McGowan v. McDonald

Belcher, C.

This action was brought to recover from the defendants, as stockholders of the Pacific Bank, their respective proportions of certain debts and liabilities of the bank, alleged to have been due and owing to depositors therein, and to have been assigned to the plaintiff.

The court below gave judgment for the plaintiff as prayed for, from which and.from an order denying a new trial the defendants appeal.

It appears from the record that the Pacific Bank was incorporated in February, 1863, by the name of the “Pacific Accumulation Loan Company,” and with a capital stock of five million dollars, divided into fifty thousand shares of the par value of one hundred dollars each, under the provisions of an act of the legislature of this state, entitled “An act to provide for the formation of corporations for the accumulation and investment of funds and savings,” passed April 11, 1862. (Stats. 1862, p. 199.) By this act corporations organized under it were authorized “to loan and invest the funds of the corporation, to receive deposits of money, and to loan and invest the same.”

In March, 1866, an act was passed by the legislature, •entitled “An act to authorize the Pacific Accumulation Loan Company to change its name” (Stats. 1865-66, p. 620), and thereafter, in April of that year, and in accordance with the provisions of the said act, the corporation changed its name to that of Pacific Bank.

In Februar}'-, 1872, an act was passed by the legislature amending the act of April 11, 1862 (Stats. 1871-72, p. 132), and under and in pursuance of its provisions such proceedings were taken by the stockholders of the said corporation that the capital stock thereof was reduced to the sum of one million dollars, and its shares to the number of ten thousand, which said capital stock had theretofore been subscribed and paid up, and thereafter remained as the capital stock of the said corporation.

The Pacific Bank never elected to continue its existence under the provisions of the Civil Code, which took effect January 1, 1873, but continued to do business as a bank under the act of April 11, 1862, and subsequent acts amendatory thereof and supplementary thereto, until June 23, 1893, Avhen, being insoWent, it closed its doors and suspended all business.

1. At common law no individual liability was imposed upon the members of a corporation, but article IV of the constitution of 1849 contained the following provisions:

“ Sec. 32. Dues from corporations shall be secured by such individual liability of the corporators and other means as may be prescribed by law.”

“ Sec. 36. Each stockholder of a corporation or joint stock association shall be individually and personally liable for his proportion of all its debts and liabilities.”

On the 22d of April, 1850, “An act concerning corporations” was passed by the legislature, Avhich provid eel in section 32: “Each stockholder of any corporation shall be individually and personally liable for a portion of all its debts and liabilities, proportioned to the amount of stock owned by him.” (Stats. 1850, p. 344.)

In 1853 an act “to provide for the formation of corporations for certain purposes ” was passed, which provided in section 16: “Each stockholder shall be individually and personally liable for his proportion of all the debts and liabilities of the company contracted or incurred during the time that he was a stockholder, for the recovery of which joint or several actions may be instituted and prosecuted.”

In French v. Teschemacher, 24 Cal. 518, it was held that section 36 of the constitution, above quoted, was not self-executing, and that legislation was necessary to give it effect. It was also held that neither of the statutory provisions above quoted was sufficient of itself to impose a liability, “yet, although neither by itself affords a perfect rule, the two combined contain what is omitted in the thirty-sixth section of the constitution, and is needed to give it a practical operation.”

Section 322 of the Civil Code contains very full and •complete provisions as to the liability of the stockholders of ail corporations formed or doing business in this state for debts incurred while they were such stockholders, and as to the method of enforcing such liability.

And section 3 of article XII of the constitution of 1879 provides: “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 lie -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.”

Appellants contend that they are not liable to the plaintiff in this case for any portion of the debts of the corporation, for the reason, 1. That by terms of the statute, under which the Pacific Accumulation. Loan Company was organized, the stockholders of the corporation were expressly exempted from such liability; aud, 2. That, as the Pacific Bank never elected to continue its-existence under the provisions of the Civil Code, the-corporation was not affected by the provisions of the code in regard to corporations, and hence no liability was thereby imposed-upon appellants.

