California Supreme Court Dec 22, 1882 No. No. 7,413Published
Before: Morrison
Synopsis
Appeal by the plaintiff from the judgment of the District Court of the Fourth Judicial District of the State of California in and for the City and County of San Francisco. Morrison, J.
Action in equity to compel the defendants, as stockholders in insolvent commercial corporation, to pay in for benefit of plaintiff amount of stock contracted for by them. The facts, are stated in the opinion of the Court.
Morrison, C. J.: The cdmplaint shows that the defendant, the “ City Paving Company,” is a corporation duly organized and formed under the laws of the State of California, on or about the tenth day of November, 1868, with a nominal capital stock of $500,000, divided into 5,000 shares of $100 each. It also avers that the defendants, respectively, at the times mentioned in the complaint, became the subscribers to shares of the capital stock of the corporation, setting forth the number of shares subscribed for by each of them. It further alleges that none of the defendants have ever paid into the corporation any portion of the capital stock subscribed for by them, and charges that the whole amount that each defendant subscribed remains due and unpaid. The complaint further charges that on the second day of May, 1878, the plaintiff recovered a judgment against the City Paving Company in the District Court of the Fourth Judicial District, for the sum of $10,500, which judgment still remains in full force and effect, and wholly unsatisfied. That an execution was issued on such judgment against the property of the City Paving Company, which was placed in the hands of the Sheriff of the City and County of San Francisco, and has been returned wholly unsatisfied. That the indebtedness upon which the aforesaid judgment was recovered accrued between the ninth day of May, 1873, and the fifteenth day of October of that year. There is a further averment in the complaint of the total insolvency of the City Paving Company, and that all of the subscriptions of the defendants to the capital stock of the corporation were made prior to the creation of the indebtedness to the plaintiff. To the complaint the defendants demurred, the demurrer was sustained by the District Court, and plaintiff has taken this appeal.
[458]The questions involved in the case are somewhat new in this State, and have never before (within our knowledge) been presented to the Supreme Court for decision. An examination of the authorities shows, however, that a suit in equity by creditors of a corporation, to compel the subscribers to the capital stock to pay in their subscriptions, is a very common proceeding not only in England but also in this country. In Ang. & Ames on Corporations, § 602, we find the law thus stated: “ It has been held that when the trustees, or other proper agents for that purpose, neglect to call in the debts due by the stockholders of a corporation for stock, so as to enable the company to pay its debts, a creditor, by a bill in chancery, can compel such agents to enforce contribution from the stockholders according to their subscriptions.” In the case of Henry v. The Vermillion Railroad Co. and other stockholders, 17 Ohio, 189, the Court say: “ These bill are filed under the act directing the mode of proceeding in chancery. They set forth judgments at law recovered against the Company; further, that after efforts made, they could not be collected on execution, and that the individual defendants are indebted to the Company as stockholders, upon their stock subscriptions. The principle has already been recognized by this Court, that a creditor’s bill will lie against a stockholder of an incorporated company, to compel him to pay over to a judgment creditor the amount of his subscription, which had not before been paid to the company (Miers et al. v. Zanesville etc. Turnpike Co., 11 Ohio, 273; S. C., 13 id. 197), and the authority of these cases we find no reason to deny.”
In the case of Haskins v. Harding, 2 Dill. C. C. 106, Dillon, Circuit Judge, uses the following language: “Without the aid of any statute, the unpaid subscriptions to the capital stock constitute a fund available to creditors who are unable to make their demands from the corporate debtor, and equity will lend its aid to enforce payment for the benefit of creditors.” (Citing numerous authorities.) In the case of Ogilvie et al. v. The Knox Insurance Co., 22 How. 380, the Supreme Court of the United States maintained the same principle in a case where the subscriptions were obtained by fraud. It is there said that, “in a bill by a judgment creditor against an incorporated insurance com[459]pany and its stockholders, to compel the'latter to pay up the balance due on their several subscriptions to the stock, they can not be allowed to defend themselves by an allegation that their subscriptions were obtained by fraud and misrepresentations of the agent of the company. It is too late, after the investment is found unprofitable and debts are incurred, for stockholders to withdraw their subscriptions under such a pretense or plea.”
The case of Adler et al. v. The Milwaukee Patent Brick Manufacturing Company et al., 13 Wis. 57, is a strong case to the same effect. The language of the Court is that “the stockholders, being in general free from personal responsibility, the capital stock constitutes the sole fund to which creditors look for the liquidation of their demands. It is the basis of the credit which is extended to the corporation by the public, and a substitute for the individual liability which exists in other cases. So far as the creditors are concerned, it is regarded in the law as a trust fund, pledged for the payment of the debts of the corporation. * * * If, therefore, by the willful or stubborn inaction of the directors or stockholders the company fails to meet its obligations and perform its duties, a court of equity will, on a proper application, afford the requisite relief.”
