DOUGLAS AIRCRAFT COMPANY v. CRANSTON

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District Court of Appeal, Second District, Division 4, California.

DOUGLAS AIRCRAFT COMPANY, Inc., a Delaware corporation, Plaintiff and Respondent, v. Alan CRANSTON, as State Controller of the State of California, Defendant and Appellant.*

Civ. 25646.

Decided: March 27, 1962

Stanley Mosk, Atty. Gen., John F. Hassler, Deputy Atty. Gen., for appellant. Louis Lieber, Jr., Elmer J. Stone, and William D. Craig, Santa Monica, for respondent.

This is a declaratory relief action in which plaintiff Douglas Aircraft Company, Inc., seeks to determine its liability, if any, under the California Uniform Disposition of Unclaimed Property Act (Code of Civil Procedure, §§ 1500–1527) hereinafter sometimes designated ‘the act.’ Alan Cranston, California State Controller, is the officer charged with the administration and enforcement of the California Uniform Disposition of Unclaimed Property Act.

Defendant appealed from the judgment of the trial court holding unconstitutional that portion of the act which in effect deprives plaintiff of the right to raise the statute of limitations.

The case was tried on an agreed statement of facts substantially as follows:

Plaintiff is a Delaware corporation having its principal place of business in Los Angeles County, California. During all times here relevant plaintiff was engaged in the performance of contracts and subcontracts, both for the United States Government and for non-governmental entities. Nearly all government contracts were of a cost or price redeterminable type, wherein plaintiff's costs of performance were primary factors in determining compensation for performance.

During the period starting with World War II and thereafter, plaintiff employed large numbers of persons in California, which employees were paid weekly by checks drawn by plaintiff upon a bank doing business in California. A number of the wage checks drawn in any week, delivered to the payee named thereon, were for unknown reasons never presented to the drawee bank for payment. A number of other wage checks were never delivered by plaintiff to the payees named thereon or to any persons claiming under or through any of said payees.

The financial benefit to plaintiff of unclaimed wages of its employees wholly or partially engaged in the performance of government contracts was, during and just after World War II, considered by the United States Government to be a ‘windfall’ to plaintiff. Under the then existing government contracts plaintiff was entitled to reimbursement for its obligation to pay unclaimed wages arising out of the government contracts even though such wages were never claimed. Plaintiff was prepared to pay all unclaimed wages to those rightfully entitled thereto, but experience indicated a substantial amount would remain unclaimed indefinitely.

The financial benefit to plaintiff of unclaimed wages of its employees wholly or partially engaged in the performance of non-government contracts was not an issue between plaintiff and the United States Government because the benefit did not affect compensation for performance of government contracts.

From approximately 1942 onward, plaintiff and the United States Government negotiated concerning means of returning to the government moneys paid to plaintiff with respect to unclaimed wages arising out of government contracts. As of the beginning of plaintiff's fiscal year 1948 (December 1, 1947) the government proposed, and plaintiff adopted, a complicated series of accounting practices to be employed by plaintiff, which, through adjustments in compensation to be paid plaintiff for performance of government contracts, resulted in a transfer to the government of the equivalent of all unclaimed wages arising out of government contracts which, at any time on or before September 18, 1955, were due and payable to plaintiff's California employees, and retention by plaintiff of the equivalent of all unclaimed wages arising out of non-government contracts unclaimed by plaintiff's California employees no matter when due and payable.

The accounting procedures resulting from the negotiations between plaintiff and the United States Government for the purpose of this controversy are assumed to have achieved the intended result of transferring to the government the equivalent of all unclaimed wages arising out of government contracts then (or at any time here relevant) in plaintiff's possession.

At the time the above mentioned accounting procedures were adopted, plaintiff also adopted a policy of interposing a defense of the bar of the statute of limitations (Code Civ.Proc. § 337) with respect to all claims for unclaimed wages whether arising from government or non-government contracts. Plaintiff has recognized no exception to the policy of raising the statute of limitations as a defense to every claim which is asserted beyond the period prescribed by the statute of limitations.

Defendant does not contend the act applies to unclaimed wages arising out of government contracts due and payable to plaintiff's California employees or ex-employees and moneys represented by such wages are not subject to the within controversy.

During its 1959 session the California Legislature enacted the Uniform Disposition of Unclaimed Property Act. The act became effective on September 18, 1959, as sections 1500–1527, Code of Civil Procedure. By the act defendant, as Controller of the State of California, is empowered and directed to administer and enforce all statutory provisions of the act, including those of which plaintiff complains herein.

