AMERICAN TRUST CO v. CALIFORNIA WESTERN STATES LIFE INS CO

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District Court of Appeal, First District, Division 2, California.

AMERICAN TRUST CO. v. CALIFORNIA–WESTERN STATES LIFE INS. CO.†

Civ. 10431.

Decided: February 01, 1938

Brobeck, Phleger & Harrison, of San Francisco, and Henry W. Ballantine, of Berkeley, for appellant. Williamson & Wallace, of San Francisco, and Ware & Ware, of Chico, for respondent.

The plaintiff brought an action praying for declaratory relief. It stated the facts in detail. The defendant answered setting up additional facts. After a hearing before the trial court sitting without a jury, the latter made findings in favor of the defendant and from the judgment entered thereon the plaintiff has appealed.

In 1930, California State Life Insurance Company, hereinafter called “California,” having its home office at Sacramento, Cal., desired to acquire the capital stock and assets of Western States Life Insurance Company, hereinafter called “Western,” the latter's home office being located at San Francisco, California; to that end it began negotiations with Tucker, Hunter Dulin & Co., investment brokers of San Francisco, California was represented in the negotiations by its president, Mr. J. R. Kruse; Tucker, Hunter Dulin & Co. was represented by its then president, Mr. Nion R. Tucker, who thereafter also represented two corporate stockholders of Western, with which he was identified, i. e., Pacific American Company, Limited, hereinafter called “Pacific,” and American National Company, hereinafter called “American,” and Phyllis de Young Tucker, who was and is his wife.

As a result of the preliminary negotiations between Mr. Kruse, representing California, and Mr. Tucker, representing Tucker, Hunter Dulin & Co., an agreement was made between California and Tucker, Hunter Dulin & Co. whereby the former agreed to pay the latter a commission for securing for it not less than two–thirds (66,667 shares) of the outstanding stock of Western, then comprising 100,000 shares, and being all of the same class. During all of the times mentioned, more than 44 per cent. of Western's outstanding stock was owned and held by four stockholders who collectively owned 44,345 shares, as follows: Arthur D. King, 15,760 shares; American National Company, 14,301 shares; Pacific American Co., Ltd., 10,051 shares; Phyllis de Young Tucker, 4,233 shares; total, 44,345 shares. The plan of sale and purchase further contemplated that California would acquire as many more shares as could be so acquired and would thereafter take over the properties, including the insurance and going business, and thereupon would liquidate Western and take over its capital, surplus, and reserves.

The parties arrived at a final understanding on June 8, 1931, but did not, until later, execute the various instruments necessary to give effect thereto. Each of said four stockholders agreed to execute with California, in addition to the agreement that would result from their acceptance of the offer to be made by California to Western's stockholders generally, four several agreements, by which said four stockholders, respectively, agreed to sell and California agreed to purchase, within two years, at a price of $60 per share, that is, $30 for each one–half share, plus interest at 6 per cent. per annum, but less any dividends on said shares received by said stockholder in the meantime, the California shares which would be received by them in accordance with California's general offer of June 8, 1931. The agreements last mentioned were in the form of letters from California addressed to said four Western stockholders severally. Each of said letters contained a form for the approval thereof to be signed by the stockholder to whom it was addressed and delivered. The agreement of June 10, 1931, delivered by California to the plaintiff's assignor, is hereinbelow set forth.

Similar letters were delivered to the three other principal shareholders of Western; the variations therein being only with respect to the names of the addressees and the number of California shares, subject to the letter.

The letters so addressed and delivered to the four principal western stockholders, affected all the 22,172 1/2 shares of California stock which said four stockholders would receive from California in consummation of the latter's general offer of June 8, 1931, save one–half share which was issued to Phyllis de Young Tucker, and has been owned and held by her since she acquired it, and was not subject to the June 10th agreement.

