Ulness v. Dunnell

• Decision Date: 15 June 1931
• Docket Number: No. 5936.,5936.
• Citation: 237 N.W. 208,61 N.D. 95
• Parties: ULNESS v. DUNNELL et al.
• Court: North Dakota Supreme Court

61 N.D. 95

237 N.W. 208

ULNESS

v.DUNNELL et al.

No. 5936.

Supreme Court of North Dakota.

June 15, 1931.

Syllabus by the Court.

A defect of parties within the purview of section 7442, C. L. 1913, for which a demurrer to a complaint is allowed, means a deficiency, not an excess, of parties.

Syllabus by the Court.

A general demurrer to a complaint for failure to state facts sufficient to constitute a cause of action will be overruled, where several defendants join in a demurrer to a complaint which states a good cause of action as to any demurrant.

Syllabus by the Court.

A dividend can be legally declared and paid out of the surplus profits only (section 4543, C. L. Supp. 1925); and when dividends are paid out of the capital stock of a corporation which is rendered insolvent by such payment, a liability arises on the part of a stockholder who receives such dividend to return it.

Syllabus by the Court.

The trustee in bankruptcy of the corporation may maintain an action to enforce such liability against stockholders.

Syllabus by the Court.

The trustee in bankruptcy of a corporation may maintain an action to enforce the statutory liability against directors for declaring and causing dividends to be paid out of capital stock. Sections 4543, 4544, C. L. Supp. 1925.

Additional Syllabus by Editorial Staff.

Appeal from District Court, Ward County; Moellring, Judge.

Action by E. L. Ulness, trustee in bankruptcy of the Magic Grain Dump Company, a bankrupt, against William Dunnell and others. From an order overruling a demurrer to the complaint, defendants appeal.

Affirmed.

Nestos, Herigstad & Stenersen, of Minot, for appellants.

Robert H. Bosard and Geo. A. McGee, both of Minot, for respondent.

CHRISTIANSON, C. J.

This action was brought by the plaintiff, Ulness, trustee in bankruptcy of the Magic Grain Dump Company, a domestic corporation, against the directors and stockholders of said corporation, to recover from them certain dividends alleged to have been paid out of the capital stock of the corporation. In the complaint it is alleged in substance that the plaintiff is the duly appointed, qualified, and acting trustee in bankruptcy of said Magic Grain Dump Company, a bankrupt, and brings this action as such trustee; that said Magic Grain Dump Company is a corporation organized and existing under the laws of the state of North Dakota with an authorized capital stock of $100,000; that the corporation was organized for the purpose of manufacturing and installing grain dumps, known as “Magic Grain Dumps,” in grain elevators; that the manufacture and distribution of such “grain dumps” was covered by patents issued by the United States of America and by the Dominion of Canada, which patents were the property of the corporation; that at all times involved in this action, the defendants Harry Knapp, Wm. Dunnell, J. E. Harmon, Fred Ernst, W. G. Hancock, Ira Rush, and Jack Adams constituted the board of directors of said corporation and had exclusive management thereof; that all the defendants named in the title of this action were owners of certain shares of capital stock in the corporation (the number of shares owned by each of said persons being specifically alleged in the complaint); that practically the sole assets of the corporation consisted of the patents above referred to; that on or about July 14, 1928, the said company sold its Canadian patents and received therefor $16,243.18 in cash; that the amount so received represented and constituted capital assets of said corporation and did not constitute profits or earnings; that on or about said 14th day of July, 1928, the defendants last above named, acting as the board of directors of said corporation, under the guise of declaring a 28 per cent. dividend on the capital stock of said corporation, distributed to the stockholders out of the moneys received from the sale of the Canadian patents the sum of $13,924 (the specific amounts received by each of the several stockholders being stated). It is further alleged that at the time of such distribution there were outstanding debts of the corporation aggregating to exceed $15,000; that the total assets of the corporation after such distribution do not exceed $500; and that the corporation is wholly unable to pay or discharge any of its indebtedness. It is further alleged that the purported declaration and distribution of dividends was unlawful and in violation of the duties of the directors, and was merely a scheme to cheat and defraud the corporation and its creditors. There is attached to the complaint an itemized statement of the claims of the different creditors showing outstanding debts to exceed $15,000. The defendants demurred to the complaint on the grounds: (1) That there is a defect of parties defendant; (2) that several causes of action have been improperly united; (3) that the complaint does not state facts sufficient to constitute a cause of action.

