Spencer v. Anderson

This is a creditor’s action to recover on unpaid subscriptions to the stock of the Medical Building Corporation. The plaintiff alleged and proved himself to be a judgment creditor of the corporation, he having commenced an action against the corporation on July 12, 1915, and secured a judgment thereon on December 31, 1917, against the corporation, upon which judgment an execution was taken out and returned unsatisfied. The present action was begun April 25, 1918. The contract upon which the plaintiff’s claim arose was entered into on March 12, 1912, upon which last-named date and prior to the execution of the contract the corporation was formed. The services were rendered pursuant to the contract, from the date of its execution until November 1, 1914. The plaintiff was at all times after the incorporation a director, vice-president, and general manager of the concern, and his duties included assisting in the sale of stock and bonds. Although this proposition is disputed, we think that for the purposes of this appeal the defendants must all be regarded as having subscribed for stock and bonds, having placed their subscriptions between the 12th of July, 1912, and the 1st of February, 1913. They each signed an instrument consenting to the creation of a bonded indebtedness of the corporation of $1,500,000, which instrument recited that the signers were stockholders. With a few exceptions, they made payments to the Medical Building Corporation upon their subscriptions after March 12, 1913. The corporation was organized to erect a building for the use of members of the medical profession, to cost about $800,000. They signed contracts providing for the payment of a certain sum down

“Los Angeles, Cal., Febr. 20, 1913.

“Medical Building Corporation,

“230 Consolidated Realty Bldg.,

“Los Angeles, Cal.

“I here subscribe for $500.00 par value of 6%, second mortgage gold bonds, and $500.00 par value of the stock of the Medical Building Corporation, for which I agree to pay $50 cash and $50 each month for the next 9 months.

“Name: Randall Hutchinson.

“Address: 330 Bradbury Bldg., L. A. Cal.

“Make all checks or drafts payable to Medical Building Corporation.

“Note: Terms may be changed to 10% cash and balance April 1st.”

The subscription in each instance called for not less than one share of stock and an equal number of bonds at a unit price of $100 for each share of stock and one bond. None of the defendants had completed payments under their agreements, although the installments were long past due. At the close of the plaintiff’s case a motion for nonsuit was made by the defendants and granted, and judgment entered pursuant thereto.

The respondents maintain that the trial court was justified in its ruling for the following reasons: That the action is barred by the statute of limitations; that the plaintiff’s case was incomplete without proof of tender of stock and bonds; that the plaintiff had knowledge of the circumstances existing and surrounding the making of all the subscriptions and therefore cannot avail himself of the right of an ordinary creditor against stockholders for whose stock the corporation has not received full value; that many of these defendants were not in fact- subscribers of the Medical

[1] In considering the questions presented by the defense of the statute of limitations, it is important to keep in mind essential differences between actions by a creditor of a corporation to recover upon the stockholders’ unpaid subscriptions, on the one hand, and actions by such a creditor to recover from stockholders who have received bonus or watered stock, upon the other hand. Some of these differences are clearly pointed out in Rhode v. Dock-Hop Co., 184 Cal. 367 [ 12 A. L. R. 437 , 194 Pac. 11 ]. Actions of the first class sound exclusively in contract, while the gist of the actions of the second class is tort. The two classes of actions present many points of similarity, and the failure to distinguish between them has led to unfortunate confusion, particularly in the earlier cases. Both are creditors’ bills in equity, both are actions by a creditor of a corporation, seeking the aid of equity for the satisfaction of his claim out of assets not reachable by the ordinary processes of the law, and in both (but for different reasons) the plaintiff is required to allege and prove the recovery of a judgment against the corporation and the return of execution nulla bona (or that the corporation has become insolvent). But here the similarity ceases.

The cause of action to recover upon unpaid subscriptions rests in contract as to every element thereof. It is in the nature of an equitable garnishment in aid of execution. By it the creditor seeks to recover not upon a debt due to him, but upon a debt due to his debtor. He seeks the interposition of equity to aid in the execution of his judgment by applying to the satisfaction thereof assets of the judgment debtor which consists of debts owing from third persons to such judgment debtor. In so doing he places himself in the shoes of the judgment debtor and prosecutes the action against the debtors of the latter, not in his own right, but in the right of the judgment debtor—the corporation.

[4] Returning now to the case wherein, as at bar, the corporate creditor is seeking to recover upon an unpaid subscription of a stockholder, we find an entirely different situation. “The foundation of this cause of action was defendant’s contract to pay the residue of his subscription [as required] ... ” (as specified in his contract). (Glenn v.

