Opinion
As Modified on Denial of Rehearing Sept. 26, 1930
Hearing Granted by Supreme Court Oct. 23, 1930.
Appeals from Superior Court, Los Angeles County; John L. Fleming, Judge.
Action by the Western Mortgage & Guaranty Company against William G. Gray, as executor of the last will and testament of Harry Gray, deceased, and others. Judgment for plaintiff against defendant named and another, and judgment for defendant Charles H. Toll, on the pleadings, and plaintiff and defendant named and another appeal. On motion by defendant Toll to dismiss the appeal, and motion by defendant named and another to dismiss the action.
Motions denied, and judgment against estate of Harry Gray, deceased, reversed, and as to defendants Marsh and Toll affirmed. [Copyrighted Material Omitted] COUNSEL
Asa V. Call and Anderson & Anderson & Sheahan, all of Los Angeles, for appellant Gray, Executor.
Winfield Dorn, Brobeck, Phleger & Harrison, and Arthur L. Shannon, all of San Francisco, for appellant and respondent.
Clyde C. Shoemaker, of Los Angeles, for appellant Marsh.
Lloyd W. Moultrie, of Los Angeles, for respondent Toll.
Fredericks, Hanna & Morton, and Harold C. Morton, all of Los Angeles, and Courtney L. Moore, of San Francisco, amici curiae.
OPINION
CRAIG, J.
By complaint filed in December, 1921, the plaintiff commenced an action against the directors of the Security Holding Company, a corporation, for recovery of the balance alleged to have been due and unpaid upon a promissory note dated February 8, 1915, in the principal sum of $100,000, which said action was based upon the provisions of section 309 of the Civil Code. Judgment was rendered in favor of the plaintiff as to the defendants Robert Marsh and the executor of the last will and testament of Harry Gray, whose demise occurred during the pendency of the suit, and the remaining defendant director, Charles H. Toll, was awarded judgment upon the pleadings. Each such adverse judgment was made the subject of appeal, and all of the proceedings are here consolidated in one transcript for review, first as to the maintenance of the suit, and if tenable, then upon the merits.
Respondent Toll has interposed a motion to dismiss the plaintiff’s appeal, and appellants Gray and Marsh move that the judgment as to them be vacated and that the trial court be directed to dismiss the action. These motions are founded upon section 309 of the Civil Code, as amended by the Legislature in 1929 (chapter 711, pp. 1261, 1266, § 12). The plaintiff alleged in its complaint that the Security Holding Company’s subscribed capital stock amounted to but $50,000, but that Directors Marsh and Gray caused the execution of said note in double that amount by the corporation, and signed the same as president and secretary thereof, respectively, and that Director Toll assented thereto; that such indebtedness exceeded the subscribed stock; and that the directors were jointly and severally liable to creditors for such excess. Concisely stated, it appearing that the statutory foundation for such actions was by the amendment above mentioned, and during the pendency of this suit, abrogated by repeal, the movants assert that the "judgment rendered as aforesaid against defendants and appellants has not become final, and since the same is founded on a statute, the repeal thereof has destroyed the cause of action." These motions are resisted by counsel for respondent and by amici curiae, upon the ground that section 404 of the Civil Code, embodied in the same chapter and title, relating to general provisions affecting corporations, contains a saving clause and was not repealed by the amendment.
By the Statutes of 1905 (chapter 416, pp. 556, 558, § 4) section 309 of the Civil Code was by an amending act inserted in part as follows:
"The directors of corporations must not make dividends, except from the surplus profits arising from the business thereof; nor must they create any debts beyond their subscribed capital stock. *** For a violation of the provisions of this section, the directors under whose administration the same may have happened (except those who may have caused their dissent therefrom to be entered at large on the minutes of the directors at the time, or were not present when the same did happen) are, in their individual or private capacity, jointly and severally liable to the corporation, and to the creditors thereof, to the full amount of the *** debt contracted. ***"
The same Legislature (Stats.1905, chapter 348, p. 410) also added a provision to said Code, designated as section 404, which reads:
"The legislature may at any time amend or repeal this part, or any title, chapter, article, or section thereof, and dissolve all corporations created thereunder; but such amendment or repeal does not, nor does the dissolution of any such corporation, take away or impair any remedy given against any such corporation, its stockholders or officers, for any liability which has been previously incurred."
On May 18, 1917 (chapter 521, p. 657), said section 309 was re-enacted substantially as above quoted, and the Legislature added thereto as a subdivision numbered 2:
"No right, cause of action, or liability now existing or any action or proceeding now pending, shall be affected by this act and such right, cause of action or liability may be enforced and such action or proceeding may be prosecuted in the same manner and with the same effect as if this act had not been passed; excepting only the liability of a director of a corporation heretofore incurred shall not exist in any case where, all of the debts and liabilities of the corporation to creditors having been paid, the capital stock divided, withdrawn, or paid out constituted all of the capital stock of the corporation and the same was paid out, withdrawn, or divided with the consent of all of the stockholders to or among themselves."
