California Supreme Court Jul 5, 1895 No. No. 15724Published
Before: Haynes
Synopsis
Corporations—Liability of Stockholders—Pleading.—A complaint in an action to enforce the liability of a stockholder of a corporation for his proportion of the indebtedness evidenced by promissory notes does not state a cause of action where it does not allege when the debt or liability of the corporation was created or incurred for which the notes were given, and does not show but that they may have been given in renewal of other notes, or upon settlement of accounts for goods sold and delivered or services rendered prior to their respective dates.
Id.—Nature and Extent of Stockholder’s Liability.—The liability of a stockholder is an original liability created by statute, and is dependent upon the fact that he is a stockholder at the time the debt is created, and the extent of his liability is measured by the proportion between the stock then held by him and the total number of shares issued.
Id.—Representation of Stockholder by Corporation.—The corporation has no power to extend the liabilities of its stockholders, nor to represent them as to their individual obligation to pay a debt or liability at the time when it was first incurred, and it cannot hind them by a note subsequently executed in consideration of a prior liability of the corporation, for which alone the stockholders were responsible.
. Haynes, C. Plaintiff, a foreign corporation, claiming that- the “ Bull & Grant F'arm Implement Co.,” a California corporation, was indebted to it in a large sum of money, brought its action against defendant Bull to enforce his liability as a stockholder in the latter corporation for his proportion of said indebtedness.
The cause was tried by the court, and plaintiff had judgment, but, being dissatisfied with the amount recovered, moved for a new trial, and appeals from the judgment and from an order denying its motion.
The complaint contained two counts upon a single cause of action, but upon the trial the first count was abandoned.-
The second count, as it was stated in the amended complaint, was upon a promissory note made by the “ Bull & Grant Farm Implement Company ” to the plaintiff on November 12, 1890, at one day, for the sum of four thousand nine hundred and fifty-four dollars and fifty-three cents, and alleges that defendant Bull' at all the times mentioned in the complaint, owned one-third of the capital stock issued by the corporation, and prayed for judgment against him for one-third of said sum.
Afterward plaintiff amended said second count by. striking out certain lines and inserting the following:
“ That at the city and .county of San Francisco, state of California, on the following dates, the Bull & Grant Farm Implement Company made, executed, and delivered its eight several promissory notes to the plaintiff for the following sums, to wit:
“On March 30, 1889, for the sum of.....................$723 89
“ April 18, ■ “ “ “ 633 95
“ May 13, “ “ “ 698 42
“ May 17, ........................... 747 37
“ July 25, “ “ “ 496 56
« July 25, “ “ “ 496 56
“ August 31, “ “ “ 772 73
“ August 31, “ “ “ 7^2 74
[3]“ That said eight promissory notes were renewed from time to time by other notes of the Bull & Grant Farm Implement Company; that said last-mentioned renewal notes were, on November 12,1890, renewed by the promissory note of the Bull & Grant Farm Implement Company to the plaintiff for the sum of four thousand nine hundred and fifty-four and fifty-three one-hundredths ($4,954.53) dollars; that said last-mentioned note is in the words and figures as follows, to wit.”
The note, set out is sufficiently described above. Following the note the complaint alleges: “ That plaintiff is still the owner and holder of said promissory note, and that no part thereof has ever been paid. Wherefore, plaintiff prays judgment,” etc.
The court found that the Bull & Grant Farm Implement Company had issued five hundred shares of stock; that at the date of the execution of each of the eight promissory notes mentioned in said amendment to the complaint the defendant owned forty-nine of said shares-, and that on November 12, 1890, the date of said last-named n’ote, he owned but twenty shares.
The court further found that said note of November 12, 1890, was not given in renewal of any of the notes set out in said amendment to the complaint, but that it was given in payment of them.
Upon these facts the court concluded that plaintiff was entitled to judgment for twenty five-hundredths of said last-named note, while appellant contends that the judgment should have been for forty-nine five-hundredths.
Appellant’s only specification is that the finding that the note of November, 1890, was not taken in renewal, but in payment, is not justified by the evidence.
