296 P. 291 | Cal. | 1931
THE COURT.
Both appellants and respondents being desirous that a rehearing be granted in this case, appellants questioning the correctness of the decision in holding that the cause of action was brought to recover a penalty, and hence was not assignable, and respondents questioning the correctness of the conclusion that the action was saved from abatement by the general provision of section 404 of the Civil Code, and amici curiae, joining with respondents in a petition to grant a rehearing, a rehearing was granted in order that further consideration might be given to the respective contentions of the parties. After a thorough re-examination of the questions presented, assisted by the additional authorities supplied by both appellants, respondents and amici curiae, we are convinced that the conclusions *463 reached in our former opinion are correct and, therefore, adopt it as the opinion in this case.
"This action was brought by plaintiffs as trustees by assignment for the benefit of creditors of the Bartlett Music Company, against the defendants as directors of said company, based upon the provisions of section 309 of the Civil Code making directors jointly and severally liable for the full amount of debts created in excess of the subscribed capital stock of the corporation during their administration. The complaint consisted of ten counts, each count of which alleged that the defendants were directors of the Bartlett Music Company, a corporation, and as such directors created an indebtedness in a certain amount which was in excess of the subscribed capital stock. At the trial the defendants moved for judgment on the pleadings which motion was granted by the court, and judgment was entered for the defendants. From this judgment plaintiffs have appealed.
[1] "After the rendition of judgment and the filing of notice of appeal by plaintiffs, section 309 of the Civil Code was amended. (Stats. 1929, p. 1266.) By said amendment the liability on the part of the directors of a corporation for the creation of debts in excess of subscribed capital stock was completely eliminated therefrom. Defendants, thereupon, filed their motion to dismiss the appeal upon the ground that as the liability of directors under this section was penal and statutory in character, the amendment operated to abate all proceedings pending thereunder. This motion was argued and submitted with the understanding that it would be considered and passed upon at the time of the determination of the case upon its merits. We will first direct our attention to the motion to dismiss.
"The case of Moss v. Smith,
"An order dismissing the appeal based upon the authority of these two cases, therefore, might well be made, were it not for the fact that there appears to be a general saving clause of actions involving corporations incorporated in the part of the Civil Code dealing with corporations. This is section 404 of the Civil Code, which provides that `The legislature may at any time amend or repeal this part, or any title, chapter, article, or section thereof, and dissolve all corporations created thereunder; but such amendment or repeal does not, nor does the dissolution of any such corporation, take away or impair any remedy given against such corporation, its stockholders or officers, for any liability which has been previously incurred.'
"This section has been in the code since 1905 and was, therefore, in the code at the time of the decision of Moss v.Smith, in 1916, and Freeman v. Glenn County Tel. Co. in 1920. Respondents argue that inasmuch as that section did not control in those two cases it should not control here. The records show, however, that this section was not drawn to the attention of the court in either of these actions. However, had the section been drawn to the attention of the court, it is quite probable that the same result would have been reached in the two cases for the reason that in each case there were present other and controlling factors not present in the instant case. For instance, in Moss v. Smith, it was held by the court that the Public Utilities Act absolutely governed and controlled, as the corporation therein *465 involved was a public utility corporation. Inasmuch as the Public Utilities Act, which, as the courts held, contained no clause saving pending litigation, was the sole controlling statute, it follows that section 404 would have no application. In the case of Freeman v. Glenn County Tel. Co. the peculiar phrasing of the saving clause of section 309, as amended in 1917, which expressly excluded from the effects of the saving clause the particular liability of directors upon which that action was based, excluded section 404 from application to that act. Subdivision 2 of section 309, as amended in 1917, reads as follows: `No right, cause of action, or liability now existing or any action or proceedings now pending, shall be affected by this act and such right, cause of action or liability may be enforced and such action or proceeding may be prosecuted in the same manner and with the same effect as if this act had not been passed; excepting only the liability of a director of a corporation heretofore incurred shall not exist in any case where all of the debts and liabilities of the corporation to creditors having been paid, the capital stock divided, withdrawn, or paid out constituted all of the capital stock of the corporation and the same was paid out, withdrawn, or divided with the consent of all the stockholders to or among themselves.' It is obvious that this is a special provision governing `liabilities heretofore incurred' under special conditions such as existed in that case, and that, therefore, the general provisions of section 404 were not applicable.