On June 6, 1929, said section 309 was again amended by adding further provisions relating to dividends and distribution of stock (chapter 711, p. 1266, § 12), effective August 14, 1929, subsequently to the appeal of this case. By the same enactment the Legislature omitted, and thereby repealed, the limitation upon the directors to incur excessive indebtedness, the provisions rendering them liable therefor, and all of subdivision 2, as herein italicized and quoted. Section 404 of the same Code still remains, unmodified. The argument in behalf of the motions is to the effect that since section 309 of the Civil Code related especially to the statutory right upon which this action was based, and embraced at the commencement of the suit a saving clause, its application must be construed as exclusive, and that section 404 thus impliedly had no application to the alleged liability, the repeal of those provisions destroyed the cause of action and right of appeal; that such repeal indicated an intention to also dispense with the saving clause, and hence that as to the liability of directors for excessive indebtedness section 404 must be construed as if repealed in that respect, by implication. This contention is strongly supported by decisions heretofore rendered under similar conditions, except for the absence therein of any mention of section 404 of the Civil Code, and the resultant inference that it was not invoked or called to the attention of the court. There are many cases where it has been held that the repeal of certain statutes giving rise to causes of action destroyed such rights of action and necessitated a dismissal even after rendition of judgment and during the pendency of the appeal. First Nat. Bank v. Henderson, 101 Cal. 307, 35 P. 899; Anderson v. Byrnes, 122 Cal. 272, 54 P. 821; People v. Bank of San Luis Obispo, 159 Cal. 65, 112 P. 866, 37 L.R.A.(N.S.) 934, Ann.Cas.1912B, 1148; Moss v. Smith, 171 Cal. 777, 155 P. 90; Freeman v. Glenn County T. Co., 184 Cal. 508, 194 P. 705. True, it is so well settled as to have become almost academic that in rendering decisions the courts must be presumed to have had in mind and recognized the intent and purpose of other existing statutes, and to have read them as a whole. McGarrahan v. Maxwell, 28 Cal. 75; Dillingham v. Welch, 179 Cal. 656, 178 P. 512. But it is equally axiomatic that we must assume that the Legislature when re-enacting section 309 had in mind section 404 of the Civil Code and by failure to repeal it exhibited an intention to reaffirm it; and this purpose is made more manifest by the fact that judicial interpretations of section 309 had been given between the first and second amendments. Robertson v. Langford, 95 Cal.App. 414, 273 P. 150. Where, as in the decisions construing section 309, no mention is made of section 404, it seems far more probable that the general saving clause was not called to the attention of the court and was overlooked, than that the court ignored it or intended without comment to hold that it had no application. It was early announced in this state, and has consistently been followed as a rule, that a decision made without notice of a statute and which in fact sets it aside cannot be invoked as authority compelling obedience on the principle of stare decisis. Duff v. Fisher, 15 Cal. 376; Alferitz v. Borgwardt, 126 Cal. 201, 58 P. 460; Martin v. Palmer U. Oil Co., 184 Cal. 386, 193 P. 950, 951. For that reason a former decision was overruled by that last cited, as "inadvertently applying those principles to a case where they were not applicable because of a positive statutory provision to the contrary." To adopt appellants’ contention as tenable would compel the sanction of an especial application of section 404 of the Civil Code, though its express purpose and intention are general as to all corporations, persons, and proceedings contemplated by any title, chapter, article or section of part 4, div. 1, of that Code. It suggests an interpretation which in the absence of legislative or judicial expression would unduly force an implied repeal of a provision created by the same Legislature which enacted section 309, and which succeeding legislative bodies have left unaltered despite or because of the modification of section 309. Repeals by implication are not favored, and will not be indulged if any other reasonable construction may be available. Ex parte Sohncke, 148 Cal. 262, 82 P. 956, 2 L.R.A.(N.S.) 813, 113 Am.St.Rep. 236, 7 Ann.Cas. 475; People v. Martin, 188 Cal. 281, 205 P. 121, 21 A.L.R. 1399. It has been held that upon the re-enactment of a former statute an unrepealed intermediate act which qualified or limited it maintains existing accrued rights and qualifies or modifies the re-enactment as it did the original one. Powell v. King, 78 Minn. 83, 80 N.W. 850; Hall v. Dunn, 52 Or. 475, 97 P. 811, 25 L.R.A.(N.S.) 193. In People ex rel. Forest Commission v. Campbell, 152 N.Y. 51, 46 N.E. 176, 177, it appeared that a statute and its accompanying saving clause were repealed, but a general statutory saving clause remained. The court of last resort there said:
"The second objection is to the effect that this appeal has abated by reason of the repeal of chapter 283 of the Laws of 1885, creating the commission, by chapter 395 of the Laws of 1895. *** This objection is without force, however, for the reason that the statutory construction law (chapter 677, Laws 1892) contains general saving clauses as to all legislation carrying out the revision of the general laws. Section 31 reads in part as follows, viz: ‘The repeal of a statute or a part thereof shall not affect or impair any act done or right accruing, accrued or acquired, or liability, penalty, forfeiture or punishment incurred prior to the time such repeal takes effect. ***’ We are of opinion that the forest commission, since its creation under the Laws of 1885, has been a continuous body, and that all actions and proceedings instituted by it may be prosecuted and defended to final effect the same as if the act of 1885 had not been repealed."
In consideration of the foregoing we think that section 404 of the Civil Code has not been repealed, nor is the instant case excluded from its purview. Its operation generally is "as efficient as a special clause expressly inserted in a particular statute," (People v. McNulty, 93 Cal. 427, 26 P. 597, 29 P. 61, 62), and the rights of the parties to this proceeding subsist.
