Schulz, Davis & Warren v. Marinkovich

No. 82-190
IN THE SUPREME COURT OF THE STATE OF MONTANA
1982

SCHULZ, DAVIS & WARREN, a partnership, et al.,,
Plaintiffs and Respondents,
-vs-
GEORGE P. MARINKOVICH, et al.,
Third-Party Plaintiff,

GEORGE P. MARINKOVICH, et al.,
Third Party Plaintiff,
-vs-
M & M ENTERPRISES, a Mont. Corp.,
Third Party Defendant.

DOMINIC C. ORI, and individual and
PATRICIA M. ORI, individually and as
a shareholder and liquidating director of M & ?ENTERPRISES,
.I
Third Party Plaintiffs and Cross-Complainant,
-vs-
M M ENTERPRISES, a Mont. Corp., Third Party Defendant,
&
and
GEORGE P. MARINKOVICH, et al., Cross-Defendants.

Appeal from: District Court of the Fifth Judicial District,
In and for the County of Beaverhead, The Honorable
Frank Blair, Judge presiding.

Counsel of Record:
For Appellant:
W. G. Gilbert, 111, Dillon, Montana
Berg, Coil, Stokes & Tollefsen, Bozeman, Montana
For Respondents
Max Hansen, Dillon, Montana

Submitted on Briefs: September 2, 1982
Decided: February 24, 1983

Filed: f E B 2 q 1983

---------
Clerk
F4r. Justice John C. Sheehy delivered the Opinion of the Court.

Appeal by George T. Marinko~rich, Ann C. Marinkovich, and P4 & M

Enterprises, from a judqment entered by the District Court, Fifth

Judicial District, kaverhead County, s i t t i n q without a jury,

awarding wage claims, penalties and attomevs fees t o various

m r t i e s in the action, and from a judgment of qeneral damages

against reorge T. Marinkovich Ann C. Phrinkovich, in favor of

Patricia M. O r i .

M & M Enterprises was incorporated in 1969. I t had four

stmkholders, each with 125 shares of stock, n m l y George T.

Marinkovich, Ann C. Marinkovich, Allj-e McFadden, and her daughter,

Patricia O r i . Upon the subsequent death of Allie McFadden, Patricia

O r i succeeded t o A l l i e ' s 1-25 shares.

The a r t i c l e s of incorporation of M & M Enterprises provided for

four directors. Each of the st0c:kholders w s elected a director.
a

The bylaws provided for officers, a president, two vice presidents,

and a secretan-y-treasurer . In the beqinning, Ceorge T. Marinkovich

was president, Ann C. Marinkrl~~ich
and Al-lie McFadden were vice

presidents, and Patricia M. O r i acted a s secretary.

After the death of Allie McFadden and the devolution of her

corporate stock t o Patricia O r i , George T. Marinkovich and Ann C.

Marinkovich, h i s wife, each had 125 shares, and Patricia O r i had 250

shares. The vacancy in the office of the director was not f i l l e d

after Al-lie &Fadden's death nor the vacant office of vice

president. Thus a t the time of the ev~mts
which give r i s e t o t h i s

la~vsuit, although Patricia O r i held i n her name one-half of the

outstanding shares of M & M Enterprises, she was outvoted on the

board of directors two-to-one.

The principal asset and business of M & M Enterprises was the

purchase and operation of the Andrus Hotel i n Dillon. Until the

hotel w s sold by the corporation in 1979, the directors of M & M
a
Enterprises, and as well Dominic C Ori, Patricia's husband, acted
.

i various ways to look after the property, to maintain it, to enter
n
into leases, and even to operate it as a business in between
lessees. Nothinq in the corporate records, or the court file,
indicates that any corporate action was taken to provide for pamt
to any of the directors for such services to the corporation.
With the sale of the hotel on June 22, 1979 to one Douqlas
Harvey, the stocfiolders met and adopted a plan of corplete
liquidations and dissolution, to accord with section 337 of the
Fed.eral Internal Revp-nue Cx.e
c3d. (26 U.S.C. 337.) The plan of
liquidation adopted provided that
". ..
from and after the date of sale anc3 transfer
of the assets of the corporation, the corporation
shall not engage in any business acti1ritie.s. The
directors them in office, and at their pleasure, the
officers shall continue in office solely for the
purpose of winding up the business and affairs of the
corporation, and after such date shsll not take such
action whatsoever which is or shall he constnled to
be inconsistent with the status of liquidation, and
such status shall be conthued until the date of the
dissolution of the corporation."

