Sherman v. S. K. D. Oil Co.

This is an action brought to recover upon stockholders’ subscription liability. Forty-one stockholders were joined as- defendants. -Nine of these stockholders appeared and answered, and after trial of the issues judgment was rendered in their favor. Two made default and judgment was rendered against them. The S. K. D. Oil Company, defendant, was organized August 12, 1910, with a capital stock of five hundred thousand shares of a par value of one dollar each. The corporation issued its entire capital stock to G. M. Kyle as fully paid stock in exchange for a lease on thirty acres of land upon which to prospect for oil. As a part of the same transaction it was agreed between Kyle and the corporation that three hundred and seventy-five thousand shares of such stock should be returned to the corporate treasury to be sold by the corporation for its benefit. It was found by the trial court at the time of the exchange of the property for the stock the oil lease was actually worth ninety thousand dollars and that the exchange was made in good faith and in the honest belief on the part of the directors that the property acquired by them was equal in value to the stock given in exchange therefor. It is not entirely clear whether the trial court intended to find that the directors actually believed that the oil lease was worth five hundred thousand dollars or whether they believed it to be worth one -hundred and twenty-five thousand dollars. The evidence, however, is undisputed on the part of the directors that they believed the lease was worth three thousand dollars per acre owing to the fact that an oil well producing one thousand barrels a day had been developed on the adjoining property and that if a successful well was obtained upon the property it would be worth much more. The finding of the trial court of good faith in the exchange of said stock is not supported by the evidence, for the directors’ own testimony shows that in their judgment ninety thousand dollars was the outside value of said lease.

Plaintiff’s cause of action is based upon three promissory notes assigned to him, the first promissory note dated October 15, 1911, for $4,280.34, bearing seven per cent interest, due February 16, 1912, payable to Fairbanks, Morse & Company; the second note was to J.

The plaintiff alleged that on November’ 30, 1911, the corporate charter was forfeited for nonpayment of the license tax and that at the same time “the corporation became insolvent and bankrupt and unable to pay its debts and without properties to pay the promissory notes belonging to the plaintiff and ever since that time has been and now is wholly insolvent and bankrupt.” The court further found that such insolvency and cessation of business was on November 30, 1911, known to the payees named in each of the promissory notes. The trial court held that the plaintiff’s cause of action was barred by the statute of limitations. This conclusion was sustained by the district court of appeal, second district, second division, which held that the statute of limitations began to run as soon as the corporation dissolved, to wit, November 30, 1911, and, therefore, that plaintiff’s cause of action was barred on all three promissory notes. This conclusion by the district court of appeal was based upon the proposition that the mere dissolution of the corporation for failure to pay its license tax at once matured all obligations against it, regardless of whether or not they were due. The petition for transfer to this court was granted! because of our doubt as to the correctness of this ruling.

[1] It seems clear that the dissolution of the corporation by operation of law for failure to pay the license tax would not have the effect of maturing its obligations. The policy and effect of the laws of this state forfeiting the corporate charter for failure to pay a license tax are discussed in the recent case of Hanson v. Choynski, 180 Cal. 275 , [ 180 Pac. 816 ], and it is unnecessary to repeat that discussion. It was there held that creditors of such a corporation must ordinarily pursue their usual remedies at law against the directors or trustees of the corporation. There is no statutory authority for holding that the notes, bonds, and other obligations of a corporation become due upon its dissolution for nonpayment of license tax, and the policy of the law is opposed to such a conclusion, as is clearly shown in Hanson v. Choynski, supra. If we regard this suit as an action upon three promissory notes against the defendant corporation, or its directors and trustees, the action is not barred.

[2] The general rule is that the right of action by a creditor against a stockholder on such liability does not accrue until judgment first has been obtained against the corporation and execution thereon is returned nulla bona. (Harmon v. Page, 62 Cal. 448 .) 'Ordinarily, therefore, a creditor may wait up to four years after the maturity of his promissory note before bringing suit against the corporation, and upon obtaining judgment and return of execution nulla bona may thereafter bring a creditor’s bill in equity against the stockholders. The statute of limitations on this latter cause of action would not begin to run until the return of the execution nulla bona.

