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holding that laws affecting the value of a contract may nonetheless be constitutional because not “every statute which affects the value of a contract impair its obligation”
Summary of this case from Cda Dairy Queen, Inc. v. State Ins. FundOpinion
No. 5083.
November 26, 1927.
APPEAL from the District Court of the Eleventh Judicial District, for Twin Falls County. Hon. Hugh A. Baker, Judge.
Action by Thomas Sanderson, a stockholder of defendant company, to enjoin it from issuing bonds, executing mortgage and levying assessment on stock. Judgment for defendant. Reversed.
Richards Haga, for Appellant.
Authority to levy and collect assessments on fully paid corporate stock must be found either in the statute or the articles of incorporation and in Idaho such authority is conferred by C. S., art. 6, chap. 186. ( Wall v. Basin Mining Co., 16 Idaho 313, 101 P. 733, 22 L.R.A., N.S., 1013; 6 Cal. Jur., p. 951; Seyberth v. American Commander Min. Co., 42 Idaho 254, 245 P. 392; C. S., sec. 4733.)
The proposed stock assessment or assessments of respondent are in excess of ten per cent of the capital stock of the company and are therefore illegal and void. (C. S., sec. 4734; Cal. Civ. Code, sec. 332; Santa Cruz Ry. Co. v. Spreckles, 65 Cal. 193, 3 P. 661; Pacific Fruit Co. v. Coon, 107 Cal. 447, 40 P. 542; Brown v. San Gabriel etc. Co., 22 Cal.App. 682, 13.6 P. 542; San Joaquin etc. Co. v. Beecher, 101 Cal. 70, 35 Pac. 349; Kohler v. Agassiz, 99 Cal. 9, 33 P. 741; Bottle Mountain Min. etc Co. v. Kern, 9 Cal.App. 527, 99 P. 994.)
One stock assessment cannot be levied while a previous one remains unpaid, unless the power of the corporation has been exercised for the purpose of collecting the previous assessment. (C. S., sec. 4735; Cal. Civ. Code, sec. 333; Strouse v. Sylvester, 6 Cal. Unrep. 798, 66 P. 660.)
The maintenance lien statute, C. S., chap. 138, art. 1, is unconstitutional and void because of improper classification. ( Crom v. Frahm, 33 Idaho 314, 193 P. 1013; Con. nolly v. Union Sewer Pipe Co., 184 U.S. 540, 22 Sup. Ct. 431, 46 L. ed. 679; 6 R. C. L., p. 381; Bedford Quarries v. Bough, 168 Ind. 671, 80 N.E. 529, 14 L.R.A., N.S., 418; Smyth v. Ames, 169 U.S. 466, 18 Sup. Ct. 418, 42 L. ed. 819, 840; Gulf C. S. F. Ry. Co. v. Ellis, 165 U.S. 150, 17 Sup. Ct. 255, 41 L. ed. 666.)
An unconstitutional statute is null, void and nonexistent and cannot be revitalized by mere amendment of one section incorporating other parts of the void law by reference. (1 Cooley, Const. Lim., 8th ed., pp. 382-384; Norton v. Shelby County, 118 U.S. 425, 6 Sup. Ct. 1121, 30 L. ed. 178, 186; Const., art. 3, sec. 18.)
Chapter 107 of the 1925 Session Laws was adopted subsequent to the execution of appellant's mortgages, lessened the value thereof and accordingly impaired the obligation of contract in violation of the state and federal constitutions. (U.S. Const., art 1, sec. 10; Ida. Const., art. 1, sec. 16; 12 C. J. 1057, 1058; Fidelity State Bank v. North Fork Highway Dist., 35 Idaho 797, 31 A.L.R. 781, 209 P. 449.)
A vested mortgage lien may not be impaired or its priority displaced by a subsequent statute. (12 C. J. 1071, 1072; Crowther v. Fidelity Ins. Co., 85 Fed. 41, 29 C.C.A. 1.)
A corporation cannot sell all its property without the consent of all or at least a majority of its stockholders and the mortgage involved here is invalid over the objection of appellant, a nonconsenting stockholder, and because a majority of the outstanding capital stock did not authorize it. (3 Fletcher, Cyc. Corp., sec. 1998; 2 Fletcher, Cyc. Corp., secs. 1203, 1206; 6 Fletcher, Cyc. Corp., sec. 4011.)
Corporate property held subject to limitations as to use or subject to a trust cannot be so disposed of as to divert it from such use or trust and the proposed mortgage would divert the irrigation system and water rights from the trust established thereon by law in favor of the settlers. (2 Fletcher, Cyc. Corp., sec. 1194; 6 Fletcher, Cyc. Corp., sec. 4012.)
If appellant had not sought the relief prayed for in this action, he might be estopped from raising the question after the bonds had been sold, and he is therefore entitled to the injunction prayed for. ( Huxtable v. Berg, 98 Wn. 616, 168 Pac. 187; Hall v. Eagle Rock etc. Co., 5 Idaho 551, 51 Pac. 110.)
James R. Bothwell, for Respondent.
We have no doubt of the power of the Salmon River Canal Company, both under its charter and the statutes of the state, to incur the indebtedness and execute the mortgage here in question. ( Hobbs v. Twin Falls Canal Co., 24 Idaho 380, 133 Pac. 899.)