Various sections of our Code of Civil Procedure establishing limitations as to the time within which actions may be commenced were pleaded. The defendants strenuously insist in support of this defense: (1) That if said sections were not available prior to the amendment of 1917, they may now be pleaded notwithstanding the existence of section 404 of the Civil Code. (2) That the statute upon which this suit is founded must be construed strictly, as of a penal character, and that to afford directors entering office since the date of said amendment the benefit of the statute of limitations but to deny similar relief to those of an earlier tenure of office, would result in an unconstitutional discrimination. It is argued upon this basis that if the debtor corporation, Security Holding Company, might have enforced the provisions of section 309 of the Civil Code by the exaction of a penalty from its directors upon the creation of the excess indebtedness in 1915, or if the plaintiff as a creditor or the original corporation might have instituted an action after such amendment, in either event the commencement of the present action in December, 1921, was more than three years thereafter, and was barred. We need not further advert to the argument that the repeal of portions of section 309 impliedly repealed section 404 of the Civil Code, since we think it did not create or revive such a limitation. That the debtor corporation, Security Holding Company, might have instituted suit against its directors for the amount of the excess indebtedness as a protection to its creditors, may not be denied; but as to whether or not the time within which such relief might have been pursued was barred, we think is immaterial. True, the directors of a corporation were answerable under their trust in an action by the corporate body for the amount of excess debts for the reason that creditors may have dealt with it upon faith in its credit as represented by its capital, and if then paid by the corporation itself they would no longer have a standing in court, for the collection of the same obligation. This principle was recognized in Underhill v. Santa Barbara, etc., Co., 93 Cal. 300, 28 P. 1049, 1051, wherein the validity of contracts for excess debts was questioned. It was there said: "If they are void, and create no liability of the corporation, it would be absurd, as well as unjust, to make the individual directors liable to the corporation, especially if the corporation had received a consideration equal in value to the debts created; but, as indemnity to the corporation, in case it should be compelled to pay such debts, or to its creditors, in case of the insolvency of the corporation, such liability of the directors is reasonable and just." Likewise in Hawke v. California Realty, etc., Co., 28 Cal.App. 377, 152 P. 959, 963, it was held that the purpose of the statute was to "provide a remedy in favor of the corporation and its creditors against those members of the board of directors by whose improvident or fraudulent exercise of the powers of a corporation debts are created disproportionately to the subscribed capital stock, and beyond the ability of the corporation to pay." Again, Merchants’, etc., Reporting Co. v. Schroeder, 39 Cal.App. 226, 178 P. 540, 541, was an action by a corporation against its directors for violation of the provisions of section 309 of the Civil Code, in that the directors paid dividends from funds other than surplus profits. It was there held: "According to that section, where directors of a corporation are guilty of the acts there denounced, they are jointly and severally liable to the corporation ‘to the full amount of the capital stock so divided, withdrawn, paid out, or reduced. ***’ The sole purpose of selling stock is to acquire assets with which to carry on that business. This is equally true, whether the stock be sold at par, or below par, or above par. The capital stock referred to in said section 309 ‘is the actual property of the corporation contributed by the stockholders.’ Tapscott v. Mexican Colorado, etc., Co., 153 Cal. 664, 96 P. 271; Excelsior, etc., Co. v. Pierce, 90 Cal. 131, 140, 27 P. 44. It is, in brief, the ‘capital’ of the corporation." So, under a statute identical in language except that the limitation as to commencement of an action was therein expressly withheld, and the liability of directors to the corporation existed until dissolution of the corporation, it was held by the court of last resort in New York: "It is a debt due to the corporation, and, as much as any other debt, is applicable to the payment of any debt against the corporation." Tallmadge v. Fishkill Iron Co., 4 Barb. (N.Y.) 382. It follows that there is in such cases a primary and a secondary liability of the directors for the derelictions denounced by the statute here in question. Whether prior to insolvency, or prior to dissolution, the principal may collect from those in trust the excess indebtedness to which they have subjected it over the amount of its "actual property." But the creditor may avail himself of the remedial provisions of the statute. The subscribed capital stock is the fund or "stake held out to the public, upon the faith of which the company obtains credit." Moore v. Lent, 81 Cal. 502, 22 P. 875, 876. And the liability of the directors also constitutes a fund for the benefit of all creditors who are entitled to share in it, in proportion to the amount of their debts. Hornor v. Henning, 93 U.S. 228, 23 L.Ed. 879; Buchanan v. Bartow Iron Co., 3 Ill.App. 191; Auburn Nat. Bank v. Dillingham, 147 N.Y. 603, 42 N.E. 338, 49 Am.St.Rep. 692. But the creditor’s suit abates upon satisfaction of his debt. James H. Rice Co. v. Libbey (C.C.) 85 F. 821; Slater v. Taylor, 241 Ill. 102, 89 N.E. 271; Parsons v. Rinard G. Co., 186 Iowa, 1017, 173 N.W. 276; Allison v. Coal Creek, etc., R. Co., 87 Tenn. 60, 9 S.W. 226; Swan v. Burnham, 70 N.H. 580, 49 A. 93; De Witt Groc. Co. v. Ware, 89 Vt. 251, 95 A. 537. That the instant suit is not one by the debtor corporation against the appealing defendants is obvious. The Security Holding Company having failed to pay the indebtedness, or to seek through penal enforcement of the statute collection for the benefit of its creditors, they are relegated to their remedial recourse upon the promissory notes or such other evidences of indebtedness as they may hold. That they are distinct and separate actions, though having a common object, one for the protection of creditors, and the other by the creditors, we think is patent. This being true, the fact that the statute of limitations may have barred such penal proceedings as the Security Holding Company might have adopted to enhance its "actual property" value does not affect the rights of a secured creditor who, by a neglect of the corporation, is compelled to look to its directors.