The provision of the act of April 11,1862, relied upon in support of the first point, is as follows:

“Sec. 27. Corporations formed under this act, and the members and stockholders thereof, shall not be subject to the conditions and liabilities contained in, and shall be exempt from, the operation of an act concerning corporations, passed April 22, A. D. 1850.’

But if by this section it was intended to declare that the stockholders of a corporation, formed under the provisions of the act, should not be individually and personally liable for any portion of its debts and liabilities, then the section was in plain conflict with section 36, article IV, of the constitution of 1849, and must be held to have had no validity or effect. For, as said in French v. Teschemacher, supra, “The individual liability of the stockholder is a constituent element in the artificial life of a corporation, made so by the author of its creation, and that life can no more exist under the constitution without the element than a natural person can exist when deprived of an element made indispensable to his existence by the laws of nature. Hence an act of the legislature, authorizing the formation of corporations, without attaching to the corporators an individual liability, would be as obnoxious to the constitution as would be the creation of a corporation by special act."

If, however, this be so, it is claimed that the whole act was rendered unconstitutional, and hence that the bank never had any corporate existence. But this does not follow. In People v. Hill, 7 Cal. 103, it was said: “That if some of the provisions of the bill are unconstitutional, this will not vitiate the whole act unless they enter so entirely into the scope and design of the law that it would be impossible to maintain it without such obnoxious provisions.” And in Robinson v. Bidwell, 22 Cal. 379, it was held that where a provision of a statute is of such a nature and has such a connection with the other parts as to be essential to the law, its unconstituality vitiates the whole enactment. But if an independent provision, not in its nature and connections essential to the law, be unconstitutional, it may be treated as a nullity, leaving the rest of the enactment to stand as valid. (See, also, French v. Tesehemacher, supra, and Ex parte Frazer, 54 Cal. 94, where the same doctrine is announced.)

It is quite evident that the section of the act in question was an independent provision which did not enter into the general object and purpose of the act, and which might be stricken out without prejudice to the other portions thereof. It therefore did not vitiate the other portions of the act or affect the validity of corporations formed under its provisions.

The provision of the civil code relied upon in support of the second point is as follows:

“ Sec. 288. No corporation formed or existing before 12 o'clock noon of the day upon which this code takes effect, is affected by the provisions of part IV of division I of this code, unless such corporation elects to continue its existence under it, as provided in section 287; but the laws under which such corporations were formed and exist are applicable to all such corporations, and are repealed subject to the provisions of this section.”

By the constitution of 1849 each stockholder of a corporation was made personally liable for his proportion of all of its debts and liabilities, but to enforce such liability legislation was necessary. It was not, however, necessary that every act providing for the formation of corporations should also provide for the liability of their stockholders. A general law making such provisions would have have subserved all the purposes required. And while the liability of the stockholder was a constituent element in the life of the corporation, and necessary to its existence, it was still only a burden imposed on the stockholder, and had otherwise nothing to do with the formation or existence of the corporation.

In Market Street Ry. Co. v. Hellman, 109 Cal. 571, it was held that the provisions of the Civil Code relating to corporations which did not affect and were not applicable to such corporations as were formed before the code took effect and had not' elected to continue their existence under it, were such only as related to the formation and existence of the corporations. Under this rule we think it must be held that section 322 of that code applies to the stockholders of corporations formed or doing business in this state before or after the adoption of the codes. Besides, our present constitution imposes the same liability, for, as said in Bidwell v. Babcock, 87 Cal. 32, section 322 of the Civil Code and section 3 of article XII of the constitution have “ substantially the same meaning and effect.”

It is objected, however, that if the provisions of the code and constitution are applicable they impose obligations upon appellants for which they were not liable when they became stockholders, and are in conflict with that provision of the constitution of the United States which inhibits the states from passing laws impairing the obligation of contracts, and are therefore as to them unconstitutional and of no effect.

The answer to this objection is that the constitution of 1849 provided: “ 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. (Const., art. IV, sec. 31.)

Under the authority thus conferred both the legislature and the people had power to change the law in regard to the liability of stockholders, without violating any provision of the constitution of the United States.