The levying of a continuing direct annual assessment upon the shares of stock, water rights and lands to which said shares of stock and water rights are now or shall hereinafter be made appurtenant as contained in sec. 3 of the resolution is valid. (Sec. 2, art. of Inc. S. R. C. Co., as quoted above; secs. 9 and 12, By-Laws S. R. C. Co., as above cited; Hobbs v. Twin Falls Canal Co., supra.)
"Ordinarily an assessment may be levied and collected on fully paid stock where authority to do so is conferred by the articles of incorporation." (14 C. J., sec. 1286; Nelson v. Keith-O'Brien Co., 32 Utah, 396, 91 P. 30; Forsythe v. Selma Mines Co., 58 Utah, 142, 197 P. 586; Huxtable et al. v. Berg, 98 Wn. 616, 168 P. 187; Wall v. Basin Mining Co., 16 Idaho 313, 101 P. 733, 22 L.R.A., N.S., 1013.)
"Where the articles of incorporation make the stock assessable without fixing the amount or prescribing any limit it may be assessed to the extent and for the amount necessary to carry on the corporate business and to save and preserve the property of the corporation and to pay and meet its just debts and obligations." (2 Fletcher, Ency. Corp. (1924 Supp.), sec. 4373. C. S., sec. 3040, amended by Sess. Laws 1925, p. 154.)
The maintenance statute as amended is not subject to the objection of improper classification. ( Crom v. Frahm, 33 Idaho 314, 193 P. 1013; 6 R. C. L., p. 411, sec. 408, p. 421, sec. 415; State v. Horn, 27 Idaho 782, 152 P. 275: German Alliance Ins. Co. v. Lewis, 233 U.S. 389, 34 Sup. Ct. 612, 58 L. ed. 1011, L.R.A. 1915C, 1189; Jones v. Power County, 27 Idaho 656, 150 P. 35; Idaho Mut. etc. Co. v. Myer, 10 Idaho 294, 77 P. 628; Thielke v. Albee, 79 Or. 48, 153 Pac. 793; Murphy v. California, 225 U.S. 623, 32 Sup. Ct. 697, 56 L.ed. 1229, 41 L.R.A., N.S., 153.)
If objection is made to the maintenance lien statute on the ground of improper classification we reply that the only one who can complain of discrimination is the Carey Act Construction Company, in this instance, the Twin Falls Salmon River Land and Water Company. ( Ex parte Washer, 78 Cal.App. 759, 248 P. 1068; 12 C. J. 768, and cases there cited.)
"The directors of any corporation formed or existing under the laws of this state after one-fourth of its capital stock has been subscribed may, for the purpose of paying expenses, conducting business, or paying debts, levy and collect assessments upon the subscribed capital stock thereof in the manner and form and to the extent herein provided." (C. S., sec. 4733; Hobbs v. Twin Falls Canal Co., 24 Idaho 380, 133 Pac. 899.)
The stockholders of the respondent, Salmon River Canal Company, Limited, authorized the action taken by the board of directors at a special meeting duly and regularly called for that purpose. (Sec. 16, By-Laws River Canal Company, Limited.)
E.M. Wolfe, Amicus Curiae, cites no authorities on points decided.
This action was brought by appellant on his own behalf, and on behalf of all others similarly situated, against respondent corporation to enjoin it and its officers and directors from issuing bonds of the corporation and using the proceeds thereof to buy up the water rights from 7,000 acres of land in the Salmon River project, thus improving the water right for the balance of the project; to enjoin it from mortgaging the entire irrigation system and all water rights of the project to secure payment of such bond issue; and from levying a continuing annual assessment on the stock of the corporation for the purpose of repaying the interest and principal of such bonds.
Upon issues being framed, the cause was tried to the court, and findings of fact, conclusions of law and decree were entered, denying the injunction, authorizing the execution of the bonds and the mortgage securing the same, and declaring the lien of the levies and assessments therefor superior to all other liens on the lands, water rights and water stock of the project. From the decree so entered this appeal is prosecuted.
Respondent is a Carey Act operating company, organized pursuant to the provisions of a contract entered into between the state of Idaho and the Twin Falls Salmon River Land Water Company for the building of the irrigation works and the sale of shares or water rights under the canal and irrigation system to persons filing upon lands within the project and the owners of other lands susceptible of irrigation from the canal system. Title to the system was maintained in the Twin Falls Salmon River Land Water Company until the completion of the works, when it conveyed by deed to respondent the property, consisting of reservoir, dam, canals, laterals, diversion works, headgates, weirs, measuring devices, flumes, rights of way, water rights, water appropriations, etc.
The express purposes of the organization of respondent company are set out in its articles of incorporation and by-laws, as follows:
"That the purposes for which it is formed are to own, acquire, hold, manage, control, operate and maintain that certain canal and irrigation system now under construction by the Twin Falls Salmon River Land and Water Company. . . .; also, for the purpose of acquiring the water rights taken up for the irrigation of the lands under said irrigation system, and acquiring other water rights in case the same may be deemed desirable; to acquire, hold, own, maintain and control the water from Salmon River or other sources of supply. . . .; to fix, charge and collect from its stockholders tolls, rentals, assessments and maintenance charges based upon the number of shares of stock held by each person or proportioned to the amount of water used or owned or by both of said methods or by assessment upon the capital stock levied in accordance with the laws of Idaho, or by such other method as may be prescribed in the by-laws of said corporation. . . .; to construct, operate and maintain canals, ditches and reservoirs and generally to do any and all things necessary or proper to be done in conducting the business of supplying its stockholders with water for irrigation and domestic use and other useful and beneficial purpose." (Sec. 2, Articles of Incorporation.)
