Creditors of Mid-Pac Construction Co Inc v Senda [1989] FMSC 18; 4 FSM Intrm. 157 (Pon. 1989) (5 October 1989)

[1989] FMSC 18; 4 FSM Intrm. 157 (Pon. 1989)

FEDERATED STATES OF MICRONESIA
SUPREME COURT TRIAL DIVISION

FSM CIVIL ACTION NO. 1988-099

CREDITORS OF MID-PAC CONSTRUCTION CO. INC.
on assignment for the benefit of Creditors
Plaintiff

V

AMBROS SENDA

Defendant

BEFORE: Arthur Ngiraklsong, Temporary Associate Justice

APPEARANCES: For the Plaintiff: Daniel J. Berman; For the Defendant: Maketo Robert

OPINION: October 5, 1989

HEADNOTES

Corporations - Stock and Stockholders; Statutes of Limitation
In the absence of any law or regulation in the Federated States of Micronesia which provides a specific limitation on actions to collect unpaid stock subscriptions, the applicable period is six years. Creditors of Mid-Pac Constr. Co. v. Senda, [1989] FMSC 18; 4 FSM Intrm. 157, 159 (Pon. 1989).

Corporations - Stock and Stockholders; Debtors' and Creditors' Rights
Where the rights of a corporation have been assigned to its creditors in previous litigation, the creditors' rights as against the shareholders or subscribers of stock in the corporation are derived from the rights of the corporation itself, and the creditors will be able to enforce the shareholders' liability only to the extent that the corporation could have enforced it before the assignation. Creditors of Mid-Pac Constr. Co. v. Senda, [1989] FMSC 18; 4 FSM Intrm. 157, 159 (Pon. 1989).

Corporations - Stock and Stockholders; Statutes of Limitation; Debtors' and Creditors' Rights
In an action to enforce an unpaid stock subscription, the statute of limitations begins to run against the creditors when it runs against the corporation. Creditors of Mid-Pac Constr. Co. v. Senda, [1989] FMSC 18; 4 FSM Intrm. 157, 159 (Pon. 1989).

Statutes of Limitation
A statute of limitation begins to run when the cause of action accrues. Creditors of Mid-Pac Constr. Co. v. Senda, [1989] FMSC 18; 4 FSM Intrm. 157, 159 (Pon. 1989).

Corporations - Stock and Stockholders; Statutes of Limitation
When a stock subscription specifies the date of payment, including payment in installments at specified times, the corporation has no cause of action until the date specified and at that time the statute of limitations begins to run. Creditors of Mid-Pac Constr. Co. v. Senda, [1989] FMSC 18; 4 FSM Intrm. 157, 159 (Pon. 1989).

Corporations - Stock and Stockholders; Debtors' and Creditors' Rights; Statutes of Limitation
Stock subscriptions which are silent as to the date and terms of payment do not become due until a call has been issued by the corporation or, if the corporation becomes insolvent without ever issuing such a call, then the cause of action to collect unpaid subscriptions accrues when the creditors, by authority of the court, first demand payment. Creditors of Mid-Pac Constr. Co. v. Senda, [1989] FMSC 18; 4 FSM Intrm. 157, 161 (Pon. 1989).

COURT'S OPINION

ARTHUR NGIRAKLSONG, Temporary Associate Justice:

This motion for partial summary judgment has come before the Court in the course of ongoing litigation arising out of the insolvency of Mid-Pac Construction Company, Inc. ("Mid-Pac"). Mid-Pac became insolvent in 1987, and this Court issued writs of execution which were returned unsatisfied to the company's creditors. See In re Mid-Pac Constr. Co.[1988] FMSC 12; , 3 FSM Intrm. 292 (Pon. 1988). The Court thereupon distributed the accounts receivable for collection on behalf of Mid-Pac's creditors, and ordered plaintiff's counsel in the present case to collect the defendant's allegedly unpaid stock subscription.

After demanding payment on August 17, 1988 and receiving no answer from the defendant, plaintiff's counsel filed a complaint with this Court for the collection of the unpaid subscription and served it upon the defendant on October 11, 1988.

The defendant's answer pleads several defenses, including that the statute of limitations has run on this action. Plaintiff has asked the Court for partial summary judgment with regard to the affirmative defense of the statute of limitations only, therefore we do not address here the merits of the defendant's other arguments, including his assertion that no subscription was ever executed.

Defendant has raised two supposedly disputed issues of material fact. The first regards the date of incorporation of Mid-Pac. As the dispute seems to be merely whether Mid-Pac was incorporated in October or in November of 1978, this difference is not material to the issue of the statute of limitations, which, as explained below, is six years. Defendant also asserts that there is a genuine dispute over his alleged withdrawal from the company sometime before 1980. While this may, if proven, provide the defendant with a defense to the claim, clearly it is not material to the question before the Court. The statute of limitations has either run or not run, regardless of whether Mr. Senda withdrew from ownership in Mid-Pac. With no genuine dispute as to the material facts, therefore, this question is an appropriate one for summary judgment. FSM Civ. R. 56.