In a very recent case—South Mountain Con. Mining Co., 7 Sawy. 30—Hoffman, J., says: “I do not question the power of the Court to compel contribution of unpaid subscriptions to the capital stock of an insolvent corporation for the purpose of paying its debts.” The learned Judge cites numerous decisions of the Supreme Court of the United States in support of his view of the law.
It may be remarked that the case of the South Mountain Consolidated Mining Company, 7 Sawy. 30, was carried by writ of review to the Circuit Court, was there affirmed, and the opinion rendered by the learned Circuit Judge is relied upon by the defense in this case. But with due deference to the very able counsel, we must say that we do not think that it sustains defendants’ position. Mr. Justice Sawyer there says: “Mining corporations in California are, in these particulars, sui generis. They are organized and carried on upon principles, in these respects, wholly different [460]from banking, railroad, insurance, and other like commercial corporations having a subscribed capital stock. There is no agreement, express or implied, to pay up any particular amount of stock, and no one understands that there is. Certainly none is intended by the parties. If there is a contract to pay up the full nominal amount of the stock, it could be called in from time to time without regard to the liabilities or needs of the corporation. There being no such agreement, there is no contract or agreement to pay up capital stock, which can constitute assets of the corporation. There is a mere power of assessment under the statute and by-laws— not a contract to pay in installments upon call; but this mere power to assess, independent of any contract, express or implied, to pay up the nominal amount of capital stock in installments, is not assets of the corporation.”
The distinction between the case there considered, which involved the liability of a stockholder in a mining corporation, and the liability of a subscriber to the capital stock of a banking, railroad, insurance, or other commercial corporation, ■such as we are dealing with in this case, is clearly marked out in the opinion of Mr. Justice Hoffman. He says: “These principles apply to all cases where an obligation has been created or incurred on the part of a stockholder to pay to the corporation a certain sum, being the par value of the capital stock subscribed for or transferred to him. The liability thus created grows out of contract, express or implied, and the creditors of the corporation may avail themselves of it, as of any other chose in action or equitable assets of the corporation, on well-settled and familiar principles.”
Other authorities might be cited in support of the views above presented, but we think we have sufficiently shown that when a stockholder has contracted with the corporation to pay in a certain amount of the capital stock, he is bound by such contract, and a court of equity will enforce it for the benefit of creditors of the insolvent corporation.
But it is claimed that the rule above stated has been changed in this State. In the first place, our attention has been called to Section 2, Article xii. of the new Constitution, which provides that “ dues from corporations shall be secured by such individual liability of the corporators and other [461]means as may be prescribed by law;” and also to Section 3 of the same article, which declares that “ each stockholder of a corporation, or joint-stock association, 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 or association.” But the above provisions of the new Constitution do not apply to this case, as the liability of the stockholders accrued before the new Constitution was adopted. The provisions of the old Constitution on this subject, however, were substantially the same. By Section 32, Article iv. (Const, of 1863), it is provided: “Dues from corporations shall be secured by such individual liability of the corporators, and other means, as may be prescribed by law.” And Section 36 of the same article reads as follows: “Each stockholder of a corporation, or joint-stock association, shall be individually and personally liable for his proportion of all its debts and liabilities.”
We are also referred to Section 322 of the Civil Code, respecting the liability of stockholders. But is the right of the creditors of the corporation to pursue the subscribers in equity, as has been attempted in this case, taken away by the provisions of the Constitution or the Act of the Legislature? We think not; and will endeavor to show that it is not, by reference to the authorities.
Thompson, in his recent work on the Liability of Stockholders, says (§ 266): “The general rule is, that, although a creditor has a concurrent remedy against a shareholder at law, this does not oust the jurisdiction of the courts of equity.” “ Section 266. The rule obtaining in some of the States, in case of a statutory liability, is that the creditor has a concurrent remedy at law.” “It has been held, under a statute of individual liability, that where a suit in equity has been instituted for such a purpose (the benefit of all the creditors), no creditor can institute a separate suit for the enforcement of such liability in his own behalf.” (§ 275.)
The ease of The Bank of the United States v. Dallam et al., 4 Dana, 575, is an authority on this subject. That was a suit in chancery against the shareholders in a corporation called [462]the Fayette Paper Manufacturing Company, the charter of which contained the following clause: “Provided, however, that the estate and property of every individual shareholder, who holds or possesses stock in said corporation, shall at all times be liable and subject in law, in proportion to his or her interest therein, to pay and satisfy all debts and demands contracted by said corporation during the time he or they held stock therein, upon a failure of the corporate funds to discharge the same.” The plaintiff had recovered a judgment against the corporation, and failing to collect the money from it, prosecuted his suit on the equity side of the Court against the shareholders, and the Court there says: “As the judgment and return on the execution thereon entitled the bank to demand the amount of its debt from stockholders in their personal right, and as they are liable, not in solido, but only distributively, in the ratio of their several interests, and are moreover multitudinous, we have no doubt that the Circuit Court, sitting in equity, had jurisdiction over a joint bill filed against all of them, concurrently with a court of law, over separate actions against each of them, upon his sole and several liability.”