"This corporation is not organized for profit, but for the purpose of conducting the said irrigation works, but inasmuch as it may be necessary to accumulate a surplus in order to conduct the operations of the company in a businesslike manner, or in order to provide for the payment of debts this corporation may make such reasonable assessments for the business purposes of the organization as may be necessary, either by way of maintenance charges or by assessments upon the capital stock of the corporation appurtenant to patented land." (Sec. 9, By-Laws.)
" . . . . the board of directors may include in the charges of maintenance and operation above specified a reasonable amount for sinking fund for the making of repairs or alterations and a reasonable amount for a sinking fund to meet the expenses of ownership, operation, management and control of the system and also any amount authorized by Section 9 of these By-Laws. The Board may provide that the maintenance charge herein provided for may be paid either in a single amount on the first day of April of each year as hereinbefore specified, or it may be paid in instalments at such times as the board may provide. The corporation shall have power to borrow money for the purpose of meeting its obligations in connection with the ownership, operation, repair, maintenance and control of the irrigation system. The maintenance charge or charges provided for in this and other sections of these by-laws shall be, and they are hereby made and constituted a lien upon the shares of stock and upon the water rights represented thereby and upon the land described in said shares of stock and the corporation may enforce said lien by suit or in any manner that may be prescribed by the by-laws of this corporation or the laws of the state of Idaho, either now in force or which may hereafter be in force. . . . . " (Sec. 12, By-Laws.)
It may be of interest to observe that the agreement entered into between the state and the Twin Falls Salmon River Land Water Company at first involved the irrigation of 150,000 acres of land, segregated under the Carey Act and amendments thereto, and state statutes made applicable to Carey Act legislation; the state receiving from the federal government under contract the Carey Act lands within the project, and later on entering into a contract with the Twin Falls Salmon River Land Water Company for the construction of a reservoir and canal system for the proper irrigation of the 150,000 acres. Thereafter it was found that there was not sufficient water to irrigate 150,000 acres of land within the project, and an understanding was had between the state and the construction company that the works should only cover 100,000 acres, with leave to enlarge the project if found desirable. Later on it was found that there was not sufficient water to irrigate 100,000 acres, and a further agreement was entered into between the parties whereby the project was reduced to 80,000 acres, which latter acreage was to be thrown open to settlers. Very soon thereafter 73,340 acres of the 80,000 acres were entered by settlers. On still further investigation of the water supply it was found that there would not be sufficient water to reclaim more than 50,000 acres of land within the project. Litigation followed, both in the federal and state courts, resulting in a reduction of irrigable land in the project to 35,000 acres. (See Twin Falls Salmon River Land Water Co. v. Caldwell, 242 Fed. 177, 155 C.C.A. 17; Twin Falls Salmon River Land Water Co. v. Caldwell, 272 Fed. 356; Caldwell v. Twin Falls Salmon River Land Water Co., 225 Fed. 588; Twin Falls Salmon River Land Water Co. v. Davis, 267 Fed. 382; State v. Twin Falls etc. Water Co., 30 Idaho 41, 73, 166 P. 220; Sanderson v. Salmon River C. Co., Ltd., 34 Idaho 145, 199 P. 999; Sanderson v. Salmon River Canal Co., 34 Idaho 303, 26 A.L.R. 292, 200 Pac. 341; Salmon River Canal Co. v. District Court, 38 Idaho 377, 221 P. 135; Parrott v. Twin Falls etc. Water Co., 32 Idaho 759, 188 P. 451; Glavin v. Salmon River Canal Co., Ltd., 39 Idaho 3, 226 P. 739.)
The authorized capital stock of respondent is 150,000 shares of the par value of $1 per share, of which approximately 60,000 shares have been subscribed and are outstanding fully paid. The proposed bond issue approved by the board of directors is for $565,000, to be secured by mortgage upon all of the property of respondent company, including the irrigation system and water rights and a right to levy tolls, assessments and maintenance liens. Principal and interest on the bonds are proposed to be paid by what is called a continuing direct annual assess ment upon the shares of stock for twenty years, the amounts of the annual levies varying from $16,950 in 1927 to $149,350 in 1947. These assessments would be sufficient to retire the entire bond issue, with interest at six per cent and the total payments of principal and interest would amount to more than $1,000,000.
Appellant is a land owner on the project and owns some 128 shares of stock in respondent company, and is also the pledgee of some 270 additional shares of such stock as collateral to mortgages which he holds on other project lands.
One of three principal points urged by appellant is that respondent company has no power to mortgage its property without the consent of a majority of its stockholders.
The powers of a corporation, like its corporate existence, are derived from a grant by the state or other sovereign creating it, and it has no powers except such as are expressly or impliedly conferred by its charter. (14a C. J., p. 246, sec. 2075.) The charter of a corporation formed under a general law conferring on it only the ordinary corporate powers does not consist of the articles of incorporation alone, but of such articles taken in connection with the law under which the organization takes place, and the provisions of the law enter into and form part of the charter. (7 R. C. L., p. 537, sec. 520.) With these principles in mind, let us look to the provisions of the general law under which respondent company was created and to its articles of incorporation, to ascertain if there is any authority on the part of respondent company to execute a mortgage on its property.