The Mercantile Trust Company commenced its action for foreclosure of the mortgage on August 4, 1920, or about four months after the note thereby secured became due, and the plaintiff and respondent herein commenced the instant suit upon the deficiency judgment in December, 1921, or about nine months following its rendition. The cause of action here asserted did not, and could not, arise until the note became due, or until a judgment thereon had been rendered. While the Mercantile Trust Company might under its trust agreement have redeemed the participation certificates, this it did not do, and upon payment thereof by the plaintiff and its acquisition of the deficiency judgment, it became a judgment creditor by assignment, for value, and resumed its original status. While for the purposes specified, the section under consideration may be deemed of a penal character as to the directors, the statute gives a civil remedy at a private suit of the creditor, which is clearly remedial. Farr v. Briggs, 72 Vt. 225, 47 A. 793, 82 Am.St.Rep. 930, citing Huntington v. Attrill, 146 U.S. 657, 13 S.Ct. 224, 36 L.Ed. 1123. It is not in such a case penal in the technical sense, as it allows no recovery as a punishment, but only to compensate for a loss. Winchester v. Howard, 136 Cal. 432, 64 P. 692, 69 P. 77, 89 Am.St.Rep. 153. In such event it has even been held in effect that the time within which to enforce a director’s liability is within the discretion of the creditor. He may pursue his remedy against the directors irrespective of the time when the liability of the corporation accrued, and if extended by the consent of the creditor, the statute does not commence to run at the date of the debt prior to extension. Duckworth v. Roach, 81 N.Y. 49; Staten Island M.R. Co. v. Hinchcliffe, 170 N.Y. 473, 63 N.E. 545; Jones v. Barlow, 62 N.Y. 202; Sullivan v. Sullivan Mfg. Co., 20 S.C. 79. In any event, the statute of limitations could not begin to run against a creditor as such until the due date of the note, which was on February 8, 1920. Consequently it cannot avail as a defense in this case. It is hardly necessary to add that if it be claimed that the statute did not begin to run until the deficiency judgment was taken, which was not until 1921, no statute of limitation can apply. There was no error upon the part of the trial court in retaining the action for trial upon the merits.
Amici curiae appearing in support of the motion to dismiss this action argue that section 404 of the Civil Code does not constitute a saving statute in such cases, and that it was not intended to provide that "such amendment or repeal does not *** take away or impair any remedy given against *** officers." They insist that this section is governed by its first clause, which must be read in the conjunctive, that: "The legislature may at any time amend or repeal this part, or any title, chapter, article, or section thereof and dissolve all corporations created thereunder," and that in the event of such dissolution the rights contemplated by this section shall not be impaired. In support of this theory is cited Greenwood v. Union Freight R.R. Co., 105 U.S. 13, 19, 26 L.Ed. 961, and the decision therein is quoted at length. It appears at once, however, that the quoted language specifically had "reference to the origin of this reservation of the right to repeal charters of corporations." It was held that the "charters of corporations thereafter granted should be subject to amendment, alteration, and repeal at the pleasure of the legislature," and that "whatever right, franchise, or power in the corporation depends for its existence upon the granting clauses of the charter, is lost by its repeal." To adopt counsel’s interpretation would, we think, impel an unauthorized judicial reconstruction of the legislative expression. But we are unable to view with greater force the possible intention that in the contemplation of said section a dissolution of the corporation must accompany amendment or repeal, than that which would require a literal reading of the same provisions such as might carry with its amendment or repeal the dissolution of all corporations. It may be conceded, as suggested in the code commissioner’s note to which attention is called, that the Constitution reserves by article 4, § 31, "the right to repeal, impair, or alter any law relative to the formation of corporations, even though the result reached would be the dissolution of every corporation organized within the state." But the section of the Code in question further provides that "such amendment or repeal does not, nor does the dissolution of any such corporation, take away or repeal any remedy given against any such corporation, its stockholders or officers, for any liability which has been previously incurred." That its intended operation should be construed to embrace only the rights and powers of corporations which might be dissolved, we think obviously too restrictive.
