author: SHENK, J. CURTIS, J., Dissenting.

text:
    [L. A. No. 16540.
    In Bank.
    February 8, 1940.]
    In the Matter of PACIFIC COAST BUILDING-LOAN ASSOCIATION, OF LOS ANGELES, CALIFORNIA (a Building and Loan Association). LOUIS C. DRAPEAU, Building and Loan Commissioner, etc., Petitioner and Respondent; H. P. DRAKE et al., Claimants and Respondents, v. CUSTODIANS OF TELLURIDE ASSOCIATION et al., Appellants.

      W. B. Waldo, Drumm, Tucker & Drumm, Albert Sidney Brown and Carpenter, Babson & Fendler for Appellants.
    L. K. Vobayda, in pro. per., James C. Ingebretsen, Bobert Lee Collins, John C. Campbell, Otto A. Ehlers, Franz B. Sachse, Jess E. Stephens, H. L. Carnahan and J. W. McKinley for Bespondents.
   SHENK, J.

This is a,n appeal from an order of the superior court instructing petitioner and respondent, Building and Loan Commissioner of this state, as to the manner of payment of claims against Pacific Coast Building-Loan Association, in liquidation.

On January 11, 1932, the association being insolvent, the commissioner took possession of its business and assets, for the purpose of liquidation. On July 11, 1932, the Superior Court of Los Angeles County, the principal place of business of the association, upheld the action of the commissioner. He thereupon began to liquidate the assets and pay claims.

On March 25, 1937, the commissioner petitioned the superior court for instructions with reference to the payment of claims. It appeared that all general creditors had been paid in full; that holders of investment certificates had been paid principal and interest up to the time the business was taken over; that holders of membership shares had not been paid anything as yet, and that a substantial surplus remained in the hands of the liquidator. The holders of investment certificates demanded payment of interest on their claims for the period of liquidation. The holders of membership shares demanded that the principal of their claims be paid before any such interest was given to the investment certificate holders. In response to the commissioner’s request for advice, the court ruled that the membership shareholders were creditors of the association; that no interest was payable to general creditors or investment certificate holders for any period since the commencement of liquidation until the principal sums of the claims of membership shareholders should be paid.

This appeal was taken by representatives of the investment certificate holders.

In figures, the facts are as follows: The membership shares, held by 4,400 owners, amounted to $3,420,563.07, $1,113,809.92 being pledged for loans, and $2,306,693.15 being “free” or unpledged. The investment certificates had claims in the sum of $3,556,897.35. General outside creditors had claims amounting to $5,950.90. It is estimated that only about $1,800,000 of additional assets will be recovered, with the certainty, therefore, that even without payment of interest to the investment certificates, the funds will be insufficient to pay membership shares in full.

The theory of appellants may be summarized as follows:

(1) Investment certificate holders are creditors of the association, entitled to the same preferential treatment as general creditors.
(2) Membership shareholders are stockholders, much like those of an ordinary business corporation; hence they are’ not creditors.
(3) Creditors of a corporation in liquidation are entitled to be paid in full on their claims before stockholders receive any payment on account of their shares.
(4) Payment in full includes interest during the period of liquidation and up to the time of payment. Whether such interest is claimed at the legal rate, or at the rates specified in the individual certificates (5 per cent, 6 per cent and 7 per cent) is not entirely clear.

It is conceded that the investment certificate holders are creditors; the nature of their investment, as will hereinafter appear, is plain. It may be further granted that membership shareholders have some voice in the affairs of the corporation which the holders of investment certificates do not have. Yet these concessions do not solve the problem, for they do not positively define the nature of the relationship of the membership shares to the corporation. One may, with assurance, declare that a common stockholder of an ordinary business corporation is not a creditor of the corporation, and his claim would be subordinated to those of creditors. (Greva v. Rainey, 2 Cal. (2d) 338 [41 Pac. (2d) 328].) But to conclude from this fact that a membership shareholder of a building and loan association cannot be a creditor in any sense is to ignore the peculiar character of such shares. Building and loan associations have grown rapidly in the past few decades, and have developed widely differing types of organization and stock structure. Membership, management, methods of raising capital, indeed, all their operations are so diverse that it is impossible to speak with precision of the relationships unless discussion is confined to a particular association formed under the laws of a single state. (See, Sundheim, Building and Loan Association, p. 12 et seq.; Fidelity Savings & Loan Assn. v. Burnet, 65 Fed. (2d) 477, 479 [62 App. D. C. 131].) Even in our own state, as will appear, we must avoid hasty conclusions drawn from eases dealing with associations formed under old laws different from those in force today. Accordingly it is necessary to examine the organization and structure of this particular association in the light of the governing statutes, articles of incorporation, and by-laws. When we do we find that the membership share is a hybrid affair, the member having some of the characteristics of a stockholder and others of a creditor. Whether those elements which make him a creditor are of sufficient substance to warrant the procedure adopted by the lower court in this case is the question to be answered by our examination.

