51 P. 710 | Cal. | 1897
In this cause Justice Harrison is disqualified ; and of the other members of the court Justices Garoutte, Van Fleet and McFarland are of the opinion that the judgment should be affirmed, and the Chief Justice and Justices Temple and Henshaw are of the opinion that the judgment should be reversed. The cause has been pending a long time, and repeated consultations have demonstrated that the said differences among the justices are permanent. For this reason, and upon the principle announced in Santa
The views of the several justices are expressed in the following opinions:
Opinion of affirmance by GABOUTTE, J.:
Plaintiff, as a dissatisfied stockholder of the Ferries and Cliff House Bailway Company, a corporation, has brought this action against the corporation, Thomas Brown and J. B. Jarboe, who it is alleged are the trustees of the holders of the bonds of the corporation, and the five other gentlemen named as defendants, who are alleged to be the directors of the corporation defendant. A demurrer was sustained to the fourth amended complaint, and an appeal is brought to this court for the single purpose of testing the legal sufficiency of that pleading. The action is essentially one in equity, and the complaint by its allegations deals with the affairs and transactions of three corporations, namely, the defendant corporation, the Powell Street Bailway Company and the Park and Cliff House Bailway Company.
The Powell Street Bailway Company was organized December 9, 1886, and the five defendants in this case, who are alleged to be the directors of the defendant corporation, organized that corporation, and constructed and equipped the road. As to the manner the stock of this corporation was manipulated and held the complaint alleges: “Defendants Martin, Ballard, Magee, Adams and Lynch subscribed in writing for barely a sufficient number of shares of the capital stock of each of said corporations as would entitle them, under the statute, to incorporate each of said companies, and no more. In the Powell Street Bailway Company said defendants subscribed for forty shares each, and said subscription list was thereupon closed, and thereafter all of said defendants duly became stockholders in said corporation to the extent of forty shares each • and that, except the aggregate subscription of two hundred shares, of the par value of $20,000, made by said defendants, directors, no other shares of the capital stock of said corporation were ever subscribed for or paid for by any other person, association or corpora
The Park and Cliff House Bailway Company was organized October 13, 1887, by these same defendant directors, and the same allegations generally are found in the complaint with reference to this corporation as are stated regarding the Powell Street Bailway Company, except that the amount of bonds issued by said corporation was $350,000, and it was further alleged: “In Park and Cliff House Bailway Company said defendants subscribed for twenty shares each, and said subscription list was thereupon closed, and thereafter all of said defendants duly became stockholders in said corporation to the extent of said twenty shares each; and that, except said aggregate subscription of one hundred shares of the par value of $10,000, made by said defendant directors, no other shares of the capital stock of said corporation were ever subscribed for or paid for by any other person, association, or corporation.”
At a subsequent date the defendant corporation was organized by the same five gentlemen, and the allegations pertaining thereto, in effect, are the same as those we have already stated pertaining to the other corporations. We also find this allegation: “In Ferries and Cliff House Bailway Company said defendant directors subscribed for fifty shares each, and said subscription list was thereupon closed, and thereafter all of said defendant directors duly became stockholders in said corporation to the extent of said fifty shares each; and that, except said aggregate subscription of two hundred and fifty shares, of the par value of $25,000, made by said defendant directors, no other shares of the capital stock of said corporation were ever subscribed for or paid for by any other person, association or corporation, and that the remainder of said capital stock of said corporation was never sold to or bought and paid for (either in whole or in part) by any other person, association or corporation; that the same remained, continued to be, and still is the property of said corporation.” It is further alleged that the proposed capital stock of each of these aforesaid corporations was divided
The foregoing facts comprise a somewhat meager statement of the allegations of a very voluminous bill in equity, and other allegations thereof will be noticed as we meet them in the consideration of the various questions involved in this litigation.