The principal defense during the trial, and contention here, of appellants Marsh and Gray, is that the plaintiff and respondent, for convenience hereinafter designated as the mortgagee, was the owner and holder of the alleged obligation in suit, and that as such Marsh had obtained its release therefrom for a valuable consideration. Generally speaking, most of the facts are conceded by the parties. The plaintiff and mortgagee was a mortgage insurance corporation, organized and conducting business pursuant to the provisions of sections 453aa to 453ff of the Civil Code. The corporation of which the defendants in this action were the sole directors, had an authorized and subscribed capitalization of $50,000. On February 5, 1915, the directors Marsh and Gray by resolution authorized the execution and delivery to the mortgagee of their corporation’s promissory note in the principal sum of $100,000, payable five years from date, and of a mortgage upon certain real property as security therefor. Toll was not present at the meeting, but the complaint alleged and the trial court found that he consented thereto, and that he assented in writing to the resolution. Thereafter, and on February 8, 1915, the note and mortgage were executed by Marsh as president and by Gray as secretary, in the name of the corporation. These securities were thereupon assigned and delivered to the trustee, Mercantile Trust Company of San Francisco, in accordance with the provisions of a contemporaneous trust agreement of such wording and scope as to enable the assignment in trust of numerous similar obligations and the issuance of mortgage certificates thereunder. Among its covenants the contract recited:
"The trustee agrees to hold the mortgage described on the ‘mortgage certificates’ of any series when the title thereto is vested in the trustee, and the note or notes secured thereby, when endorsed and delivered to it, in trust, for the pro rata benefits and security of the holders of the ‘mortgage certificates of said series, irrespective of date or priority of any one certificate over another of the same series, and as security for the payment of each of the ‘mortgage certificates’ of said series together with the interest thereon; for the performance of the terms and conditions of said ‘mortgage certificates,’ and for the uses and purposes hereinafter declared and expressed, to wit:
"The trustee shall hold said mortgage and the note or notes secured thereby as such trustee, until the full performance by the trustor of all of the conditions and agreements herein or in said ‘mortgage certificates’ set forth. ***
"In the event that the trustor shall make default in the payment of any interest or any said ‘mortgage certificates’ or in the performance of any of its covenants, agreements or guaranties herein or in said ‘mortgage certificates’ set forth, *** it shall undertake to collect the interest from time to time accruing upon said note or notes secured by the mortgage against which the ‘mortgage certificates’ of said series have been issued, and shall undertake to collect, and is hereby authorized by the trustor to collect, the principal of said note or notes when the same shall be due, and after deducting its reasonable compensation and necessary costs and expenses shall distribute the balance of said interest or principal, or both, as the case may be, pro rata among the holders of said ‘mortgage certificates,’ up to the full amount called for. ***
"The trustor agrees, as one of the considerations of this agreement, to faithfully carry out and perform all its agreements and guaranties set forth and contained in said ‘mortgage certificates,’ but the trustee shall be under no duty or obligation, either before or after the default of the trustor, to carry out or perform the agreements and guaranties of the trustor set forth in said ‘mortgage certificates’ or to enforce said agreements and guaranties on behalf of the holder or holders of said ‘mortgage certificates’ or ‘mortgage certificate.’ ***
"The trustee may be removed at any time by an instrument in writing executed by the holders of a majority in amount of the ‘mortgage certificates’ then outstanding of any series as to which the trustor is in default, but no such removal shall be made prior to an existing default by the trustor without the written consent of the trustor. ***"
Mortgage certificates representing the full amount of $100,000, in denominations from $200 to $1,000 each, were issued, certified by the trustee, and delivered to the corporation, of which $5,000 were paid to the mortgagee as a bonus, $20,500 were delivered to Marsh, $20,000 to Gray, and $51,500 to creditors in payment of obligations upon which these two directors were personally liable. On December 14, 1920, after default, the mortgage was foreclosed, execution was issued which was returned unsatisfied, and a deficiency judgment amounting to $76,470.65 was entered, which on March 25, 1921, was assigned to the mortgagee. The latter paid its obligation to the trustee, which latter also canceled the mortgage participation certificates and returned the same to the mortgagee. In the interim, and on August 9, 1919, or about two years prior thereto, by a contract in writing between Robert Marsh personally, and Western Mortgage & Guaranty Company, the company (which also happened to be the same one that had taken the mortgage on property of Marsh’s corporation and issued said certificates), respondent herein, each guaranteed and released to the other certain specified obligations and evidences of indebtedness. It was therein recited that whereas the mortgage company "claims that first party is indebted to it in various sums" and "it is desired between the parties hereto to settle the claim so made," their mutual relations therein mentioned were adjusted. The nature or amount of the "various sums" or "claim" make no reference to the subject-matter of this action, nor do they more definitely identify them than as hereinafter stated, so far as the present controversy is concerned. Marsh is stated to have paid to the party of the second part $50,000 in cash, and to have guaranteed the payment of numerous notes given by himself and others to an amount aggregating $129,650. The mortgage company in turn gives to Marsh a six months’ exclusive option to purchase certain other securities amounting in value to $454,920, it being agreed that he should also refund any interest which the mortgage company might be compelled to pay thereon from said cash payment of $50,000. Marsh is released from "all claims other than" those enumerated in certain paragraphs, and he in turn releases the mortgage company and eight other named companies, and their respective stockholders, from all claims that he might have against them. Counsel for the parties stipulated upon the trial that at the date of this agreement in August, 1919, all of the participation certificates issued in 1915 as above outlined, and certified and sold, were still outstanding in possession of the public. The note and mortgage were still held by the trustee under its trust agreement of February, 1915, to so hold them as security, for the payment of said certificates.
As we have observed, the first and principal contention of appellants Marsh and the executor of the estate of director Gray is that by the agreement of August 9, 1919, between Marsh and the Western Mortgage & Guaranty Company, he was released from the obligation upon which this litigation is founded. In fact, it is insisted by these appellants that there is no evidence to sustain the finding of the trial court to the contrary. Specifically, it was found from the evidence herein concisely summarized:
"That it is not true that on or about the 9th day of August, 1919, or at any time the said Robert Marsh paid to the above named plaintiff the sum of fifty thousand dollars ($50,000.00) or any sum in full or in satisfaction to any extent of all or any obligations or obligation on his part to the plaintiff or at all as a director of the Security Holding Company for the creation of the indebtedness set forth and referred to in paragraph III hereof, and it is not true that thereupon or at any time the above named plaintiff made, executed and delivered to the said Robert Marsh a full or any release of the said Robert Marsh of any indebtedness or obligation on the part of the said Robert Marsh as a director or otherwise for the creation of the indebtedness of the said Security Holding Company set forth and referred to in paragraph III hereof, and it is not true that the plaintiff thereby or at all received and accepted or received or accepted from the said Robert Marsh full settlement and satisfaction or any settlement or satisfaction of all obligations or any obligation arising under and out of" the transaction in controversy.
