Opinion
Rehearing Granted July 17, 1930. In Bank.
Action by Fred E. Peterson and others, trustess by assignment for benefit of creditors of the Bartlett Music Company, against W. F. Ball and others. From a judgment for defendants, plaintiffs appeal.
Affirmed.
Appeal from Superior Court, Los Angeles County; W. D. McConnell, judge.
COUNSEL
Hugh M. Foster, of Los Angeles, for appellants.
Overton, Lyman & Plumb, Irving H. Prince, Lawler & Degnan, Barry Brannen, Pacht, Pelton & Warne, and A. B. Nathanson, all of Los Angeles, for respondents.
OPINION
CURTIS, J.
This action was brought by plaintiffs as trustees by assignment for the benefit of creditors of the Bartlett Music Company, against the defendants as directors of said company, based upon the provisions of section 309 of the Civil Code making directors jointly and severally liable for the full amount of debts created in excess of the subscribed capital stock of the corporation during their administration. The complaint consisted of ten counts, each count of which alleged that the defendants were directors of the Bartlett Music Company, a corporation, and as such directors created an indebtedness in a certain amount which was in excess of the subscribed capital stock. At the trial the defendants moved for judgment on the pleadings, which motion was granted by the court, and judgment was entered for the defendants. From this judgment plaintiffs have appealed.
After the rendition of judgment and the filing of notice of appeal by plaintiffs, section 309 of the Civil Code was amended (Stats. 1929, p. 1266). By said amendment the liability on the part of the directors of a corporation for the creation of debts in excess of subscribed capital stock was completely eliminated therefrom. Defendants, thereupon, filed their motion to dismiss the appeal upon the ground that as the liability of directors under this section was penal and statutory in character, the amendment operated to abate all proceedings pending thereunder. This motion was argued and submitted with the understanding that it would be considered and passed upon at the time of the determination of the case upon its merits. We will first direct our attention to the motion to dismiss.
The case of Moss v. Smith, 171 Cal. 777, 155 P. 90, involves a very similar question. In that case the court held, Justice Henshaw writing the opinion, that the Public Utilities Act (Stats. Ex. Sess. 1911, p. 18) repealed section 309 of the Civil Code in so far as it had application to directors of public utility corporations, and that as the Public Utilities Act contained no clause saving pending litigation or imperfect or inchoate rights the effect of the repeal was to destroy the right of a creditor to further prosecute a pending action to enforce the liability of the directors under section 309 of the Civil Code for such excess indebtedness. This case is quoted with approval in Freeman v. Glenn County Telephone Co., 184 Cal. 508, 194 P. 705, which involved the question of whether or not the amendment of 1917 to section 309 of the Civil Code operated to cut off the right to enforce the liability of directors under that section for the distribution of the capital stock of the corporation in contravention of the provisions of section 309 prior to 1917. The court in that case, relying upon the authority of Moss v. Smith, supra, held that the amendment operated as a repeal of the statutory liability formerly existing with the result that the repeal operated to destroy the right of action if it occurred at any time prior to final judgment.
An order dismissing the appeal based upon the authority of these two cases, therefore, might well be made, were it not for the fact that there appears to be a general saving clause of actions involving corporations incorporated in the part of the Civil Code dealing with corporations. This is section 404 of the Civil Code, which provides 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; 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.’
This section has been in the Code since 1905 and was, therefore, in the Code at the time of the decision of Moss v. Smith, in 1916, and Freeman v. Glenn County Telephone Co., in 1920. Respondents argue that inasmuch as that section did not control in those two cases, it should not control here. The records show, however, that this section was not drawn to the attention of the court in either of these actions. However, had the section been drawn to the attention of the court, it is quite probable that the same result would have been reached in the two cases for the reason that in each case there were present other and controlling factors not present in the instant case. For instance, in Moss v. Smith, it was held by the court that the Public Utilities Act absolutely governed and controlled, as the corporation therein involved was a public utility corporation. Inasmuch as the Public Utilities Act, which, as the court held, contained no clause saving pending litigation, was the sole controlling statute, it follows that section 404 would have no application. In the case of Freeman v. Glenn County Telephone Co., the peculiar phrasing of the saving clause of section 309, as amended in 1917, which expressly excluded from the effects of the saving clause the particular liability of directors upon which that action was based, excluded section 404 from application to that action. Subdivision 2 of section 309, as amended in 1917 (St. 1917, p. 657), reads as follows: ‘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.’ It is obvious that this is a special provision governing ‘liabilities heretofore incurred’ under special conditions such as existed in that case, and that therefore the general provisions of section 404 were not applicable.