Respondent contends that the judgment must be affirmed whether said finding is justified by the evidence or not, for the reason that appellant was not entitled to any judgment upon its complaint, and, having obtained a more favorable judgment than it was [4]entitled to, it cannot complain; and he thus puts in issue the sufficiency of the complaint. [24]agreement the obligation to pay would have died with him, and nothing would have been paid under it. But it was even possible under the agreement that nothing should be paid plaintiff even though he should live a term of years, for the promise is only to pay provided the defendant, Gard, occupied the premises personally, or received rents from them. He might never occupy them himself, and he might not receive any rents. The premises might remain vacant, or the tenant might fail to pay rent. Again, it might be possible that under the agreement the defendant would be compelled to pay a sum largely in excess of the alleged purchase price; it might be double that amount, or even more, depending upon the uncertain contingency of the length of plaintiff’s life, the rental and receiving of rents, or the occupancy by the defendant. I cannot see how it is possible to conclude that this agreement was, in effect, or in the intention of the parties, an aclcnowdedgment of an indebtedness for the purchase price of the granted premises, and a promise to pay it. On the contrary, it seems clear that it was an independent and collateral contract or covenant, speculative in its character, and designed, if the original debt still existed, to cancel and extinguish it. It was speculative, because under it the plaintiff might receive a sum largely in excess of the purchase price of the land in the form of an annuity, while, on the other hand, the defendant might satisfy his $950 indebtedness by the payment of little or nothing. It seems to me that no argument is required to show that such an agreement, by no transposition whatever, can he made the basis of a lien of a vendor. Under the agreement the defendant became personally bound only and subject to an action for damages for breach of his contract, the only remedy open to plaintiff. The case is analogous to that of Payne v. Avery, 21 Mich. 524, where the court held that while the grantor, upon the facts, might be able to maintain a remedy at law for damages caused by the grantee’s failure to comply with his contract, such damages were too uncertain [25]in their character to form the subject of a vendor’s lien.”
[4]It will be observed that the complaint nowhere alleges when “ the debt or liability was incurred.” It is alleged that on November 12, 1890, a promissory note was executed to the plaintiff by the corporation in which the defendant was a stockholder, hut appellant contends that the debt or liability had its inception long before that date, and, therefore, concedes that the giving of a note does not necessarily show the date of the creation of the debt or liability. But it is not alleged that the debt or liability was created at the date of the several notes given in 1889. For aught that appears in the complaint they may have been given in renewal of other notes, or upon settlement of accounts for goods sold and delivered, or services rendered, long before their respective dates. “ The liability of each stockholder is determined by the amount of stock or shares owned by him at the time the debt or liability was incurred.” (Civ. Code, sec. 822.)
The complaint here cannot be distinguished, as to the point under consideration, from that in Hunt v. Ward, 99 Cal. 612; 87 Am. St. Rep. 87. It was there said: “It will be observed that there is no averment of the time of the incurring of the indebtedness or liability for which the note was given, or of the nature of such indebtedness, or the facts upon which it was founded, the only averment upon the subject being the making and execution of the note and mortgage. The complaint bases the right to recover on the making of the note and the judgment against the corporation; but, as the liability of the stockholder is a separate and independent one, commencing with and dependent upon the original indebtedness, it is doubtful if the averments of the complaint in the case at bar are sufficient.”
That case, however, was decided upon the plea of the statute of limitations, though the court cited with approbation the case of Tilden v. Gashwiler, No. 4052, decided [5]in 1875, where it was held that the liability was upon the original indebtedness and not upon the note.
That the conclusion there reached was right scarcely needs argument or illustration. It is well settled that the liability of the stockholder is an original liability created by the statute; that his liability is dependent upon the fact that he is a stockholder at the time the debt is created, and the extent of his liability is measured by the proportion between the stock then held by him and the total number of shares issued. A corporation may incur a debt, or several distinct debts, to the same person during a series of months, or years, and afterward give its note for the aggregate amount, whilst B, a stockholder at the time the note was given, may not have been such when any one of the several debts included in the note was contracted. An allegation, therefore, that the defendant was a stockholder at the time the note was given is not an allegation that the debt was incurred at that date, nor that the defendant was a stockholder at any prior date when the indebtedness was in fact contracted.
