Knowles v. Sandercock

Temple, J. This action was brought by the assignee of numerous creditors of the California Southern Hotel Company, a corporation, against certain stockholders, to enforce their liability as stockholders for the debts of the corporation. The complaint contained thirty-four separate causes of action. Prior to the trial one appellant, the California Furniture Manufacturing Company, paid its proportion of the indebtedness contained in the first thirty causes of action, and went to trial on the last four. The other appellants, Nathan Goldtree, Morris Goldtree, Isaac Goldtree, and J. H. Hollister, contested all causes of action. Judgment went for plaintiff on all contested — 635 — issues. All the appellants moved for a new trial, which being denied, each appeals from the whole of the several judgment against him, though all the points made by them on this appeal have reference to the last four causes of action. In each separate cause of action it is alleged that six hundred and ninety shares of the capital stock of the California Southern Hotel Company, and no more, had been continuously subscribed for during all the times mentioned in the complaint, and that the appellants Goldtree had continuously been the owners of one hundred shares, Hollister of twenty shares, and the California Furniture Manufacturing Company of twenty shares. The court found that seven hundred and fifty-three shares had been continuously subscribed for, and that appellants had during such time been the owners of the number of shares charged. Appellants Goldtree and Hollister attack the finding as to the number of shares subscribed. It was incumbent upon the plaintiff to prove the whole amount of stock outstanding to enable the court to determine the liability. For that purpose plaintiff offered in evidence the stock certificate book, to which the defendants objected on the ground that it was immaterial, irrelevant, and incompetent, and because it was not properly kept, and was not one of the books provided for by the Civil Code. The objection being overruled defendants reserved an exception, and the book was received. The entries were in form as follows: “Certificate No. 1; No. of shares, 10; issued September 25, 1888, to William Sandercock; not canceled.” The stock ledger and stock journal were also put in evidence, and the secretary of the corporation testified that they contained the names of all the stockholders; also that no other persons appear on the books of the company as having owned stock during any of the times mentioned in the complaint. It is contended that this evidence is not only incompetent, but that, admitting its competency, it is insuffi — 636 — cient. It is claimed that it is incompetent because the books are not corporation books, required to be kept by the provisions of sections 377 and 378 of the Civil Code, and are not quasi public records which, by any rule of law, is made binding on the stockholders. The evidence, it is said, is not sufficient because there may be other subscribers for stock besides those whose names appear in these books, and the liability of stockholders is made to depend upon the number of shares subscribed for. The burden, it is said, was on the plaintiff not only to show that there were certain stockholders, which, at the most, is all the books introduced show; but also to prove that no more shares had been subscribed for. Section 377 of the Civil Code requires all corporations for profit to keep a journal of all meetings of the directors, members, or stockholders. Section 378 prescribes that in addition such corporations shall “ keep a book to be known as the 1 Stock and Transfer Book,’ in which must be kept a record of all stock; the names of the stockholders or members, alphabetically arranged; installments paid or unpaid; assessments levied and paid or unpaid; a statement of every alienation, sale, or transfer of stock made, the date thereof, and by and to whom; and all such other records as the by-law's prescribe.” The book introduced seems to have been designed for the stock and transfer book. It is true that its contents are not shown here further than is above stated. So far as its contents are set out it corresponds with what is required by the code. The fact that the book is not named as the code requires is not material. The code does not require that there shall be a subscription book, nor direct how subscriptions shall be made. It does not appear that this corporation had any other book showing who the subscribers were. The suit is by strangers to the corporation against its stockholders. I think these books, together with the testimony, sufficient. (Evans v. Bailey, 66 Cal. 112.) — 637 — The thirty-first cause of action is alleged to be: “That on the 19th day of November, 1888, Ignatz Steinhart, at the special instance and request of said California Southern Hotel Company, loaned to the said California Southern Hotel Company the sum of $25,000, which sum the California Southern Hotel Company then and there promised to pay to said Ignatz Steinhart two years after the said 19th day of November, 1888, with interest on same at the rate of seven per cent per annum until paid.” The complaint then proceeds to state that to secure the same the corporation gave its promissory note, which it set' out. It is also averred that Steinhart assigned the same to plaintiff. The objections urged to the judgment on this cause •of action are: 1. That the suit is brought on the note and not on the contract of loan, which it is said is the primary indebtedness for which only the stockholders are liable; 2. That the original indebtedness has not been assigned to plaintiff; and 3. That the debt had been paid. 1. The complaint, as appears from the above, sets out the original indebtedness, and also avers the execution of the note of the corporation. I think this is correct pleading under the code, and, if the allegations in regard to the note are surplusage, they do not harm. The complaint is not objectionable on the ground that it does not show when the debt accrued. Perhaps some confusion has arisen on this subject by expressions to the effect that the stockholder’s liability is not that of a surety but that of an original debtor. These expressions, from the point of view from which they were made, correctly state the law. Nevertheless, the statute expressly makes the stockholder liable for the debts of the