In In the Matter of Empire City Bank, 18 N. Y. 199, a similar question arose. That was a proceeding to enforce a personal liability of stockholders for the debts of the bank under an act passed after the bank was incorporated. The court, by Denio, J., said: “The statute under which the proceedings were had was challenged as being a violation of the constitution of the United States and of this state. By the federal constitution no state can rightfully enact a law impairing the obligation of contracts. It is argued that, by the general hanking law, the associations which it authorizes are alone responsible for its contracts, the shareholders being wholly exempt from liability, and it is insisted that this is in the nature of a contract between the state and the shareholders, and that the constitutional guaranty of the integrity of contracts, in the national constitution, would be illusory if the state could, by changing its constitution, subvert all -existing engagements; and hence that the guaranty applies as well to state constitutions as to other state laws. Without denying or affirming the soundness of these positions, it is enough to say that the general banking law expressly reserves to the legislature the power to alter or repeal it, so that any changes, which it or the people think proper to make, are fully authorized by the provisions of the supposed contract itself.” See, also, the following cases, which are to the same effect: In the Matter of Lee etc. Bank, 21 N. Y. 9; In the Matter of Reciprocity Bank, 22 N. Y. 9; Sleeper v. Goodwin, 67 Wis. 577; Tomlinson v. Jessup, 15 Wall. 454; Meadow Dam Co. v. Gray, 30 Me. 551.

It is also objected that the Pacific Bank was originally •organized for the purpose of doing business as a savings bank, and that the stockholders of such a bank cannot be held liable for its debts. But the provisions of the constitution of 1849 applied to the stockholders of all corporations, without regard to the character of the business, to be transacted, and the same is true of the constitution of 1879. It is not, therefore, within the power of the legislature or the courts to declare any such exemption as that here claimed. (And. see Mitchell v. Beckman, 64 Cal. 117, and Kennedy v. Savings Bank, 101 Cal. 495, 40 Am. St. Rep. 369, where liability for deposits in savings banks was enforced.) If, however, the law were as it is interpreted by appellants, the objection could not be sustained, for the reason that it is alleged in the complaint, and not denied by the answer, that at all the times mentioned therein (within two years prior to the commencement of the action) “ said bank was receiving deposits and doing a general banking business.” And it was proved that since 1886 the bank had been advertising itself as a commercial bank by a printed statement on the front page of its by-laws, that it is “the oldest chartered commercial bank in California.”

2. Appellants contend that the court committed several errors of law in its rulings upon the admission of evidence offered to establish the indebtedness of the Pacific Bank to the assignors of the plaintiff.

Section 2047 of the Code of Civil Procedure provides: “A witness is allowed to refresh his memory respecting a fact by anything written by himself or under his direction at the time when the fact occurred, or immediately thereafter, or at any other time when the fact was fresh in his memory and he knew that the same was correctly stated in the writing.”

It is claimed that this section did not authorize the witnesses to refresh their memories by looking at the books, but we think it did. The entries of his deposits w'ere admittedly made in the presence of the witness and under his direction, and he knew at the time that they were correct. There can be no question, therefore, that as to them he could refresh his memory from the book. And the entries of the amounts drawn out were clearly made under the direction of the witness, for he handed in his book to have such entries made and the balance struck; and when the book was returned to him he checked it up from his own books and knew that the balance stated was correct. This "was at a time when the matter was fresh in his memory, and when he knew that the same was correctly stated. In our opinion, therefore, the case comes fairly within the rule declared by the code, and there was no error in the ruling complained of.

It is also claimed that the pass-books were not admissible in evidence against the defendants, and in support of this position Neilson v. Crawford, 52 Oal. 248, is cited.

It is well settled by numerous decisions of this court that by the constitution and statutes of this state the stockholders of a corporation organized therein are made personally liable for their respective proportions of all its debts and liabilities contracted while they are such stockholders. Such liability arises when the debt is incurred, and is primary and not secondary. In a suit against a stockholder to enforce his liability the first fact to be established is the indebtedness of the corporation, and when that is established the liability of the stockholder results as a necessary sequence. It would seem, therefore, that any evidence which is competent and sufficient to show the liability of the corporation must be competent and sufficient to show the liability of the stockholder.