As we have seen, the defendant corporation assumed the payment of $1,050,000 of bonded indebtedness at the time it entered into the contract with the other two corporations. Thereafter it created a bonded indebtedness of its own amounting to $650,000, and it is insisted that, as against it, such assumed indebtedness and its own individual indebtedness are both void, as being in excess of its subscribed capital stock, the allegations of the bill being that its subscribed capital stock is $25,000. It is further claimed that the $650,000 indebtedness is void as having been created without notice to the stockholders. The creation of the defendant corporation’s bonded indebtedness is alleged to have taken place February 13, 1889, and at that time we find no law upon the statute books forbidding the directors from creating a bonded indebtedness. The law as it then stood prohibited the directors from increasing a bonded indebtedness, and required a meeting of the stockholders to be held upon due notice to accomplish that purpose. But the creation of an original bonded indebtedness appears to have been a matter within the will of the board of directors, as coming within their general powers as such officers; and it was only by the statute of 1889, which took effect after this indebtedness was created, that such power was taken from the board of directors and given to the stockholders. But there is another reason which proves the weakness of the pleading. It is for the plaintiff affirmatively to state the facts which necessarily show this issue of bonds to be void, and it is not necessary that stockholders should have been notified as' prescribed by the law in order that a bonded indebtedness might be created
Was the $650,000 issue of bonds void, as being in excess of the subscribed capital stock of the defendant corporation? Plaintiff’s contention to this effect is maintained upon the ground that such issue was violative of section 309 of the Civil Code, wherein it is said the directors of corporations must not create debts beyond their subscribed capital stock. In the very recent case of Underhill v. Improvement Co., 93 Cal. 300, 28 Pac. 1094, this identical provision of section 309 was under consideration, and it was there held, upon - what we believe to be sound and convincing reasons, that a violation of this provision of the law by the board of directors did not have the effect of rendering the indebtedness created by its act void. And, unless the statute plainly and unequivocally declared that such would be the penalty visited upon creditors dealing with the directors of the corporation under those conditions, we would be loth to so hold, even if the question were one of the first impression; for the exact outstanding indebtedness of a corporation is often little less difficult to ascertain than that of a private individual. But, in addition to these considerations, the decision in that case has declared a rule of property, bonds have been bought and sold upon the faith of it, the business world has dealt and contracted in reliance upon the law as there declared, and for these reasons alone the interpretation of that provision of the statute as there given must stand until the legislature sees fit to otherwise enact.
The views we have heretofore expressed would seem to fully dispose of plaintiff’s claim of the invalidity of the defendant corporation’s bonds; but, owing to other questions arising in the case, and the bearings which the status of these bonds has in the consideration of those matters, we will further pursue our investigation as to the validity of this $650,000 issue of bonds. Section 309 of the Civil Code declares the
Section 331 of the Civil Code provides for the levying of an assessment upon the subscribed capital stock for certain purposes. In Stockton etc. Agricultural Works v. Houser, 109 Cal. 1, 41 Pac. 809, a case was presented where the corporation directly issued to the defendant four hundred shares of its stock in consideration of the transfer to it of a certain factory, plant, etc. In that case the corporation treated these four hundred shares as subscribed capital stock not fully paid up, and brought an action, under section 331, to recover an assessment levied thereon. This court held that the action could be maintained and a recovery had. In one of the briefs filed in the interest of this appellant, it is conceded that stock issued by the corporation in consideration of coin in the hand would be subscribed capital stock. Such concession admits too much for plaintiff’s cause, for the statute itself (section 359) provides: “No corporation shall issue stock or bonds except for money paid, labor done or property actually received, and all fictitious increase of stock or indebtedness is void.” It will thus be observed that coin paid in hand for issued stock makes that stock no different and no more valuable than though it was issued for labor
To make sure what is already certain, we add another consideration for the conclusion we have reached. Section 322 contemplates that a creditor may recover his claim in full from the stockholders. It would seem that their insolvency only could defeat such recovery. Every stockholder is liable for a certain proportion of the creditor’s debt, and the sum of the liabilities of all the stockholders is equal to the creditor’s claim, but their respective liabilities are proportionate to the subscribed capital stock. Hence all the stock held by all the stockholders must be equal to the subscribed capital stock. Of course stock subscribed, and not yet issued, bears its proportion of a creditor’s debt.
The value of the property received by the defendant corporation, as shown by the bill, was at least $1,200,000. Deducting the assumed indebtedness of $1,050,000, we then find the consideration for this issue of twenty-four thousand seven hundred and fifty shares was property of the value of $150,-000; and, when we consider that the plaintiff fails to show that the defendant corporation owned a dollar’s worth of property at the date of this transaction with the other two corporations, we are not prepared to say but that full cash value was paid for this issue of stock, and upon this state of facts, as against the pleader, we will assume such to be the fact. Under no circumstances would we be justified in declaring the issue fictitious and void. In considering the meaning of. the word “fictitious,” as used in this connection, this court said in Stein v. Howard, 65 Cal. 616, 4 Pac. 662: “It may very properly be said that the use of the word ‘fictitious’ in the constitution, as above quoted, was as in contrast with the preceding sentence—as if to say that stock issued for money paid, labor done, or property actually received (price not named) is not fictitious.” For the foregoing reasons we conclude that the “subscribed capital stock” of the defendant corporation, at the time its issue of bonds was made, was $2,500,000, and it follows therefrom that such issue did not create a debt in excess of its subscribed capital stock.