[6] The present action was commenced within less than a year after judgment was obtained against the corporation, therefore the statute of limitations has not run against the right of the plaintiff to 'commence and maintain this action. But this conclusion does not dispose of the contention made by the defendants herein. The plaintiff is here seeking to apply to the satisfaction of his judgment certain corporate assets consisting of choses in action of the corporation against its stockholders. Briefly put, he is seeking to collect certain debts alleged to be owing from the defendants to the corporation. This raises the question whether or not such debts exist. If they never existed, or if they once existed but have been satisfied, of course the creditor cannot recover upon them, even though his right to maintain his creditor’s bill be unchallenged. (San Bernardino Co. S. Bank v. Denman, 186 Cal. 710 [ 200 Pac. 606 ].) The creditor sues as the equitable assignee of the judgment debtor, and it would seem to follow that any defense which would be

This precise question does not appear to have been decided in this state, but there are decisions which foreshadow its solution. In Turner v. Fidelity Loan Concern, 2 Cal. App. 122 [ 83 Pac. 62 ], it was held that the rights of a judgment creditor seeking to enforce the subscription of stockholders to the corporation as its debtors cannot in general be greater than those of the corporation if there is no fraud, actual or constructive, and no facts showing an estoppel of the stockholders as against the creditor. In San Bernardino Co. S. Bank v. Denman, supra (186 Cal., at p. 716 [ 200 Pac. 609 ]), this court said: “The suit of a creditor to have the stock subscriptions applied on his debt is merely one instance of a resort to the equitable remedy of a creditor’s bill; a proceeding in equity to reach assets of the debtor which cannot be got in an ordinary action at law. The creditor is seeking for assets of the debtor, that is, money or credits due to the debtor. He cannot reach anything that does not constitute assets of such debtor. His standing in the court must always be in the shoes of the debtor, and he can obtain no greater relief than his debtor could obtain, at least to this extent, that he cannot force payment from one who is not the debtor of his debtor. A valid obligation must exist in favor of the debtor against the party sued, or the creditor’s bill will not lie against him. Hence, if the obligation once existed, but has lawfully been paid before the proceeding on the creditor’s bill attached

[7] This last consideration furnishes the answer to appellant’s contention that the corporation still possessed the power to levy assessments under sections 331, 332, and 349 of the Civil Code and that the continued existence of that power prevented the statute from running against it in favor of the stockholders. Respondents reply that the corporation here in question never possessed this power because one-fourth of its stock was never subscribed. But, aside from this, the sole purpose and effect of a call upon the liability of a subscriber for an unpaid subscription is to make absolute that which was conditional and to fix the time for the performance thereof. When the subscription contract contains an absolute promise to pay at a time certain, the making of a call after that time could add nothing

The decisions of the courts are not in complete accord upon this question, but the overwhelming preponderance of authority is in support of the following conclusions as to the application of statutes of limitation to creditors’ bills in equity seeking 'to enforce the liability of stockholders as upon unpaid subscriptions: (1) That where the liability is predicated upon the issuance of bonus or watered stock, the statute does not begin to run until the recovery of judgment against the corporation and return of execution nulla tona (or in some cases upon the notorious insolvency of the corporation) ; (2) that where the liability is predicated upon the issuance of stock which is only partly paid and does not purport to be otherwise, the statute begins to run in favor of the stockholder, as against the corporation and also as against the corporate creditors (in the absence of circumstances of fraud or estoppel), at the times when the subscription payments fall due; that when the subscription contract is silent as to the times of payment of the balance (or provides that it is payable upon call), the statute does not begin to run until a call is made either by the directors or by a court of equity (or in some cases upon insolvency of the corporation) ; that when the subscription contract is express and unconditional and the terms of payment are therein specified, the statute begins to run upon each installment thereof as the same falls due.

“There are some early decisions and some dicta to the effect that subscribers for stock in a corporation cannot oppose the statute of limitations to a claim in equity by creditors to have the stock paid up, on the ground that, before payment, the stockholders are chargeable with a trust in favor of creditors, and this trust ‘is a continuing subsisting trust and confidence to which the statute of limitations has no application. ’ According to the decided weight of authority, however, unpaid subscriptions simply create, as to the amount due thereon, the relation of debtor and creditor between the subscribers and the corporation, and if the statute of limitations runs against an action by the corporation to collect a subscription, as it may, it also runs, in the absence of fraud, against a suit in equity by creditors

“If the subscription is payable in installments at specified times, so that no call is necessary, the statute commences to run as to each installment from the time when it becomes due.

“In some jurisdictions it is held that the right of action does not áccrue, and hence that the statute does not commence to run against it, until the corporation is shown to be insolvent by the recovery of a judgment and a return of nulla bona, and that it does begin to run from that time.” (Id., p. 7139.)

