37 F. 394 | U.S. Circuit Court for the District of Northern California | 1888
(after stating the fads as above.) The principal question presented on the facts as found in this case, is, whether the defendants Haven and Nichols are personally liable to plaintiff, respectively, for a
“Each, stockholder of a corporation is individually and personally liable for such proportion of its debts and liabilities, as the amount of his stock, or shares owned by him, bears to the whole of the subscribed capital stock, or shares of the corporation, and for a like proportion only of each debt or claim against the corporation. * * * If any stockholder pays his proportion of any debt due from the corporation, incurred while he was such stockholder, he is relieved from any further personal liability for such debt, and if an action has been brought against him upon such debt, it shall be.dismissed, as to him, upon his paying the costs, or such portion thereof as may be properly chargeable against him. The liability of each stockholder is determined by the amount of stock or shares owned by him at the time the debt or liability was incurred, and such liability is not released by any subsequent transfer of stock. ”
Thus, taking the several provisions together, a stockholder is personally liable for his proportionate share of each debt of the corporation and of each debt, only, contracted while he is a stockholder. This section was in force at the time of the adoption of the amended constitution in 1879, and it has never since been changed. Article 12, § 2, of the constitution of 1879 is as follows: “Dues from corporations shall be secured by such individual liability of the corporators, and other means as may be prescribed by law.” And section 3 of the same article, provides, that “each stockholder of a corporation * * * shall be individually and personally liable for such proportion of all its debts and liabilities contracted or incurred during the time he was a stockholder, as the amount of stock or shares owned by him, bears to the whole of the subscribed capital stock or shares of the corporation.” Thus the section of the Civil Code, taking its provisions together, is precisely like this provision of the constitution, except by express provision, no one creditor can collect more than the share of his own particular debt of the stockholder, whether he has paid his share of the debts to other creditors or not; but the liability in the aggregate of the stockholders is precisely the same under each, since the aggregate of the stockholder’s share of liabilities to each creditor is equal to his share of the liabilities upon the whole debt or liabilities of the corporation. It is urged that the constitution on this subject is not self-executing, but that it requires legislation to give it effect; that section 322 of the Civil Code, is inconsistent with section 3 of article 12 of the constitution of 1879, and is, therefore, under section 1, art. 22, repealed by it; and, since there has been no other legislation on the subject, since the adoption of the new constitution, to give the constitutional provision effect, that this right of creditors to enforce the personal liability of stockholders has lapsed. Section 1, art. 22, referred to provides “that all laws in force at the adoption of this constitution, not inconsistent therewith, shall remain in full force and effect until altered or repealed by the legislature.” If, therefore, the provisions of section 322 quoted are not inconsistent with the provis
It is insisted, that the only remedy in this case is, necessarily, in equity, as all the stockholders are interested and personally liable for their respective shares, and are necessary parties, and numerous authorities are cited on the point. , Hut the cases cited arose where there wan no statute expressly giving a remedy at law. Section 322 of the Civil Code of California, still in force, as we have seen, provides, “that any creditor of the corporation may institute joint or several actions against any of its stockholders for the proportion of his claim, payable by each, and in such action the court must ascertain the proportion of the claim or del it for which each defendant is liable, and a several judgment must be entered against each in conformity therewith.” This is mere procedure, in an action at law, especially given by the statute. It is not an equity or an admiralty case, and is general in its application so section 914, Rev. St. U. S., applies; or if it confers a new right and affords a new remedy