The plaintiff in bringing this action as a dissatisfied stockholder stands in the shoes of the defendant corporation. His wrongs are the corporation’s wrongs. He can have no other. He is acting for the corporation, and is a mere nominal plain
Again, how was plaintiff injured by this transaction ? How was his corporation injured? What injury does he allege? Absolutely none. If no such deal had taken place, there
There is no principle of equity which would allow this plaintiff to attack that transaction. He does not propose to do the fair thing. He asks the court directly by the prayer of his bill to give him all the benefits which his corporation secured by the trade, and to relieve him from every burden assumed. He wants to retain all the property received from the other two corporations, and at the same time have the defendant corporation’s issue of stock and its assumption of the bonded indebtedness both declared void. If the corporation was here as plaintiff asking such relief, it would present a spectacle not pleasant to the eyes of a court of equity; and yet a corporation has no heart and no soul, and therefore may not always appreciate what is exact justice between man and man. It surely follows that this sight is
Is the plaintiff entitled to an accounting as to the $650,000 issue of bonds and the $400,000' net profits earned? It is alleged that these net earnings have been applied to the payment of interest upon outstanding bonds. It follows that, if the bonds are valid, the moneys have been properly applied. As to the first two issues of bonds, amounting to $1,050,000, we hold them to be valid. Again, all bonds of the $650,000 issue in the hands of bona fide holders are certainly good and valid bonds. There is no allegation in the bill that any of the $650,000 issue are not now in the hands of bona fide holders. We then assume them to be in such hands, and the result flows from such assumption that the $400,000 of net earnings have been legally expended.
We have already disposed of plaintiff’s main attack upon the validity of the $650,000 issue of bonds of the defendant corporation. But he has inaugurated many others of lesser importance. Some of his positions are not well taken, while others are so defective in statement as to go for naught when assailed by technical demurrer. As illustrative of these allegations we cite the following: “That six per cent bonds, legally issued and properly secured, were worth much more than their face value, to wit, fifteen per cent more in this market.” As an allegation that the six per cent bonds issued by this defendant corporation were worth fifteen per cent premium, this is a total failure. Again: “ That plaintiff is informed and believes that for the purpose of more fully concealing their method of appropriating the bonds and moneys of each and all of said corporations .... defendants Martin and Ballard (with the consent and connivance of de
We conclude our investigation with a passing notice of one additional matter. At the date of the deal between these corporations the directors of all of them were the same. If the defendant corporation had other stockholders than its five directors, the plaintiff probably stood alone in that capacity. As already shown, eliminating his interest, this transaction was unassailable from all points; but, allowing his status as a stockholder at that time, the mere fact that these corporations dealt with each other, all having the same board of directors, does not stamp the transaction void ipso facto. It is no more void than though one director should sell his corporation a plant for the conduct of a factory. Under any circumstances, it would only be voidable: Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 23 L. Ed. 329; Hammond v. Hopkins, 143 U. S. 224, 36 L. Ed. 134, 12 Sup. Ct. Rep. 418; Barr v. Railroad Co., 125 N. Y. 263, 26 N. E. 145. If the contract was made in good faith; if it was profitable to the 'stockholders of the defendant corporation; if, as we have shown in this case, the defendant corporation received at least $150,000 worth of property for nothing— we hardly see how a dissatisfied stockholder, indulging in
It follows from what has already been said that the bill is demurrable upon grounds too numerous to mention. For the relief sought by the prayer there is a substantia] nonjoinder of parties defendant. As against the parties defendant there is a fatal misjoinder of causes of action. The statute of limitations is a bar to a large portion of the relief sought. The bill is ambiguous and uncertain in scores of paragraphs. Necessarily the order of the trial court in sustaining the demurrer was legally sound beyond all doubt. And the only question remaining on which plaintiff may rest is that the court abused its discretion in not allowing him to amend the bill. The record nowhere discloses that he asked to amend, and, in the absence of such a showing, it must be presumed that he concluded to stand or fall upon his fifth complaint: Buckley v. Howe, 86 Cal. 605, 25 Pac. 132. But conceding to the contrary, and that he was anxious and ready to make the sixth effort, how can it be said that the trial court abused its discretion in denying his request? The present bill is the fifth attempt and fourth amended pleading. Having failed so signally upon a fifth effort, we are clear that the trial' court in its discretion was fully justified in " assuming that a sixth, seventh and eighth effort would likewise fail, and that the fault of the pleading did not lie in
We concur: McFarland, J.; Van Fleet, J.
This is an appeal by the plaintiff from the judgment of the superior court rendered in pursuance of an order sustaining the demurrers of the several defendants to a fourth amended complaint, and refusing leave to further amend. There is no bill of exceptions, and the record consists exclusively of the fourth amended complaint, the demurrers, the order sustaining them, and the judgment in favor of the defendants for their costs. The attempt of plaintiff to make an addition to this record by filing a certified copy of a demurrer to one of his former complaints is resisted by defendants, but since the only object of plaintiff is to show by this means that defendants are now estopped to raise some of the specific objections contained in their last demurrer, and since the objections which he thus seeks to obviate are immaterial, it will be unnecessary to consider either the amendment or the objections to it.
The complaint deals with a number of transactions, and is very long and involved. It does not follow a chronological order, or any order, and the facts are not alleged with the clearness and precision required in pleading. It contains much that is irrelevant, and is in several particulars uncertain and ambiguous. I shall endeavor to state, as well as I can in reasonable space, the facts upon which the plaintiff seeks to recover.
