Opinion
Rehearing Denied Nov. 3, 1971.
Opinion on pages 429 to 433 omitted.
HEARING GRANTED
For Opinion on Hearing, see 102 Cal.Rptr. 733, 498 P.2d 981.
Daley, Brewer, Patridge & Garrett, Stockton, for defendants-appellants.
James F. Roach, Woodland, for plaintiff-respondent.
JANES, Associate Justice.
Defendants, the principal shareholders (and directors) of the now defunct Agriform Chemical Company, Inc., to whom the assets of the corporation were distributed upon its dissolution in 1964, appeal after a nonjury trial from the judgment entered in favor of plaintiff, a creditor of that corporation prior to its dissolution and for whose debt no payment provision was made.
Defendants contend on appeal, as they did in the trial court, that recovery was barred by Code of Civil Procedure section 359 because plaintiff's action was not filed within three years of creation of the liability upon which suit was brought. The contention is meritorious and compels reversal of the judgment with directions that judgment be entered in favor of defendants.
Plaintiff became a creditor of the corporation prior to its dissolution. The fact of dissolution and the defendants' concomitant distribution of the corporate assets to themselves without provision for payment of the debt owing to plaintiff were known to plaintiff long before the entry [97 Cal.Rptr. 268] of judgment in the earlier action. Dissolution of the corporation and distribution of the assets took place between April 10, 1964 and June 4, 1964. The instant action was commenced April 4, 1969.
His status as a creditor was validated in an earlier action in the same superior court (Yolo County Superior Court Action No. 18076, entitled Myrl P. Hoover v. Agriform Chemical Company, Inc., filed May 11, 1962. The trial court in the case at bench took judicial notice of the file in the earlier action. That file has been lodged in this court by our order). The debt found was in the amount of $11,326. Judgment in that amount was entered December 9, 1966. Defendants filed a notice of appeal from that judgment on February 2, 1967. The Court of Appeal, Fifth Appellate District, affirmed the judgment and its remittitur was filed on March 19, 1969.
See footnote 1, supra. At least as early as June 1, 1964 (through answers by Agriform Chemical Company, Inc., to interrogatories served by him in Action No. 18076), plaintiff was informed of the corporation's dissolution, its contention that all creditors' claims had been satisfied, and of its admission that 'the remaining assets [had been] distributed to the shareholders' with no reserve established for plaintiff's claim.
Section 359 of the Code of Civil Procedure provides that 'actions * * * against Directors or stockholders of a corporation, to recover a penalty or forfeiture imposed, or to enforce a liability created by law * * * 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.' (Emphasis added.)
The liability of the defendant shareholders sued upon by plaintiff was created in 1964, by and at the time the assets of the dissolved corporation were distributed to them without provision for payment of the corporation's debt to plaintiff. (Corp.Code, §§ 824, 826, 5000, 5001, 5012; Royal Trust v. MacBean (1914) 168 Cal. 642, 649, 144 P. 139; Pourroy v. Gardner (1932) 122 Cal.App. 521, 528-529, 10 P.2d 815; see also, Richardson v. Craig (1938) 11 Cal.2d 131, 134-135, 77 P.2d 1077; Hunt v. Ward (1893) 99 Cal. 612, 614, 34 P. 335.)
Corporations Code section 824 provides: 'Except as provided in this division, the directors of a corporation shall not authorize or ratify the purchase by it of its shares, or declare or pay dividends, or authorize or ratify the withdrawal or distribution of any part of its assets among its shareholders.'
The trial court, both in denying defendants' motion for summary judgment, which motion was based on plaintiff's failure to bring this action within the time period prescribed by Code of Civil Procedure section 359, and its memorandum opinion after trial, refused to accept the date on which the liability was created as the significant date. The memorandum opinion stated, in pertinent part:
'[T]he action of plaintiff is not barred by the Statute of Limitations. As shown by plaintiff, the cause of action under Corporations Code section 826 does not arise until plaintiff is a judgment creditor. Plaintiff filed well within the limits of CCP 359.' (Emphasis added.)
