RAINEY v. MICHEL et al.*
This is an appeal from a judgment against appellant in the sum of $75,550, rendered on his liability as a stockholder of the Marine Bank of Santa Monica, under the provisions of an act of the Legislature defining the liability of stockholders in California state banks. Stats. 1931, p. 338. For convenience, we will refer to this act as the Bank Stockholders' Liability Act.
The Marine Bank of Santa Monica, which we will hereafter refer to as the bank, was organized under the banking laws of the state of California. It had issued 1,166 shares of capital stock of the par value of $100 each, of which appellant owned 7801/212 shares on August 14, 1931. He owned 175 shares of this stock prior to November 4, 1930, and acquired 5951/212 shares between that date and August 14, 1931. It does not appear just when he acquired the other 10 shares, though the finding that he owned all of his stock on August 14, 1931, is not questioned by him. When the bank was taken over by respondent, it had liabilities in the total sum of $925,055.42, of which the sum of $413,042.35 was incurred prior to August 14, 1931, and $512,013.07 subsequent to that date.
The complaint alleges the official position of respondent; the corporate existence of the bank; the number and par value of its issued shares of stock and the number owned by appellant; that on December 18, 1931, as a result of an examination of the business and affairs of the bank, respondent concluded that it was in an unsafe and unsound condition and took possession of its property, assets, and business for the purpose of liquidating its affairs; that during the process of such liquidation respondent determined and found it necessary to enforce the individual liability of its stockholders and that it was necessary for him to and that he did call for and levy a ratable assessment upon the stockholders in the sum of $100 on each share of issued stock; that the necessary assessment was levied, call made, and notice given to and served upon the stockholders; that no part of appellant's assessment of $78,050 was paid by appellant except the sum of $2,500. Judgment was sought against him in the sum of $75,550.
The answer of appellant did not deny any of the allegations of the complaint. It set up the following affirmative defenses: (1) That appellant became the owner of his stock prior to August 14, 1931, the effective date of the Bank Stockholders' Liability Act; and (2) that all the debts and liabilities of the bank were incurred and created prior to August 14, 1931.
The case comes before us on a typewritten clerk's transcript which includes, besides the judgment roll, an agreed statement of facts. No question is raised as to the propriety of including the latter document in the clerk's transcript, nor of our consideration of its contents without any certification other than that given by the county clerk, and many of the arguments advanced on this appeal are based on matters disclosed by this agreed statement of facts. For purposes of clarity, we have concluded to consider this agreed statement of facts in deciding the issues presented and the various arguments of counsel and amici curiæ based upon it. This must not be construed as a precedent holding that this manner of presenting such a document can be approved in another case. The constitutional questions presented on this appeal are grave and of wide importance. They affect many pending cases involving the liability of stockholders in state banks. We cannot decide some of these questions without reference to this document.
Many grounds for a reversal of the judgment are urged by counsel for appellant and the several amici curiæ who appear in his behalf. There is not entire uniformity in the views expressed. For our own convenience and in order that this opinion may not be unduly extended, we will consolidate such of these grounds as we deem necessary to consider and will refer to them as though all were urged by appellant. We find it appropriate to state that our task has been made easier by the splendid manner in which the case has been briefed by counsel for the parties and by the several amici curiæ.
The Constitution of 1849 (article 4, § 36) and of 1879 (article 12, § 3) placed a liability on every stockholder of a corporation for a proportion of its debts. The latter section provided that a stockholder shall be liable for his proportionate share of all its debts and liabilities contracted or incurred while he was such stockholder. This section was repealed by the people of the state at the election held November 3, 1930. Section 322 of the Civil Code was enacted in its original form on March 21, 1872. It was based on the Statutes of 1853, p. 87, which gave effect to the provisions of the Constitution of 1849 to which we have referred. Section 322 of the Civil Code contained provisions subsequently written into section 3 of article 12 of the Constitution of 1879 and gave the creditor a right of action directly against the stockholder. This section was repealed on August 14, 1931 (St. 1931, p. 444). Both the Constitution of 1849 (article 4, § 31) and that of 1879 (article 12, § 1) reserved to the state the right to alter, change, or repeal laws concerning corporations. It will thus be seen that up to the time of the election held on November 3, 1930, the state has always had a constitutional provision placing a liability on stockholders of all corporations for certain of its debts, and from 1853 to August 14, 1931, had statutes placing like liabilities on such stockholders. Also the state has always reserved to itself the right to repeal, alter, or amend laws concerning corporations. After August 14, 1931, there was no law in this state imposing a stockholder's liability on the stockholders of all corporations.
At the election of November 3, 1930, when section 3 of article 12 of the Constitution was repealed, the people amended section 1 of article 12 to read as follows: “The Legislature shall have power, by general laws and not otherwise, to provide for the formation, organization and regulation of corporations and to prescribe their powers, rights, duties and liabilities and the powers, rights, duties and liabilities of their officers and stockholders or members. All laws now in force in this State concerning corporations and all laws that may be hereafter passed pursuant to this section may be altered from time to time or repealed.” See St. 1931, p. lviii.