It is alleged that on or about the ninth day of December, 1886, the defendants W. B. Martin, John Ballard, W. J. Adams, Thomas Magee and H. H. Lynch “combined together, connived, and concocted a fraudulent scheme to acquire franchises to construct, equip, and operate street railroads in the city of San Francisco, state of California; to convey said franchises to the street railway corporations hereinafter mentioned, and organized by said defendants; to fraudulently and unlawfully issue to themselves, and thereupon divide among themselves, and convert to their own use, without sub
I have presented this paragraph of the complaint in its literal terms, because it sets forth the alleged conspiracy, in pursuance of which all the subsequent acts of the five defendants named, whether wrongful, blameless or laudable, are charged to have been done.
The first thing they did was to obtain, by means of ordinances of the city of San Francisco (and without paying the city anything therefor), various franchises for the construction and operation of street railways. Throughout the complaint and argument on the part of plaintiff it is assumed, as one of the material facts of the case, that these franchises ■—covering many miles of the streets of the city—were of no pecuniary value; the only basis of the assumption being the fact, recited in parentheses, that the defendants Martin et al. paid the city nothing for them. I merely wish to remark, in passing, that the fact assumed cannot be inferred from the fact stated, and, even if it could, this is not the way to plead issuable facts. I think, moreover, the plaintiff would scarcely
The next thing the organizers (so, for the sake of brevity, I shall hereafter designate the five defendants, Martin, Ballard, Adams, Magee and Lynch) are said to have done was to organize, December 9, 1886, a corporation known as the Powell Street Railway Company. The proposed capital stock of this company, as shown by its certificate of incorporation, was $2,000,000, divided into twenty thousand shares, of the par value of $100 per share. Each of the organizers subscribed in writing for forty of the shares, which was barely a sufficient subscription to enable them to incorporate under the laws of California, and thereupon they closed the subscription list. Afterward, it is said, they all duly became stockholders in said corporation to the extent of forty shares each; which means, I suppose, that they paid in at least ten per cent upon their subscriptions, and received, and duly receipted for, certificates of stock. It is next alleged that, except the aggregate subscription of two hundred shares, of the par value of $20,000, made by the organizers, “no other shares of the capital stock of said corporation were ever subscribed for or paid for by any other person, association, or corporation.” On October 13, 1887, the same defendants organized the Park and Cliff House Railway Company, with a nominal capital stock of $500,000, divided into five thousand shares, of which each of the organizers subscribed for twenty shares, whereupon the subscription list was closed; and on December 14, 1887, they organized the Ferries and Cliff House Railway Company, with a nominal capital stock of $2,500,000, divided into twenty-five thousand shares, of which each of the organizers subscribed for fifty shares, whereupon the subscription list was closed. In these corporations, also, it is said, that all of the organizers afterward duly became stockholders to the extent of their respective subscriptions; which means, as I again infer, that they made the necessary payment of at least ten per cent upon their subscriptions, and received and receipted for their stock certificates. As to these - companies, also, it is alleged that, except the subscription of one hundred shares, of the par value of $10,000, in the Park and Cliff House Company, and two hundred and fifty shares, of the par value of $25,000, in the Ferries and Cliff
Another legal conclusion stated in this connection is that each of these corporations, although organized at different times, was but a corporate agency to carry out the scheme and devices alleged in the complaint; that they were practically one and the same corporation, were so treated by the directors, and, finally, were all “unified” in the defendant corporation. To support this general statement, the following facts are alleged: That from the time of the organization of said corporations down to the commencement of this action the organizers have been the self-elected directors and principal officers thereof, or have had those positions filled by certain dummy stockholders, who were their mere servants or agents, voting and acting on all occasions as the organizers directed. That from the dates of the several transfers and assignments to the Ferries and Cliff House Company of the properties and franchises of the other companies, as subsequently alleged, “neither said Powell Street Bailway Company nor Park and Cliff House Company have ever possessed, claimed, or exercised any greater or other benefits from their said acts of incorporation than the right to keep alive their several corporate names, and said corporations have since the said assignments remained and continued dormant and inactive corporations; they have transacted no business, and have had no officers, offices, clerks or employees of their own, but maintain ostensible offices, and are served whenever service is necessary at the places of business and by the clerks and employees of the defendant corporation.”
On the 22d of December, 1886, occurred the first meeting of the directors of the Powell Street Company. All the
On December 19, 1887, the organizers caused the Park and Cliff House Company to create a bonded indebtedness of $350,000, secured by deed or mortgage to the same trustees— Jarboe and Brown—-which deed was duly recorded April 26, 1888. These bonds, also, were all issued and delivered to Martin and Ballard on March 5, 1888, “as payment and compensation for and in full of their services for building and equipping the road of this [Park and Cliff House] corporation.” Four only of the directors were present at the meeting when this order was passed, and two of them were Martin and Ballard. The value of the road constructed by them under the franchises of the Park and Cliff House Company is alleged never to have exceeded $200,000.