corporation, and it would not be good pleading to aver that the stockholder borrowed the money or bought the goods for which the indebtedness arose. The debt to be alleged is the debt of the corporation, and I see no reason why it may not be pleaded in the usual mode. The original contract here, upon which the in — 638 — debtedness arose, was the note, and the allegation of it is a sufficient allegation of the debt of the corporation. Whether the presumption would be that the indebtedness was incurred at the time the note was given need not now be decided, for the further fact is alleged, showing when the debt was incurred. The stockholder is, perhaps, not strictly liable on the contract, but on the statute. Still, if the debt of the corporation is created by a written contract, the debt of the corporation must be pleaded in the usual mode. The liability of the stockholder in this case is no more based on a supposed original implied contract than on the note. The proper averment of a debt is against the corporation, not against the stockholder, and the showing that it was incurred while defendant was a stockholder fixes his statutory liability. Suppose, for instance, the note called for interest at two per cent per month, it cannot be doubted that the stockholder would be liable for his proportion of all this interest until the statute of limitation would run in his favor. The debt of a corporation, which is a condition precedent to the liability of the stockholder, -must be shown by proper averment. 2. The evidence fully sustains the finding that the note and the original debt, if there is a distinction, passed by assignment to plaintiff. 3. It is contended that the indebtedness to Steinhart had been paid by the corporation. This contention is based on-the following facts: When Howard became president of the hotel corporation he found it very much in debt. The stockholders were unwilling to pay assessments or to make voluntary contributions. Thereupon he was advised to have the debts assigned and bring a suit to enforce the individual liability of the stockholders. He issued a circular to the stockholders, stating the condition. Thereupon some stockholders voluntarily paid him the amount of their supposed proportionate liability and took receipts in the following form: — 639 — “ San Francisco, November 17, 1890. “Received of [name of stockholder]-dollars, the sum being his assumed proportion of the indebtedness of the California Southern Hotel Company, which indebtedness is considered equal to $100 per share on the issued shares of said hotel company. “ John L. Howard, “ President.” Howard, when on the stand as a witness, said: “ The amounts paid in by the stockholders were for the benefit of the creditors of the stockholders as against their proportion of the entire indebtedness.” There was no assessment or call in pursuance of which this money was paid, and it is manifest that the stockholders who paid intended that the payment should protect them from their liability in the proposed litigation. But as their liability was not joint, and as each stockholder owed a share of each debt, the conditions under which the money was paid to Howard did not authorize him to pay it out in satisfaction of any one debt which would constitute an inconsiderable proportion of the entire indebtedness. Nor did Howard pretend to pay the note for the corporation. He says he borrowed the money and took the note up for the West Coast Land Company, intending when he did so to assign it to plaintiff for the purpose of causing suit to be brought on it. Therefore, it was not intended as a payment of the note,-and it was not a transaction of the hotel company. The money was not paid to the corporation and was not in its possession. It was not intended to be used to pay the debts of the corporation, but to discharge the proportionate liability of the stockholders who paid it. It was held as the money of the stockholders who paid it, and was not the money of the corporation. If applied to the payment of the debt to the extent of the proportionate shares of the stockholders who paid, that would not help appellants, for their shares of the indebtedness would be unaffected by such an application of it. — 640 — The thirty-second cause of action is for $33,069.61, due to Goodall, Perkins & Co., for which the corporation gave its note. The allegations of the complaint in regard to it are similar to those in regard to the cause of action set out in the thirty-first cause of action, and the objections to the pleading, so far as they are the same, need not be further noticed. It is said that the claim evidenced by the note contains some charges for interest which cannot be recovered from the defendants because the agreement to pay is not in writing. If so, when the interest became a legal debt against the corporation by its note, it became a debt of the stockholders. The assignment of the note carried with it the original debt. The objection is made that suit cannot be maintained upon this claim because it was a debt due to Goodall, who was also a stockholder and, it is claimed that the statute was not intended for the benefit of a stockholder who is also a creditor. The objection is founded upon certain decisions made by the courts of New York, in cases growing out of statutes which made the stockholders liable jointly and severally for all the debts of the corporation. It was held that this put the corpora-tors on the footing of partners, and, as a partner cannot sue at law for a debt due him from the partnership, they could not under such a law bring suit against a stockholder. Our law is entirely different, and the absurd consequences indicated cannot result. If each stockholder is liable only for his proportionate share of each debt,, and if, having paid it, he becomes a creditor of the corporation, still he can recover nothing from a stockholder who has already paid his share of the debt. - The thirty-third cause of action is for the balance of an account of $3,575.09, for moneys lent and for moneys paid, laid out, and expended for the use of the hotel corporation by Goodall, Perkins & Co. The only serious question in regard to this count is that it includes $225 interest which had accrued on the money lent, — 641 — paid out, and expended by Goodall, Perkins & Co., and there is no mention of interest in the complaint. The count, as before stated, is for the balance of an