[3] There is an exception, however, to the rule requiring that judgment be first had against the corporation in eases where the corporation is insolvent. In such a ease the creditor may bring an action against the corporation and stockholder without first securing a judgment against the corporation and a return of execution nulla bona. “Insolvency or return of execution nulla bona is prerequisite to maintain an action against stockholders on their subscription liabilities.” (Merchants’ Mutual Adjusting Agency v. Davidson, 23 Cal. App. 274 , [ 137 Pac. 1091 ]; Helliwell on Stock and Stockholders, sec. 450; Clark and Marshall on Private Corporations, [p. 2459, notes 513, 514; pp. 3867, 3875 (2474, n. 586) ]; 1 Cook on Corporations, sec. 108, p. 380, sec. 200, p. 532; 4 Thompson on Corporations, 2d ed., sec. 3888; 14 C. J., sec. 1725, p. 1103.) Obviously there is some difficulty in determining the exact date when the statute of limitations begins to run in favor of the stockholders in cases of insolvency, in the absence of any assignment for the benefit of creditors, or bankruptcy proceedings to fix the date of insolvency. In disposing of the contention that insolvency per se started the statute of limitations running in favor of a stockholder against a creditor’s bill the supreme court of Ohio in Barrick v. Gifford, 47 Ohio, 180 , [ 21 Am. St. Rep. 798 , 24 N. E. 259 ], aptly stated:

“Such a rule would be not only uncertain, but deceptive to the creditor. The right to commence the action would be

a matter of speculation. It could not be determined before bringing the action and taking an account, whether the company was indebted in a sum greater than its assets would pay or not. A rule of certainty, applicable to such cases, should be adopted. The true rule, and that which is usually adopted where the company has property and continues to do business, is to require the creditor first to obtain a judgment against the corporation and cause an execution to be issued, and if it is returned not levied for want of -goods, then the creditor has the right to commence suit against the stockholders upon their individual liability, and the statute of limitations begins to run against the right of action from that time, and not earlier.

“So long as the company is possessed of corporate property and continues to transact its business, the stockholders should be regarded as estopped from averring that the right of action against them as individuals, accrued, by reason of the insolvency of the company, at a period earlier than the return of an execution unsatisfied, issued upon the judgment of a creditor of the company. Stockholders have the means of knowing the condition of their company much better than creditors, and if the company continues to do business upon an insolvent basis, it should be regarded as permitted by the stockholders, as the directors and officers of the company derive their authority from, and are the agents of the stockholders. ’ ’

In Schofield v. Turner, 213 Pa. St. 548 , [ 62 Atl. 1068 ], it was said: “A misapprehension of what was decided in Swearingen v. Dairy Co., 198 Pa. 68 , [ 53 L. R. A. 471 , 47 Atl. 941 ], is doubtless responsible for this appeal. . . .

“This is what was decided in that case, summed up in the following sentence: ‘The right of action of the plaintiff, whatever it was, accrued upon the fact of insolvency of the dairy company shown by the assignment for the benefit of creditors, and the statute of limitations began to run from that date. ’ ” .

In Helliwell on Stock and Stockholders, section 450, it is said that such a creditor’s bill may be brought against stockholders “where it appears that the corporation is insolvent, has entirely ceased to do business, has made an assignment for the benefit of creditors, and has neither money, credit, nor materials with which to do business or pay its debts.”

“The appellant contends, however, that his action against the stockholders is based on his judgment against the corporation, not upon the original corporate indebtedness which is merged in the judgment, and that his cause of action against the stockholders did not accrue until the recovery of his judgment against the corporation and the return of nulla bona, or, at least, until the recovery of the judgment. If this be true, it must be for one of two reasons; first, because his right of action against the stockholders did not accrue until he exhausted his legal remedies against the corporation by the recovery of a judgment and a return of nulla bonaj or, second, because the stockholders continue liable as long as a liability exists against the corporation, and cannot interpose the statute of limitations as a defense, unless the statute has also run in favor of the corporation. What we have said is sufficient to demonstrate the fallacy of the first- proposition. An action of this kind is in the nature of a .creditor’s bill, and in the absence of statute, it is not necessary to first obtain a judgment against the corporation, when it is otherwise shown that such a proceeding would be utterly futile and subserve no useful purpose. Benham v. Ham, 5 Wash. 128 , [ 34 Am. St. Rep. 851 , 31

Pac. 459 ], Cook, Corporations, sec. 200, and authorities above cited. Nor does the liability of the stockholder continue as long as the creditors may be able to keep their obligations alive against the corporation.”

The supreme court of Arkansas has adopted the rule that actual notice of the corporation’s insolvency would start the statute of limitations running in favor of a stockholder.

In the case of Lester v. Bemis Lumber Co., 71 Ark. 379 , [ 74 S. W. 518 ], that court said: “The period of limitation to an action based on the written subscription of a stockholder in a corporation is five years, and commences to run whenever an execution has been issued against the corporation and returned unsatisfied, or whenever the creditor has notice that the corporation is insolvent.”