The case of Matthews et al. v. Murray et al., 24 Md. 527, was a suit in equity against the stockholders in a company incorporated under an Act containing the following provision: “ The stockholders shall be severally and individually liable to the creditors of the company in which they are stockholders to an amount equal to the amount of stock held by them respectively, for all debts and contracts made by such company,” and the bill was entertained by the Court. In the later case of Norris v. Johnson, 34 id. 489, the Court uses the following language: “In such case (against the stockholders) it is unanimously conceded the creditors may have relief in equity, but the controverted question is, Have they not also the right to sue at law?” In Massachusetts it has been held, that the creditor must pursue his remedy against the shareholders in a court of equity. In the case of Harris v. The First Parish in Dorchester, 23 Pick. 112, the Court holds that “ an action at common law does not lie in favor of a hank, against a stockholder, to enforce the provision in Revised Statutes, c. 26, sec. 30, that if any loss or deficiency [463]of the capital stock in. any bank shall arise from the official mismanagement of the directors, the stockholders shall, in their individual capacities, be liable to pay the same; but the remedy is by bill in equity.” The case of Perry et al. v. Turner et al., 55 Mo. 418, is an authority sustaining the jurisdiction of a court of equity in a proceeding against the stockholders; and the cases of Pollard v. Bailey, 20 Wall 520, and Hatch v. Dana, 101 U. S. 205, are authorities in support of the proposition we have been considering.
It appears to us to be well settled, that a suit such as- was instituted by the plaintiff properly lies in a court of equity, unaffected by any remedy the creditor may have under the provisions of the Constitution and the statute. Indeed, it may be that the constitutional and statutory remedy is a broader one than that arising upon the contract of subscription, for in a suit upon the latter the recovery can not extend beyond the amount of the subscription, whereas the liability created by the law, independent of any contract, is for the stockholder’s proportion of all the debts contracted or incurred during the time he was such stockholder.
There is but one other question in the case, and that relates to the Statute of Limitations. The indebtedness upon which the judgment was recovered accrued between the ninth of May and the fifteenth of October, 1873; the date of the judgment is May 2, 1878, and the complaint in this case was filed August 30, 1878; and it is claimed, on behalf of the defendants, that the Statute of Limitations has run in their favor. An examination of the authorities, however’, will show that the point is not well taken. Referring again to Thompson on the Liability of Stockholders, we find the law thus stated: “ Where the liability is for unpaid balances on stock subscriptions, there is authority for the position that the statute does not begin to run (if at all) before a notorious disbandment of the company and cessor of business; and there is good sense in this view. However this may be, it is clear of doubt that, in case of a company which continued to transact business, and which has been a 1 going company,’ without interruption, from the time of the subscription of the stockholder until the commencement of the suit for calls, the statute would not commence to run until a call made by the stockholder to pay [464]it; and, for stronger reasons, it would not begin to run until that time, if the controversy were between a creditor of the corporation and a shareholder.” (§291.) In the case of Curry v. Woodward, 53 Ala. 376, the Court say: “ Until the call was made, or there was an evident disbandment of the company and a relinquishment of business, the Statute of Limitations would not begin to run.” To the same effect is the case of Cherry et al. v. Lamar et al., 58 Ga. 541, in which a bill was filed by the creditors of a corporation to subject to the payment of their judgment against it certain unpaid stock subscribed by the defendants.
A defendant can not avail himself of the Statute of Limitations, by demurrer to the complaint, unless it affirmatively appears therefrom that the action is barred by a provision of that statute; and in this case there is no averment of the existence of any fact that would put the statute in motion. No disbandment of the company, no cessor of business, no call upon the subscribers to pay, is averred in or appears from any fair construction of the complaint. We are of opinion that the complaint sets forth a good cause of action against the defendants, and the demurrer should have been overruled
Judgment reversed.
Myrick and Thornton, JJ., concurred.
AI Brief
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Holding. A creditor of an insolvent corporation may maintain a suit in equity to compel stockholders to pay their unpaid stock subscriptions to satisfy the corporation's debts. This equitable remedy is not precluded by constitutional or statutory provisions regarding individual stockholder liability, nor is it barred by the statute of limitations where no call for payment has been made and the company has not disbanded.
Issues
Whether a creditor of an insolvent corporation may maintain a suit in equity to compel stockholders to pay their unpaid stock subscriptions.
Whether constitutional or statutory provisions regarding individual stockholder liability preclude a creditor's equitable suit to recover unpaid subscriptions.
Whether the statute of limitations bars a creditor's action to recover unpaid stock subscriptions when no call for payment has been made.
Disposition. reversed
Quotations verified verbatim against the opinion
“a suit in equity by creditors of a corporation, to compel the subscribers to the capital stock to pay in their subscriptions, is a very common proceeding”
“the unpaid subscriptions to the capital stock constitute a fund available to creditors who are unable to make their demands from the corporate debtor, and equity will lend its aid to enforce payment for the benefit of creditors.”