment of Hoover's...