In 1931 the Legislature passed the Bank Stockholders' Liability Act (Stats. 1931, p. 338) which went into effect concurrently with the repeal of section 322 of the Civil Code. The Bank Stockholders' Liability Act provides in part as follows: “The stockholders of every banking corporation organized under the laws of the State of California shall be held individually liable, equally and ratably, and not one for another, for all contracts, debts and engagements of such corporation, to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares. * * *” Section 1. “Whenever the superintendent of banks shall hereafter take possession of the business and property of any bank doing business in this state, for the purpose of liquidating its affairs, as provided by law, he may at any time during the process of such liquidation, if necessary to pay the debts of such corporation, enforce the individual liability of the stockholders set forth in section 1. For the purpose of enforcing such liability, the superintendent of banks may call for a ratable assessment upon the stockholders of such bank without previous judicial ascertainment of the necessity for such action, and the action of the superintendent of banks in calling for such assessment shall be conclusive on the stockholders of the necessity for such assessment. * * * The superintendent of banks shall have power to maintain an action or actions in this state, or in any other state or country to enforce and collect any sums or amounts due and payable and remaining unpaid upon any such assessments from any stockholder or stockholders failing to pay the same in full. * * * All sums collected from any such assessment, less the expenses of collection, shall be used by the superintendent of banks against the liquidation of claims in the same manner as the assets of the bank are so used. If such ratable assessment, first made, shall prove inadequate to pay all of the creditors of the bank in full, the superintendent of banks may levy further assessment or assessments, and proceed to collect the same in like manner so long as the total of such assessments does not exceed the liability set forth in section 1 above. If, after the payment of all liabilities against such bank, and the costs and expenses of liquidation, any surplus shall remain, the court in the liquidation proceedings shall determine and provide for any equities as between the respective stockholders, including proportions belonging to each stockholder and of any surplus of any of the assets remaining after payment of all liabilities and the costs and expenses of liquidation by reason of full or partial payment of any such assessment or assessments, and shall direct the payment thereof by the superintendent of banks accordingly.” Section 2.
Appellant urges that the Bank Stockholders' Liability Act violates the provisions of section 1 of article 12 of the Constitution as amended in 1930, as it imposes a stockholders' liability on stockholders in state banks and none on stockholders of other corporations. He urges that as this section authorizes the Legislature to prescribe the liabilities of corporate stockholders “by general laws and not otherwise,” any law imposing a liability on stockholders of corporations must apply to stockholders in all corporations, and that the Legislature cannot pass a law imposing a liability on a single class of corporations. It should be observed that the same language is used in the section in relation to the “formation, organization and regulation of corporations” and prescribing “their powers, rights, duties and liabilities.” If this argument of appellant is sound, all corporations would have to be formed, organized, and regulated by a single law which would have to provide uniform powers, rights, duties, and liabilities for them and their officers, stockholders, or members. We now have many corporations successfully operating in the fields of business, finance, education, and others, under the provisions of sections found in titles 2 to 24, inclusive, part 4 of division 1 of the Civil Code (section 414 et seq.). The purposes for which these corporations have been formed run the entire scale from corporations to receive and administer bequests, gifts, and donations, to insurance companies, banks, railroads, and public utilities. As the complexities of life have increased, the Legislature has provided for the formation of corporations possessing different powers, rights, duties, and liabilities from those previously authorized. This has seemed a wise exercise of legislative discretion, employed to meet the new conditions as they developed. It is obvious that if the interpretation placed by appellant on the provisions of section 1 of article 12 of the Constitution be adopted, it would require that the same powers, rights, and duties be given to and liabilities placed upon all corporations organized after the adoption of the amended section. If the Legislature cannot classify corporations, and if a general law must apply to all equally, a small corporation organized to own and operate a tract of farming land in a sparsely settled agricultural community, a great bank, a trust company, an insurance company, or a railroad must have the same organization and the same “powers, rights, duties and liabilities.” This would indeed be a radical departure from the traditional theory of corporate legislation in California. It would result either in ending the formation of all smaller corporations organized for industrial, commercial, and educational purposes through their inability to conform to the rigid requirements of organization of large banks, trust companies, insurance companies, and public service corporations which experience has proved necessary for their safety and stability, or a loose and unsafe corporate structure for these large corporations, if an effort were made to pass a general law affecting all which would include the organization and operation of the smaller corporations. It would seem hardly probable that in adopting this amendment to the Constitution the electors had in view any such revolutionary result when we remember that for many years they have been accustomed to the organization and operation of corporations according to well-defined classifications established by the Legislature.
Appellant further urges that at the election the people understood the term “‘general laws' in the ordinary sense of the word, this wording conveyed to them only one meaning–that the formation, organization and regulation of all corporations would be governed by general laws–uniform laws. * * *” He quotes a portion of the following language of the Supreme Court in the case of Miller v. Dunn, 72 Cal. 462, 14 P. 27, 28, 1 Am. St. Rep. 67: “It is useless to attempt to apply iron-clad rules of interpretation to any phrase or word used in a constitution. Especially is this true of a word which has a technical as well as a popular meaning. There is no word in the language which, in its popular and technical application, takes a wider or more diversified signification than the word ‘law.’ Its use in both regards is illimitable. In determining the office of words used in a constitution, the object is to give effect to the intent of the people adopting it. Cooley, Const. Lim. (5th Ed.) § 66. And, ‘where a word having a technical as well as a popular meaning is used in the constitution, the courts will accord to it its popular signification, unless the very nature of the subject indicates or the text suggests that it is used in its technical sense.’ Weill v. Kenfield, 54 Cal. 111; Sprague v. Norway, 31 Cal. 173. Words used in a constitution should be construed in the sense in which they were employed. They ‘must be taken in their ordinary and common acceptation, because they are presumed to have been so understood by the framers, and by the people who adopted it. This is unquestionably the correct rule of interpretation. It, unlike the acts of our legislature, owes its whole force and authority to its ratification by the people; and they judged of it by the meaning apparent on its face according to the general use of the words employed where they do not appear to have been used in a legal or technical sense.’ Manly v. State, 7 Md. 135.” He then quotes from Webster the definition of “general” as “the whole; the total; that which comprehends or relates to all or the chief part;–opposed to particular.” From this he draws the conclusion that the construction placed by him on the amendment must have been in the minds of the people at the time they adopted it.