We find no merit in defendants’ contention that section 404 is a general provision and that inasmuch as the 1929 Legislature expressly deleted from section 309, as it existed in 1917, the clause saving pending litigation, it affirmatively expressed its intention that pending litigation should be abated. The Legislature in 1929 made drastic and far-reaching changes in title 1 of part 4 of division 1 of the Civil Code, which deals with corporations in general. Some thirty-six sections were amended, twenty-one sections repealed, and five new sections added to this particular division of the Code. In our opinion, it appears reasonable that in the reframing of the Code applicable to corporations, the superfluity of the saving clause in section 309 was noted and the Legislature deeming it no longer necessary, entirely eliminated it. No other explanation appears to us plausible in view of the provisions of section 283 of the Civil Code, as amended in 1929 (St. 1929, p. 1261), which provides that, ‘The provisions of this title are applicable to every private corporation, unless there be a special provision in relation thereto inconsistent with some provisions of this title, in which case the special provision prevails.’
The motion for a dismissal is therefore denied.
The trial court based its order granting judgment on the pleadings in favor of the defendants upon two propositions of law: First, the liability of directors created by section 309 of the Civil Code for creating debts beyond the subscribed capital stock of the corporation is penal in character, and, second, a right of action to enforce this liability is not assignable. If these two propositions are well founded in law, then plaintiffs’ complaint failed to state facts sufficient to constitute a cause of action against the defendants, and the motion for judgment on the pleadings in favor of the defendants was properly granted.
Section 309 of the Civil Code was before this court in the case of Moss v. Smith, 171 Cal. 777, 155 P. 90. In that case, after an exhaustive review of the authorities not only in this state but in other jurisdictions, this court concludes (page 786 of 171 Cal., 155 P. 90, 94): ‘In all of these jurisdictions it is held that a creditors’ bill is the proper method to establish rights under like statutes, and in all of them the statutes themselves are declared to be penal in their nature. 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.’ The case of Moss v. Smith followed Irvine v. McKeon, 23 Cal. 472, and Moore v. Lent, 81 Cal. 502, 22 P. 875, and in turn has been followed by this court in Talcott Land Co. v. Hershiser, 184 Cal. 748, 761, 195 P. 653. In the state of Montana, where section 309 of the Civil Code of this state has been adopted without change by the Legislature as section 3837 of the Revised Codes of 1907, it was held in the case of Continental Oil Co. v. Montana Concrete Co., 63 Mont. 223, 207 P. 116, 118, ‘that the liability imposed by section 3837 is purely statutory and is in the nature of a penalty for failure to obey the mandate of the law, and this is in harmony with the decided weight of authority,’ citing Moss v. Smith, supra, and many other authorities. While the case from the Supreme Court of Montana states that the above rule is in harmony with the weight of authority, we have not been cited to a single authority supporting a contrary rule. We conclude, therefore, that the liability imposed by section 309 against directors who have suffered debts to be created in excess of the subscribed capital stock of the corporation, and which is the basis of the cause of action set out in plaintiffs’ complaint, is ‘highly punitive so far as the directors are concerned.’
The next question with which we are concerned is whether a claim, or cause of action arising out of said section 309 in favor of the corporation or in favor of the creditors against the directors, is assignable. The only authority under which the plaintiffs claim the right to institute this action against the defendants is under the assignment made to them by the corporation, the Bartlett Music Company. This assignment is not a statutory assignment for the benefit of creditors for which the Civil Code provides (section 3449), but is one which was executed by the Bartlett Music Company, as party of the first part, to five persons designated as trustees and as parties of the second part, and a number of the creditors of said corporation referred to therein as parties of the third part, and who assented in writing to said assignment. By this assignment, the corporation assigned to said trustees, ‘All of its property of every kind and nature, wherever situated, both real and personal, including all that stock of merchandise, store furniture and fixtures, book accounts, books, bills receivable, cash in hand, choses in action, insurance policies, and all other personal property of every kind and nature situated in or pertaining to, the stores now owned and conducted by said party of the first part in the City of Los Angeles, California, including any leases and leasehold interest.’