It is provided in C. S., sec. 4752, that every corporation, as such, has power to sell, lease, assign, transfer, mortgage or convey any rights, privileges, franchises, real or personal property of the corporation, other than its franchises of being a corporation. The articles of incorporation of respondent company recite that the purposes for which it is formed are to own, acquire, hold, manage, control, operate and maintain a canal system, as well as to acquire the water rights taken up for the irrigation of the lands under said irrigation system, and to acquire other water rights in case the same may be deemed desirable, and generally to do any and all things necessary or proper to be done in conducting the business of supplying its stockholders with water for irrigation and domestic use and other useful and beneficial purposes.
It is seen that the law expressly authorizes corporations to mortgage their real and personal property, and we think a fair interpretation of the provisions of the articles of incorporation of respondent company, as above referred to, justifies the conclusion that, in order to carry out the purposes for which the company was organized, it would have implied authority thereby to borrow money for those purposes and to execute a mortgage on its property as security therefor. But the question has been set at rest by the decision of this court in Hobbs v. Twin Falls Canal Co., 24 Idaho 380, 133 P. 899, and in abiding by that decision we quote the following statements therein contained as effectively disposing of the same proposition in the case at bar:
" . . . . This corporation is governed by the general incorporation laws, and under their provisions the directors act for the corporation (sec. 2728, Rev. Codes, as amended 1909 Sess. Laws, p. 159) (now C. S., sec. 4711), and have the power to borrow money and execute notes and mortgages (sec. 2769, Rev. Codes, as amended by 1909 Sess. Laws, p. 163 (now C. S., sec. 4752), and it is not essential to their validity that the sanction of the stockholders be had. (Thomp. on Corp., secs. 1185, 1192.)
"We conclude that the canal company has the power and authority, both under its articles of incorporation and the statute of the state, sec. 2769, Rev. Codes, as amended by the 1909 session of the legislature, 1909 Sess. Laws, p. 163 (C. S., sec. 4752), to borrow money and execute bonds and mortgages therefor, and that the directors of the corporation may do so without submitting the question to the stockholders."
A second point urged by appellant is that the so-called maintenance lien statute is unconstitutional and void. This statute is C. S., chap. 138, art. 1, including C. S., sec. 3040, as amended by Sess. Laws 1925, chap. 107, pp. 153, 154. Appellant contends under this head that C. S., chap. 138, art. 1, in which was contained C. S., sec. 3040, before its amendment, and the section as amended, are both unconstitutional, first directing the attack to C. S., chap. 138, art. 1, as unconstitutional for improper classification and as a denial of equal protection of the laws, in violation of the fourteenth amendment to the constitution of the United States. It is argued that this statute is unconstitutional for the same reasons advanced by this court in Crom v. Frahm, 33 Idaho 314, 193 P. 1013, as to C. S., sec. 3050, and that since the amendment to C. S., sec. 3040, by the 1925 session of the legislature contains most of the same objections found to C. S., sec. 3050, it is just as illogical. unreasonable and arbitrary as to classification as the original law. Furthermore, it is insisted, if the original law was unconstitutional, it was null and void and could not be revitalized by repealing one section, amending another at length and adopting the remaining provisions of the null and void statute by reference. Appellant also contends that the lien purported to be authorized under C. S., sec. 3040, as amended, supra, and extended to respondent company by the findings of the trial court herein, makes it a clear violation of the rights of appellant under the mortgages which he holds and an impairment of the obligation of his contracts, under the provisions of both federal and state constitutions against the passage of any law impairing the obligation of contracts.
The act of 1925 (Sess. Laws 1925, chap. 107, pp. 153, 154), repealed C. S., sec. 3039, and amended C. S., sec. 3040. The amendment did not restrict the operation of the act to corporations operating irrigation systems under the Carey Act, and otherwise removed constitutionally objectionable provisions from C. S., chap. 138, art. 1. It is insisted that it was attempted to remove constitutional objections by amending certain provisions of C. S., chap. 138, and that the amendment is subject to the objection that an original act which is unconstitutional cannot be revitalized by amendment. It would seem that the amendment of 1925 of C. S., sec. 3040, is complete in and of itself, and not subject to the objection that it contains improper classification or is a denial of equal protection of the laws, and if we are correct in so holding, the amendment would not be vitiated by mere reference to the provisions set forth in a former act. Nor would we feel called upon to hold the original act unconstitutional for the reasons assigned, in view of the well-established rule that a legislative act should be held to be constitutional until it is shown beyond a reasonable doubt that it is not so, and that a law should not be held to be void for repugnancy to the constitution in a doubtful case.