_ On December 29, 1887, the organizers, being all present and duly organized as a board of directors of the Ferries and Cliff House Company, in consideration of five dollars and the transfer and assignment of all the franchises and other property of the Powell Street Company, passed a resolution and executed a contract with Brown and Jarboe, its trustees, to the effect that the Ferries and Cliff House Company would assume and become primarily liable for the bonded and other indebtedness of the Powell Street Company. It ivas also a part of the consideration for the transfer of the Powell Street Company’s property that twenty thousand shares of the stock of the Ferries and Cliff House Company should be issued to the stockholders of the Powell Street Company—so apportioned that for each share they held in the latter company they would receive one share in the former. This part of the agreement was subsequently carried out in accordance with
On March 5, 1888, a s .milar transfer and assignment of all the franchises and other property of the Park and Cliff House Company was made to the Ferries and Cliff House Company in consideration of its assumption of the bonded and other indebtedness of the Park and Cliff House Company, and the issuance of the remaining four thousand seven hundred and fifty shares of its stock to the stockholders of the Park and Cliff House Company in proportion to their respective interests therein. All of this stock (tweny-four thousand seven hundred and fifty shares) was by the express terms of the resolution of the organizers, acting as directors of the Ferries and Cliff House Company, declared to be, and issued as, “fully paid,” and soon after its issuance was put upon the market by the organizers and sold to the extent of several thousand shares. It was listed in the stock board and quoted at from $30 to $70 per share, and plaintiff, in ignorance of the manner in which it had been issued, purchased one hundred shares of it as a permanent investment. He also purchased one hundred of the two hundred and fifty shares originally subscribed for, but when his respective purchases were made, in what order, or for what price, we are left in ignorance. The allegation is: “ That heretofore, to wit, in the month of February, 1888, plaintiff became, ever since has been, and still is, a stockholder of record on the books of defendant Ferries and Cliff House Railway Company, and at the time of the commencement of this action was, and still is, the owner of, to wit, one hundred shares of the subscribed capital stock of said defendant corporation.” By this we are expected to understand that in February, 1888, the plaintiff became the owner of record, and has ever since so continued, of one hundred of the two hundred and fifty shares
Plaintiff never was a stockholder in any of these corporations except the Ferries and Cliff House Company. With the Powell Street Company and the Park and Cliff House Company he had nothing to do, except in so far as he is brought into connection with them by the fact that their roads, franchises, and other property became a part of the “system” of the Ferries and Cliff House Company by means of the transactions above detailed. This “system,” it seems, was, at some time subsequent to his becoming a stockholder, completed and put in operation. Highly favorable reports of its success were made by its officers. Net earnings were said to be accumulating, and dividends would soon be regularly paid. The plaintiff, in reliance upon these reports and the good faith and business capacity of the organizers, paid assessments upon his stock to the extent of $2,400, and for about three years waited patiently for dividends. None being forthcoming, he began to grow suspicious, and instituted inquiries into the condition and management of the corporation and the companies which had been “unified” in it. It is not clear from the complaint which or how many of the facts above detailed he discovered after this time, but his argument implies that he then first became aware of the manner in which the stock of the various companies had been issued and manipulated, of the extent of their bonded indebtedness, the circumstances of its creation, and the disparity between the value of the corporate property and the extent of the corporate obligations. His investigation also was delayed and protracted by the denial of his right to examine the boobs of the corporation, and by its neglect to keep and preserve proper books, records and vouchers, and especially by the absence of any construction accounts. However, he did discover, either then or after the filing of his original complaint (December 10, 1892), the facts above stated, and the further fact that, in addition to the assumption of the bonded débt of the Powell
The action was commenced by the plaintiff on the tenth day of December, 1892, in behalf of himself, the defendant corporation, and all other stockholders who might elect to be joined as coplaintiffs. Originally, it is said, it was an action for discovery, but by legal development it has become an action for an accounting, which, in view of the voluminous prayer for specific relief, is, I think, rather too modest a statement of its aim and scope. It is not easy, indeed, to make a brief statement of the relief claimed. The first and most important item is that the Ferries and Cliff House Company shall be decreed to be the owner of all the property ever owned or possessed by the Powell Street Company or the Park and Cliff House Company, and that neither of those companies has any interest in or claim to any of said property. Here plaintiff seeks a decree quieting title against two corporations not parties to the action. He contends that they are unnecessary parties, because they are dormant, inactive, etc., and because their stockholders are parties. But this is n'ot true, for half of the stock of Powell Street Company is shown to have been issued to Bay Shore Company, and it is not shown that the organizers have any interest in that company. Here, therefore, would be a defect of parties defendant if any case was presented for a decree quieting title. But, really, there is no such aspect of the case. Neither corporation is alleged to be asserting any adverse claim, and if they were they could not be joined as defendants, unless they were claiming the same property.
