Peck v. Jonathan Michael Builders, Inc., No. KM 06-0236 (R.I. Super 10/27/2006)

• Court: Rhode Island Superior Court
• Writing for the Court: Silverstein
• Decision Date: 27 October 2006
• Docket Number: No. KM 06-0236,KM 06-0236
• Citation: Peck v. Jonathan Michael Builders, Inc., No. KM 06-0236 (R.I. Super 10/27/2006), No. KM 06-0236 (R.I. Super. Oct 27, 2006)
• Parties: BARBARA PECK and JEFFREY COTE v. JONATHAN MICHAEL BUILDERS, INC.

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BARBARA PECK and JEFFREY COTE v. JONATHAN MICHAEL BUILDERS, INC.

No. KM 06-0236

State of Rhode Island, Superior Court

Providence, S.C.

Filed: October 27, 2006

DECISION

SILVERSTEIN, J.

Before this Court are motions by petitioners Barbara Peck and Jeffrey Cote (Petitioners) to amend their petition to appoint a receiver and a motion for the appointment of a permanent receiver of Jonathan Michael Builders, Inc. (Respondent), a Rhode Island corporation the stock of which is owned entirely by the Petitioners. Avalon Holdings, LLC (Avalon), a creditor of Respondent, objects to the appointment of a receiver and has filed a motion to dismiss the petition on various grounds. As the motions raise issues that could broadly impact receivership practice in Rhode Island, several amici have filed briefs with the Court. Jurisdiction of this matter pursuant to G.L. 1956 § 7-1.2-1316 and the court's inherent powers as an equity court, is discussed below.

Facts/Travel

Respondent was in the construction business before ceasing operations. (Pet. Appt. Receiver, ¶¶ 1, 2, Mar. 15, 2006.) Avalon alleges that it previously had contracted with Respondent for the construction of a residential home in Jamestown. Construction has ceased on the property, however, and in March, 2005, Avalon brought suit against Respondent alleging breach of contract and unjust enrichment.

On March 15, 2006, while the construction litigation was pending, the shareholders of Respondent filed a petition for the appointment of a receiver in the Superior Court of Kent County. In support of their petition, they alleged that Respondent was insolvent, and that receivership was necessary to prevent the dissipation and depreciation of its assets. The Court appointed Theodore Orson as temporary receiver pending the outcome of the hearing to determine whether a permanent receiver would be appointed. (Order Appt'ing Temp. Receiver, Mar. 15, 2006.) Consistent with the usual practice, that Court also enjoined the continuation of any pending lawsuits against Respondent, including Avalon's. Id. ¶ 7. Avalon filed an objection and motion to dismiss, arguing that the court does not have jurisdiction to appoint a receiver in this case.

The Petitioners responded with a motion to amend which provided additional grounds for their petition to appoint a receiver. The amended petition reflects that a shareholder meeting occurred on March 15, 2006 and that the Petitioners had voted to dissolve the corporation. Each shareholder has also signed an "Action by Unanimous Consent of the Stockholders," dated May 14, 2006, which purports to ratify the results of the March 15, 2006 shareholder meeting and independently resolves to dissolve the corporation. (Mot. Am. Pet. Appt. Receiver ¶¶ 2, 3, 6 & App. A.) That motion to amend has not yet been granted by the Court. A hearing was scheduled, but the case was continued to allow interested persons to file amicus briefs with the Court. (Order Grant. Mot. Continue Hr'g, May 23, 2006). Subsequently, the case was transferred sua sponte from Kent County to Providence County. (Sua Sponte Order Tranf. Case to Providence Cty, Jun. 6, 2006).

Before the Court are the Petitioners' motion to amend their petition, the motion to appoint a permanent receiver for Respondent, and Avalon's motion to dismiss the petition.

Analysis

The Petitioners allege several statutory and equitable grounds for the appointment of a receiver and argue that any one alone would be sufficient to confer jurisdiction on the Court. Avalon, in response, presents various arguments as to why none of these grounds is applicable to Respondent—an insolvent corporation the two shareholders of which unanimously seek the appointment of a liquidating receiver. The Court will first provide an overview of the statutory scheme pertaining to dissolution and receivership, and analyze the petition under that scheme. It will then consider the nature of the Court's inherent equitable power and whether that power allows the Court to appoint a receiver for Respondent.

