(501 P.2d 483)
No. 71-270 (Supreme Court No. 23905)Colorado Court of Appeals.
Decided August 1, 1972. Rehearing denied August 22, 1972.
Attempted special assessment against stockholders of savings and loan association having impaired capital balance was enjoined in contempt hearing arising under earlier action and judgment for amount of attempted assessment against plaintiffs was entered against association’s board of directors. Association and its directors appealed.
Reversed
1. BUILDING AND LOAN ASSOCIATIONS — Action — Propriety of Special Assessment — Personal Liability — Directors — Not at Issue — Judgment Against Them — Reversed. In action concerned with propriety of special assessment against stockholders of savings and loan association, there was never any issue raised as to whether the directors of the association were to be personally liable for the amount of the assessment, nor was there any mention of the possibility of a personal judgment being entered against the directors as individuals; thus, judgment against the directors was entered without them having their day in court and therefore must be reversed.
2. Notification — Impaired Capitol — Statute Mandatory — Two Alternatives. Upon notification that capital of savings and loan association is impaired, the statute is mandatory in that the association must follow one of two alternatives, i.e., it may question the amount of the impairment within ten days of notification or it may forego questioning the impairment and levy a pro rata assessment on its stockholders to make good the impairment.
Page 179
3. Action — Propriety of Special Assessment — Improper Conduct — Directors — Cause — Impaired Capital — Not at Issue. In action concerning the property of special assessment against stockholders of savings and loan association, which assessment was precipitated by impaired capital situation, the issue of whether the board of directors had acted improperly or negligently so as to cause the impaired capital situation was not an issue before the court.
Error to the District Court of the City and County of Denver, Honorable Saul Pinchick, Judge.
Winner, Berge, Martin and Clark, Bruce D. Pringle, for plaintiffs in error.
Creamer and Creamer, Quiat Quiat, Alan H. Bucholtz, for defendants in error.
Division II.
Opinion by JUDGE COYTE.
This case was transferred from the Supreme Court pursuant to statute.
In 1965, a group of minority stockholders, owning slightly in excess of one-third of the permanent stock of Equity Savings and Loan Association, filed a suit against Equity and the individual members of the board of directors of the association and obtained an order on April 26, 1966, restraining the association and its directors from issuing any additional permanent stock, except as would be necessary to meet capital requirements as set forth in C.R.S. 1963, 122-3-7(4), without authorization by two-thirds vote of the permanent stockholders. The issuance of additional permanent stock would have required the minority group, or plaintiffs, to purchase additional stock in order to maintain their then present
Page 180
percentage of ownership in Equity. No appeal was taken from this order.
As of October 20, 1967, the office of the Savings and Loan Department of the State of Colorado made an examination of the books of Equity Savings and Loan Association for the period from January 1, 1967, to June 30, 1967, which examination revealed purported impairment of capital of Equity in the amount of $5,570. The Commissioner, by letter directed to Equity dated December 21, 1967, ordered it to promptly make good the said impairment.
The impairment of capital had come about by the order of the Board to pay interest to depositors as provided in C.R.S. 1963, 122-3-11, when there were insufficient earnings or surplus with which to pay the amount of interest ordered to be paid.
After receipt of the letter to make good the impairment of capital, the board of directors of Equity at a special meeting made a special assessment on the outstanding permanent stock of Equity in order to rectify the impaired capital and mailed the notice of special assessment to the stockholders in accordance with C.R.S. 1963, 122-3-8. All stockholders paid to Equity the amount of the assessment on their stock, except for three minority stockholders who refused to pay and who were plaintiffs in the original action. Equity then published a notice of public auction wherein it gave notice that it would sell some of the shares of permanent stock owned by these three stockholders in order to raise the amount of the special assessment assessed against them.
Subsequently, on motion of the plaintiffs in the original case, the court
Page 181
issued a citation to show cause why the defendants (Equity and members of the Board) should not be held in contempt of court for violating the 1966 decree by attempting to change the percentage of ownership of the outstanding permanent stock. It further issued an order for said defendants to show cause why they should not be enjoined from selling any of the stock of the minority stockholders in Equity Savings and Loan Association to satisfy the special assessment.