The association was incorporated in May, 1925, under the provisions of sections 634 and 648a of the Civil Code. These and other sections of the code dealing with building and loan associations were superseded in 1931 by the Building and Loan Association Act. (Stats. 1931, p. 483; DBering’s Gen. Laws, Act 986.) Except as noted herein no material changes were made in the prior law by the new act which would affect this case; and the parties concede that the act governs these liquidation proceedings.

The said sections 634 and 648a of the Civil Code, as amended in 1907 and 1909, established a new type of permissible capital structure for building and loan associations. The principal characteristic of the new plan was the provision for a .guarantee capital stock, set apart as a fixed, non-withdrawable capital, to ‘ ‘ protect and guarantee all other stockholders and creditors against any loss”. (Civ. Code, old sec. 634 [d] ; see, also, Building and Loan Association Act, see. 4.01.) Such guarantee stock, or as an alternative, a certain fixed reserve fund, must be issued in certain percentages of the amount of outstanding investment certificates. (Civ. Code, old see. 634 [e]; Building and Loan Association Act, sec. 5.03.) The theory behind this plan is that the other shares and certificates will receive a more or less fixed reasonable rate of return, with the guarantee stock (or reserve fund) as a protection, and that those who supply the capital for the guarantee stock will receive the entire surplus over the amount necessary to pay the fixed return to the other investors, and will also control the business. In brief, the guarantee stockholders take the risks, manage the affairs, and receive the profits in excess of the fixed charges. Only a few jurisdictions permit this type of association to be formed. (Sundheim, Building and Loan Associations, p. 18.)

Guarantee stock was authorized by our statutes in the following manner: Under section 634 of the Civil Code, an existing association could issue the new form of stock. Under section 648a, enacted in 1909, the corporation could, if desired, be formed with guarantee stock alone, thereafter obtaining working capital by issuance of membership shares, units or certificates. Pursuant to the statutory authority of section 648a, the present association was incorporated with guarantee capital' stock only, and it then raised its working capital by issuance of membership shares and investment certificates. These will now be analyzed, as their nature appears in the statutes, articles and by-laws.

First, guarantee capital stock was authorized at $100 per share, the total authorized amount being 5,000 shares. The said stock is non-withdrawable, and no loans can be made upon it. (Civ. Code, old sec. 637.) It must be kept unimpaired, guarantees losses, and is assessable and liable for debts. (Civ. Code, old sec. 634 [d] ; see, Act, secs. 4.01, 7.01.) A majority of the board of directors of the association (5 out of 9 members) must be selected from the holders of guarantee stock, and officers are chosen by this board. No action concerning financial matters can be taken except by affirmative vote of a majority of the whole board. In liquidation, after all claims and expenses are paid, a majority of the holders of such stock may have the surplus delivered to the association and obtain title again, free from the commissioner’s claim. (Act, sec. 13.16.)

Second, membership shares were authorized. These are either full paid shares, prepaid shares, or instalment shares, all with a par value of '$100. The instalment shares pay dues of 50 cents per month on each share until the payments and accrued dividends amount to $100. Dividends are paid or credited to the shareholders at rates fixed by the board of directors, there being no guaranteed rate. They have no further right to participate in profits, if such a dividend is specified. They have the right to borrow from the association and pledge their shares as security. The shares aie nonassessable. (Act, sec. 7.07.) They are withdrawable (Act, sec. 3.02), and are subject to forced retirement in the discretion of the directors. (Civ. Code, old see. 635; Act, see. 3.04.) They (the members) are permitted to participate in meetings and vote their shares. The by-laws declare that membership shareholders “are members of the corporation, with all the rights, power and privileges incident thereto, including a right to vote at all meetings of the shareholders and members—one vote for each share—and are subject to the same restrictions and liabilities”. However, it appears to have been the practice for these members at the time of application for membership shares to execute proxies in favor of the secretary.