It is not denied that the indebtedness created by the directors exceeded by $50,000 the amount of subscribed capital stock of their corporation, that there was issued by it and insured by the respondent a promissory note and mortgage which were transferred to the trustee as security for participation certificates which were sold to the public. By the terms of the trust agreement the trustee held the note and mortgage of the corporation to the mortgagee, with title vested in the trustee, "for the pro rata benefit and security of the holders of the mortgage certificates," "as security for the payment of each of the mortgage certificates, together with interest thereon," "until full performance by the trustor of all of the conditions and agreements" therein contained; and upon default to undertake collection of principal and interest, and to distribute the same "pro rata among the holders of the mortgage certificates up to the full amount called for." Under the statute and the foregoing solemn covenants, as a public trust, the trustee became the owner and holder of the security as a safeguard and guaranty to purchasers of the mortgage certificates, to collect $100,000 and interest and to pay them in full, until otherwise released from such duty.
Under this phase of the case, the test question is: Did the plaintiff (mortgagee) have such a claim against Marsh at the time this settlement was made as that it was included among those claims released by the compromise agreement? The reply is dependent upon the construction of section 309 of the Civil Code above quoted. It must be borne in mind that we are not here called upon to determine when the right of the Security Holding Company as a corporation would arise from its directors authorizing an indebtedness exceeding its subscribed capital stock. In this instance the mortgagee corporation has become a creditor by compensating various lienholders, and it is in this way only that it has any standing in this case. The action is not one by the corporation contemplated by section 309 whose directors violated the statute to create a creditors’ fund to meet excess obligations. If it had been such, no doubt could exist as to the penal character of the suit as against Marsh, but the proposition is thoroughly established in this state that in so far as the rights of creditors are concerned, section 309 of the Civil Code is remedial and not penal. Moss v. Smith, 171 Cal. 777, 155 P. 90; Judson Mfg. Co. v. Wyckoff, 60 Cal.App. 305, 213 P. 269. It seems clear that regarded remedially the right of a creditor as against the directors, being prospective, uncertain, and likely never to arise, could not accrue until their claims became due. This had not taken place at the time of the execution of the compromise agreement. Upon security represented by the mortgage of the holding company to the Western Mortgage & Guaranty Company, dated February 8, 1915, and assigned to the trustee, Mercantile Company of San Francisco, February 13, 1915, the participation certificates were issued, certified, and sold to the public. After default in the payment of principal and interest, and on August 4, 1920, the said trustee commenced an action in the superior court at Los Angeles to foreclose the mortgage of the Security Holding Company, and the latter’s property was sold in that proceeding. The plaintiff in foreclosures on March 25, 1921, sold and assigned to respondent, plaintiff in this suit against the directors, the deficiency judgment whereby, as we have stated, it became a creditor of the holding company. The Marsh settlement with respondent heretofore mentioned was consummated on August 9, 1919. From February 13, 1915, until about two years after such purported settlement, title to the note and mortgage in controversy was vested in the Mercantile Trust Company of San Francisco "for the pro rata benefit and security of the holders of the mortgage certificates," to collect and distribute the principal and interest among them "up to the full amount called for." It is apparent that Marsh had had numerous business transactions with respondent, and the most that can be said of the asserted settlement in 1919 is that he therein acknowledged various reciprocal obligations, paid to the company $50,000, and guaranteed the payment by others of obligations totaling $129,650, none of which is there any evidence that he was required to pay. Aside from this, Marsh is purported to have released nine corporations and their stockholders from asserted "claims," and he was likewise released from any then existing claims that the mortgage company had or claimed to have against him personally. In no instance is he mentioned as a director, nor is there any intimation of an existing or anticipated default by the Security Holding Company or of an expected purchase by respondent of its obligations from the Mercantile Trust Company of San Francisco. It does appear that in 1921 the mortgagee, respondent herein, satisfied all obligations represented by the certificates, and became the assignee of the deficiency judgment, succeeding to all rights of the Mercantile Company accruing from or incident to the indebtedness against the Security Holding Company, its officers and directors. By this instrument it was stated as the purpose to then "confer all right, privilege, claims or demands relating to or connected with said mortgage or indebtedness and to empower the Mortgage Company to take all necessary steps to collect the same under the terms of the note or any statute," and "particularly to enforce the liability of the directors of said Security Holding Company under the provisions of section 309 of the Civil Code of the State of California." The inevitable conclusion is that the contention that the mortgagee, respondent, was in August, 1919, the owner and holder of the obligation of the Security Holding Company, and that the settlement included and effected a release of Marsh from liability under section 309 of the Civil Code as to the mortgage or judgment indebtedness finds support neither in law nor in fact.
Appellant Gray as executor of the last will and testament of the deceased director assails the validity of the judgment against the estate. It appears that director Harry Gray died pending trial of the case in the superior court, and that said executor was substituted, but did not there raise the question here presented in this respect. However, should it result that the claim was such that the plaintiff could not have recovered any judgment, the objection may be made upon appeal. Hentsch v. Porter, 10 Cal. 555; Creditors v. Consumer’s L. Co., 98 Cal. 318, 33 P. 196; Cameron v. Ah Quong, 8 Cal.App. 310, 96 P. 1025.