Equity and members of the Board filed a response to the citation claiming that their acts in making the special assessment and in attempting to sell plaintiffs’ stock were lawful and proper. A preliminary hearing was held in which the minority stockholders paid the amount of the assessment into the registry of the court to be held by the court pending the outcome of the trial. The public auction for the sale of stock was vacated.
On July 23, 1968, a hearing was held on the show cause order in the contempt citation and on the order restraining the sale of the stock. At the conclusion of the hearing, the court held that defendants were not guilty of contempt and discharged the contempt citation. There has been no appeal from this phase of the case.
In its findings the court stated:
“The Court finds that the Board of Directors paid an excessive and unlawful dividend, and that the Board of Directors was liable to the corporation for distribution of improper dividends and for the amount improperly distributed. The Court finds that the Board of Directors and its members were negligent in so declaring and paying an illegal dividend. The Court finds said defendants were not guilty of contempt of previous
Page 182
order of this Court, but were guilty of mismanagement without wilfulness, or of negligence, or were possibly without sufficient awareness of the situation or sufficient experience to cope with it, but the Court specifically finds that their act in payment of and declaration dividend was in the circumstances unlawful and that they are answerable and liable therefor.”
The court then determined that in order to avoid a multiplicity of suits it would take final action and resolve the entire controversy. It thereupon entered an order prohibiting and enjoining defendants from selling any of the stock of the minority stockholders, ordered that the funds of plaintiffs, the minority stockholders, which had previously been deposited in court be returned to them, and then ordered entry of judgment in favor of Equity and against each of the directors of Equity Savings and Loan for the amount of the assessment attempted to be made against the minority stockholders.
[1] Equity and the directors appeal and allege as error the fact that they were restrained from selling plaintiffs’ stock in order to make up the deficiency, that they were given no notice by anyone that they might be considered personally liable for the impairment of capital, and that they, in fact, have not had their day in court. We agree and reverse.The original action in this case was terminated in 1966. The present controversy between the parties, in reality, has no bearing on the first suit. The only connection is that plaintiffs were allowed to file their pleadings in the 1966 case.
Aside from the contempt citation, the only questions to be determined in
Page 183
the 1968 hearing were whether the corporation could make an assessment against the permanent stock in order to rectify an impairment of capital caused by a payment of dividends, and, if it could make such an assessment, whether it could also sell stock of an individual stockholder should that stockholder refuse to pay the assessment.
[2] In the trial of this case, there was never any issue raised as to whether the directors were to be personally liable, nor was there any mention of the possibility of a personal judgment being entered against the individual members of the board of directors. These matters were not argued to the court. The first time in the proceeding that it became apparent a judgment might be entered against the individual directors was when the court summarized the issues in the case after final argument. The defendant never had an opportunity to defend against this issue and had no knowledge that it was being presented or was to be resolved. Upon notification that the capital of a savings and loan association is impaired, compliance with C.R.S. 1963, 122-3-8, is mandatory and left Equity with two alternatives. It could have questioned the amount of the impairment within ten days of notification, or it could forego questioning the impairment and levy a pro rata assessment. It chose the latter course which is provided for by statute (C.R.S. 1963, 122-3-8) and which is the proper method to make good the impairment of capital. [3] The fact, if it be a fact, that the board of directors was negligent or acted improperly in causing Equity to be in an impaired capital position, did not constitute a basis for stopping the sale of stock of those stockholders who refused to pay the stock assessment. The issue ofPage 184
whether members of the board of directors of Equity are personally liable for causing the capital to become impaired was not before the court. Whether the members of the board of directors of Equity have performed some act for which they should be held personally liable is an issue which would be the basis of a separate independent action.
Judgments reversed and cause remanded with directions that the funds paid into court by the minority stockholders be paid to Equity, or, if the funds held by the Clerk of the District Court have been returned to plaintiffs, then and in that event plaintiffs may pay the assessment, but if they refuse to do so within a time to be prescribed by the trial court, Equity shall proceed to advertise for sale and sell the minority stockholders’ stock in accordance with C.R.S. 1963, 122-3-8.
JUDGE ENOCH and JUDGE PIERCE concur.
Page 185