We have no quarrel with the rule laid down by the many authorities, some cited by appellant, which support Miller v. Dunn, supra. And we would not presume to question a definition given by that eminent lexicographer, Webster. However, we notice that in Miller v. Dunn, supra, the Supreme Court said that in adopting an amendment to the Constitution the people will be presumed to have understood “it by the meaning apparent on its face according to the general use of the words employed where they do not appear to have been used in a legal or technical sense.” (Italics ours.)
In measuring the intent, understanding, and purpose of the people in adopting this amendment, we must bear in mind the customary use of the term “general law” or “laws of a general nature” in the course of legislation in California since its statehood. Section 11 of article 1 of both the Constitution of 1849 and that of 1879 were identical and provided that “all laws of a general nature shall have a uniform operation.” Section 25 of article 4 of the present Constitution provides that “the Legislature shall not pass local or special laws in any of the following enumerated cases, that is to say: * * * In all other cases where a general law can be made applicable.” The statutes are full of laws that do not apply alike to all persons, natural or artificial, in the state, which laws have been held constitutional. As said by the Supreme Court, through Mr. Chief Justice Waste, in Re Weisberg, 215 Cal. 624, 12 P.(2d) 446, 449: “A law is general and uniform and affords equal protection in its operation when it applies equally to all persons embraced within the class to which it is addressed, provided that such class is founded upon some natural or intrinsic or constitutional distinction between the persons composing it and others not embraced in it.” This rule has been the accepted rule in California for more than fifty years. It has been applied to so many laws affecting the daily life of our citizens that they must have been cognizant of it and have become accustomed to its application and understanding of the meaning given it in legislative and judicial circles for more than half a century. In fact, the definition which we have quoted, because of its long use and general acceptation in all matters pertaining to legislation, must be considered to be the “popular meaning” and “popular signification” given to the terms under discussion by the people of the state when the constitutional amendment was adopted. Under this definition we can unhesitatingly hold that the Bank Stockholders' Liability Act is a general law as it is applicable to all persons within a class founded upon a natural, intrinsic, and constitutional distinction which carves that class out from the body of the people and permits it to stand by itself.
Appellant urges that by the repeal of section 3 of article 12 of the Constitution the people of the state announced as their policy a firm intention to do away with all stockholders' liability in California which had existed since it became a state. We cannot so construe the results of that election. It has been held that section 3 of article 12 of the Constitution was a restriction on the power of the Legislature to create any different or greater liability on the part of a stockholder than that contemplated in the section. Wood v. Hamaguchi, 207 Cal. 79, 277 P. 113, 63 A. L. R. 861. The repeal of this section removed that limitation of power. At the same election the people amended section 1 of article 12 of the Constitution and provided that the Legislature “shall have power, by general laws and not otherwise, to * * * prescribe * * * [the] liabilities of * * * stockholders” of corporations. The results of the election show an intention on the part of the people to vest in the Legislature the power to legislate on the matter of stockholders' liability free from the former constitutional restrictions and within other constitutional limitations rather than an intention to do away with all stockholders' liability in this state.
Appellant urges that the Bank Stockholders' Liability Act violates the due process of law provisions of the Federal and State Constitutions. Section 1, Fourteenth Amendment U. S. Const.; section 13, art. 1, Const. of California. He particularly urges that section 2 of that act (St. 1931, p. 339) makes the action of the superintendent of banks conclusive on the stockholders in calling the assessment without giving the stockholders the right of hearing and therefore deprives them of their day in court and deprives them of their property without due process of law. We do not so read the section. It only makes the action of the superintendent of banks in calling the assessment “conclusive on the stockholders of the necessity for such assessment.” (Italics ours.) From this language, it is evident that the conclusion of the superintendent of banks as to the necessity for the assessment is the only step in the proceedings which the Legislature attempted to make conclusive on the stockholders. It may be that in a future case for the collection of an unpaid assessment when the question of its necessity is properly made an issue this question may be inquired into by the courts. In the instant case, this issue is not presented as the answer does not deny any of the allegations of the complaint, but merely raises the two affirmative defenses we have mentioned.
The provisions of our Bank Stockholders' Liability Act are patterned after the similar provisions of the National Bank Act. Therefore the decisions of the federal courts have compelling weight here.