Section 1508, Code of Civil Procedure subjects unclaimed wages arising out of non-government contracts to operation of the act by creating a presumption of abandonment when unclaimed more than seven years. Section 1510, Code of Civil Procedure requires plaintiff to report to defendant detailed information if known concerning unclaimed wages arising out of non-government contracts, which report must be made before November 1st of each year, as of June 30, or fiscal year end next preceding. Plaintiff elected to report as of November 30th (fiscal year end next preceding) and did so report but did not furnish the detailed information called for in the act. Code of Civil Procedure, section 1512 requires persons holding abandoned property to pay over or deliver it to the State Controller within a prescribed period after filing the report. Sections 1518–1520, Code of Civil Procedure provide means whereby persons claiming title to unclaimed wages arising out of non-government contracts after payment to defendant, may obtain possession of such property from the state. Section 1515, Code of Civil Procedure declares that the bar of any statute of limitations shall not be a defense to the reporting and turnover requirements of the act.

On September 18, 1959, the effective date of the act, to the present, plaintiff held and now holds the total sum of $17,911.23 as unclaimed wages arising out of non-government contracts which sum is claimed by defendant to be subject to the reporting and turnover requirements of sections 1510, subdivision (g), and 1512 of the act.

The funds which are the subject matter of this action represent unclaimed wages arising from non-government contracts with plaintiff which have remained unclaimed by plaintiff's employees for more than four years prior to September 18, 1959. Actions against plaintiff upon claims for these wages if brought by the employees to whom the wages were originally due and payable or anyone claiming under any of them, were on September 18, 1959, barred by the provisions of section 337 Code of Civil Procedure.

Defendant contends that by virtue of Code of Civil Procedure, section 1515, the funds represented by such barred claims constitute property presumed abandoned under the act (Code Civ.Proc. § 1510, subd. (g)) and that the act requires plaintiff to report certain information to defendant with respect to such unclaimed wages (Code Civ.Proc. § 1510, subd. (g)) and to pay them over to defendant (Code Civ.Proc. § 1512).

Plaintiff claims that the act in purporting to require plaintiff to turn over to defendant the money represented by these barred claims deprives the plaintiff of its vested right to interpose the defense of the bar of the statute of limitations to said claims. Plaintiff asserts that the act to this extent takes from it substantive rights without due process of law in violation of the Constitution of the State of California and the Fourteenth Amendment to the Constitution of the United States.

Plaintiff instituted a declaratory relief action to resolve the issues described above. The trial court held that the act in purporting to require plaintiff to turn over to defendant unclaimed wages for which claims are barred by the statute of limitations deprives plaintiff of its vested right to interpose the statute of limitations to said claims; further, the act to this extent takes from plaintiff substantive rights without due process of law and violates the Constitution of the State of California. Defendant urges on this appeal that the trial court's decision on the constitutional validity of the act is in error.

The central question in this appeal is whether the Legislature has the power to deny plaintiff the right to interpose the statute of limitations as a defense to claims which have been barred by the passing of the period prescribed by the statute. To resolve this question it is necessary to consider the effect of the running of the statute of limitations in California.

The California Supreme Court settled both of these questions forty-four years ago in its landmark decision, Chambers v. Gallagher, 177 Cal. 704, 171 P. 931. In that case the defendant was an executor who failed to pay inheritance taxes which were due and payable in 1902. A three-year period of limitation for actions upon a liability created by statute ran in 1905. In 1913 the Legislature enacted an amendment to the inheritance tax law which provided as follows: ‘The provisions of the Code of Civil Procedure relative to the limitation of time of enforcing a civil remedy shall not apply to any proceeding or action taken to levy, appraise, assess, determine, or enforce the collection of any tax or penalty prescribed by this article, and this section shall be construed as having been in effect as of date of the original enactment of the inheritance tax law * * *.’ (Revised Inheritance Tax Act of 1913, Stats.1913, p. 1068.)

In 1914 the State Controller filed a petition claiming the inheritance tax from defendant. On appeal from a judgment for defendant after his demurrer was sustained, the Supreme Court held the act of 1913 inoperative to revive the right of action of the controller which had become barred by the statute of limitations. The Supreme Court adopted the doctrine stated in Wood on Limitations, 4th edition, section 11, pages 45–46, as follows: “Statutes of limitation relate only to the remedy, and may be altered or repealed before the statutory bar has become complete, but not after, so as to defeat the effect of the statute in extinguishing the rights of action. * * * It has been held in a case decided by a majority of the Supreme Court of the United States (Campbell v. Holt, 115 U.S. 620, 6 Sup.Ct. 209, 29 L.Ed. 483), that, in actions upon debt, contract, or any class of actions in which a party does not become invested with the title to property by the statute of limitations, the Legislature may by a repeal of the statute of limitations, even after the right of action thereon is barred, restore to the plaintiff his remedy thereon, and divest the other party of the statutory bar. The doctrine of this case is undoubtedly technically correct, and was suggested in the first edition of this work. It is, however, opposed to the great weight of authority in this country, and to the policy of these statutes. There can be no question that the Legislatures of the several states by the passage of the statute of limitations intended a permanent divestment of a right of action in all matters to which the statute relates, when it had run against them, and they had thereby become barred. And while it may be, as already suggested, that the reasoning of the court is correct, yet the wisdom of the doctrine announced is questionable.”