In connection with the sale of the hotel and the plan of
li-quidation,the Dillon law firm of Schulz, Davis and Warren was
desicpated. as the corporate trustee to hold the prmeeds from the

sale for the payment of the corporation debts and final disbursement
among the stockholders in proportion to their ownerships.
On April 2, 1980, the liquidatinq directors of the corporation
approved paymemt of a vmge claim presented by George T Marinko~rich
.
for $2,142.75, against the corporation. The directors, by a two to
one vote, rejected the claim of Dominic C. Ori for $500 for services
to the corporation and the claim of Patricia M. Ori for services
performed by her mther Allie McFadden for $1,600. Thereafter the
law firm as corporate trustee, was given conflicting directions from
the liquidating directors for disbursal of the remain.ing corporate
funds. As a result, the law firm as a stakeholder filed this
interpleader action on April 15, 1980, naming a s defendants the

individual directors of M & M Enterprises.

George T. Mrinkovich and Ann C. Marinkovich f i l e d their answer

t_o the complaint md interpleader, asserting the wage claim for

George T. Marinkovich, and denying any wage claims should be paid t~

Dominic C. O r i o r Patricia O r i as successor t o Allie McFadden. In

addition, George Marinkovich f i l e d a third party complaint against

third party defendant M & M Enterprises f o r h i s wage claim of

$2,142.75, plus penalties and attorneys fees.

Dominic O r i and Patxicia M. O r i f i l e d a t h i r d part:7 complaint

and cross-complaint against M & M for +heir resFctive

wage claims, and aqainst Ceorqe and Ann Marinkovich for

relinquishing the c o r p r a t e ownership t o stained glass windows which

had been removed from the hotel build-ing and delivered t o Douglas

Harvey.

The Marinkovichs f i l e d an answer a s t h i r d party defendants i n

effect denying generally the claims of the O r i l s for wages, and

denying any responsibility in damages for the relinquishment of the

stained glass windows. In this pleading, the Marinkovichs did not

raise the issue of whether Dominic C. O r i was p r o p r l y a party t o

the action.

M & M Enterprises f i l e d an answer t o the O r i cross-complaint,

in e f f e c t a general d m i a l of the claims of the O r i l s and a claim

for attorneys fees.

When +he cause came on for t r i a l , counsel for the Marinkovichs
raised for the f i r s t time whether Dominic C. O r i was a proper party

in the action, since he had not obtained permission for leave t o

intervene before joining i n h i s third party compl-aint. The D i s t r i c t

Court denied the motion t o dismiss Dominic C. O r i as a party.
 After t r i a l Sefore +he court, s i t t i n g without a iury, the court

mde findings of f a c t , conclusj.ons of law, and entered judgment as

follms:

For George T. Marinkovich i n the swn of $2,142.75 wages,

attorneys fees of $2,337.63, and a penalty i n the s m of $2,142.75;
u

For the e s t a t e of =lie K. McFadden, the s m of
u $1,600,

attorneys fees of $1,291.70, and a penalty of $1,600;

For Dominic C. O r i , the s m of $500 for wages, $1,291.70 for
u
attorneys fees, and a penalty7 of $500;

A further judgment i n favor of Dominic C. O r i i n the s m of
u

$5,000; and a judgment in favor of Patricia M. O r i , against George

T. Marinkovich m.d Ann C. Marinkovich for $3,000. Thereafter the

D i s t r i c t Court denied post-trial motions made by the Marinkovichs

and this a p p a l followed..

The issues raised by the appellants Marinkovich are these:

1. Whether Dominic C. O r i is a proper party t o the action?

?. Whether the claim of Allie R. McFadden was barred by the

statute of limitations?

3. Whether the D i s t r i c t Court had the power t o overrule the

decision of the liquidatinq directors w i t h respect t o the wage

claims of Dominic and Patricia Ori?

The objection against Daminic O r i being regarded as a mop-r

party is grounded upon h i s failure t o procure an order qranting him

1-eave t o intervene in the action a s a co-plaintiff with Patricia

O r i , b~howas already a party t o the action.