"We find no merit in defendants' contention that section 404 is a general provision and that inasmuch as the 1929 legislature expressly deleted from section 309, as it existed in 1917, the clause saving pending litigation, it affirmatively expressed its intention that pending litigation should be abated. The legislature in 1929 made drastic and far-reaching changes in title I of part IV of division I of the Civil Code, which deals with corporations in general. Some thirty-six sections were amended, twenty-one sections repealed and five new sections added to this particular division of the code. In our opinion, it appears reasonable that in the reframing of the code applicable to corporations, the superfluity of the saving clause in section 309 was noted and the legislature deeming it no longer necessary, entirely *466 eliminated it. No other explanation appears to us plausible in view of the provisions of section 283 of the Civil Code, as amended in 1929, which provides that `The provisions of this title are applicable to every private corporation, unless there be a special provision in relation thereto inconsistent with some provisions of this title, in which case the special provision prevails.'
"The motion for a dismissal is, therefore, denied.
"The trial court based its order granting judgment on the pleadings in favor of the defendants upon two propositions of law. First: The liability of directors created by section 309 of the Civil Code for creating debts beyond the subscribed capital stock of the corporation is penal in character, and second: a right of action to enforce this liability is not assignable. If these two propositions are well founded in law, then plaintiffs' complaint failed to state facts sufficient to constitute a cause of action against the defendants, and the motion for judgment on the pleadings in favor of the defendants was properly granted.
[2] "Section 309 of the Civil Code was before this court in the case of Moss v. Smith,
"The next question with which we are concerned is whether a claim or cause of action arising out of said section 309 in favor of the corporation or in favor of the creditors against the directors is assignable. The only authority under which the plaintiffs claim the right to institute this action against the defendants is under the assignment made to them by the corporation, the Bartlett Music Company. This assignment is not a statutory assignment for the benefit of creditors for which the Civil Code provides (sec. 3449), but is one which was executed by the Bartlett Music Company, as party of the first part, to five persons designated as trustees and as parties of the second part, and a number of the creditors of said corporation referred to therein as parties of the third part, and who assented in writing to said assignment. By this assignment, the corporation assigned to said trustees, `all of its property of every kind and nature, wherever situated, both real and personal, including all that stock of merchandise, store furniture and fixtures, book accounts, books, bills receivable, cash in hand, choses in action, insurance policies, and all other personal property of every kind and nature situated in or pertaining to, the stores now owned and conducted by said party of the first part in the City of Los Angeles, California, including any leases and leasehold interest'.
"The trustees named in said assignment are the plaintiffs herein with the exception of C.W. Jacks and W.C. Lannin, who were selected to take the places of C.H. Mayer and W.H. Munson, named in said assignment as two of said trustees, but who subsequently and before the commencement *468
of this action resigned. It will thus be seen that the plaintiffs take whatever rights they have in the property of the Barlett Music Co. by a voluntary assignment executed in their favor by the corporation and assented to by certain of the creditors. That such an assignment is binding upon the corporation and the creditors assenting thereto is not questioned. (Jarvis v.Webber,
"This brings us to the question as to whether the right of action against the directors for creating debts in excess of the subscribed capital stock of the corporation is assignable. If it is, then the plaintiffs acquired such right and may maintain this action for the purpose of enforcing it against the directors. If it is not assignable then as already indicated this action must fail.
"In a recent case before this court we held that the right given by the Usury Act to recover treble interest paid on a usurious note or obligation was not assignable. (Esposti v.Rivers Bros. Inc. et al.,
"In Wilson v. Shrader,
"The only answer the plaintiffs make to the contention of the defendants, which appears to be well supported by *470 the authorities just cited, is that the assignment made to them by the corporation and assented to by certain of the creditors, is as valid and binding as if made in compliance with the provisions of sections 3449 to 3473 of the Civil Code, and that such an assignment is valid against the assignor and all creditors assenting to it and serves to vest the assignor's title to all the property absolutely in the assignee, which title can be voided only by a creditor not having assented to the assignment or by a purchaser or encumbrancer in good faith and for value. We may concede that the assignment made by the Bartlett Music Company to the five persons therein named as trustees is as valid and has the same legal effect as an assignment for the benefit of creditors made under the provisions of sections 3449 to 3473 of the Civil Code. In either case, the assignee takes only such property of the assignor as the latter may legally convey or assign. We have pointed out that the right of the corporation to sue the directors for creating debts in excess of the subscribed capital stock is not assignable. Therefore, under the assignment the plaintiffs have no standing in the action.