While it is true, as the trial court observed, that plaintiff's cause of action came into existence upon the determination of his status as a judgment creditor, those events bear no relation to the liability referred to or to the limitation declared in section 359. As pointed out in those cases which have considered the application of section 359 of the Code of Civil Procedure, accrual of the cause of action is not the event which starts the statute running. Peculiar as it may seem, it is creation of the shareholders' liability that starts the calendar. (See, e. g., Richardson v. Craig, supra, 11 Cal.2d 131, 135, 77 P.2d 1077; State of Ohio ex rel. Squire v. Porter (1942) 21 Cal.2d 45, 47, 129 P.2d 691.)
Although a rule which may operate so as to terminate one's right to relief before he is entitled to seek such relief, i. e., before he has attained the status of judgment creditor, may appear unduly severe, such result must be upheld where required by the express language of section 359. (See Coombes v. Getz (1933) 217 Cal. 320, 327-328 and 330-333, 18 P.2d 939; Hunt v. Ward, supra, 99 Cal. 612, 614-616, [97 Cal.Rptr. 269] 34 P. 335; see also, 2 Witkin, Cal.Proced., (2d ed. 1970) Actions, § 348, p. 1188.) Further, it may fairly be inferred from the failure of the Legislature to amend section 359 concurrently with its major alterations to the Corporations Code, that the Legislature intended to insure to shareholders a degree of certainty and predictability as to their responsibilities; such protection is provided even at the expense of affording a lesser degree of protection to the creditors of the corporation. (See Hunt v. Ward, supra, 99 Cal. 612, 615-616, 34 P. 335.)
Compare Burns v. Massachusetts, etc., Ins. Co. (1944) 62 Cal.App.2d 972, 146 P.2d 29, involving a similarly limiting statute, but where a 'judicially carved out exception to the particular section (Prob.C. 1487) was justified on the presumed legislative intent to protect the rights of the ward. * * * (62 C.A.2d 972 [146 P.2d 29.])' (2 Witkin, Cal.Proc., (2d ed. 1970) Actions, § 383, p. 1217.)
Section 359 remains, therefore, a guarantee to shareholders of an absolute limit to the period of time in which an action may be brought to enforce a liability defined by that section. (See People v. Clauson (1964) 231 Cal.App.2d 374, 380-381, 41 Cal.Rptr. 691; Coombes v. Getz, supra, 217 Cal. 320, 333, 18 P.2d 939; Royal Trust Co. v. MacBean, supra, 168 Cal. 642, 646, 144 P. 139; Hunt v. Ward, supra, 99 Cal. 612, 614, 34 P. 335.) The liability sought here to be enforced is a liability created by law within the meaning of section 359. (See Hunt v. Ward, supra, 99 Cal., 612, 615-616, 34 P. 335.)
The Supreme Court in Richardson v. Craig, supra, 11 Cal.2d 131, 135, 77 P.2d 1077, 1079, discussed section 359, stating: 'This peculiar statute differs from the usual provision elsewhere, and from other provisions in our own code, in that it requires the bringing of the action within three years after the liability 'was created', instead of three years after the cause of action accrued. The interpretation of the section has been settled by a long line of cases which, construing the language literally, have held that actions are barred within three years after the obligation was incurred. * * * Though our entire substantive law on corporations has been revised in recent years, section 359 has remained unamended, and we must accept the interpretations set forth above, establishing the distinction between creation of the liability and accrual of the cause of action, as the present meaning of the statute.
'It would appear, then, that the statute began to run either at the time the debts of the bank were incurred, or at the time the assessment was levied, for on one of these dates the liability was certainly 'create' within the meaning of section 359, regardless of whether it was immediately enforceable by action.'
The judgment is reversed with directions that judgment be entered in favor of defendants.
REGAN, Acting P. J., and BRAY, J., Assigned, concur.
Corporations Code section 826 provides, in relevant part: 'Any one or more judgment creditors of the corporation whose debts or claims arose prior to the time of violation of Section 824 may sue the corporation and any or all of its directors in one action and recover judgment for the amount due them from the corporation against any or all of the directors guilty of the violation up to the amount of the unlawful dividends, purchase price, withdrawal, or other distribution. * * *'