Snyder v. Yoder

• Court: U.S. District Court — Northern District of Ohio
• Writing for the Court: Ben C. Boer, Cleveland, Ohio, for defendant Yoder
• Citation: Snyder v. Yoder, 176 F.Supp. 617 (N.D. Ohio 1959)
• Decision Date: 10 September 1959
• Docket Number: Civ. A. No. 33532.
• Parties: R. H. SNYDER, Plaintiff, v. Harvey O. YODER et al., Defendants.

176 F. Supp. 617

R. H. SNYDER, Plaintiff, v. Harvey O. YODER et al., Defendants.

Civ. A. No. 33532.

United States District Court N. D. Ohio, E. D.

September 10, 1959.

Theodore M. Mann, John L. Naylor, Jr., Cleveland, Ohio, for plaintiff.

Ben C. Boer, Cleveland, Ohio, for defendant Yoder.

Norman B. Miller, Cleveland, Ohio, for defendant Schutz.

WEICK, District Judge.

Plaintiff, R. H. Snyder, is a resident of Pennsylvania. During the late 1940's and 1950 he was employed as a salesman for Power Plants, Inc., an Ohio corporation, with its principal office and place of business in Cleveland, Ohio.

Defendants, Harvey O. Yoder and Otto W. Schutz, were both shareholders in and directors of Power Plants, Inc. at the time in question, and are both residents of Ohio.

A dispute arose between Snyder and his employer over commissions due Snyder, which culminated in his filing of Civil Action No. 28297 in this Court against Power Plants, Inc. on June 22, 1951.

That action came on for hearing before the late Judge Freed on June 3, 1954. After hearing it was referred to a master for a determination of damages, and the final order awarding plaintiff judgment for $8,000 plus interest and costs was entered on July 7, 1955. Power Plants, Inc.'s appeal from that judgment was dismissed on October 31, 1955.

While Civil Action No. 28297 was being pursued by plaintiff, Power Plants, Inc. entered into certain transactions vitally related to the instant controversy.

During 1951 and early 1952 the directors and officers of Power Plants, Inc. were concerned with a plan to relocate the company. On November 5, 1951 a special meeting of the Board of Directors was held, at which time a resolution was adopted that Power Plants, Inc. take such steps as would be necessary to move its business and manufacturing operations to Cadiz, Ohio, provided that the citizens of that community met certain conditions, including the subscription to $100,000 of stock in the company. Both defendants were present at that meeting.

The directors' resolutions were carried out, and thereafter a special meeting of shareholders was called on March 31, 1952, at which both defendants were present.

At that meeting the following two resolutions were passed, 886 shares voting for and 64 against:

"Be It Further Resolved, that John Gros, William Hersh, and James C. Rash proceed as incorporators to organize a new corporation to be known as `Electric Power Plant Corporation' with its principal office in Cadiz, Ohio, and that Otto W. Schutz, Secretary and counsel, is authorized to prepare all necessary papers and expend all necessary funds to properly conclude this organization, and the organizers likewise are empowered and authorized to do all acts necessary to accomplish the organization.

"Be It Further Resolved, that all real and personal property, tangible and intangible, of Power Plants, Inc. be transferred to Electric Power Plants Corporation upon the assumption of all the liabilities and debts of Power Plants, Inc., and in consideration for the issuance by Electric Power Plants Corporation of 1826 ¼ of its common stock and 1826 ¼ $100 note, said shares to be issued to the respective shareholders of Power Plants, Inc., one share and note for each no par value share of Power Plants, Inc. held by the shareholders."

Following this meeting, the directors (who were all shareholders), with the exception of one who had voted against the proposal, met informally and discussed the details of accomplishing the transfer.

On June 2, 1952 Electric Power Plants Corporation was incorporated. On July 12, 1952 the organization meeting of Electric Power Plants was held, and a board of directors was elected. Five of the seven directors of Power Plants, Inc. were elected to the six-man board of Electric Power Plants, including the two defendants.

In August of 1952 papers filed with the Division of Securities of Ohio disclosed a shareholders' equity in Power Plants, Inc. of $178,000 and that the citizens of Cadiz, Ohio were to put in a further $100,000 investment.

During November of 1952 the assets of Power Plants, Inc. were transferred to Electric Power Plants Corp., except for certain real estate in Cleveland, Ohio. The deed conveying this property to Electric Power Plants was executed in June 1952, but not recorded until April 1953.