■ The cases which are relied upon as holding that the statute does not run in such ease until judgment and execution against the corporation do not in reality so hold. Upon analysis, they will be found to group themselves into three classes. (1) Cases involving bonus or watered stock and therefore resting in fraud. (Lester v. Bends Lumber Co., 71 Ark. 379 [ 74 S. W. 518 ] ; Montgomery Iron Works v. Roman, 147 Ala. 434 [ 41 South. 811 ]; Vaughn v. Alabama Nat. Bank, 143 Ala. 572 [5 Ann. Cas. 665, 42 South. 64 ] ; Montgomery Iron Works v. Capital City Ins. Co., 137 Ala. 134 [ 34 South. 210 ]; King v. Pony Gold Min. Co., 28 Mont. 74 [ 72 Pac. 309 ] ; Jones v. Whitworth, 94 Tenn. 602 [ 30 S. W. 736 ]; Christensen v. Colby, 43 Hun, 362 ; Christensen v. Quinta/rd, 36 Hun, 334 ; Sherman v. S. K. D. Oil Co., 185 Cal. 534 [ 197 Pac. 799 ]; Rhode v. D'ock-Eop Co., 184 Cal. 367 [ 129 L. R. A. 437 , 194 Pac. 11 ]; Vermont Marble Co. v. Declez Granite Co., 135 Cal. 579 [ 87 Am. St. Rep. 143 , 56 L. R. A. 728 , 67 Pac. 1057 ]; J. F. Lucey Co. v. McMillan, 178 Cal. 425 [ 173 Pac. 1000 ]; R. S. Serrón Co. v. Shaw, 165 Cal. 668 [Ann. Cas. 1915A, 1265, 165 Pac. 668 ].) (2) Cases involving unpaid subscriptions, where the subscription contract was silent as to the time of payment, or provided for payment upon call and no call had been made. (Curry v. Woodward, 53 Ala. 376 ; Cherry v. Lamar, 58 Ga. 541 ; McGinnis v. Barnes, 23 Mo. App. 213 ; Sightower v. Thornton, 8 Ga. 486 [ 52 Am. Dec. 413 ] ; Wilkins v. Worthen, 62 Ark. 401 [ 36 S. W. 21 ]; Washington Saw. Bank v. Butchers <& Drovers’ Bank, 107 Mo. 133 [ 28 Am. St. Rep. 405 , 17 S. W. 644 ]; Appeal of Mack (Pa.), 7 Atl. 481 ; Union Sav. Bank v. Letter, 145 Cal. 697 [ 79 Pac. 441 ];

There are many cases holding that where the subscription is unconditionally payable at specified times the statute runs from those times. (See cases cited in note 61 of 6 Fletcher's Cyclopedia Corporations, p. 7139, 14 C. J. 1102, note 84, and 3 Clark & Marshall on Private Corporations, see. 802.) No case to the contrary has been cited herein, and we have found none to the contrary with the single exception of the case of Payne v. Bullard, 23 Miss. 88 [ 55 Am. Dec. 74 ], decided in 1851. In that case the court concluded, erroneously as we think, that the “trust fund doctrine” was applicable thereto and operated to prevent the statute from running in favor of stockholders as against corporate creditors. In the absence of circumstances of fraud (actual or constructive) or estoppel there is no real trust relationship between the stockholders of a corporation and its creditors. The trust fund doctrine has been generally rejected in the later decisions. (2 Pomeroy’s Equitable Remedies, 2d ed., sec. 2319, p. 5142; 3 Clark & Marshall on Private Corporations, sec. 768, and eases there cited.) Whether that doctrine still obtains in this state or not, it is at' any rate not now to be regarded as modifying or adding to the established rules of equity jurisprudence for relief upon the ground of fraud. (Rhode v. Dock-Hop Co., supra, at p. 377.)

It has been suggested that the conclusions here reached do violence to the spirit and purpose of the law and will have the effect of reducing the rights of corporate creditors to little more than a sophistry. The same suggestion was directed with equal force and with equal validity against the interpretation of section 359 of the Code of Civil Procedure, which resulted in “an anomalous condition of affairs,” whereby the statute might run against the stockholders’ liability imposed by the constitution itself, even before the creditor’s right of action thereon could arise. (Hunt v.

We conclude that the . corporate creditor has four years after the recovery .of judgment against the corporation and return of execution thereon within which to commence his action in equity to subject the corporate assets to the payment of his judgment; but in so doing he can (in the absence of fraud or estoppel) realize upon only such assets as would be enforceable at the suit of the corporation itself.

The foregoing conclusions render it unnecessary to give consideration to the various other contentions submitted by respondents in support of the validity of the judgment below.

The judgment is affirmed.

Lawlor, J., Seawell, J., Kerrigan, J., Waste, J., and Wilbur, ,C. J., concurred.