Rule 24 (c) , M. R.Civ. P ., requires a person desiring t o intervene

to f i l e anrl serve a motion for leave t o intervene upon t h parties,
stating the grounds t h r e f o r , accompanied by a pleadins setting

forth the claim o r defense for which the intervention i s sought.

Dominic O r i made no such motion, but f i l e d in the action a t h i r d

party c m l a i n t a s a co-plaintiff w i t h Patricia O r i . Idhen M & M
Enterprises responded to the Ori joint third party complaint, it
moved to dismiss the complaint and cross-complaint merely upon
general grounds. The P.larinkovichsresponse to the joint third party
cross-complaint was "Answer to Cross-Complaint of Patricia M. Ori."
No mntion was made i the pl-eadings by the Marinkovichs then or
n
later that made objection to the presence in the case of Dominic Ori
as a party. When M & M Enterprises answered the Ori third party
complaint, it was in the nature of a general denial, raising the
defense of the statute of limitations.
Thus Dominic Ori is in a position of a person whose cause has

been heard by the District Court, but who has never intervened. It
ha been held that the failure to file a f o m l moti-onto intervene
is not fatal where the trial court has eventuallv granted leave to
intervene (U.S. v. 1,830.62 Acres of Land (Western District Va.
1943), 51 F.Supp. 158) and that lack of service of a motion to
intervene can be cured by a supple-mentalmotion later served (Perry
v Godbe (C.C.D. Nev. 18971, 82 F. 141).
. It is true generally, and
was true i Montana &-fore the adoption of the Federal Rules of
n
Civil Procedure, that failure to m v e for intervention was fatal to
ie
the party's right to participate in the action. lbLtrich ~ r . Steam

Dredge and Amalgamator (1894), 14 Mont. 261, 268, 3 P. 81.
6 See
Spnqler v. Pasadena Board of Education (9th Cir. 1977), 552 F.2d

1326.
The purpse of the motion for leave to intervene is to give the
District Court the opportunity to determine whether the parties
seeking intervention may intervene as a matter of right or bv
permission of the court. (Rule 24, M.R.Civ.P.) The rule that
failure to move for intervention is fatal to the right of a party to
participate i the action is not iron-clad, however. In this case,
n
M & M Enterprises did not raise an objection to the presence of
Dominic Ori in the case at the District Court level. The
Marinkovichs answered the joint cross-complaint only as t o Patricia,

and by no pleading then o r subsequently advised the court o r Dcsninic

O r i t h a t he was not properly a party i n the action. The Marinkovich

objection t o the presence of Daminic O r i in the cause was f i r s t

raised a t the mment of the opening of t r i a l . This was a cause

where Dnmjnic O r i could intervene as a matter of right, because h i s

claim for wages, i f p r o p r l v supported, could only be paid out of

the remaining assets of the corporation then being liquidated. The

D i s t r i c t Court's action i n overruling the objection raised by

!4arinkovich a t t r i a l time i s equivalent t o authorizing i n t e ~ ~ e n t i o n

by Dominic O r i . The f a i l u r e t o raise objection t o O r i ' s presence

u n t i l the moment of t x i a l a u n t s t o a waiver of any objections t o

h i s intervention. These factors hrinq t h i s case within the rules
a\\
announced i n Martindab v. International Tel. & Tel. Corp. (2d C i r .

1979) , 594 F. 2d 291, and In Re Beef Industry Anti-trust Litigation

(5th C i r . 1979), 589 F.2d 786. In those cases though no formal

m t i o n for intervention had been made by the parties invnlved, the

appeals court ruled on the merits of the appeals on grounds of

waiver, and --
de facto o r equivalent authorization for intervention.

On those bases w sustain the District Co~lrt's order denving the
e

objection of the Marinkovichs t o the presence of Dominic O r i i n the

cause, but w warn,
e a s did the court i n In R e Beef Industrv

Anti-trust Litigation, supra, that "future l i t i g a n t s should not

attempt t o use t h i s opinion t o circumvent the clear r e q u i r ~ m t sof

the rule." 589 F.2d a t 789.

