Opinion
Hearing Granted June 20, 1944.
Appeal from Superior Court, Los Angeles County; Emmet H. Wilson, Judge.
Suit by the First Industrial Loan Company of California to enjoin Edwin M. Daugherty, as Commissioner of Corporations, from enforcing an order against plaintiff. From a judgment for plaintiff, defendant appeals.
Affirmed. COUNSEL
Robert W. Kenny and Carl W. Wynkoop, both of San Francisco, for appellant.
O’Melveny & Myers, Paul Fussell, and Pierce Works, all of Los Angeles, for respondent.
OPINION
McCOMB, Justice.
From a judgment permanently restraining defendant from enforcing an order it had made September 25, 1942, requiring plaintiff to restore a portion of its surplus which had been used for the payment of losses, defendant appeals.
At the time of the granting of the preliminary injunction, which was later made permanent, The Honorable Emmet H. Wilson, who presided at the trial, filed with the clerk of the superior court a memorandum opinion in which he clearly set forth the pertinent facts, the issues, the principles of law involved, and the reasons for the judgment. We are in accord with the views therein expressed, and we adopt the opinion of Judge Wilson as and for the opinion of this court. It is as follows:
"By this action plaintiff seeks the review and annulment of an order made by defendant and an injunction restraining the enforcement of said order. Defendant has demurred generally to the complaint and also on the ground that the court has no jurisdiction of the subject matter or of the defendant in his official capacity.
"Plaintiff was organized under the Industrial Loan Act originally adopted in 1917 and revised in 1941. (Stats.1917, ch. 522, p. 658; Stats.1941, ch. 1187, p. 2945, Deering’s General Laws, 1941 Supp. [Act 3603] p. 1992.)
"The order sought to be reviewed requires plaintiff ‘to restore and maintain the surplus required to be carried under Section 7 of the Industrial Loan Act and to be maintained under Section 4 of Chapter 5 of the Rules and Regulations of the Commissioner of Corporations relating to industrial loan companies.’
"The complaint alleges that plaintiff was organized in 1917 pursuant to the statute above mentioned. From time to time since the date of its incorporation it has declared and paid dividends out of its net profits to its shareholders. Each time before any dividend was declared not less than 10 per cent of the net proceeds of plaintiff for the preceding half year, or for such period as was covered by the dividend, was carried to its surplus, as required by section 7 of the Industrial Loan Act. During the years 1932 to 1935, inclusive, by reason of the prevailing economic conditions, plaintiff charged off, in accordance with standard accounting practices, bad debts, doubtful accounts, and losses incurred by plaintiff in the ordinary course of its business. Such charging off first exhausted its reserves for losses and undivided profits and thereafter caused a reduction of its surplus to an amount substantially lower than the aggregate amounts which from time to time prior thereto had been carried to surplus. If plaintiff’s surplus had not been so employed to offset said losses an impairment of its capital would have resulted. No dividends were declared by plaintiff between October 5, 1932, and December 9, 1936. Since the latter date six dividends have been declared. In each case 10 per cent of current profits were carried to surplus, as required by said section of the statute, before the declaration of a dividend. All of the foregoing facts were known to defendant Commissioner at or shortly after the dates on which they respectively occurred, and with such knowledge he issued, during the period from 1932 to and including April 1, 1941, fifteen permits or supplemental permits, or amendments thereto, authorizing plaintiff to issue and sell its securities to the public. Prior to November 1, 1941, defendant did not require plaintiff either to maintain or to restore its surplus to an amount equal to the aggregate of all sums theretofore carried by plaintiff to its surplus, and no rule or regulation of defendant required that any industrial loan company so maintain or restore its surplus. Following the revision of the Industrial Loan Act in 1941 defendant revised his rules and regulations relating to industrial loan companies. Section 4 of Chapter 5 of the Industrial Loan Act Rules and Regulations, which became effective November 1, 1941, reads as follows: ‘An industrial loan company shall maintain the statutory surplus required by Section 7 of the Industrial Loan Act and shall not use any portion of said statutory surplus to offset bad debts, doubtful accounts or for other special reserve accounts.’ In July, 1942, defendant issued the order above mentioned requiring defendant to restore and maintain its surplus, coupled with an order directing plaintiff to show cause why said order should not be observed. At the hearing there was presented and considered by defendant an agreed statement of facts, together with other evidence presented by both plaintiff and defendant, such additional evidence supplementing but not contradicting or restricting the agreed statement of facts, after which defendant signed and filed his findings of fact, conclusions, and order making final his original order of July, 1942.