The trustees named in said assignment are the plaintiffs herein with the exception of C. W. Jacks and W. C. Lannin, who were selected to take the places of C. H. Mayer and W. H. Munson, named in said assignment as two of said trustees, but who subsequently and before the commencement of this action resigned. It will thus be seen that the plaintiffs take whatever rights they have in the property of the Bartlett Music Company by a voluntary assignment executed in their favor by the corporation and assented to by certain of the creditors. That such an assignment is binding upon the corporation and the creditors assenting thereto is not questioned. Jarvis v. Webber, 196 Cal. 86, 236 P. 138. By this assignment, and as to the corporation and the creditors whose consent was given thereto, the plaintiffs took and thereafter held under the terms of said written assignment, all property of the corporation, which the latter could transfer or assign. We cannot agree with the contention of the defendants that the assignment is not broad enough to cover causes of action. By reference to the language of the assignment, it will be noted that it purports to assign ‘all property of every kind and nature’ belonging to the corporation, including ‘choses in action.’ This latter term is sufficiently comprehensive to cover causes of action.
This brings us to the question as to whether the right of action against the directors for creating debts in excess of the subscribed capital stock of the corporation is assignable. If it is, then the plaintiffs acquired such right and may maintain this action for the purpose of enforcing it against the directors. If it is not assignable, then as already indicated this action must fail.
In a recent case before this court we held that the right given by the Usury Act to recover treble interest paid on a usurious note or obligation was not assignable. Primo Degli Esposti v. Rivers Bros. Inc., et al. (Cal. Sup.) 279 P. 423, 424. In that case we said: ‘The second answer is that the right which the original maker of a usurious note and mortgage is given under section 3 of the Usury Act to recover such interest and to treble the same is in the nature of a statutory penalty, and, under the authorities from other jurisdictions, which we hereby approve, is not assignable. In the case of Pardoe v. Iowa State Bank, 106 Iowa, 345, 76 N.W. 800, a statute containing the same language as that of the usury law of this state was so construed with a quite abundant reference to authorities. A similar ruling was made by the Supreme Court of Kansas upon the terms of a similar statute in the case of Lloyd v. First Nat. Bank, 5 Kan.App. 512, 47 P. 575. See, also, Robinson v. St. Marie’s Lumber Co., 34 Idaho, 707, 204 P. 671, 21 R. C. L., p. 2117, § 6; Wilson v. Shrader, 73 W.Va. 105, 79 S.E. 1083, Ann. Cas. 1916D, 886, 893 and notes; Allen v. Petty, 58 S.C. 240, 36 S.E. 586; First State Bank, etc., v. Bank of Jefferson, 112 Okl. 177, 240 P. 311.’
In Wilson v. Shrader, 73 W.Va. 105, 79 S.E. 1083, 1084, Ann. Cas. 1916D, 886, the court phrased the question presented on appeal as follows: ‘If the rights of action for the penalty are not assignable, the declarations are wholly and essentially bad. They set forth no causes of action, the benefit of which the assignee can take. A vital inquiry therefore, is whether penalties under the statute here involved are assignable.’ The action of Wilson v. Shrader, supra, was instituted for the recovery of a penalty given by section 7 of chapter 79 of the Code of West Virginia against a coterminous landowner for mining coal within five feet of the land of the adjacent owner without his consent in writing. The statute provided for a forfeiture or penalty of $500 in favor of the adjacent owner for each violation of said statute. The declarations set forth three separate and distinct violations of the statute and judgment was asked for $1,500 based upon the facts so alleged. At the time of the alleged violations, one Samuel V. Woods was the owner of the adjacent estate. Before the commencement of the action, he sold the same to the plaintiff, and in his deed to the plaintiff he endeavored to assign his right to recover the amount of the three penalties given under said statute. The opinion of the Supreme Court of West Virginia contains a most thorough citation of authorities upon the question of the assignability of rights of action based upon statutory penalties, and concludes that rights so given by statutes cannot be assigned. The court in that case points out (73 W.Va. 105, 79 S.E. 1086) that: ‘The reasons that preclude the assignability of mere personal rights, such as actions for slander, assault, and battery, and other pure torts, obviously apply here. Assignability of such claims encourages litigation and strife. The same principle of public policy forbids the conversion of penalties into commodities or assets.’