[4] "Appellants make the further contention, however, that the appellants as trustees under such assignment for the benefit of creditors occupy a dual position. They not only succeed to all of the property of the corporation by virtue of the assignment, but they represent and stand in the shoes of the creditors as well, and in this latter capacity they are authorized to maintain this action on behalf of the creditors to recover from the directors upon their liability under section 309 of the Civil Code. It will be noted under the provisions of this code section as they were previous to the amendment of said section in 1929, that the directors assenting to an excessive indebtedness are made `jointly and severally liable to the corporation and to the creditors thereof', etc. There is undoubtedly a dual liability created by this section of the code against the directors, one in behalf of the corporation, and the other in behalf of the creditors. If we understand appellants' position, it is that if they are not able to maintain this action to recover on behalf of the corporation by virtue of said assignment, they are, at least, entitled to institute and prosecute the same to *471
judgment as representative of the creditors under the terms of said section of the code making the directors liable to the creditors as well as to the corporation. Unfortunately for the appellants, this court has on two occasions held that the assignee even under a statutory assignment for the benefit of creditors `is merely the representative of his assignor and does not represent the creditor'. (Francisco v. Aguirre,
"The appellants appear to lay great stress upon the case ofHerner v. Henning,
"Our conclusion in this matter is that the plaintiffs have no right to maintain this action and that the trial court acted properly and legally in granting the motion of defendants for judgment on the pleadings."
In the original briefs filed in support of their motion to dismiss the appeal, it was apparently conceded by respondents that section 404 of the Civil Code was a general saving clause, the respondents relying upon the argument that the legislature in the 1929 amendment by deleting the specific saving clause from section 309 of the Civil Code had by affirmative action shown that it did not intend the general saving clause of section 404 of the Civil Code to apply to an action brought to enforce the liability of directors for the debts of the corporation created in excess of its subscribed capital stock theretofore imposed by section 309 of the Civil Code, but eliminated by the 1929 amendment. The court did not agree with this contention, being of the opinion that the clause saving pending causes of action was deleted from section 309 of the Civil Code, not for the purpose of retroactively cutting off pre-existing rights, but because, in view of the presence of section 404 in the code, its superfluity was recognized.
After the filing of our former opinion, amici curiae joined with respondents in petitioning the court for a rehearing upon this phase of the case, urging for the first time that section 404 of the Civil Code was not a general saving clause. It is argued, in this behalf, that the latter clause of section 404 is governed and controlled by the first clause which must be read in the conjunctive that "the legislature *473 may at any time amend, or repeal this part, or any title, chapter, article, or section thereof and dissolve all corporations created thereunder" and that, therefore, only in the event of the dissolution of a corporation by legislative act does the latter provision of section 404 of the Civil Code operate to preserve existing rights and liabilities. As amicicuriae read and understand section 404 of the Civil Code, its sole purpose and intent is to authorize the legislature to dissolve any California corporation by repealing or amending any part of the law relative to corporations and incidental to such dissolution to provide that an amendment or repeal which operates to dissolve a corporation will not operate to impair any remedy against the corporation or its officers for liabilities theretofore existing. In an attempt to prove that this is the correct interpretation, amici curiae have traced the legislative history of the enactment of section 404 of the Civil Code. It appears that section 404 of the Civil Code is identical in language with section 384 of the Civil Code, which latter section was repealed in 1907 for the reason that section 384 of the Civil Code was not in the proper place in the code and section 404 was. The Repealing Act contained a proviso that the rights acquired under section 384 should not be lost but continued in force under the provisions of section 404 It also appears that section 384 of the Civil Code is based upon section 31, article IV of the California state Constitution of 1849 (which section is preserved in somewhat different language in section 1 of article XII of the California Constitution of 1879), which read as follows: "Corporations may be formed under general laws, but shall not be created by special act, except for municipal purposes. All general laws and special acts passed pursuant to this section may be altered from time to time, or repealed." The code commissioners in a note to section 384 of the Civil Code, after quoting that provision of the Constitution, say, "Under that provision of the tenth section of the first article of the Constitution of the United States which prohibits a state from enacting any law `impairing the obligation of contracts' it has been settled that the charter of a private corporation is an executed contract between the government and the corporators, and that the legislature