The remaining issues with respect t o the wage claims, w t r e a t
e

as one, though appellants obiect t o the qrant of the O r i wage claims

Qn the grounds of the statute of limitations and t h a t the D i s t r i c t

Court had no power t o overrule the decisions of the liquidating

directors. I t is our view that. the wage claim issues can be decided

by looking a t the pavers of liquidating directors generallv w i t h
respect to their duties i winding up
n the affairs of the
corporation.
Under the dissolution plan adopted by the corporation, a part
of which we have quoted above, +_he corporation was not to "engage in
any business activities," and "the directors then in office ...
shall continue i office solely for the purpose of winding up the
n
business and affairs of the corporation." The only business of
liquidating directors was the liquidation of the corporation. The
grant of additional salaries not provided before the dissolution is
not the proper business of the corporation in winding up.
The sane situation existed in the facts shown in Duval v.
Cornnissioner of Internal Revenue (5th Cir. 1932), 57 ~ . 2 d496.
There the corpration was dissolved on August 31, 1919. For income
tax purposes, the corporation attempted to claim as a deduction
salaries for officers based on entries m d e in the books of the
business on December 31, 1919. The federal court ruled the attempt
to claim such deduction was improper stating:
". .. the evidence negatived the conclusion that any
corporate action with reference to additional
salaries was taken before the dissolution of the
corporation. After its dissolution in August, 1919,
the corporation continued in existence as a bodv
corporate for a prescribed time for the purpose of
prosecuting or defmding suits, settling its
business, disposing of its propertv, and dividing its
capital stock, but not for the purpose of continuing
its business (Citing a state statute). The creation
of liability for additional salaries was a business
transaction requirins corporate action which could
not be taken after the corpration ceased to exist
for the purpose of continuing its business. An
alleged liability for additional salaries of officers
of the corporation which was not attempted to be
created by any corporate action nor until after the
corporation had been dissolved, was not a business
Pne
-s incurred or paid by the corporation for which
the statute (26 U S C A
. . . . § 989) a l r s a deduction
lcw
from gross incow-. It follm~s that the disallmance
of the deduction was not erroneous." 57 F.2d at 498.
Although Duval, supra, is a tax case, under the principles

enunciated therein and for the same reasons, none of the parties
here have the r i g h t t o claim additional s a l a r i e s not provided bv

corporate action before the dissolution. It is especially

appropriate t o apply the Duval r u l e here, where two directors

representing 50 percent of the stock ownership of the corporation,

vote t o sustain their wage claims against the remining a s s e t s of

the d i s s o l v d corporation, znd a t the sane time, vote t o deny the

wage claims of persons related t o the ownership of the other 50

percent of the corpora-te stock though represented by one director.

57 note from the record,
7e t h a t following the death of Allie K.

McFadden, P a t r i c i a O r i raised the question of the a-win-t of

another board member t o repla-ce her mother and there the vote was

two-to-one against the appointment of a n.ew director, w i t h P a t r i c i a

O r i casting the dissenting vote.

Although neither party raised the issue of the p w e r of t l ~ e

dissolved corporation t o grant additional s a l a r i e s t o i t s o f f i c e r s ,

an action j
n interpleader i s j equity and i n such case,
n the

provisions of section 3-2-204(5), iTA, come i n t o play:

"In equity cases and i n matters of proceedings of an
equitable nature, the Supreme Court shall review a l l
questions of f a c t a r i s i n g upon the evidence presented
in the record, whether the s m be presented bv
specification of p a r t i c u l a r s i n which the evidence i s
alleged t o be i n s u f f i c i e n t o r not, and determine the
same, a s well a s questions of law . . ."
The r e s u l t of our view of the p e r of the liquidating d i r e c t o r s

here, i s t o deny t o a l l of the p a r t i e s t h e i r r e s p c t i v e wage claims,

penalties and attorneys fees based thereon. The further e f f e c t is

t o require the stakeholder, the p l a i n t i f f s i n inte-rpleader, t o

disburse the funds i n their hnds without regard t o such wage

claims.