The third classification was the investment certificate, a type of unsecured note or debenture, used by the association in raising funds from time to time, as needed. (See, Act, sec. 5.01.) The purchasers pay a certain sum and receive a certificate in a form similar to a promissory note, with attached interest coupons. The terms of the notes vary from one to three years. No dividends are paid, but a fixed sum as interest as specified, ranging in different instances from 5 per cent to 7 per cent. The certificates may' be pledged for loans and are subject to enforced retirement or redemption. (Act, sec. 5.06.) The holders have no voice in management, do not participate in the business affairs, and the by-laws provide: “Holders of either form of these Investment Certificates are not members of the corporation and have none of the rights, powers and liabilities incident thereto.” They are immune from liability for assessments or debts. (Act, see. 5.01.) They have a special priority in the event of liquidation; they are “entitled upon liquidation of an association to receive payment in full before any payment or distribution shall be made to shareholders or stockholders”. (Act, sec. 5.01.)

It is apparent from the most cursory examination of the above that a sharp distinction exists between guarantee stock and membership shares. The definitions in the statute make this distinction at the outset. “Shareholder” is synonymous with “member” and means the holder of “shares”. “Stockholder” means the holder of “stock”. “Shares” refers to “withdrawable shares” which constitute “membership shares”. “Stock” means “guarantee stock”. (Act, sec. 1.01; see, also, Civ. Code, old sec. 648a.) The guarantee stock, as already pointed out, is permanent, non-withdraw-able, assessable, and liable to claims of creditors. None of these things is true of membership shares. The guarantee stockholders take the major risk, and in return have the controlling voice in management (since a majority of the board must be selected from their group). They receive all the profits over the moderate return by way of interest or dividends going to others. The very name of the guarantee stock discloses a primary purpose, the creation of a fund for the protection of others who invest in the association, including membership shareholders and investment certificate holders. In liquidation, their rights are expressly subordinated, not only to investment certificate holders, but also to membership shareholders. (Act, see. 13.16.) These guarantee stockholders closely resemble the common stockholders of an ordinary business corporation, in both powers and liabilities, and bear no resemblance at all to the traditional members of a building and loan society or association. The membership shares, however, have none of these characteristics, but instead are of the familiar type found in the typical building and loan association. The power of the member to withdraw, and the power of the association to compel retirement, are significant indications of the difference between ordinary common stock and guarantee stock on the one hand, and membership shares no the other.

Further study discloses a marked similarity between membership shares and investment certificates. The declared purpose of each type is to secure working capital, which means, it would seem, operating funds rather than an original stated capital or capital stock. Neither is assessable, neither is liable for debts. Both are withdrawable, and both are subject to forced retirement. Both may be pledged for loans. Both are protected by the guarantee stock, and such stock is subordinated to both in the payment of claims on liquidation. There is an obvious legislative purpose to treat these two forms of investment in most eases as substantially similar in so far as the rights of the investors are concerned.

What then are the differences between membership shares and investment certificates, upon which appellants rely? There are only three of consequence. First, the return on the investment differs. Investment certificate holders receive a fixed rate of interest. Membership shareholders are entitled only to dividends as determined by the board of directors. But such a dividend must be specified, or they share in the profits. In practice, dividends are specified. The result is some more or less fixed return, in both types of investment, varying not more than a few per cent. Second, the investment certificate holders have no voice in the management of the association. The membership shareholders may attend meetings and vote. This distinction is less impressive when we consider the fact that the majority of the board, with full control over financial matters, must be guarantee stockholders, so that in truth the membership shareholders only help select the management, but have no genuine power of management themselves. Third, the investment certificate holders have a liquidation preference. They are entitled to have their claims paid in full before any payments are made to other kinds of shares (except in the case of exchangeable shares under late legislation).