We think the ingenious construction placed upon the language of section 309 of the Civil Code by the plaintiff and respondent is not supported by the weight of appropriate authority. As heretofore observed, Legislatures in some states have ordained that a contractual duty of directors toward creditors of a corporation is the basis for recovery in such cases, while in other jurisdictions, as in our own, it has been held that although remedial as to creditors, the statutes are highly penal as to the directors. Section 309 of our Civil Code forbids excessive indebtedness, and provides: "For a violation of the provisions of this section, the directors *** are, in their individual or private capacity, jointly and severally liable to the corporation, and to the creditors thereof, to the full amount of the *** debt contracted." This section has been considered and the decisions in jurisdictions to which the respondent looks for authority exhaustively quoted and compared with expressions of contrary views in California. Our Supreme Court in Moss v. Smith, 171 Cal. 777, 155 P. 90, concluded: "Examples need not be multiplied. We have pointed out that Irvine v. McKeon, 23 Cal. 472, judicially declares the penal nature of this statute. Moore v. Lent, 81 Cal. 502, 22 P. 875, dealing with the same statute, quotes Irvine v. McKeon approvingly, and declares: ‘While such laws are to be commended, as in the interest of creditors and fair dealing, they are penal in their nature and should be strictly construed.’ *** Indeed, the whole matter may be summed up in the statement that even if section 309 be remedial so far as the creditor is concerned, it is highly punitive so far as the directors are concerned." Respondent calls attention to the purposes of this suit in seeking redress for losses incurred by it, and quotes from the text of volume 14a of Corpus Juris, at page 198, which is expressly founded upon decisions contrary to our own, that, "These views are that the statutes are not penal; that they are not penal but remedial." In the same section and preceding this quotation the text-writer in the same work announces the rule in this state as directly opposite to that contended for, in the following language: "As these statutes change the rule of the common law, they furnish the exclusive test of liability in actions brought thereunder. In the majority of jurisdictions the courts regard these statutes as penal." And among innumerable decisions so holding are cited: Moss v. Smith, 171 Cal. 777, 155 P. 90; Moore v. Lent, 81 Cal. 502, 22 P. 875; Irvine v. McKeon, 23 Cal. 472. That the statute is penal, and that its language renders it operative regardless of remunerative considerations is apparent and we think extended discussion in this regard is unnecessary.
Numerous authorities from jurisdictions wherein similar provisions are deemed penal, holding that causes of action arising thereunder do not survive the death of a director and cannot be maintained against his estate, are also available. Moies v. Sprague, Administrator, 9 R.I. 541, a suit upon a statutory liability for the amounts of promissory notes, which had been reduced to judgment against the corporation, was said to have abated upon the demise of the director. Declaring that violations of the provisions of such statutes for debts incurred, or for failure to perform prescribed official duties, are in the nature of torts authorizing actions ex delicto, it was said:
"The statute does not expressly declare, nor does it in our opinion contain language which necessarily imports, that this shall be the effect of the liabilities, or of either of them, when incurred; and, such being the case, we do not think we ought to construe them, or either of them, as equivalent to such a contract. The liabilities accrue in consequence of a neglect and a violation of duty, or, in other words, of a tort, which signifies not merely misfeasance, but also nonfeasance, where there is a duty to be done. The action brought is that which is given by the statute, to wit, an action on the case, which, conforming to the statute, alleges no promise on the part of the decedent,— as indeed, it properly could not, without the authority of the statute, there being in the view of the law no privity of contract between a creditor of the corporation and its officers, in the absence of special agreement. We are therefore, brought to the conclusion that the liability alleged, either in the second or the third count, does not give a cause of action which survives the person affected by the liability, or which constitutes at law a valid claim against his estate." (Italics as quoted.)
Mitchell v. Hotchkiss, 48 Conn. 9, 40 Am.Rep. 146, involved liability of the officers of a corporation for its debts upon failure to file an annual statement of its financial condition as required by the statutes of Connecticut. The personal liability of Hotchkiss during his lifetime was not denied. But pending the suit and before trial he died. Upon an appeal from an order sustaining a plea in abatement, citing among other authorities Irvine v. McKeon, supra, it was said:
"There is no statute controlling the question under consideration. The only provision is that found in the General Statutes, p. 421, sec. 6, that ‘if the defendant in any action shall die before final judgment, it shall not abate if it might originally have been prosecuted against his executor or administrator.’ *** The argument for the plaintiffs seemed to be based principally upon the assumption that the officers of a corporation are under some original common law liability to pay all the debts contracted by it while they as officers are in default as to the performance of any of the duties prescribed by statute; that their exemption from personal liability under the corporate organization is not an absolute but only a conditional one.
"This reasoning is fallacious. There may be cases where the organization is so defective that creditors need not recognize it as a corporate being at all, in which case the so-called officers or active agents in its business transactions may perhaps under some circumstances make themselves personally liable. But conceding the lawful organization and existence of the corporation, the existence of all its members, officers as well as stockholders, so far as its transactions are concerned, become merged in the artificial being, so that in contemplation of law they are utter strangers to those who deal with the corporation; and as stockholders and officers they are never liable except so far as the law makes them liable."
