Opinion
SUBSEQUENT HISTORY:
April 19, 1912. Appeal-Dismissed by Supreme Court Nov. 25, 1912.
Appeal from Superior Court, Merced County; E. N. Rector, Judge.
Action by J. M. Trindade against the Atwater Canning Packing Company. From a judgment for plaintiff, defendant appeals. Reversed.
COUNSEL
Jas. F. Peck, of Oakland, Terry W. Ward, of San Francisco, and W. B. Bunker, of Oakland, for appellant.
F. W. Henderson, of Merced, for respondent.
JUDGES: BURNETT, J. We concur: CHIPMAN, P. J.; HART, J.
OPINION
BURNETT, Judge
On motion plaintiff was given judgment on the pleadings, and the question to be decided on this appeal of the defendant is whether a stockholder and director of a corporation, who has paid his proportion of the corporate debts, can successfully maintain an action against said corporation for reimbursement for the amount which he has paid. The claim of respondent is that the action " is one on implied contract and based upon the law that where one, although himself under a liability to make a payment, pays a sum for which another is primarily liable, he may recover from the latter the amount so paid." In support of his position, among other authorities, he cites sections 2847 and 2848 of the Civil Code, providing for the obligation of the principal to the surety who has satisfied the claim, and the remedies which the latter is entitled to enforce against the former. There is no doubt of the doctrine as thus stated, but the foundation principle is manifestly that the parties sustain to each other the relation of principal and surety. In other words, this duty exists and may be enforced where the primary obligation rests upon the one from whom reimbursement is sought and where the one paying the debt has simply become responsible for the performance by the principal of an express or implied promise in favor of a third party. Under the Constitution, statute, and decisions of this state, however, the relation of principal and surety does not exist between the corporation and its stockholders. As is well known, each stockholder of the corporation, by virtue of section 322 of the Civil Code, based upon section 3, article 3.2, of the Constitution, is rendered liable individually and personally " 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." The said section of the Code provides that the creditor " may institute joint or several actions against any of its stockholders for the proportion of his claim payable by each, and in such action the court must ascertain the proportion of the claim or debt for which each defendant is liable, and a several judgment must be rendered against each, in conformity therewith." The creditor is not required to sue the corporation at all, and there is certainly nothing in the language of the statute that would seem to contemplate an action by the stockholder against the corporation for reimbursement. The responsibility of the stockholder is apparently considered and treated as independent and primary and we find it so declared by the Supreme Court.
In M., etc., M. Co. v. Woodbury, 14 Cal. 265, it is said: " It would seem, from a just and reasonable construction of the constitutional and statutory provisions upon this subject, 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. His responsibility commences with that of the corporation, and continues during the existence of the indebtedness. It is not in any sense contingent, but is declared to be absolute and unconditional. The remedial effect of these provisions, in which consists their only value, should not be impaired by construction. Similar provisions in other states have generally been construed in the same manner. It has frequently been decided that the members of a corporation, who are answerable personally for the corporate debts and liabilities, stand in the same position, in relation to the creditors of the corporation, as if they were conducting their business as a common partnership."
In Young v. Rosenbaum, 39 Cal. 654, it is declared, through Chief Justice Rhodes, that " the stockholders are not sureties of the corporation, but are principal debtors. A judgment against the corporation does not extinguish or suspend the liability of the stockholders, and it clearly does not merge it. The remedy against the corporation may, for some cause, be suspended, or, perhaps, barred without impairing the remedy against the stockholders, because the liability of the latter is primary; and is conditional or contingent only, in this: that there must be a subsisting debt against the corporation."
In Morrow v. Superior Court, 64 Cal. 386, 1 P. 355, it is said: " As to the primary liability of the stockholders of the company for its debts, we entertain no doubt. * * * The liability of the stockholder is, in our opinion, as distinct and separate from that of the corporation as it would be if the act had made no provision for any other liability than that of the stockholders for the debts of the company."
A similar view, with the citation of al large number of authorities, is announced in section 4802 of Thompson on Corporations (2d Ed.) as follows: " The liability imposed by constitutions and statutes on stockholders for the debts of the corporation is now held and recognized generally as primary and not secondary. The conclusion, therefore, is that stockholders under such provisions do not occupy the position of surety to the corporation. Their liability is not only primary, but generally is direct to the creditors, and may be enforced without any proceedings whatever against the corporation, unless a suit against the corporation is made a condition precedent."