In one of its earlier decisions construing some of the provisions of the National Bank Act, the United States Supreme Court said: “The liability of the stockholders is several and not joint. The limit of their liability is the par of the stock held by each one. Where the whole amount is sought to be recovered the proceeding must be at law. Where less is required the proceeding may be in equity, and in such case an interlocutory decree may be taken for contribution, and the case may stand over for the further action of the court–if such action should subsequently prove to be necessary–until the full amount of the liability is exhausted. It would be attended with injurious consequences to forbid action against the stockholders until the precise amount necessary to be collected shall be formally ascertained. This would greatly protract the final settlement, and might be attended with large losses by insolvency and otherwise in the intervening time. The amount must depend in part upon the solvency of the debtors and the validity of the claims. Time will be consumed in the application of these tests, and the results in many cases cannot be foreseen. The same remarks apply to the enforced collections from the stockholders. A speedy adjustment is necessary to the efficiency and utility of the law; the interests of the creditors require it, and it was the obvious policy and purpose of Congress to give it. If too much be collected, it is provided by the statute, that any surplus which may remain after satisfying all demands against the association, shall be paid over to the stockholders. It is better they should pay more than may prove to be needed than that the evils of delay should be encountered. When contribution only is sought, all the stockholders who can be reached by the process of the court may be joined in the suit. It is no objection that there are others beyond the jurisdiction of the court who cannot for that reason be made codefendants.” Kennedy v. Gibson, 8 Wall. 498, 505, 19 L. Ed. 476.
In the case of Bernheimer v. Converse, 206 U. S. 516, 27 S. Ct. 755, 758, 51 L. Ed. 1163, the court had before it the provisions of the Stockholders' Liability Law of the state of Minnesota. This act provided that an assessment levied upon the stockholders of a corporation “shall be conclusive upon and against all parties liable upon or on account of any shares of said stock of such corporation, whether appearing or having notice thereof or not, as to all matters relating to the amount of and the necessity for said assessment. * * *” Laws 1899, c. 272, § 5. This statute goes further than the California Bank Stockholders' Liability Act as the Minnesota act provides that the assessment shall be conclusive as to its amount as well as to its necessity. The Supreme Court of the United States cited with approval a decision of the Supreme Court of Minnesota and said: “This statute came before the supreme court of Minnesota in Straw & E. Mfg. Co. v. L. D. Kilbourne Boot & Shoe Co., 80 Minn. 125, 83 N. W. 36. In that case it was given full consideration and its constitutionality sustained, and it was held that while the assessments upon the outstanding shares of stock in an amount necessary to meet the deficiency in the assets of the corporation was conclusive upon the stockholders as members of the corporation, yet the statute, properly construed, did not have the effect to deprive a person, when sued for the amount assessed on shares of stock under the provisions of the act, from showing that he was not a stockholder, or that he was not the holder of so large an amount of stock as was alleged, or that he had a claim against the corporation which, in law or equity, he might be enabled to set off as against a claim for assessments, or from making any other defense personal to himself; and that the order of assessment was conclusive upon stockholders only in so far as it decided the amount of assets or liabilities of the insolvent corporation and the necessity of making an assessment upon the stock to the extent and in the amount ordered.” Bernheimer v. Converse, 206 U. S. 516, 27 S. Ct. 755, 758, 51 L. Ed. 1163.
In the case of United States v. Knox, 102 U. S. 422, 425, 26 L. Ed. 216, it was said: “Although assessments made by the comptroller, under the circumstances of the first assessment in this case, and all other assessments, successive or otherwise, not exceeding the par value of all the stock of the bank, are conclusive upon the stockholders, yet if he were to attempt to enforce one made, clearly and palpably, contrary to the views we have expressed, it cannot be doubted that a court of equity, if its aid were invoked, would promptly restrain him by injunction.”
While the language quoted from the foregoing decisions is largely dicta, it has the compelling force of reason and sound sense. Should occasion arise, a court of equity would undoubtedly find grounds upon which to protect against fraud, oppression, or such palpable mistake of fact as would raise the question of the right of the superintendent of banks to take any action at all. These matters would go to his jurisdiction. Jurisdiction to act should exist before his acts be given the protection of the statute.
It would seem that the contention of appellant that the Stockholders' Liability Act violates the due process of law provision of the Federal and State Constitutions is answered by the case of Bernheimer v. Converse, supra. Many cases are cited to support the conclusions there reached.
It is well settled that due process of law requires that a plaintiff be given a forum in which to enforce and protect his rights, and the defendant to be heard and defend against claims against him. Under the terms of the Bank Stockholders' Liability Act, the superintendent of banks cannot render judgment against a stockholder nor issue execution upon his property. Resort must be had to the courts to enforce collection from a stockholder who does not voluntarily pay the assessment levied against him. Thus the act itself specifies the forum in which the superintendent of banks must appear and in which the stockholder may defend the action against him, and the due process of law provisions of the two Constitutions are fully satisfied.
Appellant urges that the act is too vague and uncertain to be enforced. He argues that it may be so construed that in a case where the majority of the stockholders are insolvent a burden of debt far in excess of the par value of their stock may be fastened upon the solvent stockholders through the means of repeated assessments which the act permits. This cannot be done because the act itself makes stockholders “individually liable, equally and ratably, and not one for another * * * to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares.” A similar argument was answered by the Supreme Court of the United States in the case of United States v. Knox, supra, as follows: “With respect to the character of that liability, it is entirely clear from the language employed in creating it, that it is several and cannot be made joint, and that the shareholders were not intended to be put in the relation of guarantors or sureties, ‘one for another,’ as to the amount which each might be required to pay. In the process to be pursued to fix the amount of the separate liability of each of the shareholders, it is necessary to ascertain, 1, the whole amount of the par value of all the stock held by all the shareholders; 2, the amount of the deficit to be paid after exhausting all the assets of the bank; 3, then to apply the rule that each shareholder shall contribute such sum as will bear the same proportion to the whole amount of the deficit as his stock bears to the whole amount of the capital stock of the bank at its par value. There is a limitation of this liability. It cannot in the aggregate exceed the entire amount of the par value of all the stock. The insolvency of one stockholder, or his being beyond the jurisdiction of the court, does not in any wise affect the liability of another; and if the bank itself, in such case, holds any of its stock, it is regarded in all respects as if such stock were in the hands of a natural person, and the extent of the several liability of the other stockholders is computed accordingly. Crease v. Babcock, 10 Metc. (Mass.) 525.”