I have no doubt that the payment of the'several sums of money by plaintiff Borland, for the benefit of the Wyoming & Dakota Water Company under the circumstances detailed in the statement of facts, constitute debts, or liabilities of the corporation within the true intent and meaning of the constitution, and statutes for which stockholders of corporations are rendered personally liable, to the extent of their due proportion. That a stockholder, and even a director, may, in a proper manner, become a creditor of a corporation is settled. Oil Co. v. Marbury, 91 U. S. 587; Hotel Co. v. Wade, 97 U. S. 13; Railroad Co. v. Spreckles, 65 Cal. 193, 3 Pac. Rep. 661, 802; Hallam v. Hotel Co., 56 Iowa, 178, 9 N. W. Rep. 111. See, also, Harts v. Brown, 77 Ill. 226; Sanborn v. Lefferts, 58 N. Y. 179; Brinham v. Coal Co., 47 Pa. St. 43-49; Hope v. Valley Co., 25 W. Va. 789; Cook, Stocks, §§ 660, 663; Duncomb v. Railroad Co., 84 N. Y. 190, 88 N. Y. 1; Harpending v. Munson, 91 N. Y. 650. The note for $45,000 does not, in my judgment, come within the principle of the decision in Wilbur v. Lynde, 49 Cal. 290, and other cases cited by the defendant, conceding, for the purposes of the argument, that they were correctly decided. The transaction was, in fact, between the Wyoming & Dakota Water Company and the Bank of California, not between the corporation- and" Borland. The bank declined to advance the money to take up the two drafts on the corporation, one for $25,000, and the other for $20,000, unless Borland would guaranty the payment of the loan, but agreed to advance it upon his guaranty. Now the form of the note was simply the mode adopted to. effect this guaranty. The note was made payable, in form, to Borland Hemmeand Graves and indorsed by them, and delivered to the Bank of California, this simply being the ordinary form of such transactions with banks. The transaction was between the Bank of California and the corporation, and not between the corporation and the nominal payees of the note. The consideration of the note was advanced by the bank to the corporation, on the note and indorsement, and not by, or to, Borland, • or on the unindorsed note. The transaction is substantially, so far as the corporation and Borland are concerned, the same as if the note had been jointly made to the bank, as payee, by the corporation and Borland, as joint makers, instead of its being made payable, in form, to Borland, and indorsed by him'to the bank. The money was not advanced on the note, but on the indorsed note. The note went to protest,'and Borland afterwards, paid it, with the. interest, on his guaranty, after he ceased to be a director, and the liability of the corporation to him arose from this payment, as guarantor, and not upon any advances made to him, or by him on the note as payee of the note. I have no doubt, that this -note, taken in 'connection with the explanatory oral testimony, and the drafts taken up with the proceeds, are en
Defendants insist that they were not stockholders at the time the indebtedness in question was incurred, and for that reason, that they were not personally liable. Section 824 of tlie Civil Code of California provides, that “shares of stock are personal property, and may be transferred by indorsement by the signature of the proprietor or his attorney, or legal representative, and delivery of the certificate; but such transfer is not valid, except between the parties thereto, until the same is so entered upon the books of the corporation as to show tho names of tho parties by and to whom transferred, the numbers or designation of the shares, and the date of the transfer.” And the rules and regulations of the company forbade the transfer of the stock on the books of the company, while there were any unpaid assessments existing upon it. Under the provision of the statute cited, so long as a transfer of stock, however absolute in terms, properly remains unrecorded on the hooks of the corporation, the party in whose name the stock stands, as between himself and the corporation, or its creditors, must for all purposes be deemed the owner of the stock. People v. Robinson, 64 Cal. 373, 1 Pac. Rep. 156; Irons v. Bank, 27 Fed. Rep. 595; Price v. Whitney, 28 Fed. Rep. 297; Evans v. Bailey, 66 Cal. 112, 4 Pac. Rep. 1089. See, also, Cook, Stocks, § 262; 2 Mor. Priv. Corp. § 856; Tayl. Corp. 748; State v. Ferris, 42 Conn. 560. Fowler v. Ludwig, 34 Me. 455; Bank v. Cutler, 49 Me. 315; Dane v. Young, 61 Me. 160; Shellington v. Howland, 53 N. Y. 371. But, in this case a transfer could not be lawfully made upon the books for the reason, that .there was an unpaid assessment upon the stock of one dollar a share, at the time of the alleged assignment of the certificates of stock; and for that reason, the then,president of the company, Thomas Barr, refused to sign the transfer of the shares hold in his own right by Haven or to permit the entry inadvertently partly made by the secretary to remain on the books, and the incomplete entry was canceled thereon. But this transfer, such as it was, for the purpose of putting 100 shares in the name of Clay, was not made till November, 1881. The inchoate transfer on the books is dated November 29, 1881, and Eoberts testifies that the certificate was handed to him hut a few days before this effort to have a transfer made on the books and the secretary testifies that it was made very soon after receipt of the certificate. Although Haven has an indefinite idea, that he delivered the certificates to Eoberts in December, 1880, it is, entirely clear, from the evidence, that this was not done till some time in November, 1881, and the indebtedness in question all accrued before February 1,1881, long before the pretended disposition of the stock, and the liability of Haven would not have been affected had the transfer attempted on November 29, 1881, been completed and been valid. There never was any attempt to transfer Nichols’