We should not be led astray, when observing these differences, and come to the hasty conclusion that they determine a point which, upon further consideration, has nothing to do with them. The difference in voting rights, for example, is not conclusive. Suppose the certificate holders were themselves given a vote. Would this outweigh all the other factors which make them creditors and itself turn them into stockholders? Obviously it would not. Nor does the liquidation preference of investment certificates have the effect claimed by appellants. The investment certificate holder is without doubt a preferred creditor, but this does not make the membership shareholder any less a creditor, though an inferior one. In short, it appears that the membership shares are fundamentally similar to the investment certificates, and the differences noted are not of such significance as to overcome this similarity, in respect of the rights of the investor against the association. We conclude that the membership shareholders are creditors of the association.

The cases relied upon by appellants to deny the status of creditors to holders of such shares are all distinguishable.

Groover v. Pacific Coast Sav. Soc., 164 Cal. 67 [127 Pac. 495, Ann. Cas. 1914B, 1261, 43 L. R. A. (N. S.) 874], was an old form of association, incorporated prior to the statutes of 1891 governing building and loan associations, and whether its structure bore any substantial resemblance to that of the association here involved does not appear. But aside from this, the issue in the case was whether upon insolvency borrowing instalment shareholders should be given a credit on their debts in the amount of payments made on their stock. It was held that to permit this would be to discriminate against nonborrowing members and outside creditors, and to violate the equitable principle of equality. In the course of its opinion the court referred to the distinction between a stockholder and a borrower, and held that the dual position 'of the borrowing stockholder could not be ignored. In the present case many of the borrowing shareholders were credited with their share payments, and no complaint was made as to this action. The problem before us here, as to the respective rights of membership shareholders and investment certificate holders, is one upon which the Groover case throws no light. Not only was the controversy there over a different issue, but it does not appear that there were any investors in a- position comparable to that of the investment certificate holders.

Pacific Coast Sav. Soc. v. Sturdevant, 165 Cal. 687 [133 Pac. 485, 49 L. R. A. (N. S.) 1142], a case involving the same association' as the Groover ease, was concerned solely with the question whether stockholders whose stock had matured and who had given notice of withdrawal and demand for payment prior to insolvency, were entitled to priority over other stockholders, in liquidation. The court held that the principle of equality among members applied; that all should be treated alike, without preference; and that the notice of withdrawal and demand did not change them into general creditors with a right to preferential treatment. Again it must be emphasized that the conflict there was between members or stockholders, and no class of investment certificate holders existed. As for the general language of this and the preceding case, far from supporting the position of appellants, it is actually contrary thereto, for it stresses the principle of equality among those similarly situated. As we have already shown, the marked similarity between membership shares and investment certificates would, under the language of both these cases, suggest the denial of preferences rather than the giving of them.

Equally distinguishable are several federal cases cited by appellants. In Fidelity Savings & Loan Assn. v. Burnet, 65 Fed. (2d) 477 [62 App. D. C. 131], an association with both guaranty stock and membership shares, the only question was whether the normal return paid to the membership shares was “interest”, deductible under the Revenue Act of 1921, or “dividends” which would be nondeductible. The court concluded that the shareholders were not creditors receiving interest, but stockholders receiving dividends, and that these were not deductible payments. There is no reason to dispute the soundness of this conclusion, for the court was dealing with a solvent association, and the question of rights in liquidation was not at all involved. As will hereinafter be seen, the court expressly recognized that an entirely different view is properly taken upon insolvency. In Harry E. Jones, Inc., v. Kemp, 74 Fed. (2d) 623, and Barrymore v. Kemp, 69 Fed. (2d) 335, the sole question was whether investment certificate holders were entitled to parity with general creditors in payments on liquidation. There was no consideration given to the status of membership shareholders in either case.

On the other hand, there are several decisions which have, in various situations, recognized that members or shareholders of an insolvent association in liquidation may be treated as creditors.