Appellant further urges that the Bank Stockholders' Liability Act places an unlawful burden upon him when it makes him liable for his share of the costs of liquidation. This precise argument was answered by the Supreme Court of the United States adversely to the contention of appellant in the case of Bernheimer v. Converse, supra.
Appellant urges that Bank Stockholders' Liability Act is unconstitutional because it vests in the superintendent of banks judicial powers when he is given the right to determine that the affairs of a bank are in such condition as to justify his taking it over for purposes of liquidation and fix the amount of the assessments on the stockholders, and that judicial powers can only be given to the courts under the provisions of section 1 of article 6 of the Constitution. This precise question was considered in the case of Bushnell v. Leland, 164 U. S. 684, 17 S. Ct. 209, 41 L. Ed. 598, where it was said: “All these alleged errors may be reduced to the single contention that under the national banking law the comptroller of the currency is without power to appoint a receiver to a defaulting or insolvent national bank, or to call for a ratable assessment upon the stockholders of such bank, without a previous judicial ascertainment of the necessity for the appointment of the receiver and of the existence of the liabilities of the bank; and that the lodgment of authority in the comptroller, empowering him either to appoint a receiver or to make a ratable call upon the stockholders, is tantamount to vesting that officer with judicial power, in violation of the constitution. All of these contentions have been long since settled, and are not open to further discussion. Kennedy v. Gibson, 8 Wall. 498 [19 L. Ed. 476]; Casey v. Galli, 94 U. S.  674 [24 L. Ed. 168]; U. S. v. Knox, 102 U. S.  423 [26 L. Ed. 216]. When, after the adjudication in Kennedy v. Gibson, the questions were for a second time pressed in argument, the court contented itself with calling attention to the fact that they had been affirmatively adjudicated upon, and were concluded. We see no reason now to reopen controversies which were then treated as concluded, and have since been approved and in all respects fully affirmed. The contention that there is now presented in argument a grave constitutional question, which was not pressed or considered in the prior cases, is a mere assumption which has no foundation in fact. A casual inspection of the points pressed by counsel in Casey v. Galli, makes evident the fact that the very arguments now advanced were then urged upon the court, and held to be untenable.” We have not been cited to, nor have we found a single decision of the United States Supreme Court which questions the soundness of this conclusion. Many decisions support it.
Appellant seeks to escape the result of these decisions by urging that under the Constitution of the United States Congress may give to executive and administrative officers and boards judicial powers, while in California the Constitution expressly vests in the courts, provided for in section 1 of article 6 of the Constitution, all the judicial powers of the state. While this is true, we have had for many years executive and administrative officers and boards and legislative bodies vested with quasi judicial powers with the full sanction of the courts under the limitations of the Constitution. Illustrations of the quasi judicial powers given to officers and boards may be found in 6 California Jurisprudence 681 to 684, inclusive, with the authorities cited supporting the grants of such powers. The quasi judicial powers thus granted are incidental and supplemental to the main powers of the officers and boards and are not held primarily judicial. If the act of the superintendent of banks in adding the figures showing the liability of a bank, and doing the same with those showing its assets, and counting its liquid assets and then comparing the results, and, where necessary calling for an assessment, can constitute something resembling a judicial act, they are incidental powers and can be nothing more than quasi judicial acts. They do not possess the qualities of judicial acts nearly as much as those of city councils and boards of supervisors in phases of local improvement proceedings which have been recognized and upheld by the courts. If these powers given the superintendent of banks are in any manner judicial, they are not such powers as are restricted to the courts by section 1 of article 6 of the Constitution.
Appellant urges that all of his stock in the bank having been acquired prior to August 14, 1931, the effective date of the Bank Stockholders' Liability Act, the Legislature has changed the nature of his contract as a stockholder which it cannot do under the provisions of the Constitution prohibiting the passage of laws impairing the obligations of contracts.
In considering this question, we must bear in mind that our Constitution has reserved to the state the right to alter or repeal laws affecting corporations. This provision becomes a part of the charter of every corporation organized in this state. This rule has been recognized in this state since the decision in the case of French v. Teschemaker, 24 Cal. 518. In McGowan v. McDonald, 111 Cal. 57, 43 P. 418, 420, 52 Am. St. Rep. 149, the precise question we are considering was before the Supreme Court. It was there said: “It is objected, however, that, if the provisions of the Code and constitution are applicable, they impose obligations upon appellants for which they were not liable when they became stockholders, and are in conflict with that provision of the constitution of the United States which inhibits the states from passing laws impairing the obligation of contracts, and are therefore as to them unconstitutional and of no effect. The answer to this objection is that the constitution of 1849 provided: ‘Corporations may be formed under general laws, but shall not be created by special act, except for municipal purposes. All general laws and special acts passed pursuant to this section may be altered from time to time, or repealed.’ Article 4, § 31. (Under the authority thus conferred, both the legislature and the people had power to change the law in regard to the liability of stockholders, without violating any provision of the constitution of the United States.” See, also, Pacific Gas & Electric Co. v. State of California, 214 Cal. 369, 6 P.(2d) 78; Peterson v. Ball, 211 Cal. 461, 296 P. 291, 74 A. L. R. 187; Aronson & Co. v. Pearson, 199 Cal. 286, 249 P. 188, 51 A. L. R. 1380; Kaiser Land & Fruit Co. v. Curry, 155 Cal. 638, 103 P. 341. The case of Sherman v. Smith, 1 Black (66 U. S.) 587, 17 L. Ed. 163, is authority for the conclusion that where a state has reserved the right to amend an act under which a bank was organized, it might impose a liability on stockholders for after-acquired debts where none existed before without violating any of the provisions of the Federal Constitution.