It is next contended that the conveyance of the property of the Wyoming & Dakota Water Company to the Father de Smet Company, and the release, of the former from all indebtedness to the Father de Smet Company by the latter, as set forth in the statement of facts, extinguished all indebtedness for the advances before that time made by the Father de Smet Company, and that the liability could not thereafter be reinstated, as against a stockholder without his consent, whatever might be the case with reference to the corporation. If it was competent for the Wyoming & Dakota Water Company to convey all its property to the Father de Smet Company* and for the latter, in consideration thereof, to release all prior indebtedness for all advances made, and to execute in addition thereto in favor of the former company two valid promissory notes for $100,000 each, it is not apparent to me, why the transaction, by mutual agreement, might not be reversed, and the property reconveyed, upon a restoration of the consideration received, the liability revived,. or new liability created, and the parties placed in statu quo. The transactions are of precisely the same character, and if it was competent for the two corporations to make the first transaction, it is not apparent to my mind why they did not have the power to make the second. The property conveyed by the Wyoming & Dakota Water Company was the kind of property, which it was organized to obtain, manage and enjoy; and, having conveyed it away, leaving nothing of the kind with which to carry on the business for which it was organized, it was, certainly, authorized to purchase other property of the kind, with the same consideration which it received for the property sold, and if it could legally purchase other property of the kind, why not repurchase, for the same consideration, that before held, sold and conveyed? There can be no doubt, I think, that it was entirely competent for the Wyoming & Dakota Water Company to repurchase this property from the Father de Smet Company, and create a liability for moneys as a part of the consideration, and give its note therefor so as to be binding upon the corporation. If so, then the liability thus created against the corporation being valid as against the corporation, it must, necessarily, be valid against the stockholders of the corporation; for the constitution and statutes expressly make the stockholder personally liable for his “proportion of all its debts and liabilities contracted or incurred during the time he was a stockholder.” There can be no such thing as a valid debt, or liability against a corporation, contracted while a party is a stockholder, without that stockholder being at the same time personally liable for his proportionate share. If therefore, it was-competent for the corporation to rescind their agreement by a contract, valid as to the corporators, and place the corporation in statu quo, or to create a new but similar liability, that would
With reference to the books of the corporation, none were introduced of the character, or for the purpose shown in the case of Neilson v. Crawford, 52 Cal. 248, cited by defendants. The ledger and day-book kept by a clerk were not introduced to show charges against the corporation, nor -were they introduced at all. The only books introduced were the record of the stock transfers to show that defendant’s stock had not been transferred on the books, and the records of the proceedings of the hoard of directora at tiieir various official meetings, to show what the official action of the directors and board was at those meetings. Those records were, certainly, competent to show what the official action of ‘the board of directors was. Indeed it was the only competent evidence for that purpose. What effect that official action had upon the rights of the parties, is quite another question. The directors, are, certainly, the agents of the stockholders, elected'by them, and acting as such under their authority. They are not mere clerks of the corporation, performing ministerial duties only. The records are open to the inspection of the stock
Nearly, if not all of the evidence introduced in this case by plaintiff was objected to by defendants, and taken under objection and exception to be considered and ruled upon by the court in the light of all the testimony, when the whole case should be before it. One part of the testimony often supplements and throws light upon and illustrates the other. All oral testiniony to establish the advance of money by the plaintiff for the bene'fit of the corporation, was objected to because the matters ought to be of record, and the record would be the best evidence; and, when record evidence was offered, it was objected to because, although it might be competent to establish a liability against the' corporation, it is not competent to affect the personal rights of a stockholder of the corporation. Under the principles insisted upon by defendants, I apprehend that it would be very difficult to establish the personal liability of a stockholder to a creditor of the corporation, and