"The complaint further alleges that it was not contended by defendant at said hearing that plaintiff was conducting its business in an unsafe or injurious manner, or that plaintiff’s capital was impaired or reduced below the amount required by law, or that plaintiff had in any manner violated or failed to comply with the provisions of its articles of incorporation, or with any law of this state, except that it was asserted by defendant, and denied by plaintiff, that Section 7 of the Industrial Loan Act required the maintenance or restoration of surplus by industrial loan companies in the aggregate and in substance as purportedly required by said Section 4 of Chapter 5 of the Rules and Regulations hereinbefore quoted.
"1. Jurisdiction. The Industrial Loan Act expressly vests the court with jurisdiction to review an order of the Commissioner of Corporations such as the one here in issue. Section 11 of the act, after authorizing the Commissioner to make an order requiring a company organized under the act to perform or to discontinue certain acts, provides: ‘Such company shall have 10 days after any such order is made final in which suit may be commenced to restrain enforcement of such order and unless such action be so commenced and enforcement of such order be enjoined within 10 days by the court in which such suit is brought, then such company shall comply with such order.’ Section 23 provides that ‘Every order, decision, license or other official act of the commissioner shall be subject to review in accordance with law.’ The section further provides that the court, upon such review, ‘shall receive and consider any pertinent evidence which was introduced in the formal hearing before the commissioner, * * * but shall be limited to a consideration and determination of the question whether there has been an abuse of discretion on the part of the commissioner in making such order, decision, finding, requirement, or rule.’
"This provision adds to the executive prerogative by attempting to limit the courts in their jurisdiction to review the orders of the commissioner. The legislature is without power so to demarcate the judicial power. The constitutional division of governmental functions and the limitations and restraint placed on each branch of the government prevents accretion to the executive power at the expense of the legislative and judicial branches unless the latter inertly allow their historical authority to be absorbed by the executive. Without independent judicial review executive justice will be uncertain and incomplete. Defendant does not possess and the legislature cannot, in the absence of constitutional authority, grant him judicial power or functions. He is an administrative officer exercising discretionary administrative functions. (Schwab-Wilson Machine Corp. v. Daugherty, 15 Cal.App.2d 701 [59 P.2d 1057].) It needs no statutory declaration to vest the court with jurisdiction, and such jurisdiction cannot be limited or curtailed by legislative fiat, to review an order of an administrative officer or board, and, if the order be in excess of the power of such officer or board, to annul the same and to enjoin its enforcement. (Brock v. Superior Court, 11 Cal.2d 682 [81 P.2d 931]; Agricultural Prorate Comm. v. Superior Court, 5 Cal.2d 550, 586 [55 P.2d 495].) A person adversely affected by an order of an administrative board or officer is not restricted, upon review thereof, to the record of the hearing before such board or officer, but is entitled to a trial de novo in a court of law on questions of both law and fact (Laisne v. State Board of Optometry, 19 Cal.2d 831 [123 P.2d 457]), although the same need not necessarily be an unqualified or unlimited trial de novo. (Dare v. Board of Medical Examiners [[21 Cal.2d 790, 136 P.2d 304].)
"Having jurisdiction of the subject matter and jurisdiction to review and annul the order, the court must necessarily have jurisdiction of the person who created the subject matter--the officer that made the order--and to enforce a writ of mandate or injunction, or both, against him.
"2. General Demurrer. Section 7 of the Statute reads as follows: ‘The directors of every corporation, under the provisions of this act, may at certain times and in such manner as its by-laws prescribe, declare and pay dividends to the stockholders of such corporation, of so much of the net profits of the corporation as may be appropriated for that purpose under its by-laws, but before any such dividend is declared, not less than 10 per cent of the net profits of such corporation for the preceding half year, or for such period as is covered by the dividend, shall be carried to its surplus until such surplus shall equal the amount of the paidup capital stock.’ Section 11 provides among other things: ‘If it shall appear to the Commissioner of Corporations that any company hereunder has violated or failed to comply with the provisions of its articles of incorporation, or any law of this State, or whenever it shall appear from the report of any company hereunder, or the commissioner shall have reason to conclude, that the capital of any company hereunder is impaired or reduced below the amount required by law, he may, by an order under his hand and official seal, addressed to such company, direct such company to discontinue such violation and to comply with the law, or to make good the deficiency or impairment of capital alleged by him to exist within 60 days after the date of such requisition; or
" ‘If it shall appear to the commissioner that such company is conducting business in an unsafe or injurious manner, he may, in like manner, direct the discontinuance of any such unsafe or injurious practices.’
"The order in issue here, directing plaintiff to restore and maintain its surplus, is claimed by defendant to have been made pursuant to section 4 of chapter 5 of his rules above quoted requiring industrial loan companies to maintain the ‘statutory’ surplus ‘required by section 7’ of the act and prohibiting the use of such statutory surplus to offset bad debts or doubtful accounts. Defendant’s power to make rules rests on section 10 of the act which provides that ‘The commissioner shall have the power to establish such rules and regulations as may be reasonable or necessary to carry out the purposes and provisions of this act.’