In the case of Lester v. Bends Lumber Co., supra, that court holds that the statute of limitations, if no execution had been issued and returned, begins to run when a creditor has notice of the insolvency of the corporation and that such notice would probably be presumed when the insolvency of the corporation became a matter of general notoriety. In this case it is held that the corporation had been insolvent more than the statutory period before the suit was brought, but the fact was not generally known and hence the suit brought was in time.

In the ease of Harmon v. Page, 62 Cal. 448 , supra, the cause of action against the corporation accrued May 9, 1873. Judgment against the corporation recovered May 2, 1878. A complaint was filed on stockholders’ liability August 30, 1878. The court quotes the approval from Curry v. Woodward, 53 Ala. 376 , as follows: “ ‘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 v. Lamar, 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. ’ ’

In Cook on Corporations (volume 1, section 200, page 532), it is said: “The corporate funds are the corporate creditors’ primary resource, even where the liability of the individual stockholder is declared to be primary, like that of an original contractor or partner. Where, however, the corporation has

The rule is thus stated in Corpus Juris, volume 14, page 1103, section 1725: ‘‘ Where liability secondary. Where the stockholder’s liability is secondary, as a general rule, the creditor’s right of action against the stockholders on their statutory liability does not accrue, so as to set the statute of limitations running, until judgment has been recovered against the corporation, or until such judgment has been recovered and execution thereon against the corporation has been returned unsatisfied. Where, however, the corporation has done, or suffered to be done, any act which would render judgment and process against it impossible or of no avail, the creditors’ right of action against the stockholders may accrue without first obtaining judgment and execution against the corporation; and, within this rule, limitations begin to run in favor of stockholders from the time the corporate property is placed in the hands of an assignee in insolvency or bankruptcy, or of a receiver, or the corporation has been dissolved, or suspended business, or from the time when by some other legal proceeding its property has been put in process of application to the payment of its debts. But the creditors’ right of action against the stockholders does not accrue upon the corporation becoming insolvent in the sense, simply, that its property is insufficient for the payment of its liabilities; nor on the appointment of a receiver for the corporation merely for the purpose of carrying on its business, and not on account of its insolvency, or to wind up its affairs.”

In the case at bar three things co-operated on November 30, 1911, to the accrual of a cause of action against the stockholder: the dissolution of the corporation; the insolvency thereof, and notice of the latter to the creditor. Unless, however, the creditor was bound to commence an action against the stockholders before his right accrued against the corporation, we may assume the dates when the plaintiff’s rights of action accrued against the corporation as the dates when such rights also accrued against the stockholders. In considering this matter it should be borne in mind that the

The corporation could not have successfully interposed the statute of limitations to a suit brought by the plaintiff upon the promissory notes in question at the time this suit was brought, to wit, February 11, 1916, except as to the third cause of action on the note which matured January 12, 1912. As it is conceded by the appellant that the statute of limitations had run upon this last-mentioned note, we need not give it further consideration. As to the first notes, assuming that the statute of limitations on the action upon the notes against the corporation and the statute of limitations upon the action against the stockholders were running concurrently because of the insolvency of the corporation, it remains to consider whether or not that period lapsed before the bringing of the suit. If that period is four years or more, the statute of limitations had not run as against the first two notes. If the period is three years or less, the statute has run as to all the notes. The defendants plead practically all the sections fixing limitations upon actions, and the court found in accordance with the allegations of the answer. In the argument it is claimed that section 359 of the Code of Civil Procedure applies to the action against the stockholder. This statute regulates the time for commencing actions against stockholders of a corporation to enforce a liability created by law and provides that such an action must be brought within three years after the discovery by the aggrieved party of the facts upon which the penalty of forfeiture attached or the liability was created. Of course, in one sense every liability is created by law and by the acts of the parties. In that sense, and only in that sense, is this action upon a liability created by law. Obviously, the section does not apply to suits in equity brought to enforce the implied obligation of the stockholder to pay the par value of the stock owned by him.

It is suggested that section 338, subdivision 4, applies. This section provides that an action must be begun within three years “for relief on the ground of fraud or mistake.” The cause of action in such case is not to be deemed to have

It follows from the foregoing that the plaintiff’s action as to the first two promissory notes which matured within four years from the commencement of the action is not barred by the statute of limitations.