cannot repeal, impair, or alter it against the *474 consent or without the default of the corporation judicially ascertained and determined. (. . . Dartmouth College v.Woodward, 4 Wheat. (U.S.) 518 [4 L. Ed. 629]; . . .) In consequence of this construction, it has become usual for legislatures in acts of incorporation, either to make the duration of the charter conditional, or to reserve the power to alter, modify, or repeal the charter at pleasure; `and as the power of modification and repeal is thus made a qualifying part of the grant of franchises, the exercise of that power cannot of course impair the obligation of the grant'. . . . Section 384 was inserted in this code out of an abundance of caution, and not because it was deemed necessary, for there can be but little doubt that the constitutional provision quoted at the head of this note enters into and becomes a part of the contract, thereby reserving to the legislature the right to repeal, impair, or alter any law relative to the formation of corporations, even though the result reached would be the dissolution of every corporation organized within the state." (Civ. Code, Ann., 1st ed., vol. 1, p. 121.) It is apparent from the foregoing discussion that the original purpose of section 384 of the Civil Code, and hence of section 404 of the Civil Code, which is identical in language, was to neutralize the effect of the Dartmouth college doctrine and to preserve in the legislature of the state the power to control all corporations by reserving to the legislature the power to alter, amend or repeal any law relative to corporations, "even though the result reached would be the dissolution of every corporation organized within the state".
Conceding this to be the purpose of the enactment of section 404 of the Civil Code, nevertheless we do not believe that section 404 is susceptible of the construction claimed for it byamici curiae. Amici curiae claim that rights and liabilities are preserved by the latter clause of section 404 only in the event of the dissolution of a corporation. If the first clause of section 404 is read in the conjunctive, it would follow that the power reserved to the legislature was to dissolve all corporations by amending or repealing any section of the code relative to corporations. It is obvious, we think, that the power reserved to the legislature need not go to the extent of dissolving a corporation, but that any *475 exercise of its power which falls short of that result is equally permissible. The power only to dissolve a corporation without the power to alter or modify its rights or liabilities, or to change the rules and regulations applicable thereto, would be a meager power, and fall far short of the complete control over corporations which concededly section 404 of the Civil Code was enacted to preserve to the state legislature.
If the first clause of section 404 of the Civil Code be read, as we think it must, to reserve to the legislature not only the power to dissolve any and all corporations in the state but to amend any part, title, chapter, article or section of the code relative to corporations regardless of whether such action does or does not result in dissolution, it follows logically that the latter part of section 404 is a general saving clause providing for the preservation of any remedy given against any corporation, its stockholders, or officers, for any liability which had been previously incurred, and which in the absence of such provision would be taken away or impaired by such amendment or repeal. In short, the latter clause of section 404 of the Civil Code is as broad in its scope as the first clause of section 404, and inasmuch as the first clause reserves plenary power to the legislature to amend or repeal any laws relative to corporations, the latter clause preserves all rights and liabilities affected by such amendment or repeal.
Under the decision of People v. McNulty,
The argument is reiterated upon rehearing that in the 1929 amendment the saving clause of section 309 was expressly omitted with the legislative intent of terminating all rights previously acquired but not carried to final judgment. As before noted, this court was of the opinion that the saving clause of section 309 was omitted because its *476 superfluity was apparent. Confirmation of our opinion is to be found in the comment of Henry Winthrop Ballantine in his book entitled, "California Corporation Amendments (1929)" upon section 309 of the Civil Code. Mr. Ballantine who served in the capacity of draftsman of the committee of The State Bar of California on revision of the corporation law and was instrumental in preparing the drafts of the amendments enacted by the legislature in 1929, commenting upon the 1929 amendment to section 309, says:
"The saving clause as to causes of action or liability now existing or actions now pending against directors was omitted. Under the decision of Moss v. Smith,
"The cases just cited, however, seem erroneous in that they overlook the general saving clause contained in section 404 which provides that an amendment or repeal of any section of the code does not take away or impair any remedy given against any corporation, its stockholders or officers for any liability which has been previously incurred. Under the decision of People v.McNulty, supra, it is held that a general saving clause like section 329 of the Political Code, in the general body of the law, is as effective as a special saving clause in the particular section. It would seem accordingly that the Supreme Court in the future, if its attention were called to this section, would follow the code rather than the prior decisions which overlooked the code section."