"The authority of defendant to make and enforce rules lies within and does not extend beyond the statute and the validity of the rule in question pursuant to which he has purported to act depends on whether the statute requires or its purposes contemplate that the surplus must be maintained constantly without impairment by charges for losses.
"Section 11 of the statute enumerates the derelictions of an industrial loan company that the commissioner may order to be corrected or discontinued: (a) violation of its articles of incorporation; (b) violation of any law of this state; (c) impairment or reduction of capital below the amount required by law; (d) conducting its business in an unsafe or injurious manner. It was not charged by defendant that plaintiff had violated its articles of incorporation or any law, nor that its capital had been impaired, neither was it charged that plaintiff was doing business in an unsafe or injurious manner. There is no question as to plaintiff’s solvency. The offense claimed to have been committed by plaintiff was that it had impaired its surplus by charging losses against it. There is no claim that plaintiff had failed to comply with any provision of the statute, unless it be that section 7 impliedly required that a surplus, once established, must remain unimpaired.
"Defendant argues that because there is no language in section 7 or in any other portion of the statute expressly permitting the use of the surplus, any such use is contrary to law, that the restoration of any used portion is not governed by the provisions for its creation, and that therefore any used portion must be immediately restored as required by the commissioner’s rule above mentioned. Plaintiff asserts that there is nothing in the statute forbidding the use of the surplus and claims the right to use it under such conditions as existed when it was employed to absorb bad debts and other losses. Thus two opposing queries arise: Why should the law require a surplus to be created if it may be impaired by charging bad debts against it? On the other hand, why should there be a surplus if it cannot be used in the stress of circumstances to carry a company through the rough weather of a depression? The answers are to be found in the definition of the term ‘surplus.’
"A surplus is a fund created ‘to meet unforeseen contingencies and unusual losses.’ (First National Bank v. Moon, 102 Kan. 334 [170 P. 33, 35 L.R.A.1918C, 986].) It ‘represents permanent surplus or a liability that is carried permanently on the books and is rarely ever decreased * * * except by necessity, in case of a loss to the bank.’ (Chicago Title & Trust Co. v. Central Trust Co., 312 Ill. 396 [144 N.E. 165, 172].) The primary purpose of a surplus ‘is the accumulation of a sum against which bad debts may be charged so that at all times the capital may be kept unimpaired.’ (Pullen v. Corporation Comm., 152 N.C, 548 [68 S.E. 155, 161].) If a banking corporation should divide all its profits and accumulate no surplus, any business loss or deficiency must be made good or proceedings may be instituted against it and it would be subject to the hazard of a receivership and termination of its corporate existence. (Mulcahy v. Hibernia S. & L. Society, 144 Cal. 219 [77 P. 910].)
"By reason of economic conditions it became necessary for plaintiff, in accordance with standard accounting practice, to charge off bad debts, doubtful accounts, and general business losses. These were charged to reserves for losses and to undivided profits until they were exhausted. In making further similar charges plaintiff then had the choice of reducing its surplus or impairing its capital. Impairment of its capital would have furnished a ground for the taking over of plaintiff and its assets by defendant. (Industrial Loan Act, sec. 11.) Liquidation of the company and loss to its investors were avoided by the reduction of the surplus to the extent necessary to absorb losses.
"In statutes regulating financial institutions ‘surplus’ does not mean the same as ‘reserve.’ Reserves are computed on the basis of liabilities to the public. The reserve of an insurance company is based on the total liability of the company to its policy-holders. If the reserve is not maintained the company is insolvent (Insurance Code, § 981, et seq. [St.1935, p. 537, as amended]) and the insurance commissioner may take possession of its books and property. (Sec. 1011 [St.1937 p. 2563].) A bank must maintain a reserve proportionate to its deposits and if impaired the superintendent of banks may impose the penalty provided in the statute. (Bank Act, secs. 20 and 68, [Deering’s Gen.Laws 1937, Act 652].) A building and loan association is required to maintain an investment certificate reserve in a specified proportion to its investment certificate liability, and if it fails so to do it is prohibited from paying dividends or distributing profits until the reserve shall have been restored. (Building and Loan Act, sec. 5.03, [Deering’s Gen.Laws 1937 Act 986]).
"Insurance companies, banks, and building and loan associations are required to maintain a surplus for certain purposes in addition to their reserves. If an insurance company’s surplus ‘is impaired by reason of loss’ the amount of impairment shall be restored ‘in the manner provided for its accumulation.’ (Insurance Code, sec. 12371.) Losses sustained by a bank in excess of its undivided profits may be charged to and paid from surplus, in which event the surplus shall be restored in the manner of its creation. (Bank Act, § 21.) Likewise if a reserve of a building and loan association shall be impaired, ‘it shall thereafter be restored in like manner’ to its accumulation. (Building & Loan Act, sec. 10.03.)