When the limitation period runs the obligor or other prospective defendant gains an immunity from liability. In many states including California, this immunity has been regarded as a vested right, with the result that the Legislature cannot make an extension or modification operate retroactively so as to revive a claim previously barred. (Chambers v. Gallagher, supra, 177 Cal. 704, 171 P. 931.)

The United States Supreme Court has long held the contrary view, definitively stated in Campbell v. Holt, 115 U.S. 620, 6 S.Ct. 209, 29 L.Ed. 483 and reaffirmed in Chase Securities Corp. v. Donaldson, 325 U.S. 304, 65 S.Ct. 1137, 89 L.Ed. 1628.

In Tannhauser v. Adams, 31 Cal.2d 169, at page 177, 187 P.2d 716, at page 721, 5 A.L.R.2d 1015 the Supreme Court commented on the effect of the running of the statute of limitations: ‘By the running of the statute ‘the title to the property irrespective of the original right is regarded as vested in the possessor’ and even ‘the subsequent repeal of the limitation law cannot be given a retroactive effect so as to disturb the title.’ [Citations]'

Defendant strongly urges in his briefs that the rule of Campbell v. Holt, supra, 115 U.S. 620, 6 S.Ct. 209, 29 L.Ed. 483, should be adopted in California as to claims arising out of a contractual relation. But the California Supreme Court expressly rejected the doctrine of Campbell v. Holt, supra, as being ‘opposed to the great weight of authority in this country, and to the policy of these statutes.’ (Chambers v. Gallagher, supra, 177 Cal. 704, 708, 171 P. 931, 933.)

Applying the well settled rule of Chambers v. Gallagher, supra, 177 Cal. 704, 171 P. 931, to the facts of this case it is clear that plaintiff has a vested right to raise the statute of limitations (Code Civ.Proc. § 337) as a defense to claims by plaintiff's employees, ex-employees or persons claiming under any of them for unclaimed wages due and payable before September 18, 1955, and where no action was filed by said claimants before September 18, 1959.

If given effect, section 1515, Code of Civil Procedure, would make unclaimed wages available through the State Controller to these claimants whose actions were otherwise barred by the statute of limitations by reviving their expired remedies. Clearly, Chambers v. Gallagher, supra, 177 Cal. 704, at pages 708–709, 171 P. 931, at page 933 ruled on this precise point in its language: ‘There can be no question that the Legislatures of the several states by the passage of the statute of limitations intended a permanent divestment of a right of action in all matters to which the statute relates, when it had run against them, and they had thereby become barred.’

The Commissioners on Uniform Laws recognized that provisions of the Uniform Disposition of Unclaimed Property Act which provide that periods of limitation should be no bar to enforcement of the act would be unconstitutional in states in which the statutory bar is deemed a vested right. (9A Uniform Laws Annotated, 267 et seq.)

In New Jersey, where the defense of the statute of limitations is regarded as a vested right, the Supreme Court of that state in State, by Parsons v. Standard Oil Co., 5 N.J. 281, 74 A.2d 565, a case presenting the same issues of law existing in this case, held unconstitutional those portions of the New Jersey Abandoned Property Escheat Act which purported to reach unclaimed wages, claims for which were barred by the statute of limitations prior to passage of the act.

We hold under the authority of Chambers v. Gallagher, supra, 177 Cal. 704, 171 P. 931, that plaintiff's right to the defense of the statute of limitations became vested beyond the power of the Legislature to impair as to claims to unclaimed wages barred on or before September 18, 1959, and that those provisions of the Uniform Disposition of Unclaimed Property Act (Code Civ.Proc. §§ 1500–1527), which purport to require plaintiff to turn over the amount of such claims to defendant deprive plaintiff of its vested right to interpose the bar of the statute thereby taking from plaintiff substantive rights without due process of law in violation of the Constitution of the State of California.

It is unnecessary to determine whether such portions of the act also violate the due process requirements of the Fourteenth Amendment to the Constitution of the United States.

The judgment is affirmed.

BURKE, Presiding Justice.

JEFFERSON and BALTHIS, JJ., concur.

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