Our holding t h a t liquidating directors may not award s a l a r i e s

t o i t s o f f i c e r s and shareholders f o r pre-dissolution services in the

winding up process does not conflict. w i t h our s t a t u t e s on voluntary

corporate o r shareholder dissolution. As noted above, the s e t t i n g
of salaries for the conduct of corporate business pre-dissolution is
.
a business activity of the corpration. F ? h m a statement of intent

to dissolve a corporation is filed with the Secretary of State,
under Pbntana law, the corporation "shall cease to carm on its
business, except insofar as maj7 be necessarv for the b~inding up
thereof.I' Section 35-1-905, MCA.
The record in this case is barren as to what steps the
liquidating directors had taken to camply with Montana statutes on
corporate dissolution. Regardless, under the plan of dissolution
adopted to comply with 26 U.S.C. 5 337, the directors had agreed
"from and after the date of sale and transfer of the assets of the
corporation [not to] encjage in any business activities." One of the
aims of 26 U.S.C. § 337, is for tax purposes to establish a strict
but clear rule, within a specified time limitation, 12 months, upon
which planners might rely and bring certainty and stability into the_

corporate liquidation area. Central Tablet Wq. Go. v. U.S. (1974),
417 U.S. 673, 682, 94 S.Ct. 2516, 2522, 41 L.Fd.2d 398.
There remains the judpnt against George T. Marinkovich and
Ann C blarinkovich prsonally , in favor of Patricia Ori in the sum
.

of $3,000 for their alleged bad faith in relinquj-shing the
corporation's claim to stained glass windows.
The value of the stained glass windows in the evidence varied
from $20,000 to $5,000, the latter sum at which Dominic Ori
apparently offered them for sale to another party. Marinkovichs
claim that the stained glass ~nlindmswere delivered to Harvey by
Dominic Ori and therefore the claim for damages on this ground is
moot. Ori contends on the other hand, that the delivery of the
stained glass windows by Dminic Ori was not an act of transferring
the title of the corporation in the windows to the third party. At
the meeting of the liquids-ting directors, the same meeting in which

the wage claims were considered, the claim with respect to the
stained glass windows was brought up. There the corporation's claim

for the value of the stained glass windows was relinquished by the

liquidating directors, again by a vote of two t o one.

The District Court, i n considering t h i s matter, found t h a t the

stained glass pieces m e d by the corporation was disposed of bv a

vote of the directors, but if the vote had been made by the

shareholders, the question of disposal of the stained glass wau1.d

have keen "equally represented." The court concluded that such

d-isposal of the stained glass was not i n the regular course of

business, and t h a t the directors voting i n favor of the disposal

without submitting the same t o a vote of the shareholders violated

section 35-1-809, MCA (1979). On t h a t basis, the District Court

awarded Patricia O r i damages equal t o one-half of its determined

value of the stained glass windows, the sum of $3,000.

The record sustains the judgment f o r damages i n favor of

Patricia O r i .

Accordingly, t h i s cause i s reversed a s t o the wage claims, and

a l l s m i n judfpnent awarded i n the D i s t r i c t Court t o George T.
u s

Maridkovich, Dominic C. O r i , and the estate of Allie K. McFadden,

for wages, penalties, o r attorneys fees are s e t aside; but the

iudgment of $3,000 against C~orge
Marinkovich and Arn C. Marinkovich

in favor of Patricia O r i is affirmed.

Justice

W Concur:
e
iqe concur:

?&'&
kg$&Chief Justice

Justices
 I dissent from the majority's holding that approval of
certain wage claims was a "grant of additional salaries not
provided before the dissolution."
Montana's corporation statutes are based in large part
upon the Model Business Corporation Act (1960) of the
American Bar Association. Official comments to this Act are
therefore useful in interpreting Montana statutes. Sections
35-1-904 through 906, MCA, dealing with liquidation and
winding up, are counterparts to sections 85 and 87 of the
Model Act. The comment to those sections provides in part:
"Historically corporate dissolution resulted in
realty reverting to the grantor, personalty
escheating to the sovereign and choses in action
extinguished with the death of the corporation.
This is no longer true. Statutes now prescribe the
general effects of dissolution and the procedures
to be followed.
"When dissolution has been authorized by the
shareholders under section 83 or section 84, a
statement of intent to dissolve the corporation is
required by section 85 to be filed with the
secretary of state. This constitutes notice to the
state and public that dissolution proceedings have
officially begun. After such filing the business
of the corporation ceases except as necessary to
wind up its business and affairs. Notice is given
to creditors, assets are collected, liabilities
discharged, and the remaining assets distributed to
shareholders. The orderly liquidation of the
corporation is assured and the corporation
protected from a multitude of creditors' suits by
dissatisfied shareholders by section 87 (c) which
provides for liquidation under the supervision of
the court on applicatin by the corporation. Many
jurisdictions have adopted the Model Act procedure
in preference to the older one of dissolving first
and constituting the directors as trustees of the
liquidation which follows."
Under former Montana law, voluntary dissolution of a
corporation occurred after application to the District Court
where the principal place of business was situated. Section
15-1108, R.C.M. (1947). Upon verification of the statements
contained in the application, the District Court issued a.
judgment declaring the corporation dissolved and naming the
directors as trustees. Section 15-1113, R.C.M. (1947).
These statutory trustees were required to wind up the defunct
corporation's affairs by "settling with its debtors and
creditors and appropriating the amount of profit or loss."
Gilna v. Barker (1927), 78 Mont. 357, 365, 254 P. 174, 177,
citing Rohr v. Stanton Trust & Savings Bank (1926), 76 Mont.
248, 251, 245 P. 947, 948.
Montana repealed its statutes prescribing the trustee
method of corporate dissolution in 1967. Directors no longer
serve as statutory trustees, holding corporate assets in
trust for the benefit of creditors. The process by which a
corporation is dissolved requires that certain conditions
precedent to dissolution he met. Filing of a notice of
intent to dissolve and articles of dissolution are two such
conditions precedent to voluntary dissolution. Articles of
dissolution can be filed only after "all debts, liabilities,
and obligations of the corporation have been paid and
discharged or adequate provision has been made therefor and
all of the remaining property and assets of the corporation
have been distributed to its shareholders." Section
35-1-111, MCA (1981). Liquidation and discharge of debts
precede dissolution. Dissolution occurs when the Secretary
of State issues a certificate of dissolution, at which time

the existence of the corporation ceases. Section
35-1-912 (2), MCA (1981), formerly S15-2286, R.C.M. (1947) .
M & M Enterprises was winding up its business and
affairs when the wage claims were presented. Dissolution had
not taken place.
The majority cites Duval v. Commissioner of Internal
Revenue (5th Cir. 1932), 57 F.2d 496 in support of its
holding that the liquidating directors lacked power to
approve wage claims presented during the liquidation period.
Duval addresses the issue of post-dissolution granting of
officers' salaries. It is distinquishable on its facts. Mr.
Duval's wage claim was submitted 7 1/2 months after the
corporation was dissolved. J. E. Duval Printing Company
"ceased doing business on August 31, 1919, when it
dissolved." Duval, 57 F.2d at 497. Mr. Duval assumed all
the corporations's assets without paying any consideration
and operated the business as a sole proprietorship
thereafter. In March, 1920, he filed a business tax return
for the year 1919. The return indicated that Mr. Duval, his
wife, and daughter had taken a sizeable salary increase for
services rendered before and after the dissolution. The
additional salaries were claimed as a corporate tax
deduction. The Internal Revenue Service disallowed deduction
of the retroactive salaries as a pre-dissolution business
expense.
The Ori and Marinkovich wage claims, on the other hand,
were presented before dissolution of M & M Enterprises. The
claims were not for additional salaries as corporate
directors, but for functions generally performed by
employees, i.e., clerking at the hotel's front desk, doing
maintenance work on the premises. The trial court found that
the "claims were never presented before because the
corporation was not in a position to pay them until the hotel
was sold." Trial Memorandum, March 11, 1982 at 7.
Payment of just debts of the corporation is an incident
of the winding up process. The Ori and Marinkovich claims
should not be automatically disallowed.
" [A]lthough a director occupies a fiduciary
relation to the stockholders, he is nevertheless
entitled to demand payment for an honest debt due
him from the corporation of which he is a director.
(citation omitted) However, this rule must be
tempered with the qualification that there are
circumstances under which equity will not permit
him to do so." Troglia v. Bartoletti and Casey
(1969), 152 Mont. 365, 369-70, 451 P.2d 106, 108.
 To hold that approval of such claims by directors of a
dissolving corporation is ultra vires regardless of the
circumstances thwarts legislative intent that all debts be
paid or adequately provided for in the winding up period
prior to dissolution. Approval or disapproval of claims
should be based on general legal principles.