The signing of the various agreements to give effect to the plan occurred on June 10, 1931, at a meeting at the office of Tucker, Hunter Dulin & Co. in San Francisco, attended by the several parties and their counsel. At that time the agreement between California and Tucker, Hunter Dulin & Co., which was in letter form, was signed. It was in part as follows: “We offer that if, on or before October 1, 1931, certificates representing at least 66,667 shares of the present outstanding capital stock of Western States Life Insurance Company are deposited with American Trust Company at its principal office in San Francisco, California, properly endorsed for transfer to us, for the consideration hereinafter mentioned, we will, on or before October 1, 1931, pay to American Trust Company for the account of each of the depositing stockholders respectively, the sum of $40 per share for each share represented by the certificates so deposited by such stockholders (together with interest upon each such sum of $40 at the rate of 6 per cent. per annum from the date of the deposit of such certificates but not prior to July 1, 1931, to the date of purchase by the undersigned), and deliver to American Trust Company for the account of such stockholder a certificate of stock in the undersigned made out to such stockholder; the number of shares of stock in the undersigned represented by such certificate to be 1/2 of the number of shares represented by the cerificates deposited by such stockholder.” At the same time, Mr. Kruse signed and delivered to the four large Western stockholders the letters containing California's agreement to take up the stock which would be issued to them under California's general offer. It is, omitting heading, as follows:

“In the event that you sell to us all of your stockholdings in Western States Life Insurance Company in accordance with the offer made by us to stockholders as contemplated by that certain agreement in letter form bearing date June 8, 1931, between us and Tucker, Hunter Dulin & Co., you are to cause to be resold to us or to some person designated by us, and we agree to repurchase or cause to be purchased by some person designated by us, on or before two years from the date hereof, 2116 shares of the stock of the undersigned given in part payment therefor, at the rate of $60 per share, plus 6 per cent of such total amount, from the date of the consummation of such sale, in accordance with said offer, until the date of repurchase, less however, any and all dividends declared upon said repurchased shares.

“We furthermore undertake that in the event of such purchase by us of any stock of the Western States Life Insurance Company, in accordance with said offer, the undersigned will not increase the number of its outstanding shares of stock nor make any change in regard thereto, except as contemplated by said contract with the said Tucker, Hunter Dulin & Co. until after the repurchase of said shares in accordance with the first paragraph hereof.

“If the foregoing is in accordance with your understanding, kindly signify your approval thereof upon the copy of this letter enclosed herewith, and return the same to us.

“California State Life Insurance Company

“By J. R. Kruse, Pres.

“Approved:––––.”

These are the June 10, 1931, letters which lie at the basis of this case and its two companion cases. California–Western States Life Ins. Co. v. Pacific American Co., 76 P.2d 208; California–Western States Life Ins. Co. v. Tucker, 76 P.2d 209. The record further discloses that each of the four largest stockholders was a large dealer in shares of corporate stock, that the business of each was conducted by a capable and competent manager, and that in selling his or its stock in the Western each acted upon the advice of able counsel.

By certain assignments this plaintiff acquired the rights of American National Company prior to the commencement of this action. On May 31, 1933, the date was approaching when, pursuant to the terms of the contract dated June 10, 1931, the defendant would have been obligated to repurchase the stock held by this plaintiff. Negotiations resulted in a modified agreement. In substance, that agreement was as follows:

(1) American Trust Company sold to California–Western States Life Insurance Company and the latter purchased from the former the 7150 shares of stock of California–Western States Life Insurance Company; (2) California–Western States Life Insurance Company agreed to pay to American Trust Company the purchase price of the stock, computed at the rate of $60 per share––$429,000––together with interest thereon, in the following manner: (a) In cash, concurrently with the execution of the agreement, one–half of the purchase price, amounting to $214,500, together with the sum of $15,084.27, representing the amount by which the accrued interest on the purchase price to June 10, 1933, exceeded the dividends theretofore declared on the stock, making a total sum of $229,584.27; (b) by a promissory note for one–quarter of the purchase price, $107,250, maturing on March 1, 1934; the note to be executed and delivered by the buyer to the seller concurrently with the execution of said agreement, bearing interest at the rate of 6 per cent per annum until paid; (c) by a promissory note for one–quarter of the purchase price, equaling $107,250, maturing on January 1, 1935; the note to be executed and delivered by the buyer to the seller concurrently with the execution of the agreement, bearing interest at the rate of 6 per cent. per annum until paid; (3) as security for the payment of the two promissory notes, the buyer, concurrently with the execution of the agreement, pledged to the seller 3,575 shares of stock of the buyer, being one–half of the 7,150 shares sold to the buyer; upon payment of the promissory note maturing on or before March 1, 1934, the seller agreed to release from the pledge and deliver to the buyer certificates for one–half of said pledged stock; and upon payment of the promissory note maturing on or before January 1, 1935, the seller agreed to release from the pledge and deliver to the buyer certificates for the remaining one–half of the pledged stock. Thereupon the stock was transferred to the defendant, the notes and the pledge agreement were delivered to the plaintiff, and the defendant paid to the plaintiff the required cash sum of $229,584.27. The market value of defendant's own stock was, in the meanwhile, falling, thus disappointing the anticipations of all parties concerned. Subsequently a number of stockholders of the defendant company became generally dissatisfied with the defendant's management, finding a great many things to blame. They succeeded in assuming control of the defendant company, and on December 6, 1933, the defendant's attorney, Mr. Williamson, orally suggested to the plaintiff that the defendant considered the purchase of its own stock in June, 1933, to be improper. This was the first intimation of any claim by the defendant on account of any of the transactions we have related. No written claim or demand was asserted until December 21, 1933. On December 21, 1933, California–Western States Life Insurance Company sent to American Trust Company a letter claiming that the purchase of said 7,150 shares of stock by California–Western States Life Insurance Company was contrary to law and a void transaction, offering to redeliver the shares of stock of defendant company, but not the shares of Western States acquired in 1931, and demanding the repayment of the sum of $229,584.27. On January 31, 1934, American Trust Company filed this action against California–Western States Life Insurance Company for declaratory relief. Additional facts will be set forth as the occasion requires.

The plaintiff claims the judgment is not supported by the findings, and that many of the findings are not supported by the evidence. The trial court found that the 1931 repurchase promises and the 1933 repurchase were invalid. It gave judgment to the defendant and against the plaintiff for $229,584.27, the cash paid to plaintiff in 1933, plus interest, and ordered the surrender of the notes theretofore delivered to the plaintiff, but it permitted the defendant to retain the Western States stock which it had acquired from the plaintiff's predecessor in 1931.