The next item of relief prayed is that it may be decreed that no portion of the capital stock of either of said railway companies was ever subscribed for or lawfully issued, except two hundred shares of the Powell Street Company, one hundred shares of the Park and Cliff House Company, and two hundred and fifty shares of the Ferries and Cliff House Company. Third. That the transfer by the organizers, act
The relief asked in the first clause is wholly outside of the case, for the reasons above stated. The other clauses of the prayer, from the second to the eleventh, inclusive, all bear upon the accounting which he demands as against the organizers. So far as they ask a decree invalidating large issues of stocks and bonds which may have passed into the hands of bona fide purchasers, I do not understand that the plaintiff hopes to obtain a judgment binding in this respect upon any person not a party to the action. The only defendants against whom this relief is prayed, except the organizers, are Jarboe and Brown, who are alleged to have taken the stock held by them (if any) with full knowledge of all the circumstances attending its issuance. It is alleged that large amounts of the bonds are held by transferees of the organizers unknown to plaintiff, who took them with notice of their invalidity, and he asks leave, when their identity shall be discovered, to serve them and bring them in as defendants, which he has the undoubted right to do. Until they are so brought in he does not claim or expect a decree binding upon them as to the validity of their bonds. As against the organizers, however, he does claim that the court should decree, as the basis of their accounting, that there is no valid indebtedness of the Cliff House and Ferries Company in excess of $25,000, and no valid stock in excess of two hundred and fifty shares; that they (and their transferees, with notice, when discovered and made parties) must give up for cancellation such stocks and bonds as remain in their hands, and that they must account to the corporation for the true value of all unlawfully issued stocks or bonds that have become valid obligations, by transfer to innocent purchasers, if any such there be, and especially that they must restore to the treasury of the corporation the money they have expended to pay interest upon the bonds, for the issue of which they are solely responsible, and the proceeds of which he alleges they have fraudulently converted to their own use.
I shall endeavor to show that the justice of the cause lies • somewhere between these extremes, and that justice is not unattainable in this proceeding. The first proposition upon which plaintiff relies in support of his claims is that there never was any subscribed stock in either of the three corporations besides the shares subscribed for preliminary to their formation, viz., two hundred shares in Powell Street Company, one hundred shares in Park and Cliff House Company, and two hundred and fifty shares in the Perries and Cliff House Company, and, consequently, that their respective bonded debts in excess of the par value of their subscriptions—$20,000, $10,000 and $25,000—were utterly void by reason of the statutory prohibition (Civ. Code, sec. 309) against the creation of debts in excess of subscribed capital.
This proposition is wholly untenable for several reasons. In the first place, the subscribed capital stock of a corporation referred to in section 309 of the Civil Code includes the entire lawful issue of the stock of a corporation, and is not limited to the shares formally subscribed for as a necessary preliminary to the filing of the certificate. To form a corporation, under the laws of this state, the projectors must file a certificate (Civ. Code, sec. 290), and that certificate must show, among other things: “(6) The amount of its capital stock and the number of shares into which it is divided; (7) if there is a capital stock, the amount actually sub
This shows that in forming a railroad corporation the first essential is the preliminary organization of persons willing to subscribe $1,000 per mile for the projected work, and to pay in to their provisional treasurer ten per cent of their subscription. For this purpose a subscription list must be opened, but it may be closed just as soon as a sufficient amount is subscribed to satisfy the statute. Such was the course pursued by these organizers, and the closing of the subscription lists signified nothing more than that they wished to proceed with the organization of the corporation without waiting for other subscriptions, or that they desired to keep it entirely under their own control. Whatever their motive, they did nothing in this matter that the law forbids or discountenances. Nor was their action a fixing of the capital stock of the corporations, within the meaning of section 458 of the Civil Code. The sections above referred to (sections 290-293) plainly show that the proposed capital stock is one thing, and the stock preliminarily subscribed is another, and that it never was the intention of the legislature to limit the issue of corporate stock to the amount subscribed as a condition or prerequisite to the filing of the certificate of incorporation. On the contrary, the law sanctions the practice, so long and so universally followed, of issuing, after incorporation, the shares not previously subscribed, up to the aggregate number mentioned in the certificate. How such issuance is to be regulated and controlled we need not stop to inquire, except so far as it concerns this case. Conceding that the directors have no power to issue them except at par, and upon payment of the same amount that has been called on previously issued shares, it cannot be denied that by unanimous concurrence of all the directors and all the stockholders they may be issued for less than their par value in money or in exchange for property; for who, in such case, could complain 1 The strictest limitation that is to be found upon the power of corporations to issue their shares is contained in section 11 of article 12 of the constitution, which provides that “no corporation'shall
Applying the above reasoning to the action of the organizers in issuing the stock of the Powell Street Company and of the Park and Cliff House Company to themselves in exchange for street railway franchises, it appears that the issue was entirely regular and valid, for they all concurred in the act, and they owned all the previously issued stock. They were the whole corporation—directors, trustees and stockholders. The transaction was the simple and ordinary one of incorporating a business of any sort—commercial, mining or manufacturing—where the partners or co-owners put their mine or factory or stock in trade into a corporation and receive stock of the corporation in exchange. ■ To attempt to invalidate such a transaction upon the ground that the directors, in issuing the stock to themselves, violate their duty as trustees of the stockholders, is absurd. They are themselves the stockholders, beneficiaries and trustees at the same time, and there can be no conflict of interest between them.