It is contended by appellant that the act of 1925 was adopted subsequent to the execution of the mortgages held by appellant, and that said act purports to authorize a lien prior to and superior to his mortgages, under which he claims a lien on the lands covered thereby and to the water stock and water rights, and that therefore his contracts are impaired, which being true, the act of 1925 is repugnant to and in violation of the United States constitution, art. 1, sec. 10, and of the Idaho constitution, art. 1, sec. 16. We are not inclined to agree with this contention. Appellant's contracts remain the same; his indebtedness is not terminated or lessened in any amount; neither is he denied the right to enforce his contracts. At most, his security might be lessened, in that upon foreclosure and sale his security might or might not discharge the obligations. The lands covered by the mortgages are within the tract to be furnished with additional water, and the value thereof may be materially increased. His injury, therefore, is purely speculative, and not having been injured, why complain. When appellant accepted the mortgages, he knew, or should have known, and since he is a stockholder in the Salmon River Canal Company, he must have known that the articles of incorporation provided that the directors might do all things necessary to supply sufficient water to properly irrigate the land within the segregation, and that in order to do so they might borrow money by mortgaging all the property of the corporation, levy assessments, collect tolls, in order to discharge the corporate indebtedness, and he accepted his mortgages, therefore, subject to whatever legal rights the corporation had under statutes then in force or that might thereafter be created by statute.
"Any enactment of a legislative character is said to 'impair' the obligation of a contract which attempts to take from a party a right to which he is entitled by its terms, or which deprives him of the means of enforcing such a right." (12 C. J., p. 1056, sec. 699.)
The general rule would seem to be that a statute which does not act on the contract itself but merely on the property which is the subject of the contract may not be said to impair the obligation of the contract. (12 C. J., supra.) The value of the contract may be diminished, but the obligation of the parties to each other is not affected in the slightest degree, as was said in State v. Pullman Co., 75 Kan. 664, 90 P. 319, 321. "Nor does every statute which affects the value of a contract impair its obligation. It is one of the contingencies to which parties look now in making a large class of contracts, that they may be affected in many ways by state and national legislation." ( Curtis v. Whitney, 13 Wall. (U.S.) 68, 70, 20 L.ed. 513.) The right to enforce appellant's contracts remains undisturbed, and their validity is not impaired.
The third point urged by appellant is that the proposed assessments on the capital stock of respondent company are in violation of C. S., chap. 186, art. 6, relating to assessments on capital stock, and particularly secs. 4733-4736. Under this point appellant contends that, under our constitution, all private corporations are incorporated under the general laws, and that, accordingly, the articles of incorporation cannot broaden the power of a corporation to levy assessments beyond that given by the statute under which the corporation is created. In support of this contention appellant relies upon the statement contained in the opinion of this court in Seyberth v. American Com. etc. Co., Ltd., 42 Idaho 254, 264, 245 Pac. 392, as follows:
"The levy and collection of assessments are statutory, and in this state the authority conferred upon the directors of a corporation to levy and collect assessments upon the subscribed capital stock for the purpose of paying obligations, conducting business, or paying debts, is provided for by C. S., sec. 4733."
C. S., sec. 4733, provides:
"The directors of any corporation formed or existing under the laws of this state, after one-fourth of its capital stock has been subscribed, may, for the purpose of paying expenses, conducting business or paying debts, levy and collect assessments upon the subscribed capital stock thereof in the manner and form, and to the extent, herein provided."
Thus, appellant argues, the power to levy and collect assessments on capital stock is limited to the manner and form, and to the extent, as in the remaining or following sections of C. S., chap. 186, art. 6, provided.
C. S., secs. 4734, 4735 and 4736 provide, in substance, that (4734) no one assessment must exceed ten per cent of the amount of the capital stock named in the articles of incorporation; (4735) no assessment must be levied while any portion of a previous one remains unpaid; and (4736) the order levying an assessment must specify the amount thereof, when, to whom and where payable, fix the day subsequent to the full term of publication of the assessment notice on which the unpaid assessment will be delinquent, and a day for the sale of delinquent stock.
It is insisted by appellant that the resolution authorizing or levying the assessment, or assessments, herein shows a complete disregard of all these statutory requirements, in that:
A. (4734) No attention is paid to the ten per cent limitation;
B. (4735) Semi-annual assessments are levied over a twenty-year period without any reference to whether or not previous assessments have been paid; and
C. (4736) While a date for payment of each assessment is fixed, no provision is made as to date of delinquency, date for sale of the stock delinquent, or for the place at which, or the person to whom the assessments are payable.
It was anticipated by appellant that respondent might urge that its articles of incorporation and by-laws enlarge the powers conferred by statute in connection with the levying of assessments, and he maintains that neither its articles nor by-laws purport to enlarge such powers, — citing the following portions of the articles of incorporation and bylaws of respondent to show that it has limited itself in the matter to the provisions of the statutes relating to assessments:
(Articles of Incorporation, sec. 2): "That the purposes for which it is formed are: . . . . To fix, charge and collect from its stockholders, tolls, rentals, assessments and maintenance charges based upon the number of shares of stock held by each person or proportioned to the amount of water used or owned, or by both said methods or by assessment upon the capital stock levied in accordance with the laws of Idaho or such other method as may be prescribed in the by-laws of said corporation."
(By-Laws, sec. 13.): "Assessments shall be made upon the capital stock of the corporation appurtenant to patented lands within the irrigation system in accordance with the laws of the State of Idaho."
(The italicization in the two quoted sections is supplied by appellant to emphasize his point that respondent has not attempted to enlarge its statutory power relating to assessments on its capital stock, in that the articles of incorporation and by-laws themselves expressly limit any assessments to the manner and extent provided by statute.)