It remains to consider the effect of the initial transaction by which the corporation issued its entire corporate stock and later to consider the effect of that situation upon appellant’s rights against the respondent stockholders. The pleadings of the defendants, as well as their arguments before this court, would indicate that they do not claim that the lease in question was worth five hundred thousand dollars or any other sum in excess of one hundred and twenty-five thousand dollars. As between the corporation and Mr. Kyle, who transferred the lease to the corporation in exchange for all its stock, the corporation was only out one hundred and twenty-five thousand shares of stock for the lease. In any action between the corporation or its stockholders and the vendor of the lease, one hundred and twenty-five thousand shares, no doubt, would be taken to be the purchase price of the lease in determining whether or not the corporation had been defrauded. We are not considering the rights of the corporation. It is bound by the action of its directors. Nor are we considering the rights of the stockholders against the corporation or the assignor of the lease. We are considering

At this juncture we pause to consider a point raised by the defendants which, if determined in their favor, will require the affirmance of the judgment. It is claimed by the defendants that the creditors who extended credit to the corporation had full knowledge of the issuance of the stock at an overvaluation. If the creditor had full knowledge of the transaction he could not recover in a court of equity on a creditor’s bill (Rhode v. Dock Hop Co., supra). It was found by the trial court that all the facts with reference to the issuance of said stock were fully known to J. F. Lucey Company, in whose favor the last two notes were executed before it extended the credit to the corporation, and that such facts were fully known to the payee of the first note at least four months before the note was executed. All .of

It remains to consider the cause of action against the respective stockholders who appeared and defended the action, and, in order to discuss that question, it will be necessary to state further facts in regard to the several defendants involved.

The defendants W.

Of the one hundred and twenty-five thousand shares of stock which were issued in consideration of the lease and were retained by the assignor, G. M. Kyle, 15,625 shares were transferred to defendant P. E. Spellaey; the same number to defendant T. Spellaey, and 31,070 shares to defendant J. F. Davies. These shares were owned by said defendants from that time until the trial of the action. In the same manner 15,625 shares were issued to J. M. Danziger and afterward sold by him in good faith to J. F. Davies, but the transfer was not recorded on the books of the corporation and at the time of the trial said shares of stock still stood on the books of the corporation in the name of J. M. Danziger. In the same manner 15,625 shares were issued to W. Morgrage. He sold and transferred to defendant Fred C. Clift 1,875 shares of stock; to defendants W. H. Davies and Birney Donnell two thousand five hundred shares each, and to persons unknown 3,750 shares, all of which were transferred upon the books of the corporation. Defendant W. Morgrage also sold the balance of five thousand shares to J. F. Davies, but no transfer was made upon the books of the corporation and the same remained in the name of defendant W. Morgrage up to the time of the trial.

[8] The failure to make the transfer on the books of the corporation requires that such transfer be disregarded in considering the rights of a creditor of a corporation, for the stockholder remains liable to the creditors of the corporation in the absence of a proper transfer. (Realty & Rebuilding Co. v. Rea et al., 184 Cal. 565 , [ 194 Pac. 1024 ]; McCarty v. More, 181 Cal. 738 , [ 186 Pac. 140 ]; Geary Street P. & O. R. R. Co. v. Bradbury Estate Co., 179 Cal. 46 , [ 175 Pac. 457 ] ; Shean v. Cook, 180 Cal. 92 , [ 5 A. L. R. 1042 , 179 Pac. 185 ]. See, also, Security Commercial & Savings Bank of El Centro v. Imperial Water Co., 183 Cal. 488 , [ 192 Pac. 22 ].)

It is apparent from an examination of the record that the parties in the preparation of their appeals in the trial of the case and the court in its finding did not have in mind the distinction between subscribers for stock and purchasers and transferees of watered stock pointed out in Rhode v. Dock Hop Co., supra. That case was decided subsequent to the filing of briefs and argument of this case in this court. It was there announced that in an action to recover the difference between overvalued property and the par value of the stock in case of watered stock, it was necessary to prove that the holders of such stock participated in the transaction, or, if transferees, that they acquired this stock with notice, actual or constructive, of such fraudulent overvaluation. As all presumptions are to be indulged in in favor of the judgment, we will examine the record with a view to applying the rules announced in Rhode v. Dock Hop Co., supra, to the balance of the defendants. The complaint alleges that all of the five hundred thousand shares of stock were issued to G. M. Kyle in full payment of the purchase price of the oil lease, as fully paid stock. It is further alleged: That at said day and date and at said meeting of said board of directors, or immediately thereafter, but as a part of the same transaction, the said corporation, by its officers duly authorized, executed and delivered certain of the said shares of the said capital stock, by issuing certificates therefor to the following named defendants, all of whom subscribed for or acquired by transfer, and at all times herein mentioned owned and now own, the said shares represented by the said certificates, as follows: J. M. Danziger, 15,625 shares; J. F. Davies, 31,250 shares; G. M. Kyle, 240 shares; L. B. Kyle, 31,010 shares; W. Morgrage, 5,000 shares; P. E. Spellacy, 15,625 shares; T. Spellacy, 15,625 shares; W. H. Davies, 2,500 shares; Bimey Donnell, 2,500 shares; and Frederick

It would be a fair construction of this complaint and one that must be indulged in in support of the judgment in favor of the other defendants to conclude that all of the defendants named in the allegation, other than G. M. Kyle, acquired their stock as transferees. The recital, “but as a part of the same transaction,” in the foregoing allegation is hardly sufficient to justify the conclusion that all the stockholders of the corporation specifically set forth in this paragraph participated in the original transaction, as it is elsewhere alleged that five hundred thousand shares of stock were issued to G. M. Kyle.