Plaintiff's first point is that defendant may not recover the purchase price paid by it in 1933 for the stock then purchased, since recovery is not necessary for the payment of liabilities of the defendant existing at the time of the 1933 purchase. The ruling of the trial court was doubtlessly based on a long line of decisions that had theretofore been rendered. Stevens v. Boyes Hot Springs Co., 113 Cal.App. 479, 298 P. 508, and Hansen v. California Bank, 17 Cal.App.2d 80, 61 P.2d 794. But the plaintiff contends that the statutes have been materially altered by chapter 862, page 1762, of the Statutes of 1931, and that the rule in force when the repurchase was made in 1933 was quite different. In particular it cites and relies on section 365 of the Civil Code as amended by said chapter. Said section is as follows: “Except when shares are purchased in accordance with this title, shareholders selling to the corporation shares issued by the corporation shall be and remain liable to the corporation, or to its receiver or its trustee in bankruptcy to the extent of payments made therefor and for the unpaid balance of the subscription price due thereon, if any, for the payment of existing liabilities of the corporation at the time of such sale.” (Italics ours.) The plaintiff claims that, in any event, it was not liable if the repurchase was made in “accordance with this title”; that if not so made the plaintiff was liable only “for the payment of existing liabilities of the corporation at the time of such sale”; and then only “to the extent of payments made” to the plaintiff on such repurchase. It also claims it was under no circumstances liable for an “unpaid balance of the subscription price due thereon” because it purchased but never subscribed for any of defendant's stock, and that it never owed any sum on any subscription contract. The defendant takes the position that the plaintiff does not properly construe said section. Continuing it asserts said section, when properly construed, means as follows: “Except when shares are purchased in accordance with this title, shareholders selling to the corporation shares issued by the corporation shall be and remain liable to the corporation, or to its receiver or its trustee in bankruptcy to the extent of payments made therefor and for the unpaid balance of the subscription price due thereon for the payment of existing liabilities of the corporation at the time of such sale.” It bases that claim on the assertion that syntax and the rules of grammar contemplate that qualifying words and phrases ordinarily refer to the next preceding antecedent, and that such is the rule in statutory construction unless the context and evident meaning of the enactment requires a different construction. 23 Cal.Jur.Stats. § 110, p. 733. The plaintiff replies in effect that the context and evident meaning of section 365 gives no room for applying the rule for which the defendant contends. The plaintiff argues vigorously that if the said section is given the construction for which the defendant contends, it follows that: “A corporation able to pay its debts which made an unauthorized purchase of its stock could not recover the unpaid balance of the subscription. But the corporation although fully solvent and able to pay all of its debts could recover the amount paid to the shareholder who would thus receive the stock free of any liability upon his subscription agreement thereby acquiring the stock without paying for it.” That is clearly the effect of the defendant's contention. No doubt in certain cases the rule of statutory construction for which the defendant contends will be applied. However, very slight indication of legislative purpose or parity of reason or the natural and common–sense reading of the statute may overturn it and give it a more comprehensive application. Sutherland on Statutory Construction, 2d Ed. § 420. So in the instant case. Section 365 of the Civil Code as quoted above is altogether clear in all respects. In Davis v. Hart, 123 Cal. 384, at page 387, 55 P. 1060, 1061, the court said: “A cardinal rule of interpretation is that a statute free from ambiguity and uncertainty needs no interpretation. This must be so, for all interpretation and construction is for the purpose of ascertaining the legislative will. When this is clear, interpretation is not allowable. In such case it cannot be argued that the result is unjust or against policy. [The statute] is itself conclusive upon these subjects.” See, also, McNamara v. Steckman, 202 Cal. 569, 575, 262 P. 297; 25 R.C.L. 957. That is the rule which we think is applicable in the instant case. Except for the earnestness of counsel we would stop at this point. However, as able counsel vigorously disagree, other considerations will be discussed. The defendant argues that the judgment as rendered by the trial court was authorized prior to the enactment of section 365 of the Civil Code and that said section is not exclusive. The plaintiff contends that it is exclusive, and that the maxim expressio unius est exclusio alterius is applicable. In making that reply the plaintiff is right for the reason assigned. Moreover, chapter 862, p. 1762, Statutes of 1931, is, by all parties, treated as and conceded to be a revisory statute. If it is contended that under it more than one remedy exists for the same cause of action, then the person making that claim must be able to quote those provisions from the face of the statute showing the existence of cumulative remedies. Unless reprinted in said chapter, the provisions of the former statutes were repealed. Section 1, c. 862, p. 1763, Stats. 1931. Earlier decisions on the subject based on the provisions of the repealed statutes are no longer controlling. In so far as the new statute changes the remedy, such statute controls. Hanley v. Sixteen Horses, etc., 97 Cal. 182, 32 P. 10. The doctrine of that case has never, so far as we are advised, been departed from in this state, nor elsewhere. Murdock v. City of Memphis, 20 Wall. 590, 617, 22 L.Ed. 429; 8 Rose's Notes, U.S.Reps. 563–565.

The plaintiff, as stated above, contends that its maximum liability is the amount of payments received by it. The defendant asserts said contention is a strained construction of the statute. We think not. It is its plain wording. The point is used by the defendant to introduce a comment on the statements made by the author of the statute. As nothing we have said, or intend to say, is based on that author's statement, we will not pause to consider said comment. Nor will we pause to discuss the statements of legislative counsel. Counsel have not shown that either class of such statements comes within the rule which permits courts to examine the reports, published by authority of law, of legislative bodies. Story v. Richardson, 186 Cal. 162, 165, 198 P. 1057, 18 A.L.R. 750.