Defendant Yoder testified that at the time of the transfer he was told by John Gros that the Cleveland property was being retained to satisfy the claims of any creditors of Power Plants, Inc. However, in February of 1955, when Electric Power Plants Corp. sold the property, the full purchase price was deposited in Electric Power Plants' treasury.

Thus, by the time final judgment was entered in favor of plaintiff against Power Plants, Inc. in Civil Action No. 28297 said corporation was a hollow shell, devoid of any assets. It has never been formally dissolved.

On February 24, 1958 plaintiff filed a motion in Civil Action No. 28297 to add Electric Power Plants Corp. as a party defendant to the judgment. This motion was resisted by Electric Power Plants, but was granted by Judge Connell on July 11, 1958 who treated both corporations as a single entity.

Plaintiff has been unable to satisfy his judgment against Electric Power Plants, since that time, because of its apparently poor financial condition. He seeks in the present action to hold the defendants liable as directors of Power Plants, Inc. on the theory that the distribution of stock and notes to the shareholders was not authorized by the statutes of Ohio.

Plaintiff's claim against these two defendants is stated as follows:

"The actions of defendants Yoder and Schutz and the other participating directors of Power Plants, Inc. have precluded plaintiff's recovery on his judgment. Had it not been for the transfers and distribution they devised, approved and participated in during 1952, there would have been ample property in Power Plants, Inc. with which to satisfy plaintiff's adjudicated claim."

The question of the defendants' liability in this action rests upon the interpretation of certain sections of the Ohio General Code.¹

The primary section upon which plaintiff relies is General Code § 8623-123b. By that section directors are prohibited from distributing assets except as provided generally in Section 8623. A wilful or negligent violation of said prohibition on the part of directors makes them "jointly and severally liable to the corporation for the full amount of any such unauthorized * * * distribution."

The first matter for consideration is whether, under the statute, corporate creditors have any direct right of action against the directors for an unauthorized distribution. By the express terms of Section 8623-123b the directors' liability runs only to the corporation itself.

However, General Code § 8623-123c provides a foundation for such an action. It states, in part:

"No action shall be brought by or on behalf of any creditor to reach and apply any debt or liability arising under or pursuant to the two preceding sections until after the happenings of one of the events specified in section 8623-28 of the General Code."

Absent this paragraph of § 123c, it is very doubtful whether, under the General Code, creditors would have any right of action against directors of a solvent corporation for an unauthorized distribution of assets. For without this single mention of creditor's rights, the Code would only establish a liability from the directors to the corporation.

In fact, the view is expressed that it is not clear that under General Code §§ 8623-123b and 123c any direct liability of directors to creditors existed, 12 O. Jur. 2d, Corporations § 614, but rather that § 123c related to the right of creditors to pursue shareholders who had received an unauthorized distribution, which right was also provided for in § 123b. In this regard it is worth noting that not one Ohio case has been cited wherein directors of a solvent corporation were held directly liable to creditors for an unauthorized distribution of assets, and that under the present Ohio Corporation Law, Ohio Rev.Code § 1701.95, the opinion of the Ohio authorities is that no such direct liability exists, 12 O. Jur. 2d, Corporations § 614.

It is my view, however, that under the statutes in force at the time a right of action existed in behalf of creditors directly against directors. General Code 8623-123b creates a liability running from directors to the corporation. Section 8623-123c impliedly gives creditors the right to reach this liability, when it expresses the limitation on the right of creditors to reach and apply any liability created under § 123b.

The next matter for consideration is whether the distribution was in fact violative of the provisions of § 8623 generally.

Under the terms of General Code § 8623-65, controlling on the sales of entire assets of a corporation, the corporation had no right to make a direct distribution of the proceeds of the sale to shareholders. This right was taken away by an amendment of said section in September, 1949.

Nowhere in the entire Section 8623 is there found a provision authorizing a distribution such as was made here.

The closest analogous section is § 8623-40. That section, however, controls distributions of excess assets resulting from a reduction of stated capital, which was not the case here. Even under that provision though, any distribution which would have the effect of reducing the stated capital below $500 and/or rendering the corporation unable to satisfy its obligations and liabilities is forbidden. Therefore, this distribution would have been violative of § 8623-40, if it applied.

The distribution not having been made as provided in General Code § 8623 generally, must be considered as unauthorized.

The next defense raised is that the action was not taken by defendants in their official capacity as directors, and they are therefore not liable under §...