It is true, as pointed out by the learned, author in section 4803 et seq., that by the states the liability imposed upon the, stockholders is secondary to that of the corporation itself, and therefore it has been held in those states that the stockholders sustain the relation of surety or guarantor. This circumstance explains the apparent conflict in some of the decisions. The utterances of our Supreme Court upon the subject, however, seem to be entirely harmonious. Some importance is attached by respondent to the dissenting opinion of Mr. Justice Crockett in Prince v. Lynch, 38 Cal. 535, 99 Am. Dec. 427, but it is hardly necessary to state that we are required to attach more importance to the opinion of the court therein, prepared by Chief Justice Sawyer, wherein it is declared, on page 532 of 38 Cal., 99 Am. Dec. 427, that: " The stockholder is not a surety in any sense of the term. He is under the Constitution and the statute primarily liable in the same sense as the corporation is primarily liable. The same identical act which casts the liability on the corporation also casts it on the stockholder. These are not separate contracts. The stockholder does not stand in the position of an indorser or guarantor."
Nor do we find any comfort for respondent in Knowles v. Sandercock, 107 Cal. 629, 40 P. 1047, cited by him. The question there in relation to the point was one of pleading. It was properly held that the debt of the corporation must be averred as such and the showing that it was incurred while defendant was a stockholder fixed his statutory liability; the court saying: " The stockholder is, perhaps, not strictly liable on the contract, but on the statute. Still, if the debt of the corporation is created by a written contract, the debt of the corporation must be pleaded in the usual mode." We can find in the statutes or decisions of this state--we repeat--no warrant for the assumed position that said relation of principal and surety exists, and thus is the foundation of respondent's main contention swept away.
The only other ground upon which with any degree of plausibility the action can be supported is that afforded by the principle of equitable subrogation in its broadest application as recognized by the authorities. In 37 Cyc. 363, for instance, it is said: " The doctrine is one of equity and benevolence and like contribution and other similar equitable rights was adopted from the civil law and its basis is the doing of complete, essential and perfect justice between all the parties without regard to form and its object is the prevention of injustice." On page 370 et seq. it is further stated that: " Formerly the right of subrogation was limited to transactions between principals and sureties, but it is no longer confined to cases of strict suretyship, but is broad enough to include every instance in which one party is required to pay a debt for which another is primarily answerable, and which in equity and good conscience ought to be discharged by the latter and in the mode which equity adopts to compel the ultimate discharge of the debt by him, who in good conscience ought to pay it, and to relieve him whom none but the creditor could ask to pay, * * * and, as its purpose is only to prevent fraud or subserve justice, it will not be applied where its exercise would promote injustice and thus can be applied only with a due regard to the legal and equitable rights of others." But the same author, on page 374, declares that. subrogation is not allowed " in favor of him who pays a debt in performance of his own covenants, for the right of subrogation never follows au actual primary liability and there can be no right of subrogation in one whose duty it is to pay," and many eases are cited in support of the text.
Substantially the same statement of the doctrine is made by Sheldon on Subrogation, quoted in Redington v. Cornwell, 90 Cal. 58, 27 P. 42, as follows: " It is treated as the creature of equity, and is so administered as to secure real and essential justice, without regard to form and is independent of any contractual relation between the parties to be affected by it. It is broad enough to include every instance in which one party pays a debt for which another primarily answerable, and which in equity and good conscience should have been discharged by the latter, * * * and it is not allowed where it would work any injustice to the rights of others." As we have already seen, respondent simply discharged his statutory and primary liability when he paid his proportion of the debt, and therefore, within the principle stated by the aforesaid authorities, he is not entitled to subrogation. But, looking at the question from a somewhat different viewpoint, a judgment for plaintiff under the circumstances would, or might, at least, operate to work an injustice to the rights of others. The probable effect would be the appropriation by plaintiff of all the assets of the corporation. This means an interference with the business of the corporation and a preference for one stockholder, who is also a director, to the disadvantage of other stockholders.
As to the the former contingency, it will not be disputed that " each shareholder is entitled to have the capital stock of the corporation preserved unimpaired for the purpose of carrying on the business which the corporation was organized to perform," 10 Cyc. 551. Nor does it appear to us according " to equity and. good conscience" to allow plaintiff to exhaust the funds to the detriment of others similarly situated. The stockholders are, of course, equal before the law, and none of them should have a better right than the others to appropriate the funds of the corporation for the payment of his particular claim. Of course, if the corporation were solvent, this feature of the case; would not be entitled to such consideration. But, upon respondent's theory of subrogation, the stockholders who have paid their proportion of the liabilities become creditors, and the result is that the corporation is hopelessly insolvent.