account, and ought to have specified the nature of the items composing it. This cannot, however, be a very serious matter. It is only by force of precedents and established practice that such pleading is construed to state a cause of action at all. It can hardly be said such a complaint states the facts constituting a cause of action. Defendant can demand a bill of particulars, and only by so doing can he really learn the facts. But all the items indicated bear interest by virtue of the statute. The complaint does show an indebtedness on the part of the corporation for the interest, and also that defendants as stockholders are liable for their proportion thereof. The thirty-fourth cause of action is for $5,668.17, balance of an account for moneys lent and for moneys paid, laid out, and expended by the First National Bank of San Luis Obispo for the hotel corporation. It is contended that this debt had been paid by the corporation, or at least had been secured by a mortgage which the creditor still holds and which is unforeclosed. The hotel corporation executed to the bank a mortgage for the sum of $15,000, which the witnesses testified was intended as collateral security for what the corporation then owed the bank, and for further advances. The bank, however, gave the corporation credit on its books for $15,000, and deducting the debt showed a balance of $9,529.09 cash on deposit to the credit of the hotel corporation. It is claimed that this amounted to payment. There was no agreement that it should be considered payment, but had there been it would have made no difference. The debt was not paid, but at most renewed, and no doubt the stockholder can be made to pay his proportion of it. The note was due but the mortgage had not been foreclosed. This fact constitutes no defense for defendants. They are not affected by the fact that because — 642 — of the mortgage only an action to foreclose could be brought against the corporation. The mortgage only affects the remedy against the mortgagor—the corporation. The liability of the stockholder, as has already been said, is primary in the sense that he is not a surety. He is not injured nor is he benefited by the fact that the corporation has given security. (Sonoma Valley Bank v. Hill, 59 Cal. 107.) It is contended by the California Furniture Manufacturing Company that the subscription of that corporation for twenty shares of the stock of the hotel corporation was ultra vires, in the absolute sense and is void. It was admitted that on the twenty-sixth day of October, 1888, the hotel corporation issued to the appellant corporation twenty shares of stock and received two thousand dollars therefor, and that the stock is still retained by appellant. The articles of the hotel corporation declare “ that the purposes for which it is formed are the building, owning, and operating an hotel in the city of San Luis Obispo.” The articles of the defendant corporation declare that the “ objects for which this corporation is formed are to manufacture, import, buy, and sell furniture and upholstery; and to carry on said business in all its branches, including the dealing in all materials appertaining to said business.” It will be seen that the defendant corporation is not authorized to deal in stocks or to become a stockholder in other corporations. The general rule is undoubtedly that a corporation cannot own corporate stocks unless expressly authorized. Indeed, it has been said that statutes in regard to the formation of corporations do not authorize any but natural persons to become corporators. (Morawetz on Corporations, sec. 433.) “A private corporation has no implied authority to invest in shares of another private corporation. If this were so, it might, by an easy process, transfer its resources to another.” (Spelling on Corporations, sec. — 643 — 172. See, also, Taylor on Corporations, sec. 267; Brice on Ultra Vires, 133; Pearson v. Concord R. R. Corp., 62 N. H. 537; 13 Am. St. Rep. 590; Lake Erie V. Ry. Co. v. Iron Co., 46 Ohio St. 44; Central R. R. Co. v. Pennsylvania R. R. Co., 31 N. J. Eq. 475; Denny Hotel Co. v. Schram, 6 Wash. 134; 36 Am. St. Rep. 130; Hazelhurst v. Savannah R. R. Co., 43 Ga. 57; People v. Chicago Gas Co., 130 Ill. 268; 17 Am. St. Rep. 319; Franklin Co. v. Lewiston Inst. for Savings, 68 Me. 43; 28 Am. Rep. 9.) In this state a corporation is forbidden to engage in any business other than is expressly authorized in its charter or the law under which it is organized. (Const., art. XII, sec. 9.) To own stock in another corporation is to become interested in the business of such corporation. A stockholder is engaged in the business of the corporation within the meaning of this section of the constitution. He has a voice in the management—may, in fact, control such business—and is, of course, liable for the debts incurred while he is a stockholder. The above provision makes all acts which are wholly without the business of the corporation unlawful. The only reply make by respondent to this point is that the subscription is sustained by Kennedy v. California Savings Bank, 101 Cal. 495, 40 Am. St. Rep. 69. In this, I think, counsel is mistaken. It was there held that the bank rightfully invested its funds in the shares of other corporations. It has been held that banks and other corporations whose business it is to loan money may take stock in other corporations as collateral, and in the process of realizing its securities may become the owner of them. Also, in some cases, such institutions may invest temporarily surplus funds in such securities. It has, however, been held as to such corporations that they cannot permanent!}' invest in the stock of other corporations unless authorized by their articles. The corporation defendant has no funds to invest. Its capital is for the purpose of carrying on its business, no part of which consists in getting interest on money — 644 — or making a profit in outside investments. Its sole purpose is to earn a profit for its stockholder through the business to be conducted by itself as specified in its articles. Its subscription, therefore, was ultra vires and void. The judgment and order are affirmed as to all the appellants except the California Furniture Manufacturing Company, and as to it the judgment and order are reversed. McFarland, J., and Henshaw, J., concurred. Hearing in Bank denied. Beatty, C. J., dissented from the order refusing a hearing in Bank.