Respondent endeavors to answer the contention that the proposed levies are illegal and void under C. S., secs. 4733-4736, by arguing, in effect: That the language as used in the articles of incorporation cannot be construed as a limitation upon the amount of an assessment that may be made upon the capital stock, and that that portion of sec. 2 of the articles of incorporation set out above, providing for assessments upon the capital stock "levied in accordance with the laws of Idaho," indicates that the incorporators had in mind the method by which the levy may be made, and not the amount of the levy. But aside from this, respondent contends, assessments upon the capital stock "levied in accordance with the laws of Idaho" are not confined to C. S., secs. 4733-4736, but may be made under C. S., sec. 3040, as amended by Sess. Laws 1925, chap. 107, pp. 153, 154, which provides, in part.
"Any corporation heretofore organized or any corporation that shall hereafter be organized for the operation, control or management of an irrigation project or canal system, or for the purpose of furnishing water to its shareholders, and not for profit or hire, the control of which is actually vested in those entitled to the use of the water from such irrigation works for the irrigation of the lands to which the water from such irrigation works is appurtenant, . . . . shall have the right to levy and collect from the holders or owners of all land to which the water and water rights belonging to or diverted by said irrigation works are dedicated or appurtenant . . . . and also from the holders or owners of all other land who have contracted with such company, corporation or association of persons to furnish water on such lands, . . . . reasonable tolls, assessments and charges for the purpose of maintaining and operating such irrigation works and conducting the business of such company, corporation or association and meeting the obligations thereof. . . ."
And, respondent urges, the stockholders of the corporation themselves have adopted the same interpretation as to the amounts of assessments, as contained in the statute quoted from above, by providing in their by-laws (sec. 9) that:
". . . . this corporation may make such reasonable assessments for the business purposes of the organization as may be necessary either by way of maintenance charges or by assessments upon the capital stock of the corporation. . . ."
It is also suggested by respondent that the construction which it places on its authority to levy assessments is not contrary to the rule announced in Seyberth v. American Com. etc. Co., Ltd., supra, for the reason that in that case the court was dealing with the broad principle of the authority of directors to levy and collect assessments, and that the question of whether or not the directors were authorized to levy an assessment by the articles of incorporation was not involved, nor was the court considering the amount of an assessment that may be levied by an irrigation corporation not organized for profit.
In support of its position on this point, respondent cites the following cases: Nelson v. Keith O'Brien Co., 32 Utah, 396, 91 P. 30; Huxtable v. Berg, 98 Wn. 616, 168 P. 186; Forsyth v. Selma Mines Co., 58 Utah, 142, 197 P. 586.
The first two cases cited hold to the same effect as the Idaho case of Wall v. Basin Min. Co., Ltd., 16 Idaho 313, 101 Pac. 733, 22 L.R.A., N.S., 1013, that authority to make an assessment on capital stock fully paid must be found in either the constitution or statutes of the state, or the provisions of the articles of incorporation of the company. The other case, Forsyth v. Selma Mines Co., reaffirms this rule, and is perhaps more nearly in point on the entire proposition than the others.
In the last cited case it was contended that an assessment levied on the outstanding stock of a mining corporation was in excess of the amount authorized by law, and therefore null and void, the assessment amounting to more than ten per cent of the outstanding capital stock of the corporation, in violation of sec. 902, Compiled Laws of 'Utah, 1917. The court stated in the opinion that the articles of incorporation of the mining company expressly provided that the particular kind or class of stock in question "shall be assessable," and that the assessments "shall be levied by the board of directors and shall be made payable in the manner and form as provided for by said board." It was observed that the parties seeking to have the assessment declared invalid, very strenuously argued and contended that the only interpretation to be placed upon the language employed in the articles of incorporation, as above referred to, was that the common stock might be assessed only within the limitations prescribed by the statutes, and the court answered as follows:
". . . . It would seem that a more logical construction would be that the incorporators must have contemplated by the expression used that the common stock should be assessable without limitation, for the purpose and the amount necessary to carry on the corporate business in general, and more especially to develop, save, and protect its mining claims and other property, thereby subserving the best interest of the company and its stockholders in the only way possible. . . . . So long as the incorporators themselves saw fit to agree and expressly provide by their articles of incorporation that stock should be assessable without prescribing any limitation as to the amount, this court is impelled to hold in accord with the theory advanced by the defendants that it was fully intended by the incorporators that the board of directors of the company should be invested with the power to assess without limitation for any amount that might be necessary to meet the exigencies of the corporate business and protect the interests of the corporation and its stockholders."
The court then passed from the consideration of the articles of incorporaation to the provisions of the Utah statutes bearing on the question involved, and stated that even though it be conceded that the articles of incorporation left the amount of the levy to be as provided by statute, the position of the parties attacking the assessment could not be sustained under the statutes. The sections of the Utah statutes dealing with assessments on the capital stock of corporations were then set forth (secs. 879, 900, 901, 902, 903), and the conclusion was reached that the section limiting assessments to ten per cent of the outstanding capital stock had wholly to do with calls or assessments on unpaid subscriptions, and that under sec. 900, providing that:
"The full paid capital stock of any corporation . . . . shall not be assessable for any purpose whatever, except to such extent and in such manner as may be expressly provided in the articles of incorporation. . . ."