However, in the joint answer of J. M. Danziger, Wilbert Morgrage, P. E. Spellacy, T. Spellacy, G. M. Kyle, and J. F. Davies, it is affirmatively alleged that G. M. Kyle was the owner of the above-mentioned lease, dated July 7, 1910; that on July 8, 1910, it was agreed between defendants G. M. Kyle, J. F. Davies, P. E. Spellacy, and T. Spellacy that the defendant corporation should be formed and that Kyle should assign said lease to the corporation, and that said corporation should issue in the name of said Kyle 499,995 shares of its capital stock, 249,995 of which said shares should be retained by said Davies as fully paid and non-assessable and by him divided between himself and his associates, and the balance of two hundred and fifty thousand shares returned to the treasury of said corporation, to be sold by it and the proceeds arising therefrom to be used for the benefit of said corporation; that on July 8, 1910, the corporation was formed and Kyle assigned his lease to the corporation, which caused to be issued and delivered to said Kyle, 499,995 shares of its capital stock as fully paid and nonassessable; that said Kyle immediately returned to the corporation two hundred and fifty thousand shares of said stock. The finding of the trial court upon the matter under discussion is as follows:

“That thereafter and on August 16th, 1910, said G. M. Kyle offered to sell and convey said lease to said S. K. D. Oil Company for 500,000 shares of its capital stock fully paid, and when so issued to immediately return to the treas

ury of said company, for the use and benefit of said company, 375,000 shares of said stock. Thereupon, the said corporation at a meeting regularly called for that purpose, accepted said proposition by resolution regularly passed and spread upon the minutes of said corporation, and on the same day, to wit, August 16th, 1910, said G. M. Kyle assigned, transferred and delivered said lease to said S. K. D. Oil Company and said S. K. D. Oil Company thereupon caused to be issued and delivered to said G. M. Kyle 500,000 shares of its capital stock as fully paid, and said G. M. Kyle on said day returned to the treasury of said company 375,000 shares of said stock, to be sold and the proceeds thereof to be applied to the use and benefit of said corporation; the remaining 125,000 shares of said stock so issued to Mm as fully-paid was then divided as follows, to wit, to T. Spellacy, 15.625 shares; to G. M. Kyle, 31,420 shares; to J. F. Davies, 31,070 shares; to P. E. Spellacy 15,625 shares; to L. B. Kyle 10 shares; to J. M. Danziger 15,625 shares; to Wilbert Morgrage 15,625 shares, all of which shares were issued in the respective amounts to said parties respectively, and since said issuance have stood and now stand on the books of said company in the names of said respective parties, except as to the stock of said Morgrage, as hereinafter in these findings set out. ...” (Italics ours.)

The defect of the complaint in failing to sufficiently allege that the respondents participated in the original transaction is cured, so far as the defendants T. Spellacy, P. E. Spellacy, J. F. Davies, and G. M. Kyle are concerned, by the affirmative allegations of their answer. We might also infer that W. H. Davies and Wilbert Morgrage, who each received 15.625 shares, were associates of J. F. Davies within the meaning of that expression as used in their answer, in the light of the finding that the stock was divided between them and the above-mentioned defendants. Such a conclusion, however, would be a mere inference. There is no allegation in the complaint, no direct admission in the answer, and no express finding holding that W. H. Davies and Wilbert Morgrage participated in the original transaction or received their stock with knowledge thereof. All inferences are to be drawn most strongly in favor of the judgment upon appeal, and for that reason the judgment in their favor must

The judgment of dismissal included all the defendants other than two who had made default, although many of the defendants had not been served and had not appeared in the action. No point, however, was made upon this feature of the judgment and it need not receive further consideration.

The judgment will be affirmed except as to the defendants P. E. Spellacy, T. Spellacy, G. M. Kyle, and J. F. Davies; as to the said named defendants, the judgment is reversed.

Olney, J., Shaw, J., Lennon, J., Sloane, J., Lawlor, J., and Angellotti, C. J., concurred.