Prior to the enactment of chapter 862, p. 1762, Statutes of 1931, it had been held that a corporation desiring to repudiate a contract to purchase its own stock should return the stock to the seller. Bank v. Wickersham, 99 Cal. 655, 34 P. 444. The defendant quotes from section 325 of Ballantine's California Corporation Laws to the effect that the same rule applies to an action maintained under section 365 of the Civil Code, chapter 862, p. 1816, Stats.1931. It then asserts its construction of said section must be followed. That conclusion does not follow. The rule requiring the return of the stock was one imposed by the court to the end that the aggrieved party should do equity. Pratt et al. v. Short et al., 79 N.Y. 437, 445, 35 Am.Rep. 531; 13 C.J. p. 412, Contracts, § 341. It was not a part of the former statute, nor is it a part of chapter 862, p. 1762, Statutes of 1931. No reason appears why an aggrieved party suing under the latter statute should not do equity as well as one suing under the statutes as they were worded prior to the changes made in 1931. Although the amount of the recovery may be less under the amended statute than under the earlier statute, such fact does not constitute an excuse for a failure to do equity. Nor does the court rule requiring equity to be done in any manner add to, nor detract from, the clear meaning of the former statutes, nor of the statute enacted in 1931.

Defendant also calls to our attention the decisions that were based on provisions in the Civil Code as they were worded prior to 1931. It says the corporation purchasing its own stock was held entitled to recover not only the moneys so expended but to have its unpaid notes canceled and returned. Of course, the answer is that said statutes have been “superseded,” and we are concerned with what the statutes provided on June 10, 1933.

The plaintiff calls to our attention the wording of section 365 of the Civil Code, as amended in 1933, St.1933, p. 1398. The defendant asserts that assuming the amended section is a statute in pari materia it may not be considered in interpreting said section as enacted in 1931 unless the latter is ambiguous. But it is the defendant that claims said enactment in 1931 is ambiguous. The plaintiff earnestly contends to the contrary, and, in making its point, it is merely answering a claim set forth by the defendant. Assuming, solely for the purposes of this decision, that section 365, as enacted in 1931, is ambiguous, then it follows that the amendment thereof in 1933 may properly be examined to ascertain the intention of the Legislature in enacting the statute of 1931. Old Homestead Bakery, Inc., v. Marsh, 75 Cal.App. 247, 242 P. 749. Turning to the amendment of 1933, it is as follows: “When a corporation in violation of any provision of this title, purchases shares issued by it, any shareholder or owner of shares who sells such shares knowing that the corporation is the purchaser with knowledge of facts indicating the impropriety of such purchase shall be liable to the corporation or its receiver, liquidator or trustee in bankruptcy to the extent of the payments received therefor and for the unpaid balance of the subscription price due thereon, if any, in the event that the corporation is adjudged insolvent or bankrupt in any action or proceeding begun within one year after such purchase.” Reading the several statutes in pari materia, it is clear that under the statutes prior to 1931 the defendant was entitled to sue for all moneys paid on an illegal purchase of stock theretofore issued by it; that under chapter 862, p. 1762, Statutes of 1931 its right was limited as expressed in section 365 as incorporated in said chapter; and that under said section 365, as amended in 1933, the defendant's right to recover was further limited in several material respects. On the other hand, if section 365, as enacted in 1931, is not ambiguous, then, as stated above, it is not subject to construction and it means just what is said on its face.

The defendant calls attention to the fact that the plaintiff contends the defendant agreed to buy its stock and pay for it out of “earned surplus,” and that such agreement was proper. Defendant then asserts such was not the law. Stevens v. Boyes Hot Springs Co., supra. The authority does not support the assertion. The Stevens Case involved noncompliance with sections 309 and 359 as they were worded on July 6, 1922, the date of the purchase there involved. Stats.1917, p. 657, and stats.1921, p. 127. Said statutes were materially different from the provisions of chapter 862, p. 1762, Statutes of 1931. Furthermore, nothing we have said, or intend to say, involves the legality of purchases by a corporation of shares theretofore issued by it. For the purposes of this opinion we are assuming the purchase was illegal.

