San Francisco & North Pacific Railroad v. Bee

By the Court, Wallace, C. J.: The property levied upon to satisfy the judgment of Bee against The San Francisco and Humboldt Bay Eailroad Company is admitted to have been formly the property of that company. The judgment of Bee was rendered in November, 1872 (upon an indebtedness existing as early as July, 1869), and the execution thereon, issued in September, 1873, was levied upon property claimed by the corporation plaintiff in this suit, The San Francisco and North Pacific Eailroad Company, and described in the complaint as follows: “ The road-bed for a distance of ten miles north, commencing at Petaluma, being all the lands or real estate, and all the bridges, embankments, excavations, viaducts, culverts, trestlework, and Lother superstructures and constructions, along the line of the San Francisco and North Pacific Eailroad, all in the county of Sonoma,, State of California.” The complaint alleges that the corporation plaintiff, for a valuable consideration, purchased this property from The San Francisco and Humboldt Bay Eailroad Company, and on the 17th day of November, 1869, obtained from the latter corporation a deed of conveyance, convey [403] ing all its right, title, and interest therein. The allegation of a valuable consideration is denied in the answer, which also avers that the deed referred to was executed wholly without consideration of any kind; but at the trial the Court below found the fact upon this point as follows : “ That on the 17th day of November, 1869, the plaintiff, for a valuable consideration, purchased of the San Francisco and Humboldt Bay Bailroad Company, the property described in the complaint; and said plaintiff then became, ever since has been, and still is, the exclusive owner thereof.” A decree having been thereupon entered in that Court, perpetually enjoining the defendant Bee from causing the said property to be sold in satisfaction of the judgment he had obtained, this appeal was taken; and one of-the points made for the appellant is that this finding is not supported by the evidence. It appears that in March, 1868, The San Francisco and Humboldt Bay Bailroad Company was incorporated, and became the owner of the property in controversy. This corporation seems never to have been dissolved, but is yet in esse. On the 16th day of November, 1869, the corporation, plaintiff here, was attempted to be organized, and for the purposes of this decision we will assume was in fact organized; and, as described in its articles of incorporation, its road included the road which was already owned and in process of construction by the San Francisco and Humboldt Bay Bail-road Company, and subsequently levied upon under the execution already referred to. Its officers were the same persons who were the officers of the San Francisco and Humboldt Bay Bailroad Company, and its stockholders were also substantially the stockholders of the latter company, each stockholder receiving stock of the new corporation corresponding in amount with stock held by him in the old one. As observed already, the organization of the new corporation was effected on the 16th day of November, 1869, on which day its articles of incorporation were filed in the office of the Secretary of State. On the 13th day of November, 1869, some three days previous, a resolution had been adopted by the Board of Directors of the San Francisco * [404] and Humboldt Bay Bailroad Company authorizing the President and Secretary of that corporation to sell and convey, on such terms as they might deem expedient, all or any of its property; to execute and deliver all writings and conveyances necessary to that end and to affix the corporate seal thereto. Accordingly, on the 17th day of November, 1869, the next day after the organization of the corporation plaintiff, an indenture reciting this resolution and purporting to be in pursuance thereof was executed by the President and Secretary therein referred to, and delivered to the corporation plaintiff here, as grantee thereof. It recited a consideration of twenty thousand dollars paid in hand, and purported to convey to the corporation plaintiff the railroad in process of construction by the corporation grantor, including the road and property in controversy in this suit. It is not claimed now, as we understand it, that in point of fact any portion of the recited consideration, or any other consideration, was paid at thé time, or afterwards, except that at some time, subsequently to the delivery of the deed, the grantee therein, or its President, extinguished some seven or eight hundred dollars of the indebtedness of the corporation,,grantor by the payment of fifty cents upon the dollar, and exacting from the creditor “ a clean receipt for the whole amount.” These are substantially the facts held by the Court below to amount to a purchase and sale for a valuable consideration, and one which in equity vested in the corporation plaintiff a title to the property superior to the claim of the defendant Bee, to have it applied in satisfaction of his debt. In Martin v. Zellerbach (38 Cal. R. 300) it was held here' that the property and assets of a corporation are vested in its trustees, to .be preserved by them as a fund to secure the creditors of the corporation. By the thirteenth section of ‘‘ An Act concerning corporations ” (Acts 1850, 348) it is provided in substance that until its dissolution and the payment of its debts, it shall' not be lawful for the trustees to make any dividend except from the surplus profits arising from the business of the corporation, nor to divide, withdraw, or in any way pay to the stockholders, or any of [405] them, any part of the capital stock of. the company. The capital stock and the assets of the San Francisco and Humboldt Bay Railroad Company, therefore, constituted a fund, devoted by law to the payment of the debt to Bee, and the debts of that corporation, if any, to other persons; and it was certainly not competent to the members of that corporation to dissipate this fund and place it beyond the reach of creditors by merely going through the process of re-incorporation, taking on a new corporate name, transfering the assets of the old corporation to the new one without consideration, and issuing the capital stock in the new corporation to the holders of the capital stock of the old corporation. This transaction involved a breach of positive statute law. It was the dividing of the capital stock of the old corporation—the withdrawal of its assets, to the injury of its creditors—which is forbidden by the statute, and it should not be countenanced or aided by a Court of equity. Judgment reversed and cause remanded, with directions to dismiss the action. Remittitur forthwith. Mr. Justice McKinstry did not express an opinion.