In re Western States Building-Loan Assn., 50 Fed. (2d) 632, was a bankruptcy proceeding, and the question was whether certificate holders or shareholders were creditors with provable claims. Emphasizing the right of withdrawal, the court said: “It is to be noted that the contract relationship established does make the association the debtor of its shareholder”, and wrent on later to explain: ‘1 When an association is forced into liquidation, and as a consequence is in a position no longer to fulfill its obligations, it must be that the debt matures, and that, in whatever fund is realized upon a sale of the assets, the debtor or shareholder is entitled to participate.” In Fidelity Savings & Loan Assn. v. Burnet, supra, strongly relied upon by appellants, the Western States case is considered and distinguished, the court conceding that upon insolvency, the shareholder gains the rights of a creditor. Likewise, the ease of In re Guaranty Building & Loan Assn., 49 Fed. (2d) 776, while denying shareholders the right to institute bankruptcy proceedings, recognizes that “they become invested with the character of creditors upon the adjudication in bankruptcy”. (See, also, Sundheim, supra, see. 193; Rummens v. Home Savings & Loan Assn., 182 Wash. 539 [47 Pac. (2d) 845, 100 A. L. R. 570] ; Mott v. Guardian Bldg. & Loan Assn., 140 Or. 489 [14 Pac. (2d) 447].)

From the foregoing discussion, it must be concluded that the membership shareholders herein are to be treated as creditors of the insolvent association in liquidation. With this established, the determination of the precise point at issue becomes a relatively simple matter. We are not concerned with the rights of general outside creditors, which are universally conceded to be prior to those of members. Our only problem is to determine the rank of the claims of shareholders and investment certificate holders. The statute expressly places the investment certificate holders in a more favorable position than the membership shareholders; but this does not wmrrant the courts in still further extending the preferential position established by statute. The law gives preference in the matter of payment of the claim, which, reasonably interpreted, means the principal sum due; and this claim has already been satisfied in full. As to interest the statute is silent. And, in view of that silence, the statutory preference should logically end at that point, and the problem must then be solved in accordance with the usual equitable principle governing liquidation, namely, the principle of equality among creditors. Stated broadly, the rule is that one creditor is not entitled to payment of interest on his claim in receivership, bankruptcy, or other form of liquidation, after the commencement thereof, where the assets are not sufficient to pay the principal of all claims in full. (See, Greva v. Rainey, 2 Cal. (2d) 338 [41 Pac. (2d) 328] ; Glenn on Liquidation, secs. 488, 510.)

The above rule was announced by this court recently, upon a full review of the authorities, in Greva v. Rainey, supra. A bank was in liquidation and the respective rights of stockholders and various depositors were involved. This court held first that the depositors, as creditors, were entitled to payment of not only the principal of their claims but interest during liquidation, before any payments should be made to stockholders. This distinction between the rights of creditors and stockholders is well settled, and as applied to the present case, would mean that any of the various kinds of creditors of the association would be entitled to interest as against the guarantee stockholders. The second holding in the Greva case was that as to the different classes of depositors, that is, those in the commercial and those in the savings departments, neither should receive interest until payment of the entire principal sum to all. We said (p. 346): “The decisions . . . are uniform to the effect that in so far as is possible the creditors of an insolvent debtor must be treated on a basis of equality . . . That, indeed, is the premise from which springs the rule that interest ordinarily will not be computed nor paid from the date of the suspension of business, or commencement of the receivership or other liquidation procedure. Therefore, there being but one debtor involved, all creditors are entitled to equal consideration except where the statute expressly provides otherwise, and then only to the extent provided.” And quoting from People v. American Loan & Trust Co., 172 N. Y. 371 [65 N. E. 200], we said further (p. 347) : “As the statute does not say that preferred claims shall be paid with interest to the date of payment, the courts should not, because the claims of substantially all the creditors, both preferred and unpreferred, were alike in origin, for they /were created by the deposit of money; and preference in derogation of the common law should not be extended by construction beyond the express command of the statute. ’ ’

It follows that the lower court, correctly instructed the respondent Building and Loan Commissioner as to the apportionment of funds in payment of claims against the association.

The order is affirmed.

Edmonds, J., Gibson, J., Carter, J., and Waste, C. J., concurred.

CURTIS, J., Dissenting.