The only answer the plaintiffs make to the contention of the defendants, which appears pears to be well supported by the authorities just cited, is that the assignment made to them by the corporation and assented to by certain of the creditors, is as valid and binding as if made in compliance with the provisions of sections 3449 to 3473 of the Civil Code, and that such an assignment is valid against the assignor and all creditors assenting to it and serves to vest the assignor’s title to all the property absolutely in the assignee, which title can be voided only by a creditor not having assented to the assignment or by a purchaser or encumbrancer in good faith and for value. We may concede that the assignment made by the Bartlett Music Company to the five persons therein named as trustees is as valid and has the same legal effect as an assignment for the benefit of creditors made under the provisions of sections 3449 to 3473 of the Civil Code. In either case, the assignee takes only such property of the assignor as the latter may legally convey or assign. We have pointed out that the right of the corporation to sue the directors for creating debts in excess of the subscribed capital stock is not assignable. Therefore, under the assignment the plaintiffs have no standing in the action.
Appellants make the further contention, however, that the appellants as trustees under such assignment for the benefit of creditors occupy a dual position. They not only succeed to all of the property of the corporation by virtue of the assignment, but they represent and stand in the shoes of the creditors as well, and in this latter capacity they are authorized to maintain this action on behalf of the creditors to recover from the directors upon their liability under section 309 of the Civil Code. It will be noted under the provisions of this Code section as they were previous to the amendment of said section in 1929, that the directors assenting to an excessive indebtedness are made ‘jointly and severally liable to the corporation, and to the creditors thereof,’ etc. There is undoubtedly a dual liability created by this section of the Code against the directors, one in behalf of the corporation, and the other in behalf of the creditors. If we understand appellants’ position, it is that if they are not able to maintain this action to recover on behalf of the corporation by virtue of said assignment, they are, at least, entitled to instituted and prosecute the same to judgment as representatives of the creditors under the terms of said section of the Code making the directors liable to the creditors under the terms of said section of for the appellant for the benefit on two occasions held that the assignee even for the appellants, this court has of creditors ‘is merely the representative of his assignor, and does not represent the creditors.’ Francisco v. Aguirre, 94 Cal. 180, 182, 29 P. 495, 496, First National Bank v. Menke, 128 Cal. 103, 106, 60 P. 675. These cases further hold that an assignee for the benefit of creditors under a statutory assignment from his assignor is not a person upon whom the estate of the assignor devolves by operation of law, but that he takes title to whatever estate he possesses by the voluntary act of the previous owner. In other words, the assignee holds solely under the assignment made by the assignor for the benefit of his creditors. We do not think it can be successfully contended that the appellants, who are made trustees under a nonstatutory assignment, are possessed of any greater powers, or stand in any more favorable position regarding the property of the assignor, than an assignee under a statutory assignment. The latter has some semblance of reason for contending that he holds his position and exercises the powers of his office under a procedure provided by law, while the former has not. His rights depend entirely upon the voluntary acts of the persons who are parties to the assignment.
The appellants appear to lay great stress upon the case of Hornor v. Henning, 93 U.S. 228, 23 L.Ed. 879. In this case the court had under consideration the Act of Congress of May 5, 1870 (16 Stats. at L. 98), one of the provisions of which made the trustees or directors of any corporation organized under the act liable to the creditors for corporate debts created in excess of the capital stock. The court in that case held that an action at law by an individual creditor to recover the amount due him would not lie against the directors, but that the liability of the directors represented a trust fund for the benefit of all the creditors of the corporation so far as it might be necessary to pay their debts. It is pointed out in that case that while the action as brought could not be maintained, the proper proceeding would be one brought in equity by all of the creditors, or by one or more in behalf of all, for the purpose of subjecting this trust fund to the payment of all of the creditors in proportion to the amount of their debts. The same ruling was made in Moss v. Smith, supra. We confess we are unable to discern how this ruling in any way helps the case of appellants. It may, however, indicate a procedure under which the creditors of a corporation may avail themselves in establishing their rights under the provisions of section 309 of the Civil Code prior to its amendment in 1929. But it cannot have any determining effect upon the action now before us.
Our conclusion in this matter is that the plaintiffs have no right to maintain this action and that the trial court acted properly and legally in granting the motion of defendants for judgment on the pleadings.
Judgment is affirmed.
We concur: WASTE, C. J.; PRESTON, J.; RICHARDS, J.; SEAWELL, J.; SHENK, J.