Appellant contends that if the Bank Stockholders' Liability Act be held constitutional and sufficient to create a liability on the stockholders for subsequent debts, it cannot be held to apply to and justify an assessment for antecedent debts because such interpretation of the law would violate the obligations of contracts already incurred. This argument naturally divides itself into two parts, namely, (1) concerning the stock owned prior to the repeal of section 3 of article 12 of the Constitution, and (2) concerning the stock acquired after that time and before August 14, 1931. The second problem involves the question of whether or not there remained in California any law imposing liability on the stockholders of a corporation between the date of the repeal of section 3 of article 12 of the Constitution and the time the Bank Stockholders' Liability Act became effective. We will consider these two questions in the order stated.
It is too well settled to require extensive citation of authorities that under the provisions of section 3 of article 12 of the Constitution, and section 322 of the Civil Code, a contractual relation existed between the stockholders of a corporation and its creditors. Whittier v. Visscher, 189 Cal. 450, 209 P. 23; Coombes v. Getz, 285 U. S. 434, 52 S. Ct. 435, 437, 76 L. Ed. 866. The contracts were created by law and their terms imposed upon the stockholders the direct and personal obligation of each stockholder to pay to each creditor such proportion of the “debts and liabilities” contracted or incurred during the time he was a stockholder as the amount of stock or shares owned by him bears to the whole of the subscribed capital stock or shares of the corporation. Section 322, Civ. Code. In the case of Coombes v. Getz, supra, the Supreme Court of the United States had before it the effect of the repeal of that portion of section 3 of article 12 of the Constitution placing a joint or several liability on the directors of corporations to the creditors and stockholders for money embezzled or misappropriated by the officers during the terms of office of the directors. The situation there presented was exactly analogous to the one we are considering. The Supreme Court of the United States there said: “When a right has arisen upon a contract, or a transaction in the nature of a contract authorized by statute, and has been so far perfected that nothing remains to be done by the party asserting it, the repeal of the statute does not affect it, or an action for its enforcement. It has become a vested right which stands independent of the statute.” That case must be regarded as settling the law in California that the repeal of section 3 of article 12 of the Constitution did not relieve the stockholders of a corporation of their contractual liability to the creditors for their proportionate share of the debts contracted by the corporation during the time they were stockholders and before the repeal of that section. Article 1, § 10, Const. of U. S.; article 1, § 16, Const. of Cal. It is also authority for the conclusion that the repeal of section 322 of the Civil Code did not relieve the stockholders from a like liability for antecedent debts unless the repeal of the constitutional provision effected an implied repeal of the Code section.
These last-cited provisions of the Federal and of the State Constitutions are general in their terms and throw their protection around the entire contract. They give no right or protection to the creditor that can be denied to the debtor. The contractual benefits to the creditor cannot be lessened, nor the obligations of the debtor increased by any law passed in this state. The case of Coombes v. Getz, supra, dealt with the question from the point of view of the creditor and held that his contractual rights could not be impaired or taken away by the repeal of section 3 of article 12 of the Constitution. In the instant case we have the reverse of that situation presented. We must answer this question: If we uphold the contention of respondent and hold that he may levy the assessment on appellant to pay all indebtedness of the bank regardless of whether the debts or any portion of them were contracted prior to the repeal of section 3 of article 12 of the Constitution, is a greater obligation placed on appellant than existed before the passage of the Bank Stockholders' Liability Act and the levy of the assessment under it? If we answer this question in the affirmative, we must hold that the assessment cannot be levied to pay any debts contracted prior to the repeal of the constitutional provision in question.
Appellant owned about 15 per cent. of the issued stock of the bank at the time of the repeal of the constitutional provision. For the purpose of convenience and illustration only, we may assume that the bank had contracted about $308,000 of debts before that date and during the time defendant owned that stock. We may also assume that other stockholders were insolvent and judgment proof. Appellant's total liability to these creditors, assuming he owned 15 per cent. of the issued stock, was $46,200 and no more. The payment of that sum would completely satisfy the obligation of his contract to these creditors. He could be called upon to pay no more. This obligation would be extinguished by such payment. In the instant case, the superintendent of banks is calling upon appellant to pay $78,050 ($2,500 of which is paid) to be applied upon $925,055.42 of the indebtedness of which we have assumed that $308,000 was incurred prior to November 4, 1930, and which he proposes to pay in part with the assessment collected from appellant. Thus about one-third of the $78,050, or the sum of $26,016.66, is to be applied on the indebtedness created prior to the repeal upon which appellant had a contractual obligation of $46,200 and no more. It will thus be seen that under the construction of the law urged by respondent, and the facts we have assumed, the obligation of appellant would be increased by $26,016.66 from $46,200 to $72,366.66 on these debts. This cannot be done. It increases the obligation of his contract contrary to the provisions of both the Federal and State Constitutions.