The question of law which remains is when the statute of limitations begins to run on an action for the collection of unpaid stock subscriptions. In the absence of any law or regulation in the Federated States of Micronesia which provides a specific limitation on actions to collect unpaid stock subscriptions, the applicable period is set by 6 F.S.M.C. 805 at six years. Parties have acknowledged this, but disagree as to when the six years begin to run.

In this case, the creditors' rights as against the shareholders or subscribers of stock in the corporation are derived from the rights of the corporation itself. These rights have been assigned to the creditors of Mid-Pac in previous litigation before this Court. The creditors, therefore, will be able to enforce the shareholders' liability only to the extent that the corporation could have enforced it before the assignation. Thus, if the corporation is barred by the statute of limitations from enforcing a stock subscription, the creditors of the corporation are as well. The statute begins to run against the creditors when it runs against the corporation.

As with any statute of limitations, the period within which to commence actions begins to run when the cause of action accrues. When a stock subscription specifies the date of payment, including payment in installments at specified times, clearly the corporation has no cause of action for breach of the agreement until the date specified. At that time, the statute of limitations begins to run. Here, however, we have a "Stock Affidavit," alleged to be the defendant's subscription, which is silent as to the time or other terms of the subscription. Again, there are no applicable laws or regulations in the Federated States of Micronesia which fix the terms of payment where a stock subscription fails to specify them. In such a situation, the defendant argues that the subscription is payable immediately upon the formation of the corporation, and that the cause of action accrues at that time. On the other hand, the plaintiff urges the Court to adopt a rule that subscriptions which are silent as to the time of payment are not due until there has been a call from the directors, and that the corporation has no cause of action to collect unpaid subscriptions until such a call has been made.

In matters of first impression such as this, the Court has at times looked to the case law of other jurisdictions, particularly in the United States, for comparison and guidance. See, e.g., Semens v. Continental Air Lines, [1985] FMSC 3; 2 FSM Intrm. 131, 137 (Pon. 1985); Federated Shipping Co. v. Ponape Transfer & Storage, 4 FSM Intrm. 3, 9 (Pon. 1989). Although the weight of authority in the United States would seem to favor the rule that where no time of payment is fixed a stock subscription becomes due only upon a call, on the whole US courts are quite divided on the issue. See 4 Fletcher Cyclopedia of Corporations (Perm Ed.) § 1794 (rev. 1984); Annot., 35 A.L.R. 832 (1925), and cases discussed therein.

More importantly for this Court, however, the rule that a call or demand is necessary affords more adequate protection to the creditors of a corporation. That is certainly a significant concern in the Federated States of Micronesia, where efforts are being made to encourage business opportunities and attract investment.

Especially in the absence of a bankruptcy code, cases of insolvency such as that of Mid-Pac have proven extremely problematic. Undercapitalization compounds those problems, since corporations in large part receive credit based upon the amount of their stated capital. Although creditors rely on stock subscriptions in this way, however, they cannot enforce the agreements, and are not always even in a position to know whether a subscription has been paid in. Creditors often learn of the thinly-capitalized nature of the corporation and of unfulfilled subscription promises only once insolvency occurs.

Prior to insolvency, enforcement of stock subscriptions is left to the directors of the corporation. Yet, as in the present case, often the directors and the subscribers are the same individuals, or at least the former are agents of the latter. Thus, the corporation cannot be relied upon to look after the interests of creditors in collecting unpaid subscriptions. Allowing the directors to bar creditors' claims on unpaid stock subscriptions simply by never having made a call, therefore, invites those directors and officers who are also shareholders to refrain from enforcing the subscription agreements. It would be inequitable to allow a corporation, through its directors' negligence or self-interest, to thus mislead and prejudice its creditors, inviting their reliance then precluding them from reaching the capital upon which they extended credit.

Public policy, therefore, strongly favors a rule that stock subscriptions which are silent as to the date and terms of payment do not become due until a call has been issued by the corporation. If a corporation becomes insolvent without ever issuing such a call, then the cause of action to collect unpaid subscriptions accrues when the creditors, by authority of the court, first demand payment.

In this case, it is uncontested that no call was ever issued to defendant to collect on the alleged stock subscription. Thus, no cause of action accrued until August 17, 1988, when counsel for the creditors of Mid-Pac, upon order of this Court, first demanded payment by the defendant. The complaint in this case was served on the defendant in October of that year. Clearly, therefore, the six year statute of limitations prescribed by 6 F.S.M.C. 805 has not run.

Plaintiffs are entitled to judgment as a matter of law with regard to the affirmative defense of the statute of limitations.

So ordered the 5th day of October, 1989.