"Defendant seems to treat the surplus, when created as provided in section 7 of the Industrial Loan Act, as a reserve as the same is defined and required by the Insurance Code and the Bank and Building and Loan Acts. This theory has no foundation in the Industrial Loan Act. This statute does not require the establishment or maintenance of any reserve whatsoever. The surplus prescribed is not based on liabilities, as in the case of the other classes of corporations mentioned, but is established and replenished only when dividends are declared and is accumulated by setting aside not less than 10 per cent of the net profits for the respective dividend periods without reference to the amount of liabilities. If no dividend is declared no surplus need be created.
"The statute does not require that the surplus remain at all times unimpaired, and I find nothing in its purposes that so contemplate. The allegations of the complaint are deemed to be true on demurrer. The charges for losses were made against the surplus during the four year period from 1932 to 1935, and no dividends were declared during that period, nor until December, 1936. Since the latter date six dividends have been declared, 10 per cent of the current profits having been credited to surplus with each dividend. Notwithstanding that all of said facts were known to defendant at or about the dates when they occurred, he issued 15 permits or supplemental permits, or amendments thereto, during the period from 1932 to April, 1941, authorizing plaintiff to issue and sell its securities to the public. Defendant did not, prior to November, 1941, require plaintiff to restore its surplus to its former amount. Having knowledge of the reduction of plaintiff’s surplus over a period of four years, defendant, without requiring its restoration, acquiesced in and permitted the issuance of plaintiff’s securities for a period of ten years from 1932 to the end of 1941. During said period the administrative construction of the statute was the same as that now contended for by plaintiff. The contemporaneous construction of a statute by executive officers of the state extending over a long period of years is entitled to consideration. (Riley v. Thompson, 193 Cal. 773 [227 P. 772].) In 1941 the legislature revised the entire statute. (Stats.1941, ch. 1187, p. 2945.) The quoted portion of section 11 in the revision is the same as the original statute. By not making a specific requirement in the revised act for the restoration of a reduced surplus the legislature in effect concurred in defendant’s previous construction. (People v. Southern Pacific Co., 209 Cal. 578, 595 [290 P. 25].)
"The act in question is a penal statute, it being a misdemeanor to violate or to participate in the violation of any of its provisions. (Industrial Loan Act, sec. 22.) If defendant’s present contention be sustained plaintiff committed a criminal act when it reduced its surplus and another when it failed to restore the same immediately, although the act does not forbid reduction nor require immediate restoration. The only offense charged against plaintiff is that it did not comply with defendant’s rule. The statutory authority to establish rules does not empower defendant to legislate nor to enact a rule declaring an act to be a crime that is not made such by law. Due process of law demands that a standard of conduct and an ascertainable standard of guilt be laid down by statute. (Cline v. Frink, 274 U.S. 445 [47 S.Ct. 681] 71 L.Ed. 1146.)
"It is not within the province of the court to insert into a statute what has been omitted nor to omit what has been inserted. (Code Civ.Proc. sec. 1858; In re Haines, 68 Cal.App. 522 [229 P. 984]; [In re] Estate of Barnett, 97 Cal.App. 138 [275 P. 453]; Pacific Coast, etc., Bank v. Roberts, 16 Cal.2d 800. [108 P.2d 439].) An administrative officer has no more power in this regard than the court. Such an officer has no discretion but to follow the law. There being no ambiguity in the act it must be construed as it is written. If the law does not prohibit the use of surplus to absorb losses the commissioner cannot do so. Defendant’s position that he has power to make a rule that amounts to legislation on a matter which the legislature failed to cover is untenable. It is in excess of his jurisdiction to enlarge the terms of the statute under the guise of regulation, nor may he impose conditions more onerous than are prescribed by law. (Boone v. Kingsbury, 206 Cal. 148 [273 P. 797].)
"The statutes regulating banks, building and loan associations, and insurance companies had been adopted and had been amended and revised many times prior to the revision of the Industrial Loan Act in 1941. The legislature, with knowledge of the requirements of said statutes, failed to place similar provisions in the latter act. But an industrial loan company cannot declare and pay a dividend without carrying to surplus 10 per cent of the net profits for the dividend period. By reason of this provision surpluses will be restored even in the absence of express requirements therefor similar to those in the other three statutes mentioned. The unauthorized order of defendant requiring an industrial loan company to restore the impaired surplus immediately, if enforced, would place such a company in a much less favorable financial position than the legislature has placed its competitors in the money lending field which may restore their impaired surpluses not immediately but in the same manner as they were created."
The judgment is affirmed.
MOORE, P. J., and W. J. WOOD, J., concur.