We next consider the effect of the repeal of section 3 of article 12 of the Constitution on the effectiveness of section 322 of the Civil Code. Appellant acquired 5951/212 shares of stock in the bank between the election repealing the constitutional provision and August 14, 1931, the effective date of the repeal of section 322 of the Civil Code by act of the Legislature. It is obvious that if the Code section was not in effect during that time, there was no contractual relation to be interfered with that could attach to the ownership of these shares.
There is no final decision of the supreme or appellate courts of the state to which we have been cited bearing on this problem. In the case of W. Fine & Son v. Hall, 21 P.(2d) 697, the Third District Court of Appeal decided that the repeal of the constitutional provisions did not effect a repeal of section 322 of the Civil Code. A hearing was granted by the Supreme Court in that case and the appeal was dismissed before it was decided there. The Honorable Adolphus F. St. Sure, United States District Judge for the Northern District of California, held that the repeal of section 3 of article 12 of the Constitution repealed section 322 of the Civil Code by necessary implication. Hoffman v. W. H. Worden Co. (D. C.) 2 F. Supp. 353. The Honorable William P. James, United States District Judge for the Southern District of California reached a contrary conclusion and held that the Code section was not repealed by the repeal of the section of the Constitution. In re Motor Transit Terminal Corporation (D. C.) 4 F. Supp. 841.
The Senate resolution setting forth the amendment to section 1 and the repeal of section 3 and other sections of article 12 of the Constitution thus states the purpose of the Legislature: “For the purpose of removing existing limitations upon the power granted by section 1 of article 12 of the constitution amended as herein proposed, sections 2, 3, * * * of article 12 of the constitution is hereby amended. * * *” St. 1929, p. 2239.
Under the general powers possessed by the Legislature, we have no doubt that independent of section 3 of article 12 of the Constitution it possessed the authority to impose upon stockholders of corporations the liabilities fixed by section 322 of the Civil Code and that section 3 of article 12 of the Constitution simply imposed a limitation on these powers. That section did not pretend to be a grant of power. If the Legislature possessed the power to impose a liability on stockholders, the repeal of the constitutional provisions limiting the extent of the exercise of that power should not be construed as a repeal of section 322 of the Civil Code passed under general powers possessed by the Legislature independent of the repealed section. We have read and studied all the cases cited by counsel and amici curiæ on this question and those cited in the three cases we have just cited, besides others. We have concluded that the correct rule is announced in W. Fine & Son v. Hall, supra, and in Re Motor Transit Terminal Corporation, supra. In our opinion the conclusions in those cases are supported by sound reasoning and ample authority which it would serve no good purpose to repeat here.
Our study of the subject has given us an additional reason for our conclusion that the repeal of section 3 of article 12 of the Constitution did not repeal section 322 of the Civil Code. It was first adopted in 1872 while the Constitution of 1849 was still in force. Our present Constitution was not adopted until 1879, seven years after the adoption of the Code section. During those years the Code section could not have drawn its vitality from the present Constitution. It has been held that the adoption of the Constitution of 1879, which superseded that of 1849, did not repeal section 322 of the Civil Code, but that it was continued in force and effect by section 1 of article 22 of the Constitution of 1879. Borland v. Haven (C. C.) 37 F. 394; Gardiner v. Bank of Napa, 160 Cal. 577, 117 P. 667. This section of the Constitution stands in its original form. While section 322 of the Civil Code has been amended at various times, there was no material difference between its provisions as to the liability of stockholders to creditors at the time of its repeal than those contained in the section as adopted in 1872. If section 1 of article 22 of the Constitution be considered as necessary to have continued the Code section in force, that section of the Constitution, which is still unrepealed, gave the Code section lasting force and effect. The repeal of section 3 of article 12 of the Constitution, which was but a virtual copy of the opening sentences of section 322 of the Civil Code as then in effect, should not be held to effect a repeal of the Code section as that law did not find its origin or existence in the repealed section of the Constitution, but either in the general powers of the Legislature over corporations or in the section 1 of article 22 of the Constitution or both. It is our conclusion that section 322 of the Civil Code was not repealed by the repeal of section 3 of article 12 of the Constitution, but remained in full force and effect until the effective date of its repeal by the Legislature on August 14, 1931.
It is settled law that section 322 of the Civil Code created a contractual liability upon the stockholders of a corporation to pay their proportionate shares of the debts of the corporation to creditors coming within its provisions. Sonoma Valley Bank v. Hill, 59 Cal. 107; Brown v. Merrill, 107 Cal. 446, 40 P. 557, 48 Am. St. Rep. 145; Winona Wagon Co. v. Bull, 108 Cal. 1, 40 P. 1077; Chambers v. Farnham, 182 Cal. 191, 187 P. 732; Anderson v. Schloesser, 153 Cal. 219, 94 P. 885. These contractual relations were of continual creation between creditors and stockholders up to the time of the repeal of the Code section on August 14, 1931. What we have just said concerning the liability of stockholders who owned stock prior to the repeal of section 3 of article 12 of the Constitution and the conclusions reached on that subject are equally applicable to the liability of stockholders who acquired their stock after the repeal of that section and before the repeal of section 322 of the Civil Code. No law can change the obligation of an existing contract. The liability of appellant on his stock acquired after the repeal of the constitutional provision was contractual in nature and was fixed by the Code section. The Bank Stockholders' Liability Act could not increase the amount of that obligation. Therefore the superintendent of banks could not levy an assessment on the stock of appellant to pay any debts of the bank antedating August 14, 1931, the date of the repeal of the Code section. He must apply the money collected by him on such assessment on debts contracted on or after that date.