that this security or liability provided by the constitution and statutes, would be wholly illusory. In my'judgment it is perfectly competent to show by the official record of the action of the bo'ard of trustees duly assembled, that for instance A. B. was by resolution unanimously passed, duly appointed and authorized to act as superintendent of the corporation and general manager of its affairs, in Dakota and Wyoming territories, and by parol evidence that the corporation had property in each of those territories, and that A. B. did in fact take the charge and management of its affairs in those regions in pursuance of said appointment; that he in fact made monthly reports of his operations and expenditures in the construction of the ditches and works of the company in those territories, there being no question as to the specific contents of those reports; and that he drew drafts upon the said corporation at San Francisco for moneys required for his operations; that the directors received and acted upon those reports as correct, and in fact paid such drafts, and that it is competent in corroboration of this oral testimony, and to show the dates, amounts, acceptance, etc., to introduce the drafts themselves, upon proper proofs of their genuineness; that it is competent to prove by oral testimony, that the corporation had no money with which to take up the drafts, as they became due, and it was necessary to borrow money for the purpose; that upon negotiation with a bank for a loan of money, it'was ascertained that the money could not he got on the note of the corporation alone, but could be had upon the note of the corporation indorsed or guarantied by the plaintiff; and that this condition of things was brought to the notice of the directors, and this being so shown, that it is competent to show by the records of the board, that at a meeting duly héld for the purpose, a resolution was passed, authorizing the president to execute a note for the amount of money wanted, to be indorsed by the plaintiff as surety, and fixing the rate of interest to be paid on the loan; and then to show, by parol testimony accompanied
But because Mr. Borland and the directors wore not present in Dakota and did not know from personal observation and knowledge, all that was done, and there was no proof by parties having personal knowledge, precisely of all the work that was done in Dakota, and whether the money drawn from time to time by the superintendent on the authority of the directors was actually all, in fact expended for the purposes set forth in the monthly reports, it is insisted, that the action of the hoard of directors in raising the money and paying the drafts upon the representation of the superintendent and reports upon which the board acted, however valid as against the corporation, is not binding upon a stockholder, and can impose no personal liability upon him,—that the directors could not create liabilities upon hearsay evidence. The directors of great corporations having business far away from the central office, and often in distant, and even in foreign countries, must act upon the reports of their authorized agents. No other mode of conducting their business is practicable, or even possible. They cannot possibly have persona] knowledge of every act performed in the name of the corporation, and if they cannot render the corporation liable for acts performed beyond the reach of their own observation, they cannot carry on the business of the corporation, at all. The directors of the Wyoming & Dakota Water Company were, certainly, authorized to act upon the information derived from their authorized agents in the regular course of their business, and in so acting, to borrow money for its supposed uses and hind the corporation for its payment; and those who advance it, or become responsible to those who do, and are thereafter compelled to take up the obligations, are not hound to look to the correct application of tlio money so raised. It was only necessary for plaintiff to show that the directors acted in good faith upon information received from their agents in the usual course of business. It was not necessary to show how all the money was expended, and no effort was ruado to do so either by hearsay evidence or otherwise. Those transactions are certainly valid as against the corporation, whether the moneys were properly applied by the authorized agent of the corporation in Dakota or not; and in a suit against the corporation by the Bank of California, for the
But there is no charge that the moneys raised in the mode stated Avere not in all respects legitimately expended in the proper business of the company, and there was no occasion for hearsay evidence, or other evidence, on that point.. There is no averment in the ansAver that there was one dollar improperly raised or improperly expended by the directors, their agent, or anybody else. The ansAver simply denies, that the plaintiff, Borland, advanced, or paid any moneys at all for the benefit of the Wyoming & Dakota Water Company, as alleged in the complaint. And there is not only no averment, in the ansAver, but not a particle of evidence tending in the slightest degree to sIioav, that one dollar of the money advanced by Borland on the $45,000 note, or the $6,000 and $3,500 drafts, or the $6,854.15 paid to Garber & Thornton; or of the money advanced by the Father de Smet Company, the balance of which Avas, afterwards, included in the note set out to the Father de Smet Company, was eArer improperly expended, or used for any purpose other than the legitimate objects of the corporation; nor is there a particle of testimony tending to shoAv that every dollar claimed was not advanced and paid by plaintiff, exactly, as is indicated by the testimony on behalf of