As pointed out in our former opinion, special circumstances were present in both the case of Moss v. Smith, supra, andFreeman v. Glenn County Tel. Co., supra, which rendered section 404 of the Civil Code inapplicable to these actions. No such factors are present in the instant case.
We are, therefore, of the opinion that the motion to dismiss the appeal upon the ground that the amendment of 1929, which eliminated the liability on the part of directors *477 for the creation of debts in excess of subscribed capital stock, operated to abate all proceedings thereunder, was in the first instance properly denied.
The additional authorities furnished us by appellants, questioning the correctness of the conclusion that section 309 imposes a liability penal in its nature and hence unassignable, are of little value. The case of Illinois State Bank v. QueenCity Quarry Co.,
Appellants cite no cases in this jurisdiction directly holding said liability to be contractual — indeed, in view of Moss v.Smith, supra, and Talcott Land Co. v. Hershiser, supra,
none could be cited. But appellants cite cases which hold the liability of directors under other statutes to be contractual, and argue that the liabilities involved in these cited cases are similar to the liability imposed by section 309 of the Civil Code, and thereby reach the conclusion that the liability imposed by section 309 of the Civil Code is contractual, *478
not penal. (Winchester v. Howard,
In re La Jolla Lumber Mill Co., 243 Fed. 1004, decided by the District Court, Southern District of California, holding that the liability of a director under 309 could only be enforced by a bill in equity is cited, apparently to present the point that the remedy being in equity was not a penalty for the reason that an equity court will not enforce forfeitures and penalties. This argument was likewise advanced and answered in the leading case of Moss v. Smith, supra, the court there saying: "The fact that the action may be treated in the nature of a creditors' bill brought on behalf of plaintiff creditor and all others, and that it thus addresses itself to the equitable side of the court, has not the slightest weight in determining the nature of the statute, and no more weight has the invocation of the familiar maxim that equity *479
abhors penalties and forfeitures. The question might have been of consequence in the older administration of jurisprudence where the courts of law and equity were wholly separated, but it ceases to be of consequence under our system, and even under the English system since its Reformed Judicature Act has come into effect. All redress and relief is administered in one forum and by one judicial officer. If, as chancellor, he revolts at enforcing a legal penalty, he will doff his chancellor's robe and lay aside his great seal, and donning the judicial ermine will enforce the penalty . . ., resuming the regalia of his chancellorship for the purpose of making equitable disposition of the fund." The case ofIn re La Jolla Lumber Mill Co., supra, is similar in its holding to Honot v. Henning, discussed in our first opinion. So likewise is the case of United States Farm L. Co. v.Bennett,
At first glance, some slight support is apparently afforded to appellants by the holding in Southern Cal. Home Builders v.Young,
Appellants point out that in the case of United States FarmLand Co. v. Bennett, supra, plaintiff secured judgment against defendant on account of goods alleged to have been delivered "by plaintiff and its assignors" and that in Colcord et al. v.Granzow et al.,
An amicus curiae makes the further contention that a distinction has been made both by statute and decisions of courts between the liability imposed upon directors creating excessive corporate debts and those incurred by the directors in the commission of other acts enumerated in section 309 of the Civil Code resulting in the impairment of the capital stock of the corporation, such as declaring of dividends from sources other than surplus profits, and that while the action of the directors declaring dividends contrary to the provisions of this section of the code is expressly made a crime by a separate section of the Penal Code (sec. 560) and would, therefore, be void as to the corporation, no such drastic legislation is to be found against the action of directors creating excessive debts, but on the other hand, such debts, though created in violation of the statute, are binding upon the corporation. (Underhill v. SantaBarbara etc. Co.,
Judgment is affirmed. *482