But the plaintiff contends that, although these stocks may have been lawfully issued, they do not constitute “subscribed capital stock,” within the meaning of section 309 of the Civil Code, which prohibits the directors of corporations from
In Barron v. Burrill, 86 Me. 75, 29 Atl. 938, it was held, under a statute similar to our own, that the receipt of shares had the same effect in fixing the obligation of the shareholders to the corporation and its creditors as a regular subí scription. To the same effect, see Handley v. Stutz, 139 U. S. 427, 35 L. Ed. 227, 11 Sup. Ct. Rep. 530; Sanger v. Upton, 91 U. S. 56-64, 23 L. Ed. 220; Chubb v. Upton, 95 U. S. 665, 24 L. Ed. 523; and see Stockton etc. Agricultural Works v. Houser, 109 Cal. 1, 41 Pac. 809.
The organizers did not, therefore, contract any indebtedness beyond the subscribed capital stock in issuing $700,000 bonds of Powell Street Company, and $350,000 bonds of
It is not necessary to resort to the doctrine of Underhill v. Improvement Co., 93 Cal. 300, 28 Pac. 1049, to sustain the validity of these bonds, but, if it were, the decision in that case would furnish another complete answer to plaintiff’s objections.
The next contention of plaintiff is that the respective debts of these several corporations are all invalid, because none of them has ever fixed its capital stock and filed the proper certificate of full payment, as required by sections 458 and 459 of the Civil Code. The law does not declare what shall be the consequence of a failure to comply with these provisions, and this complaint does not show that the conditions have arisen which would make it incumbent upon these companies to take the prescribed action. We need not, therefore, stop to consider the scope and object of this part of the law. It is sufficient for the present purpose to say that neither the sections cited nor section 456 impose any restriction upon corporations as to their power to contract debts, except that the debt must not exceed the capital stock. They are not required to fix their capital stock before contracting a debt otherwise than as it is fixed by the certificate of incorporation, and whether the amount of lawful indebtedness which they may incur is limited only by the statement in the certificate as to the amount of capital stock, or by the amount of stock subscribed, is a matter of indifference in this case; for not one of
The next transaction of the organizers assailed by the plaintiff is their assumption in behalf of Ferries and Cliff House Company of the bonded debt of Powell Street Company, and the issuance of twenty thousand shares of the stock of the former company to the shareholders of the latter. This was determined upon in December, 1887, and consummated in January, 1888, before the plaintiff had become a stockholder, and while the organizers held all the stock of each of the two corporations concerned in the transaction. What has been said above, therefore, respecting the issue of stock and bonds by Powell Street Company and Park and Cliff House Company equally applies to the issue of this stock and assumption of this debt by Ferries and Cliff House Company. All that was done was done by unanimous concurrence of all the directors and all the stockholders. There could be no violation by the directors of their duties as trustees, because they were at the same time sole beneficiaries and sole trustees, and no conflict of interest between the individual and the representative was possible. The twenty thousand shares of stock were issued in exchange for property on terms expressly agreed to by every party in interest, and the issue was, as has been shown, lawful. The bonded debt was within the amount of the stock simultaneously subscribed, and was therefore a lawful issue, even if it had been the act of the directors alone, and a fortiori was lawful as the act of the entire body of stockholders, not in contravention of any constitutional or statutory inhibition, and not in conflict with any interest of creditors. Indeed, there appear to have been no creditors other than the holders of the bonds, payment of which was then assumed.
A special objection to the issuance of these twenty thousand shares of stock urged by plaintiff is that by the exchange of properties they took the place, of the original capital of Powell Street Company, which the directors were forbidden to divide among the shareholders: Civ. Code, sec. 309. It is true that the organizers violated their duty as trustees of Powell Street Company by making a division of these shares (Kohl v. Lilienthal, 81 Cal. 378, 6 L. R. A. 520, 20 Pac. 401, 22 Pac. 689), and thereby subjected themselves to the liabilities to creditors and stockholders of that corporation prescribed by
In the month of February, 1888, then, at which time plaintiff first became a shareholder in Ferries and Cliff House Company, the affairs of that corporation, as shown by its books and records, were in this condition: Its certificate capital was $2,500,000, divided into twenty-five thousand shares, of which two hundred and fifty shares had been subscribed prior to filing its certificate, and twenty thousand shares subsequently issued as “fully paid up” in exchange for property by the act of all its directors, concurred in by all its stockholders. This issue of stock was, as has been shown, lawful, and the result was that the directors were thereby empowered by the stockholders to incur a bonded indebtedness of $2,025,000. This power they had exercised to the extent of assuming the payment of $700,000 of Powell Street Company’s bonds. No stockholder was in a position to complain of anything they had done in the way of issuing stock or incurring indebtedness, and the plaintiff, as successor in interest to the person from whom he purchased his stock (whether it was part of that originally subscribed or of that which was subsequently issued), was in this respect in no better position than his assignor. If he bought stock without making any inquiry into the condition of the corporation, he must suffer the consequences of his own improvidence. If he made inquiry, and was deceived, he may have had a right to rescind as against his vendor, but he has no claim upon this score against the directors or other stockholders.