A judgment in favor of McMasters against the Wyoming & Dakota Water Company recovered upon the 8105),049.76 note given by the corporation to the Father de Sniet Company for balance of advances made by the latter to the former, and proceedings thereunder, was introduced in evidence by plaintiff, under objection by defendants, that, a judgment against a corporation is not competent evidence in an action by a creditor against a stockholder of the corporation, to enforce a personal liability. There are some authorities, including some New York cases, apparently depending upon peculiar statutes of that state of a highly penal character that seem at first blush to sustain this view. But I think they are inapplicable. However that may be, the weight of authority appears to be very largely to the effect, that a judgment against a corporation for a corporate debt, is, at least, prima facie, if not conclusive, evidence against the stockholders therein, when sought to be held liable for such debt; and many of the authorities seem to hold it conclusive except upon proof of fraud, or collusion, or when there is a defect of jurisdiction. 2 Mor. Priv. Corp. (2d Ed.) § 886; Cook, Stocks, § 209; Tayl. Corp. § 737; Freem. Judgm. § 177; Donworth v. Coolbaugh, 5 Iowa, 300; Grund v. Tucker, 5 Kan. 70; Came v. Brigham, 39 Me. 35, 40; Milliken v. Whitehouse, 49 Me. 527; Thayer v. Lithographic Co., 108 Mass. 523, 528; Hawes v. Petroleum Co., 101 Mass. 385; Bohn v. Brown, 33 Mich. 257; Slee v. Bloom, 20 Johns. 669; Schaeffer v. Insurance Co., 46 Mo. 248; Haagland v. Bell, 36 Barb. 57; Hastings v. Drew, 76 N. Y. 9-15; Stephens v. Fox, 83 N. Y. 313; Wilson v. Coal Co., 43 Pa. St. 424; Bank v. Chandler, 19 Wis. 457; Glenn v. Springs, 26 Fed. Rep. 494. This appears to me to he the better view. At all events, it is not a matter of any consequence, in this case, for the liability is fully made out by the oral evidence, various notes, and the record of the action of the boards of direct
I am fully satisfied that the plaintiff is entitled to recover. I cannot go through the long record, and rule, specifically, and, independently, upon every exception taken to the evidence by defendants. I have indicated the character of the important evidence,^ and the exceptions thereto, and given examples of that upon which I have acted in deciding this case. The other evidence considered is largely of a similar kind, and the exceptions of like character. It is necessary to consider one part of the evidence, in its relation to others in order to decide, intelligently upon its admissibility. Generally, therefore, I overrule the objections taken by defendants.
Should a bill of exceptions be required, it would necessarily, include nearly all if not the whole evidence in the case, as there is very little, that was not taken under objection on some ground on the part of the defendants, and it is necessary to consider one part as illustrated by the others. The facts I have taken pains to set out very fully, and at large, in the findings; and the question, after all is, what is their effect upon the rights of the parties? The, case can better be disposed of upon the facts, than upon rulings upon specific isolated items of evidence. If the acts of the parties, as set out, constitute a liability against the corporation, then they must create a personal liability upon each stockholder for his proper share. As before stated, there can be no liability on the part of the corporation without creating a corresponding liability for his share against the stockholder. It may well, be that a fraudulent and collusive transaction between the party in whose favor the liability is sought to be created, and the directors of a corporation intentionally cooperating together could not cast any personal liability upon a stockholder; but, then, such a transaction would be equally void as to the corporation. I cannot now, conceive of a case in which there is a valid debt, or liability, against the corporation where there would not, under the constitution and statutes be a corresponding proportionate personal liability against a party, who was a stockholder, at the time when the debt, or liability was incurred. If this be so, then, the only question as to the liability can be, is there a liability against the corporation? And if that be so, than any evidence, that is competent to establish the liability, as against the corporation, must be competent to establish the liability, of the stockholders, for the liability of the corporation being established, the liability of the stockholder for his share, follows as an