Statutory Scheme for the Liquidation and Dissolution of a Corporation

Part 13 of the Rhode Island Business Corporation Act (BCA), titled "Dissolution and Revocation," contains the provisions for receiverships. G.L. 1956 §§ 7-1.2-1301 to 1325.¹ At the outset, it is important to note the distinction between certain terms used in the statute. "Liquidation" is the process of marshalling a corporation's assets, selling them, and distributing those assets to the corporation's creditors and shareholders. See § 1316. "Dissolution" is the act that terminates the existence of the corporate entity, and may be accomplished either at the behest of the corporate principals ("voluntary") or by court decree ("involuntary"). See §§ 1301-1303, 1308-09 (providing procedures for a voluntary dissolution); § 1320-21 (providing for an "involuntary" dissolution by court decree). Liquidation and dissolution are not equivalent—liquidation is merely one step in a process that terminates with the dissolution of a corporation. See 16 William Meade Fletcher et. al., Cyclopedia of the Law of Private Corporations § 7667.50 (perm. ed., rev. vol. 1998) (hereinafter "Fletcher"). The appointment of a receiver is also distinct from both liquidation and dissolution. Id.² "Insolvent" is defined by the BCA as "the inability of a corporation to pay its debts as they become due in the usual course of its business." § 106(8).

Sections 1314 and 1316 of the BCA give the Court power to appoint a receiver when the Court is supervising the liquidation of a corporation. Section 1314 enumerates grounds³ for a shareholder, creditor, or the Attorney General to petition for liquidation, while § 1316 provides for the appointment of receivers in liquidation proceedings.⁴ In the case of a shareholder action "the superior court has jurisdiction to liquidate . . . when it is established that, whether or not the corporate business has been or could be operated at a profit, dissolution would be beneficial to the shareholders because:

(i) The [directors or controlling shareholders] are deadlocked in the management of the corporate affairs and the shareholders are unable to break the deadlock; or

(ii) The acts of the [directors or controlling shareholders] are illegal, oppressive, or fraudulent; or

(iii) The shareholders are deadlocked in voting power . . . .

(iv) The corporate assets are being misapplied or are in danger of being wasted or lost; or

(v) Two (2) or more factions of shareholders are divided and there is such internal dissension that serious harm to the business and affairs of the corporation is threatened; or

(vi) The holders of one-half (1/2) or more of all the outstanding shares of the corporation have voted to dissolve the corporation." Section 1314(a)(1).

The Petitioners have sought appointment of a receiver, inter alia, under the jurisdiction conferred by § 1314(a)(1)(vi).⁵

The Petitioners also rely on §§ 1302-03,⁶ which provide for the voluntary dissolution of a corporation. Once the shareholders of a corporation adopt a resolution to dissolve:

"(1) The corporation shall execute and file articles of dissolution in accordance with §§ 7-1.2-1308 and 7-1.2-1309.

. . . .

(3) The corporation shall proceed to. . . liquidate its business and affairs. After paying or adequately providing for the payment of all its obligations, the corporation distributes the remainder of its assets, either in cash or in kind, among its shareholders according to their respective rights and interests.

(4) The corporation, at any time during the liquidation of its business and affairs, may apply to a court of competent jurisdiction . . . to have the liquidation continued under the supervision of the court as provided in this chapter." Section 1302(b) (emphasis added).

The person filing articles of dissolution must state that all outstanding obligations have been paid, or that adequate provision for payment has been made, prior to filing the articles. Section 1308.

Here, the two shareholders of Respondent have unanimously resolved to dissolve the corporation and argue that this is sufficient grounds for the appointment of a receiver under § 1302 and § 1314(a)(1)(vi).⁷ Avalon argues, however, that an insolvent corporation may not voluntarily dissolve under § 1302 because, by definition, see § 106(8), an insolvent corporation cannot possibly make adequate provision for its debts. It further agues that § 1314(a)(1)(vi) "provides the jurisdiction for judicial dissolution only where dissolution has been otherwise authorized by the voluntary dissolution provisions" of §§ 1302-03. As a result, it seeks dismissal of the petition to appoint a receiver.

Avalon's argument is only partially correct, however, because § 1314 does not provide for dissolution at all—it provides for liquidation. It is true that an insolvent corporation could not voluntarily dissolve because it could not truthfully proclaim that adequate provision has been made for all of the corporation's debts and obligations. See §§ 1302(b)(3), 1308. It may liquidate, however, as long as the corporation passes a resolution to dissolve under § 1302 or § 1303, and the court may supervise that liquidation with a receiver. Section 1302(b)(4). In fact, as the amici point out, it is the insolvent corporation that most often requires a court-supervised liquidation to avoid a "race-to-the-courthouse" by its creditors. So Avalon's contention that only a solvent corporation may voluntarily dissolve, while correct, does not deprive the court of jurisdiction to appoint a receiver because liquidation is not dissolution.

Nothing in either § 1302 or § 1314 dictates a contrary result. In fact, § 1302 expressly states that the corporation, "at any time during the liquidation of its business and affairs, may apply to a court of competent jurisdiction. . . to have the liquidation continued under the supervision of the court as provided...