That the stockholder’s liability is not upon the note of the corporation was necessarily decided in the late case of Bank of San Luis Obispo v. Pacific Coast S. S. Co., 103 Cal. 594. In that case the bank loaned the San Luis Hotel Company, a corporation, a large sum of money on December 30, 1886, and took the note of the corporation therefor, payable six months after date. The note became due June 30,1887. The action against the defendant, as a stockholder, was commenced June 3, 1890, less than three years after the maturity of the note, but more than three years after the loan was made, and it was held that the making of the note did not prevent the statute from running in favor of the stockholder, and that the action was barred under section 359 of the Code of Civil Procedure.
Section 322 of the Civil Code provides: “Each stockholder of a corporation is individually and personally liable for such proportion of its debts and liabilities as,” etc.
[6]In Trippe v. Huncheon, 82 Ind. 307, the action was upon a judgment rendered against the Kankakee Valley-Draining Company, a corporation, to recover the amount thereof from the defendants, who were members of the association, under a statute which provided as follows: “ The members of every such association shall be individually liable for all debts contracted by, and all damages assessed and accrued against, the association during their membership.”
The court said: “ This imposes upon the members of such a corporation, as individuals, not as corporators, an absolute, primary obligation to pay all debts contracted by the company of which they are members. Their liability is created by the statute, and is distinct from any obligation which they, as corporators, owe to the corporation or its creditors. The corporation has nothing to do with this liability, nor has it the right or power to represent its members as to this individual obligation. It is a matter between the creditors of a corporation and its members, not as corporators, but as individuals. . . ' . In this and similar eases, by becoming members of the corporation, such members impliedly agree that, as individuals, they will pay all debts contracted by the corporation, and to this agreement the creditors become parties. It is upon this obligation that the creditor who seeks to charge the members of the corporation as individuals must sue—not upon a judgment obtained against the corporation.”
In Mokelumne Hill etc. Min. Co. v. Woodbury, 14 Cal. 265, it was held “ that an individual corporator, in respect to his personal liability for the debts of the corporation, does not occupy the position of a surety, but that of a principal debtor.” But the defendant, though a principal debtor as to debts created while he is a stockholder, is not a party to the note or notes executed by the corporation, and is not liable thereon, but is liable, only by force- of the statute and to the extent limited by it. The action here is upon the last note, as to which the. allegation is that it remains wholly unpaid. But. [7]even if it were true that the action is upon the eight notes mentioned in the amendment to the complaint, the result must be the same. In neither case does the complaint state a cause of action against the defendant. It must be apparent that the defendant may have been a stockholder owning a certain number of shares at the date of the execution of a promissory note by the corporation, and yet not have been a stockholder at the time the debt or liability evidenced by the note was created, or, if then a stockholder, he may have owned a different number of shares. The stockholder’s liability is upon the debt, to the extent and under the circumstances defined by the statute, and not upon the express promise of the corporation to pay at a particular time and place. There may be cases where the written promise of the corporation is necessary to create a liability against either the corporation or the stockholder, but such cases are not considered here.
It is, therefore, not necessary to consider whether the finding excepted to is justified by the evidence.
As the defendant has not appealed, and the plaintiff has obtained a more favorable judgment than it was entitled to, the judgment and order appealed from should be affirmed.
Britt, 0., and Belcher, C., concurred.
For the reasons given in the foregoing opinion the judgment and order appealed from are affirmed.
McFarland, J., Temple, J., Henshaw, J.
AI Brief
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Holding. A stockholder's statutory liability is based on the original debt incurred by the corporation, not on the corporation's subsequent promissory notes, and a complaint failing to allege when the original debt was incurred is insufficient.
Issues
Whether a stockholder's liability is based on the corporation's promissory note or the original underlying debt.
Whether a complaint against a stockholder is sufficient if it fails to allege the date the original debt was incurred.
Disposition. affirmed
Quotations verified verbatim against the opinion
“The liability of each stockholder is determined by the amount of stock or shares owned by him at the time the debt or liability was incurred.”
“An allegation, therefore, that the defendant was a stockholder at the time the note was given is not an allegation that the debt was incurred at that date”