The foregoing conclusions find abundant support in the context. Title 1, part 4, Division 1, section 277 et seq., Civil Code, chapter 862, p. 1762, Stats.1931, uses the expression “stated capital.” Section 300b provides of what it shall consist, and that it shall not be changed except as provided in said statute. In several different sections other provisions are set forth showing it was the legislative will that in the interest of the creditors of the corporation said “stated capital” must be protected and preserved. Then section 342 authorizes, in certain limited cases, a corporation to purchase, out of earned surplus, shares of stock theretofore issued by it. But, having so provided, it adds: “A corporation shall not purchase its own shares of any class in any case when there is reasonable ground for believing that the corporation is unable, or, by such purchase, will be rendered unable, to satisfy its debts and liabilities when they fall due.” (Italics ours.) That limitation is re–enforced by section 342a, which provides that a purchase out of earned surplus as provided in section 342, subd. (7), shall not affect “stated capital.” The power to declare dividends is, to the same extent, limited by section 346, as the power to purchase its own shares is limited by section 342. Section 347 provides for the redemption of certain shares by certain corporations. But it repeats the limitation expressed in section 342 on the exercise of the power to redeem. Again, section 348 provides for a reduction of “stated capital,” and again the same limitation is repeated. By the provisions of section 363 the directors shall neither authorize nor ratify, except as provided in said title 1, part 4, division 1 of the Civil Code, “the purchase by it [the corporation] of its shares with corporate funds nor declare or pay dividends nor authorize or ratify the withdrawal or distribution of any part of its assets among its shareholders.” Each of the foregoing provisions is in effect a requirement that the corporation shall so conduct its affairs as to keep its issued capital stock unimpaired. Each is primarily a requirement in the interest of its creditors.

Then follow the remedies. (1) If the prohibited disbursements are “wilful or negligent” the directors are “jointly and severally liable to the corporation and to shareholders and subscribers for the full amount of any loss sustained by the corporation, the shareholders, and/or subscribers.” (2) If the corporation is insolvent the liability runs to “the corporation or its * * * trustee in bankruptcy to the full amount of any loss sustained by the shareholders or creditors.” (3) Then section 364 provides: “Any shareholder who knowingly receives any dividend or distribution of assets not authorized by this title shall be individually liable to the corporation for the amount so received by him, with interest from date of receipt, in the event that the corporation is unable to meet its debts and liabilities as they mature. Any two or more shareholders may be sued in the same action.” (Italics ours.) And section 365 provides: “Except when shares are purchased in accordance with this title, shareholders selling to the corporation shares issued by the corporation shall be and remain liable to the corporation, or to its receiver or its trustee in bankruptcy to the extent of payments made therefor and for the unpaid balance of the subscription price due thereon, if any, for the payment of existing liabilities of the corporation at the time of such sale.” (Italics ours.) Comparing the foregoing provisions, it will be noted that the directors of a solvent corporation who make a willful or negligent violation of the statute (except those who may have caused their dissent therefrom to be entered in the minutes of the meeting at which such action was authorized, or who were not present at the time) shall be liable to the corporation “for the full amount of any loss sustained by the corporation.” But, of an insolvent corporation, they are liable to “the full amount of any loss sustained by * * * creditors.” A stockholder who knowingly receives any dividends or distribution of assets not authorized is liable “to the corporation for the amount so received by him, with interest from date of receipt, in the event that the corporation is unable to meet its debts and liabilities as they mature.” And a stockholder who has sold his stock to the corporation in contravention of the statute is “liable to the corporation, or to its receiver or its trustee in bankruptcy to the extent of payments made therefor * * * for the payment of existing liabilities of the corporation at the time of such sale.” In other words, four distinct, separate remedies are delineated. No two are precisely the same. The liability in each of the last two proceedings is “for the payment of existing liabilities of the corporation.” The liability in each of the first two proceedings is “the full amount of any loss sustained”––perhaps more or less than the amount of moneys received. All four are in the interest of the corporation making the payment and the last three are in the interest of defraying obligations to creditors. No single one rests on an obligation to repay, in any event, all moneys received. All four clearly mean that the stated capital will be maintained to protect the creditors.

There is evidence that this plaintiff's assignor bought shares of stock in the defendant corporation; but there is no evidence that it was ever a subscriber for the stock of the defendant. There is no evidence and there is no finding that on June 13, 1933, the defendant had any liabilities nor, if so, the amount thereof. Therefore, the defendant was not entitled to recover. It follows that the findings do not support the judgment, and that the judgment should be reversed.

Several other points are made by the plaintiff, but, in view of the conclusion we have reached on the point hereinabove discussed, it is unnecessary to discuss them.

The judgment is reversed.

STURTEVANT, Justice.

We concur: NOURSE, P. J.; SPENCE, J.