In Borland v. Haven, 37 Fed. Rep. 394, a case decided by the United States circuit court for California, Sawyer, judge, the question arose as to the admissibility and effect of evidence in a case like this, and on page 414 it was said, “ that any evidence that is competent to establish the liability, as against the corporation, must be competent to establish the liability of the stockholders, for the liability of the corporation being established, the liability of the stockholder for his share follows as an inevitable legal consequence by the express terms of the constitution and statute.”

The case of Neilson v. Crawford, supra, relied on by appellants, was an action to enforce the liability of the defendants for their portion of the indebtedness of a corporation of which they were stockholders. At the trial, to prove such indebtedness, the plaintiff offered in evidence the books of the corporation—its ledger, journal, book of resolutions and transfers. It was held on appeal that while in an action against the corporation for the recovery of a debt its books of account, showing the existence of the indebtedness alleged, would be admissible, because they are the admissions of the corporation entered by its servants, still they were inadmissible in an action against the stockholders. And the court said: “If an admission of indebtedness, made by a corporation, be evidence of indebtedness in an action against a stockholder, it is not perceived why a similar admission made by a stockholder should not be evidence in an action brought against the corporation, nor why an estoppel against the corporation—for instance, a judgment rendered—should not equally estop a stockholder to deny the fact of indebtedness in an action brought against him to enforce his proportionate liability.”

That case is not in point here, for the reason that in this case the books of the bank were not offered, and the objection urged is only to the admissibility of the pass-books of depositors. But the pass-books were the books of the depositors and not of the bank. They showed the indebtedness of the bank as certificates of deposit would have shown it. Now suppose the assignors of plaintiff had held certificates of deposit, instead of pass-books, can there be any doubt that they would have been admissible? We think not.

Besides in Kennedy v. California Sav. Bank, 97 Cal. 93, 33 Am. St. Rep. 163, it was held that the legal effect of the condition prescribed by section 3 of article XII of the constitution of this state, regulating the individual liability of stockholders for debts contracted and liabilities incurred by the corporation, is that a corporation when created becomes the agent of its stockholders to make such contracts and incur such liabilities as are authorized by law and its articles of incorporation, and the contracts which it thus makes bind the stockholders to the extent named. If this be so, then the rule that the admissions of an agent, which are made while in the performance of his duty and are a part of the res gestse, may be proved against the principal, must be applicable here. And see Mitchell v. Beckman, supra, where it was held that there was no error in admitting in evidence a judgment against the corporation for the purpose of establishing its indebtedness and the liability therefor of its stockholders.

We conclude, therefore, that the court below did not err in admitting the pass-books in evidence.

3. Some of the appellants object to the allowance of interest against them from the time of the suspension of the bank. But, as before stated, the pass-books were balanced and the accounts stated on the day before the suspension. Section 1917 of the Civil Code provides that interest is payable on all moneys “ due on any settlement of accounts, from the day on which the balance is ascertained, and on moneys received to the use of another and detained from him.” Ordinarily, of course, interest is not payable on the amount found due when a pass-book is balanced. But when a bank suspends business and refuses to pay its depositors it thereafter clearly detains moneys which it received to their use, and, under the provisions of the code, must be held liable for interest thereon.

4. The point is made that the evidence-does not show that appellant Wood was a stockholder when the deposits were made. But the complaint alleges that Wood was the owner of-two hundred and twelve shares of stock of the bank at all the times mentioned therein, and this allegation is not denied in his answer. His ownership of the stock was therefore admitted, and no evidence as to it was required.

The other points discussed by counsel do not require special notice.

The judgment and order appealed from should be affirmed.

Searls, C., and Haynes, C., concurred.

For the reasons given in the foregoing opinion the judgment and order appealed from are affirmed.

McFarland, J., Temple, J., Henshaw, J.

Hearing in Bank denied.