To the same effect are Diversey v. Smith, 103 Ill. 378, 42 Am.Rep. 14; Feitner v. Lewis et al., 119 N.Y. 131, 23 N.E. 296, 16 Am.St.Rep. 811; Killen v. Barnes, 106 Wis. 546, 82 N.W. 536; Githers v. Clarke et al., 158 Pa. 616, 28 A. 232. Many others might be cited, but we think the principles above enunciated are in harmony with the rules established in this state and with the intent of the Civil Code. Further, it has been said that sections 1493 and 1582 of the Code of Civil Procedure provide only for the maintenance against an executor of an action which might have been maintained against the testator arising upon contract. Nevertheless they do not purport to change existing rules as to the survival of causes of action. Morse v. Steele, 149 Cal. 303, 86 P. 693; Clark v. Goodwin, 170 Cal. 527, 150 P. 357, L.R.A.1916A, 1142. Upon like principle it was held that a cause of action upon a stockholder’s liability does survive. Miller & Lux, Inc., v. Katz, 10 Cal.App. 576, 102 P. 946. Hence, we must conclude that the judgment in so far as it holds the estate of Harry Gray, deceased, liable for derelictions denounced by section 309 of the Civil Code, cannot be upheld.
We now proceed to consider the defense of respondent Toll, who was not present, and took no part in the proceedings at the directors’ meeting. There is nothing in the record tending to indicate that he participated in creating, or even had knowledge of the creation, of the indebtedness from which this controversy arose. The plaintiff alleged that after adoption of a resolution authorizing execution of the note and mortgage, the defendant Charles H. Toll "in writing on the record of said meeting in the minute book of said corporation, assented to and approved said resolution," and that none of said defendants dissented from the action of said board of directors. A demurrer was sustained upon the ground that the complaint did not state a cause of action, and we think the ruling was proper. It is elsewhere alleged that the resolution was "unanimously adopted by said board of directors," but it is immediately apparent that such allegation is without foundation. Authorities from other jurisdictions, cited by the plaintiff (appellant in this instance), are not applicable. They construe statutes creating contractual obligations of corporate directors who merely consent to an excessive indebtedness, or who neglect to object thereto or to sign a protest. Our courts, however, have repeatedly called attention to the fact that the exception contained in section 309 of the Civil Code is penal as to the directors, though remedial as to creditors, and must be strictly construed. Directors "under whose administration the same may have happened (except those who may have caused their dissent therefrom to be entered at large upon the minutes of the directors at the time, or were not present when the same did happen) are, in their individual or private capacity, jointly and severally liable." Which is the equivalent of penalizing only those who were present and acquiesced. There is no intimation of an intended liability of a director who was absent and took no part in the proceedings at the time. By the very allegations of the complaint it is expressly averred that this respondent was not present, and that he did not dissent, and there is no allegation that he assented to a violation of the provisions of said section. His subsequent act amounted merely to an approval of the decision of a majority of the board, which had become final and needed no additional force to render it the official act of the corporation. A thorough examination of the record, which the parties concede is largely documentary, fails to reveal a single step in all of the proceedings bearing the name of Toll or in which he appears to have participated. True, we are concerned here only with the sufficiency of the complaint, but in fairness to appellant’s contentions as a creditor, we have scrutinized the proceedings which resulted in consummation of the loan, and from this we are unable to discover more than Toll’s possible willingness that his codirectors venture upon their personal credit to incur an exorbitant indebtedness. It falls far short of a showing commensurate with the rules announced in such cases. As early declared, and from which there has been no departure, the penal character of such legislation has been recognized. Irvine v. McKeon, supra, involved the question here presented. The Supreme Court then said:
"This statute provides for making one person individually liable for the debts of another, and prescribes how and under what circumstances he shall be held thus liable. Like other statutes which create a forfeiture or impose a penalty, it is to be strictly construed; and every intendment and presumption is in favor of the defendant in such cases. He is to be held liable only on full and strict proof of all the facts by the statute made essential to create the liability. *** It was necessary for the plaintiff to prove also that these debts were contracted under the administration of the defendant, as one of the directors or trustees of the corporation, and that he was ‘present when the same did happen; ’ for ‘those who were not present when the same did happen’ are expressly excepted from the liability imposed by the statute."
In Judson Mfg. Co. v. Wyckoff, 60 Cal.App. 305, 213 P. 269, again it was held:
"The mere fact that an indebtedness in excess of the amount of the subscribed capital stock was created during the time that J.A. Elston was a director is not sufficient to warrant a recovery against him. It is also necessary to prove that he was present when the indebtedness was created. ***
"Section 309 of the Civil Code, while remedial in so far as the creditors are concerned, is penal in its nature, when considered from the standpoint of the directors (Moss v. Smith, supra), and its provisions are to be strictly construed."
Moss v. Smith, supra, already discussed, is to the same effect, and reviews a great many decisions wherein it is said that the soundness of the ruling in Irvine v. McKeon has been declared. Other authorities might be cited herein, which hold that constructive liability under a statute which is penal in its nature is not sanctioned.
Other questions incidentally involved and argued we think require no discussion, in view of what has been said.
The motions for dismissal of the appeal and directing a dismissal of the action are denied. The judgment as against the estate of Harry Gray, deceased, is reversed, and as to the defendants Marsh and Toll it is affirmed; the prevailing parties to have their proper costs.
We concur: WORKS, P.J.; IRA F. THOMPSON, J.