Fredericks v. Hammons

• Citation: 33 Ariz. 310,264 P. 687
• Decision Date: 28 February 1928
• Docket Number: Civil 2679
• Parties: R. N. FREDERICKS, Appellant, v. A. T. HAMMONS, as State Superintendent of Banks for the State of Arizona, and as Receiver of THE PRESCOTT STATE BANK, a Corporation, Insolvent, Appellee
• Court: Supreme Court of Arizona

264 P. 687

33 Ariz. 310

R. N. FREDERICKS, Appellant, v. A. T. HAMMONS, as State Superintendent of Banks for the State of Arizona, and as Receiver of THE PRESCOTT STATE BANK, a Corporation, Insolvent, Appellee

Civil No. 2679

Supreme Court of Arizona

February 28, 1928

APPEAL from a judgment of the Superior Court of the County of Yavapai. Joseph S. Jenckes, Judge. Affirmed.

Mr. J E. Russell, for Appellant.

Mr John A. Ellis, for Appellee.

OPINION

ROSS, C. J.

This is an action to enforce a stockholder's double liability. The Prescott State Bank, an insolvent, on November 25th 1925, was taken possession of by A.T. Hammons, state superintendent of banks. It was incorporated in 1916 with a capital stock of $100,000, divided into 1,000 shares of the par value of $100 each, all issued and outstanding. The defendant, R. N. Fredericks, at the time the bank superintendent took over the bank for liquidation, was the owner of 289 shares of such stock. In the insolvency proceeding, upon the petition of the superintendent of banks, on January 13th, 1926, the court, after notifying the defendant, and all other persons interested, investigated the assets and liabilities of the bank and determined that it was insolvent as of the date the superintendent took it over, and found that its liabilities exceeded its assets by more than its entire capital stock of $100,000, and that it was necessary to collect from the stockholders their constitutional and statutory liability to meet its obligations to its creditors, and in such proceeding the superintendent of banks was ordered to enforce the double liability of the stockholders, including defendant, to the full extent of their stock.

On May 26th, 1926, in obedience to the court's order, the superintendent of banks instituted this suit setting up the facts above stated, and others, as his cause of action against defendant, Fredericks. At the same time he caused a writ of attachment to be issued and levied upon certain property of defendant; also a writ of garnishment was issued and served upon certain creditors of defendant. The defendant filed motions to dissolve the two writs on the ground that the debt sued for was not of the character authorizing or permitting attachment or garnishment, in that the demand was not based on a contract, express or implied, for the direct payment of money. This motion was denied, and its denial is assigned as error.

By demurrer defendant made the point that the complaint was bad, as not being in the nature of a creditor's suit, but a direct suit to collect the liability for the benefit of the creditors. The overruling of the demurrer is assigned as error.

It is next claimed the enforcement of the double liability against defendant impairs the obligations of contract, in violation of section 10 of article 1 of the Constitution of the United States. We will take up these propositions in their order.

This assignment involves the ruling on defendant's motion to dissolve the writs of attachment and garnishment. The use of attachment by plaintiff to secure and obtain the fruits of his judgment, in case he is successful, is authorized in certain kinds of debts or demands whenever overdue by paragraph 1393, and when not due by paragraph 1396, of the Civil Code of 1913. One of the grounds upon which attachment may be issued is when the action is upon a "contract, express or implied, for the direct payment of money" made or payable in the state and not adequately secured. Subd. 1, par. 1393, supra. It was upon this ground the attachment was procured. The defendant contends that a stockholder's double liability does not arise out of contract, but is statutory, and that at all events his liability is not for the direct payment of money. The first contention is not supported either by the text-books or the decisions. According to these authorities, the stockholder's liability is contractual. The constitutional provision (§ 11, art. 14) at the time the defendant acquired the stock was:

"The shareholders or stockholders of every banking or insurance corporation or association shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such corporation or association, to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares or stock."