I dissent. I take issue with the following statement found in the early part of the majority opinion: “The theory behind this plan [the plan under which said association was organized] is that the other shares [membership shares] and certificates will receive a more or less fixed reasonable rate of return, with the guarantee stock (or reserve fund) as a protection, and that those who supply the capital for the guarantee stock will receive the entire surplus over the amount necessary to pay the fixed return to the other investors, and will also control the business. In brief, the guarantee stockholders take the risks, manage the affairs, and receive the profits in excess of the fixed charges. ’ ’ The opinion is based solely upon this theory. The substance of the entire theory is stated in the last sentence of this statement. This statement, in my opinion, does not correctly set forth the respective rights, duties and obligations of the guarantee stockholders and the holders of membership shares.

In the first place, the guarantee stockholders do not take the risks of the association alone, but assume them only in part and jointly with the holders of membership shares. If the association fails to make any profit, after paying the general running expenses of the association and the interest due on the investment certificates, the holders of membership shares, like the guarantee stockholders, receive no return on their investment. If there is a surplus after paying these expenses and interest, this surplus may be paid out in dividends to both the guarantee stockholders and the holders of membership shares. The holders of membership shares are entitled to dividends at the same rate as is allowed the guarantee stockholders. The only risk assumed by the guarantee stockholders, not assumed by the membership shareholders, is that the stock of the former is liable for assessment and to creditors.

The claim that the guarantee stockholders have the controlling voice in the management of the association is based upon a provision of the by-laws that five out of nine directors must be guarantee stockholders, but these five directors, as well as the other four directors, are elected by the combined votes of the guarantee stockholders and the holders of membership shares, each entitled to one vote. From the character of an association organized like the Pacific Coast Building-Loan Association, it is obvious that the number of membership shares would exceed by far the guarantee stock. It, was so in the present association as the holders of membership shares largely predominated over the guarantee stockholders in the proportion of over ten to one. There were 2,755 shares of guarantee stock, and over 34,000 membership shares outstanding at the time this association was taken over by the commissioner. The shareholders, therefore, were able to control the election of the board of directors, who in turn managed the affairs of the association. While it is true that five of the nine directors were required to be holders of guarantee stock, if they owed their position to the vote of the holders of membership shares, it is only reasonable to assume that they would carry out the wishes of the power that elected them. Furthermore, there were twenty-nine holders of membership shares, who were also holders of guarantee stock. There was nothing to prevent the membership shareholders from casting their votes for at least five of these holders of both guarantee stock and shareholder stock, and together with the four that they might elect from their own membership, elect a board of directors consisting wholly of holders of membership shares. In such an event, which is not only possible but probable in the management of an association with a corporate structure like the Pacific Coast Building-Loan Association, the management of the association would be in the entire control of the holders of membership shares. It is not correct, therefore, to say that the guarantee stockholders manage the affairs of the association. They may do so only with the consent and approval of the holders of membership shares. The latter are legally the controlling factor in the management of the affairs of the association. The majority opinion refers to the custom of holders of membership shares to execute proxies in favor of the secretary, but they were under no legal obligation to execute such proxies, and they might recall them at any time.

Neither can it be correctly said that the guarantee stockholders receive the profits in excess of the fixed charges. The fixed charges are the expense of conducting the association and the interest on borrowed money, including the interest on the investment certificates.' After these charges have been paid, the balance, if any, belongs to the stockholders, both guarantee stockholders and membership shareholders, and may be paid to' them in dividends. The dividends are declared by the board of directors, and must be paid equally on the stock, both of the guarantee stockholders and that of holders of membership shares. This dividend is not a fixed charge, but is only payable by resolution of the directors and when declared is paid alike to both classes of stockholders.

It is apparent, therefore, that the distinction which the majority opinion makes between these two classes of stockholders has little, if any, basis to support it. On the other hand, these two classes do possess many points of similarity which would indicate that they are each stockholders of the association, although they may not have equal rights in the corporate property, and their duties and liabilities may differ in some respects. They each are members of the corporate 'body. They have equal voting privileges. The members of each class may act as directors and officers of the association. They are entitled to equal dividends on their stock. These rights and privileges are usually enjoyed only by stockholders of a corporation, and when they arise by reason of a person’s relation to a corporation, invariably constitute that person a member of a corporation. Then again the name of the security—“membership shares”—is a clear indication that it was intended that the owners thereof were to be stockholders in the corporation. The word “shares”, when used in connection with an interest in a corporation, invariably denotes the interest a stockholder has in the corporate property. Not content with designating the corporate interest of this class of investors in a building association as a “share”, the act went further and described it as a -“membership share”, further indicating that the owner thereof was to be a member of the corporation or a stockholder thereof.