As a last resort in seeking to support the right to levy an assessment for and to pay the money collected upon antecedent debts, respondent urges that we should take judicial notice of the general financial conditions existing during the past several years and uphold his position under the general police powers of the state. He cites many cases, among which is Noble State Bank v. Haskell, 219 U. S. 104, 31 S. Ct. 186, 188, 55 L. Ed. 112, 32 L. R. A. (N. S.) 1062, Ann. Cas. 1912A, 487, where it is said: “It may be said in a general way that the police power extends to all the great public needs. Camfield v. United States, 167 U. S. 518, 17 S. Ct. 864, 42 L. Ed. 260. It may be put forth in aid of what is sanctioned by usage, or held by the prevailing morality or strong and preponderant opinion to be greatly and immediately necessary to the public welfare.” He urges that in the present emergency nothing can promote the “public welfare” more than safe banking and the knowledge on the part of depositors that their money will be repaid to them.
The same contention was made in the case of Wood v. Hamaguchi, 207 Cal. 79, 277 P. 113, 117, 63 A. L. R. 861, and was thus answered by the Supreme Court: “It but remains to consider the remaining contention of appellant that authority is found for the liability imposed by the so-called Bank Act, in the general police powers of the state. This contention requires little discussion. The case of Frost v. City of Los Angeles, 181 Cal. 22, 183 P. 342, 6 A. L. R. 468, cited by appellant in support of his contention, contains language to the effect that, while the legislature possesses the entire police power of the state, such power is limited by the provisions of the Constitution of California and the Constitution of the United States. Volume 12 of Corpus Juris, p. 929, states this limitation as follows: ‘However broad the scope of the police power it is always subject to the rule that the legislature may not exercise any power that is expressly or impliedly forbidden to it by the state constitution.’ The following cases are to the same effect: Ex parte Whitwell, 98 Cal. 73, 32 P. 870, 19 L. R. A. 727, 35 Am. St. Rep. 152; In re Smith, 143 Cal. 368, 77 P. 180; San Diego, etc., Ass'n v. City of East San Diego, 186 Cal. , 254, 200 P. 393, 17 A. L. R. 513. And in People v. Holder, 53 Cal. App. 45, 199 P. 832, the court said: ‘It is well settled that the police power cannot be made a cloak under which to overflow or disregard constitutional rights.”’ The Constitution of the United States and of California both prohibit the Legislature from passing any law that would interfere with the obligations of contracts. For the reason that the Bank Stockholders' Liability Act, if held applicable to antecedent debts, would violate the express provisions of both Constitutions as to those debts, it cannot be upheld as a valid exercise of the police powers of the state.
Another line of cases holds that under the police power private property may be summarily destroyed without violating either the provisions of the Fourteenth Amendment to the Federal Constitution or those of sections 13 and 14 of article 1 of the State Constitution. Patrick v. Riley, 209 Cal. 350, 287 P. 455; Graham v. Kingwell, 218 Cal. 658, 24 P.(2d) 488; Adams v. Milwaukee, 228 U. S. 572, 33 S. Ct. 610, 57 L. Ed. 971. In these cases and those of similar import the property involved was usually inherently dangerous to life, health, or morals or to the safety of person or property. The facts of the instant case do not bring it within the classification upon which the foregoing cases and those which follow the same rule depend for the soundness of their reasoning to escape the effect of the rule announced in Wood v. Hamaguchi, supra, which must be considered as controlling here.
Courts will not hold acts of the Legislature unconstitutional unless it is clearly necessary to do so. Where two reasonable constructions can be placed on an act, one resulting in holding it constitutional and the other unconstitutional, it is our duty to adopt the one resulting in holding it constitutional. We can see no reason why the constitutionality of the Bank Stockholders' Liability Act may be questioned if its provisions are held to apply only to debts and liabilities contracted or incurred after the effective date of the act. We therefore hold that the assessment cannot be levied to pay, and the money collected cannot be used to liquidate debts or liabilities of the bank contracted or incurred prior to August 14, 1931. Creditors of that period must be left to their remedies against the stockholders under the laws in force at that time.
We do not need to reverse the judgment because we conclude that the assessment cannot be levied for, or the money collected to pay, antecedent debts. It is stipulated that the liabilities of the bank contracted after August 14, 1931, amount to $512,013.07. The assessments if fully paid will produce only $111,600. This is sufficient showing of the necessity for the assessment in view of the fact that the question was not raised in the answer and was not litigated nor considered in the trial court. In making this statement we are not passing upon the meaning of the word “conclusive” as used in section 2 of the Bank Stockholders' Liability Act (St. 1931, p. 339).
In a final reply brief filed by amici curiæ after all other briefs had been filed, the point is made for the first time that the record does not disclose the amount of the assets of the bank and that these assets with the assessments might furnish a surplus of money after paying the debts and liabilities contracted or incurred after August 14, 1931. This question was not raised at the trial or in any of the other briefs and its presentation at that time is entirely too late to require us to consider it seriously.
We concur: BARNARD, P. J.; JENNINGS, J.