The demurrer was overruled, and the defendants have appealed.

[1] 1. The first ground of the demurrer, that there is a defect of parties defendant, is clearly untenable. The basis of this ground of demurrer, as pressed by the appellants, is that too many persons are named as parties defendant. But “a defect of parties, plaintiff or defendant” (section 7442, C. L. 1913) means a deficiency of parties and has no application to a case of too many parties, or the joining of persons who have no interest in the litigation. Mader v. Plano Manufacturing Co., 17 S. D. 553, 97 N. W. 843;Olson v. Shirley, 12 N. D. 106, 96 N. W. 297. “The defendant cannot demur upon the ground that there are too many plaintiffs or defendants, but may do so if the petition shows that others should be joined. It must be a defect, and not a misjoinder.” “A defect of parties for which a demurrer is allowed is a deficiency, not an excess, of parties.” Olson v. Shirley, supra.

[2] 2. Does the complaint state facts sufficient to constitute a cause of action? The question must be answered in the affirmative. The demurrer in this case was interposed by all the defendants jointly, hence, the trial court was correct in overruling the demurrer if the complaint stated a cause of action as to any of the defendants, even though it failed to state a cause of action as to others. Dalrymple v. Security L. & T. Co., 9 N. D. 306, 83 N. W. 245; 49 C. J. p. 428; Pomeroy's Code Remedies (5th Ed.) p. 16.

[3] We are of the opinion, however, that the complaint in this case states a cause of action against all of the defendants. According to the allegations of the complaint, all the defendants were and are stockholders in the Magic Grain Dump Company and received the alleged dividend. Some of the defendants were also directors who declared and caused such alleged dividend to be paid to the several stockholders, including themselves. It is a well-settled principle that a dividend cannot rightly be declared by a corporation except out of the profits earned by it. 6 Fletcher's Ency. Corp. p. 6209 et seq.; Fricke v. Angemeier, 53 Ind. App. 140, 101 N. E. 329.

In this state that principle is embodied in statute. Sections 4543, 4544, Supplement to the Compiled Laws of 1913.

“The directors of corporations must not make dividends except from the surplus profits 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. * * *” Section 4543, Supplement to the Compiled Laws of 1913.

“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. * * *” Section 4544, Supplement to the Compiled Laws of 1913.

According to the allegations of the complaint, the dividends paid over to and received by the different stockholders constituted practically all the property of the corporation and rendered the corporation wholly insolvent. While there is a conflict in the authorities as to whether an action will lie against a stockholder to recover a dividend paid out of the capital stock of a solvent corporation where the stockholder received the dividend in good faith, believing it to be paid out of the profits (Lark Equity Exchange v. Jones, 42 N. D. 145, 149, 171 N. W. 863), the authorities are all agreed that stockholders have no right to retain moneys received by them for dividends paid out of the capital stock of an insolvent corporation (6 Fletcher's Ency. Corp. pp. 6209, 6215; 7 R. C. L. p. 285; Powers v. Heggie (Mass.) 167 N. E. 314). Such moneys may be recovered from the stockholders who have received them by the corporation (6 Fletcher's Ency. Corp. p. 6209 et seq.), or by the trustee in bankruptcy of such corporation. 6 Fletcher's Ency. Corp. pp. 6211, 6212; Cottrell v. Albany Card & Paper Mfg. Co., 142 App. Div. 148, 126 N. Y. S. 1070; Powers v. Heggie, supra; Mackall v. Pocock, 136 Minn. 8, 161 N. W. 228, L. R. A. 1917C, 390; Fricke v. Angemeier, supra; Miley v. Heaney, 168 Wis. 58, 169 N. W. 64;Breon v. Genger et al., 182 Wis. 616, 197 N. W. 195.

[4][5] The trustee in bankruptcy succeeded not only to the bankrupt's title to property and to contractual and statutory rights of action existing in favor of the bankrupt corporation (Bankruptcy Act § 70a, 11 USCA § 110(a); 2 Collier on Bankruptcy [13th Ed.] p. 724; 4 Remington on Bankruptcy [3d Ed.] § 1402 et seq.); but, according to the provisions of the Bankruptcy Act, “such trustees, as to all property in the custody or coming into the custody of the bankruptcy court, shall be deemed vested with all the rights, remedies, and powers of a creditor holding a...