This definitely fixed defendant's obligations. In accepting the stock he impliedly agreed to abide by such law. It became and was a part of the contract he entered into and he voluntarily gave his consent to be bound thereby. 6 Fletcher, Cyc. Corp., § 4176; 1 Michie, Banks and Banking, § 47. The recent case of Aronson & Co. v. Pearson, 199 Cal. 286, 51 A.L.R. 1380, 249 P. 188, sets forth the reasons for holding stockholder's liability is founded upon contract, as follows:

"The same principle is expressed in Thompson on Corporations (2d Ed.), § 4790, as follows:

"'This liability is not imposed upon stockholders without their consent, for the reason that, where such a statute or constitutional provision exists when a person becomes a stockholder in a corporation, he impliedly at least agrees to become liable to the extent prescribed. In other words, such a provision, under familiar principles, becomes incorporated in, and a part of, the undertaking of the stockholder, and is therefore said to be the result of his stockholder's agreement, and is contractual in its nature.'

"The constitutional and statutory provisions relating to the liability of stockholders become essential terms of the subscription agreement of a stockholder as fully as if they were set forth at length therein. By accepting ownership of stock in a corporation, the stockholder in effect offers to make payment, to the extent of his stockholder's liability, to any person who may extend credit to the corporation during the period of his ownership. Whenever, during such ownership, any person so extends credit to the corporation, 'the offer and the act (of extending credit) combined make a complete contract' between the stockholder and the creditor."

In Adams v. Clark, 36 Colo. 65, 10 Ann. Cas. 774, 85 P. 642, it is said:

"This liability, unlike the liability imposed by the statute upon directors or officers of a corporation for its debts, because of their fraud or negligence in the management of the affairs of the corporation, is not penal in its nature -- to be regarded as a purely statutory liability -- it is a liability voluntarily assumed by the act of becoming a stockholder, and an obligation thus assumed is purely contractual, contains all the elements of a contract, and is to be enforced as such."

This law is so well settled that we deem it unnecessary to cite other authority.

The next contention, to the effect that the liability of a stockholder is not for the direct payment of money, and therefore not within the terms of the statute authorizing an attachment to secure any judgment that might be obtained, is not so easily disposed of. The difficulty grows out of the meaning that should be given to the word "direct." The phrase of which this word is a part is common to the attachment law of California, Montana and Oregon. Section 537, Code Civ. Proc. Cal.; § 890, Code Civ. Proc. Mont.; § 295, Laws Or. 1920.

In our somewhat cursory examination of the decisions from Oregon, we find no case construing the phrase or the word "direct" contained therein. The courts of California and Montana have not had the same smooth sailing. In the early case of Hathaway v. Davis, 33 Cal. 161, its meaning first came into question. In that case the court admitted its inability to divine its meaning when considered alone, but construed it in connection with subdivision 1 of section 538 of the same Code (the same as our paragraph 1394), which requires the plaintiff to be able to swear that the defendant is indebted to him in a certain sum, specifying the amount, to exclude causes of action for unliquidated sums of money and to include collateral contracts holding that such contracts or promises may be "for the direct payment of money," as well as the principal promise.

Since the decision in the Hathaway case the construction of the phrase therein announced has been followed in several cases. It is said in 3 Cal. Jur. 416, § 12:

"In the application of this rule of construction it is held that a bail bond, an official bond, an appeal bond, and a contract of guaranty, are contracts 'for the direct payment of money.' Likewise, an action against a stockholder to recover unpaid installments upon a subscription to the stock of a corporation; or to recover his proportion of a debt of the corporation, is one upon a contract 'for the direct payment of money.' And the same is true of an action by a county to recover a license tax." (Italics ours.)

See, also, Kennedy v. California Savings Bank, 97 Cal. 93, 33 Am. St. Rep. 163, 31 P. 846; Aronson & co. v. Pearson, supra.

In Whittier v. Visscher, 189 Cal. 450, 209 P. 23, the court, in discussing the nature of a stockholder's liability, said:

"While it is true that it is the authority of the statute which creates the general liability of the stockholder on the corporation indebtedness, in a case like this, it is the contract of the corporation which creates the indebtedness. In assuming the status of a stockholder each owner of shares of stock in effect empowers the corporation by its act to bind him by its obligations. It is a separate independent liability, but it is created by and arises on the contract. There is nothing that we can discover in the creation of the stockholder's liability or in its enforcement, where it arises on a contract of the corporation, to differentiate it...