It is true that the guarantee stockholders were entitled to participate in the reserve fund, which right was not enjoyed by the holders of membership shares, but this right given to tlie former does not affect the status of the latter as members of the corporation. Mere inequality in the right of different classes of stockholders to share in the profits of the corporation does not take either class out of the stockholders’ status. Section 290 of the Civil Code provides for different classes of stockholders with different rights and liabilities, yet all are stockholders of the corporation. The laws of this state permit the formation of a corporation with preferred and common stock. The rights of these two classes of stockholders to share in the profits of the corporation are different, yet the members of each class are stockholders.

There may be other slight differences between the rights and liabilities of guarantee stockholders and those of holders of membership shares, but they are not so fundamental that they change the character of the latter and constitute them creditors instead of stockholders, when they possess all the characteristics of stockholders above enumerated.

Particular reliance is placed in the majority opinion upon the right of withdrawal which may be exercised by holders of membership shares, which right is not enjoyed by guarantee stockholders. Conceding that after this right has been exercised by shareholders, those exercising such right thereafter become creditors of the corporation and can no longer be regarded as stockholders, it does not follow that prior to exercising this right of withdrawal and from the inception of their acquiring membership shares, they were merely creditors. After exercising their right of withdrawal pursuant to the by-laws of the association, their only right therein was to receive the amount due on their surrendered shares. The association then owed them a debt, and that was its only obligation to them, and that was their only right. Prior thereto, their rights were entirely different. Before notice of withdrawal they had no right to demand' of the association the amount called for by their shares, but were remitted to dividends on their shares. As we have seen, prior to withdrawal, they had all the rights of a stockholder including not only the right to receive dividends on their stock, but the right to vote at all its meetings, act as a director and officer of the association, and as we have seen, through this right they had a part in, and it was even within their power, acting in conjunction with other holders of membership shares, to actually manage the affairs of the corporation. It seems too clear for argument that by exercising their right of withdrawal their status had been completely changed. Their rights as shareholders had been wiped out, and the new rights as creditors had been created.

Those holders of membership shares, who were such at the time this association was taken over by the Building and. Loan Commissioner for the purpose of liquidation, and they include all such shareholders who are now contending that they are mere creditors of the association, occupy an entirely different position. Respecting the rights of such shareholders, who attempted to withdraw after the Building and Loan Commissioner took over the association for the purpose of liquidating, the accepted rule is, “The rights of withdrawal ‘are provided for with respect to going concerns only.’ (Reddick v. United States B. & L. Assoc., 106 Ky. 94 [49 S. W. 1075] ; and Hohenshell v. Home B. & L. Association, 140 Mo. 566, [41 S. W. 948]).” (Pacific Coast Sav. Soc. v. Sturdevant, 165 Cal. 687 [133 Pac. 485, 49 L. R. A. (N. S.) 1142].)' In that case, this court further said, [page 694] “Assuming that a notice of withdrawal given and accepted while the society is actually solvent gives stockholders so withdrawing the status of creditors after the lapse of the time required for notice, we think the burden is upon a stockholder seeking to show that his status has been changed to that of a creditor, to allege and prove the essential fact that the corporation, admittedly insolvent at the time the distribution is sought, was not insolvent when the alleged right of payment accrued.’’