There would seem to be no difference, equitably considered, if, instead of a judgment for plaintiff, the corporation had preferred respondent, and, with knowledge of the claims of the other stockholders, had directed the remaining funds to be appropriated for the payment of plaintiff's demand. There is a conflict in the decisions of different jurisdictions, it is true, as to whether this should be permitted, but the more equitable view is that expressed by Mr. Freeman and quoted in section 6192 of Thompson on Corporations as follows: " When a corporation has become insolvent, every director must as a general rule, be chargeable with notice of such insolvency, either because he actually has such notice or because his failure to have it cannot exist without his being negligent in the discharge of the duties of his office. * * * The usual rule of allowing a race between creditors, and of rewarding the most diligent by permitting him to retain the fruits of his diligence, cannot be fairly applied between creditors, some of whom are directors or managing officers of a corporation and others of whom are not. The early start which the special knowledge of the director would permit and incite him to make will but rarely fail to enable him to distance all competitors. The only just and equitable rule, therefore, is one which will wrest from him the fruits of every form of device by which a preference may be sought, whether it be payment, security, assignment, or by judicial proceedings taken by him whether actually aided or not by his fellow directors."
The facts alleged in the pleadings bring this case, as we view it, within the compass of the foregoing principles. It appears that in October, 1910, the Merced Security Savings Bank and the Commercial Savings Bank of Merced commenced separate actions against the stockholders of defendant corporation to secure from them their proportional share of the debts due from defendant herein to said banks. The aggregate indebtedness was over $ 40,000. The subscribed capital Stock of appellant corporation was 1,288 1/2 shares, held by about 50 individuals, whose holdings ranged from 1 share to 340 shares. In January, 1911, all the stockholders, except four, paid their pro rata of said debts or suffered default judgments to be taken against them for the amounts due. Plaintiff was one of said four who appeared in the action by demurrer. Thereafter he voluntarily paid his proportion of said debts, and immediately brought the present action to recover of defendant the amount which he paid, to wit, the sum of $ 744.97. When he filed his complaint herein, the actions brought by said banks against the other three stockholders were still pending. The amount of the assets of defendant corporation does not exceed $ 1,000. Upon the theory of respondent as to his rights, it is thus to he seen what an advantage he secured by his speed in instituting the present action. We think, however, for the reasons already stated, that his vigilance should not be thus rewarded. The other stockholders, it is true, have not intervened, but the facts are fully set forth in the pleadings, and, if there is to be a virtual dissolution of the corporation and distribution of the remaining assets, the other stockholders should be brought in by order of the court that there may be an equitable disposition of the whole matter.
The view we have taken is in harmony with the decision of the Supreme Court in Sacramento Bank v. Pacific Bank, 124 Cal. 147, 56 P. 787, 45 L. R. A. 863, 71 Am. St. Rep. 36, wherein it is said: " Under the Constitution and statutes of this state, each stockholder may be compelled to pay to the corporation assessments to the full amount of his subscription to the capital stock of the corporation for the payment of creditors of such corporation, and also be individually liable to each creditor for such proportion of his claim as the amount of stock held by said stockholder bears to the whole of the capital stock. The two liabilities and the remedies based thereon are concurrent. * * * It follows, then, that whatever the intervener has paid, either directly to the corporation in the way of assessments, or on account of his personal liability as a stockholder directly to the creditor, he was bound to pay under the law and can recover no portion back either by subrogation oil otherwise." In that action the intervener was a stockholder in the defendant bank, and, by virtue of his statutory liability, had been compelled to pay his proportion of its indebtedness to plaintiff therein and he therefore made the claim that he was entitled to be subrogated to that extent in and to plaintiff's right to the dividend declared by the directors of the defendant corporation. While the facts, of course, were different, that case bears a striking analogy to this and the principle enunciated therein, we think, is controlling herein.
There is no harshness, we may say, in the rule we have announced. When the corporation is organized, the stockholders assume the burdens imposed by the statute. Each one is presumed to know that the Legislature has prescribed the measure of his liability, and has not provided that the creditor shall first bring his action against the corporation, or that the stockholder who pays his proportion of the indebtedness can look to the corporation for reimbursement. The stockholder takes this risk in view of the prospect of gain and to relieve him of it in the way attempted by respondent would be virtually to render nugatory the said statutory provision.
Without more particular specification, we may add that, if the doctrine espoused by respondent should be recognized by the courts, it might and would lead to serious complications in corporate liabilities, would likely work grievous injustice to many stockholders, and would greatly hamper the business and impair the usefulness of many corporations, and, furthermore, we cannot see that it is demanded by any requirement of the law or principle of equity and fair dealing.
The judgment is reversed.
We concur: CHIPMAN, P. J.; HART, J.