— together with the declaration in the articles of incorporation of the mining company that stock "shall be assessable" without fixing the amount or prescribing any limit, the incorporators must have had in mind and fully intended that the stock should be assessable to the extent and for the amount found necessary to enable the corporation to do business along business lines, at least to such an extent as would enable the company to carry out the purposes of its organization and save and preserve the property of the company and its stockholders and to pay and meet just debts and obligations.
Appellant contends that this decision of the Utah court cannot be considered as authority here, for the reason that the statutes of Utah and Idaho on the subject of assessments are open to different constructions, the difference being in the particular sections of the statutes of the two states limiting assessments to ten per cent of the outstanding capital stock. The Utah court construed its section (902) containing the limitation of ten per cent as relating only to calls or assessments on unpaid subscriptions, and appellant urges that the Idaho statute (C. S., sec. 4734) containing the ten per cent limitation is intended to be a check on the amount of any assessment on capital stock which is paid up. Appellant calls attention to the first exception under the Idaho statute, providing that an assessment may exceed ten per cent "if the whole capital of a corporation has not been paid up," etc., and says, "if the section only relates to calls, this exception would be wholly unnecessary and meaningless."
There does seem to be some difference in the statutes of Utah and Idaho on this subject. Section 900 of the Utah Compiled Laws authorizes assessments on full paid stock "to such extent and in such manner as may be expressly provided in the articles of incorporation." Section 901 provides for the levy and collection of assessments upon the unpaid capital stock "in such a manner and at such times, as may be prescribed in the articles of incorporation, or, if not therein provided for, in the manner and form and to the extent hereinafter prescribed." Section 902 follows with the provision that "no assessment shall exceed ten per cent. of the outstanding capital stock of the corporation," etc. It must be remembered (first) that sec. 900 of the Utah laws provides for assessments on full paid capital stock, and authorizes their levy to such extent and in such manner as may be expressly provided in the articles of incorporation, thus, apparently, not attempting to prescribe any limitation as to the amount of any assessment on full paid capital stock; (second) that section 901 of the Utah laws deals with unpaid or not fully paid capital stock, and authorizes assessments thereon in such a manner and at such times as may be prescribed in the articles of incorporation, or, if not therein provided for, in the manner and form and to the extent "hereinafter prescribed." And with sec. 902 (directly following section 901, so as to be within the terms of the words "hereinafter prescribed" as used in sec. 901) limiting any assessment to ten per cent of the outstanding capital stock, the conclusion would appear to be inevitable that the ten per cent limitation refers only to assessments on stock not full paid. Such conclusion is strengthened by the holding of the Utah supreme court in the case under consideration, and by the headings and substance of the pertinent Utah sections. Section 900 is headed, "Full-paid stock non-assessable," the body of the section authorizing such assessments "to such extent and in such manner" as may be expressly provided in the articles of incorporation, evidencing an intent not to control the amount of any assessment on full paid capital stock when provided for in the articles of incorporation. Section 901 is headed, "Assessment of stock not full paid," the body of the section authorizing assessments upon unpaid capital stock in manner and at such times as may be prescribed in the articles of incorporation, or, if not therein provided for, in the manner and form and to the extent "hereinafter prescribed," here evidencing an intention to limit assessments on unpaid, stock to the amount fixed by section 902, immediately following, or ten per cent.
Now, with reference to the Idaho statutes on the subject: C. S., sec. 4733, provides that assessments may be levied and collected, after one-fourth of the capital stock of any corporation formed or existing under the laws of this state has been subscribed, upon the subscribed capital stock thereof, "in the manner and form, and to the extent, herein provided." This section appears to authorize assessments upon both paid and unpaid capital stock, but in the manner and form, and to the extent, as in the sections following provided. Then comes C. S., sec. 4734, with the provision that no one assessment must exceed ten per cent of the amount of the capital stock named in the articles of incorporation, and, keeping in mind that C. S., sec. 4733, authorizes assessments on capital stock without regard to whether it be full paid or unpaid, but "to the extent" as in the sections following provided, the logical inference would appear to be that the ten per cent limitation on assessments contained in the next section, C. S., sec. 4734, applies to full paid capital stock as well as to capital stock not fully paid, and such a deduction becomes more apparent when considering the first exception to the ten per cent limitation, under C. S., sec. 4734, viz., the allowance of assessments for the full amount of unpaid stock, when the corporation is unable to meet its liabilities or to satisfy the claims of creditors, or for any less amount (which might be above ten per cent) sufficient to meet the liabilities of the corporation.
Another more or less important distinction to be considered in connection with the application of the decision of the Utah supreme court in Forsyth v. Selma Mines Co., supra, to the Idaho statutes and the case at bar, is that we do not have on the subject of assessments a section of the statutes similar to sec. 900 of the Compiled Laws of Utah, authorizing assessments on the capital stock of corporations, full paid, to such extent and in such manner and form as may be expressly provided in the articles of incorporation.