From this time forward, however—from the moment the organizers began to transfer the stock of the Ferries and Cliff House Company to outsiders; from the time, in other words, when the directors ceased to be their own sole beneficiaries— their acts and conduct must be judged by a different standard. They then became bound, in all matters connected with their
It is contended, however, by respondents that this transaction, though voidable, was not absolutely void, and could therefore be validated by express ratification or by an implied ratification evidenced by acquiescence or by laches. This proposition is undoubtedly correct. The consent of all the stockholders of Ferries and Cliff House Company would have made the transaction with Park and Cliff House Company exactly as regular and legitimate as that with Powell Street Company, and as valid in every respect, and a subsequent ratification by all the stockholders would have been as effective as a previous consent. The only question is whether there has been any ratification. It is not pretended that there has been any express ratification by plaintiff or by any of the class of stockholders which he represents, but it is said that a rescission of the contract was the proper course and that a failure to rescind or to offer to rescind is ratification. This may be so in ordinary cases, but it is difficult to see how the doctrine can be applied to a dissatisfied
But the statute interposes no bar to his demand for an accounting for the issue of $650,000 of Ferries and Cliff House bonds by the organizers to themselves. They were issued on and subsequent to the eleventh day of December, 1889, and the action was commenced December 10, 1892—one day short of three years after the wrong complained of. The action was therefore commenced in time, and there can be no doubt of the right of plaintiff, upon the admitted facts, to demand the accounting. The mere fact that the directors issued the bonds to themselves in payment of their own demands against the corporation, and that they have never accounted to the corporation, would, in itself, be sufficient to support the action; but it is also alleged, and by the demurrer admitted, that the bonds were taken by the directors at their face value when they were actually worth fifteen per cent premium, and that their claims for construction, etc., were for more than was justly due.
Plaintiff claims that none of the directors were entitled to receive anything for services or supplies furnished in the construction of the roads, and bases his contention on the provisions of section 18 of article 12 of the constitution, which reads as follows: “No president, director, officer, agent or employee of any railroad or canal company shall be interested, directly or indirectly, in the furnishing of material or supplies to such company nor in the business of transportation as a common carrier of freight or passengers over the works owned, leased, controlled or worked by such company, except such interest in the business of transportation as lawfully flows from the ownership of stock therein.’* I do not con
The claim of the plaintiff that this whole issue of bonds of Ferries and Cliff House Company was void, because in excess of its subscribed capital, has been sufficiently answered. Another ground upon which their validity is attacked is that this was an increase of the bonded debt of the corporation without the consent of the stockholders, and therefore in violation of section 359 of the Civil Code. A careful reading of that section, however, as it stood prior to the amendment of March, 1889, in connection with other provisions of the code, leads to the conclusion that it only applied to those cases in which it was desired to create an indebtedness in excess of the stock which the corporation had the power to issue. In such cases it was necessary to increase the capital stock as a prerequisite to the increase of indebtedness, and for the increase of capital stock the consent of the stockholders is necessary. But when the existing debt of a corporation was within the amount of its subscribed capital, and a proposed addition to its indebtedness would leave the total amount still within the amount of its subscribed capital, this was not the increase of bonded debt contemplated by section 359 (as it existed February 13,1889) requiring the consent of two-thirds of the stockholders.
There is, indeed, no objection that I can see to the validity of any of these bonds in the hands of bona fide holders. But so far as they-remain in the hands of the organizers, or of their transferees, who took them with knowledge of the facts, they may be called in and canceled to the extent that they exceed the just and lawful claims of the directors of the company, to be ascertained on the accounting, and, if enough of them cannot be recalled to square the account, the organizers are jointly and severally liable for the deficiency.
The complaint states no case for a decree quieting title against anyone, and the prayer for that relief, and for all other relief not warranted by the facts alleged, should simply be disregarded. Such being the case, it was error in the superior court to sustain the demurrers generally. There were, as has been indicated, some specific grounds of demurrer that were well taken, and the order should have been limited to those grounds. So limited, it would not have justified the conclusion and judgment “that the plaintiff is not entitled to any relief against the defendants, or against any of them,” etc. On the contrary, there would have remained a clear case for substantial relief; and, though the court might have been justified in requiring the plaintiff to strike out some of the redundant and irrelevant matters contained in the complaint before requiring the defendants to answer, it could not deny him any relief. Judgment reversed and cause remanded, with leave to the plaintiff to amend his' complaint in accordance with the views herein expressed.
We concur: Henshaw, J.; Temple, J=