Respondent argues, indirectly, that it may not be bound by the statutes, C. S., secs. 4733-4736, as to the amount of assessments, and cites the case of Wall v. Basin Mining Co., 16 Idaho 313, 101 P. 733, 22 L.R.A., N.S., 1013, as holding that the authority to make an assessment upon capital stock fully paid up must be found either in the statutes or constitution of this state, or the provisions of the articles of incorporation. Such a holding is recognized as the settled law in this country, as stated in Forsyth v. Selma Mines Co., supra, but it is to be noted that it goes to the authority of making an assessment, and not to the amount of any particular assessment. In other words, the mere authorization for assessments contained in the articles of incorporation of a company would not, under the rule stated in Wall v. Basin Mining Co., Ltd., supra, empower the corporation to levy an assessment in any amount it deemed advisable, if a limitation upon the amount of an assessment upon the capital stock of a corporation is contained in the statutes, and the statutes are controlling. If the statutes were not intended to be controlling in the matter, for what purpose were they enacted and re-enacted, and why do they still remain a part of the written law of the state? The compiled statutes establish the law of this state respecting the subjects to which they relate. (C. S., sec. 9444.)
The statutes of California on the subject of assessments on the capital stock of corporations are similar to those of Idaho, and in the case of Santa Cruz Co. v. Spreckles, 65 Cal. 193, 3 P. 661, the California supreme court had occasion to construe them. In passing, the court cited the case of Sullivan v. Triunfo Min. Co., 39 Cal. 465, as holding, under an earlier act but which contained a limitation upon assessments, that the statute was, as it purported to be, applicable to all corporations formed under the general laws of the state. Farther on in the opinion in the Spreckles case it was stated that, in enacting the sections of the California code in question, the legislature not only did, but clearly intended to, authorize, for the purposes and subject to the limitations prescribed, assessments upon stock fully paid for, as well as assessments for the amount unpaid thereon.
A holding and statement as to the necessity for adherence to the statutory limitation on assessments on capital stock are also found in Pacific Fruit Co. v. Coon, 107 Cal. 447, 40 Pac. 542, and 6 Cal. Jur., p. 956.
As to respondent's contention that assessments upon capital stock, levied in accordance with the laws of Idaho, are not confined to C. S., secs. 4733-4736, but may be made under C. S., sec. 3040, as amended by Sess. Laws 1925, chap. 107, pp. 153, 154, authorizing the levy and collection of reasonable tolls, assessments and charges by any corporation organized for the operation, control or management of an irrigation project, etc., it may be suggested that the ten per cent limitation would still maintain, in that an assessment not exceeding ten per cent might be reasonable, and one beyond that unreasonable; or, that the definite limitation as to the amount of an assessment, as fixed in C. S., sec. 4734, would govern over an indefinite limitation. We are of the opinion, however, that respondent company must be amenable to the provisions of C. S., chap. 186, art. 6, in the matter of the levy and collection of assessments upon its capital stock.
Appellant points out that if the levy for the entire amount of the bond issue herein be considered as a single assessment, the aggregate amount thereof, $1,147,750, is six times more than the total capital stock of respondent company. In the order levying the assessment it is termed a "continuing direct annual assessment," collectible semiannually over a period of twenty years. On the other hand, appellant says, if it be considered a series of assessments over a twenty-year period, every assessment, with one exception, is in excess of ten per cent of the capital stock named in the articles of incorporation of respondent company; and, since all are levied at the same time and by the same resolution, all, therefore, with the exception of the first, are in direct violation of C. S., sec. 4735, which prohibits an assessment on capital stock while any portion of a previous assessment remains unpaid. The only answer respondent attempts to make on this point is that "if it shall be determined that resolutions should be adopted from time to time, or from year to year, embracing the assessments as herein levied to comply with the letter of the law this may be done."
It is also contended by appellant that the proposed assessments are void for nonconformance to the requirements of C. S., sec. 4736, in that no provision is made as to date of delinquency of unpaid assessments, date for sale of delinquent stock, or the place at which, or the person to whom, the assessments are payable.
The order levying the "continuing direct annual assessment" on the capital stock of respondent company is subject to the objections urged against it by appellant, as being in violation of the provisions of C. S., chap. 186, art. 6, secs. 4733-4736, and it follows, therefore, that the trial court erred in refusing to issue the injunction as prayed for by appellant. The judgment is reversed. Costs to appellant.
Wm.E. Lee, C.J., and Givens and T. Bailey Lee, JJ., concur.
Respondent has filed a petition for rehearing in this case.
We adhere to the position heretofore taken as to the construction placed upon C. S., secs. 4733-4736, concerning assessments levied upon the capital stock of a corporation. These sections, authorizing assessments on corporate stock within certain prescribed limitations, are not in conflict with C. S., sec. 3040, as amended by Sess. Laws 1925, chap. 107, pp. 153, 154, providing for the right to levy reasonable tolls, assessments and charges. The latter statute is a part of C. S., chap. 138, and relates to an entirely different procedure for raising revenue for the purpose of maintaining and operating irrigation works and meeting the obligations of an irrigation company.
If assessments are levied on the capital stock, the amount and manner of the levies are governed by C. S., secs. 4733-4736, inclusive; and if assessments are levied under C. S., sec. 3040, as amended, supra, then the levies may be for a reasonable amount, based upon the number of shares or water rights held by each person or proportioned to the amount of water used or owned, or by both of said methods, for the purposes stated in said section, but the procedure to be followed thereunder must be in compliance with the provisions of C. S., chap. 138, art. 1, as amended, of which C. S., sec. 3040, is a part.
Wm.E. Lee, C.J., and Givens, Taylor and T. Bailey Lee, JJ., concur.
Petition for rehearing denied.
I concur in the decision as to the "third point" only: that the assessments proposed are in violation of statute.