The Sturdevant case was cited with approval in Fidelity Savings & Loan Association v. Burnet, 65 Fed. (2d) 477, 481 [62 App. D. C. 131], where the court referring to the Sturdevant ease construed it as follows: “In Pacific Coast Sav. Soc. v. Sturdevant, 165 Cal. 687, [133 Pac. 485, 49 L. R. A. (N. S.) 1142], a building association had become insolvent. Certain of its stockholders who had the right of withdrawal had given notice of their intention to withdraw. The question was, Did they, by virtue of this notice, change their position from stockholders to creditors, or, as stated by the Supreme Court of California, did they by this fact cease to be stockholders and become creditors? The court answered this question in the negative. It is quite true in that case no guaranty stock had been sold and issued and therefore the provisions of the law subordinating that stock to the other stock did not apply, but the principle decided was conclusive of the legal relation of such shareholders to the association, that is to say, that they did not occupy to the association the same aspect as a depositor to a savings bank. And this, it seems to us, is necessarily correct, for, if it were held that the fact of the issue by the association of permanent stock itself made all other classes of stock debts, and all other stockholders creditors, it might, by the issuance of a negligible amount of guaranty stock relieve practically all of its assets from liability to general creditors except upon an equality with shareholders participating in the conduct of the association’s affairs. Hence it would seem to us that the fact of the issue by the company of guaranty stock has no such significance as is claimed.”

The case of Cook v. Emmet Perpetual & Mutual Bldg. Assn., 90 Md. 284 [44 Atl. 1022], holds that general creditors are entitled to preference over stockholders who gave notice of withdrawal before judicial determination of insolvency where the association was in fact insolvent when the notice was given.

In the present case, it was judicially determined that the Pacific Coast Building-Loan Association was insolvent on January 11, 1932, the day the Building and Loan Commissioner took possession of it for the purpose of liquidation, and it follows from the above authorities that any withdrawal, or any notice of withdrawal, after that date, was ineffectual to transform the stockholder attempting thus to withdraw into a creditor of the corporation.

The main authority relied upon by the majority opinion as holding that these shareholders are creditors of the association is the case of In re Western States Building-Loan Association, 50 Fed. (2d) 632, in which it was held in effect that the right of a holder of membership shares created the association the 1 ‘debtor of its shareholder” and accordingly holders of membership shares were creditors, and were entitled to sign a petition in involuntary bankruptcy proceedings. This case is out of line with the decision in the case of Fidelity Savings & Loan Association v. Burnet, supra, and the other cases relied upon above. The court in the Fidelity Savings & Loan Association ease, supra, refused to follow the earlier ease of In re Western States Building- Loan Association, supra. The last-named ease is a decision of the United States District Court and was rendered by an individual judge while the decision in the Fidelity Savings & Loan Association was by the Circuit Court of Appeals and was the unanimous conclusion of four justices of that court. I submit that, with due deference to the ability of the eminent jurist who wrote the earlier decision, the latter one is entitled to greater weight, as it is later in date, was rendered by a higher court, and was approved by four eminent justices thereof, while the first opinion had only the approval of a single member of the court. But independent of the weight to be given these opinions of the federal courts, the question before us is the construction of a statute of this state. The court in the Fidelity Savings & Loan Association, supra, cited and relied upon two decisions of this state, the Sturdevant case, supra, and Groover v. Pacific Coast Sav. Society, 164 Cal. 67 [127 Pac. 495, Ann. Cas. 1914B, 1261], and is, therefore, in harmony with the law as declared by the decisions of this state, while the decision in the Western States Building-Loan Association makes no reference to either of these two eases, or any other decision of this, or any other appellate court of this state. For this reason alone, the decision in the Western States Building-Loan Association ease, supra, should not be followed by the courts of this state.

The only correct conclusion that can be reached in this case, in my opinion, is that holders of membership shares are members of the association, and therefore are stockholders ; that holders of investment certificates are creditors of the corporation, and are, therefore, entitled to be paid in full, principal and interest, before anything is paid to the stockholders. The case of Greva v. Rainey, 2 Cal. (2d) 338 [41 Pac. (2d) 328], cited in the majority opinion, has no application in this case, as the controversy involved there was between two classes of bank depositors, all of whom were concededly creditors of the corporation. In reaching this conclusion it is not necessary to rely upon section 5.01 of the Building and Loan Act, which expressly provides that, •1 ‘ The holders of investment certificates . . . shall be entitled upon liquidation of an association to receive payment in full before any payment or distribution shall be made to shareholders. ...” The judgment should be reversed with directions to the Building and Loan Commissioner to pay to the holders of investment certificates, interest upon the amount due them on their investment certificates from the date on which the commissioner took over said association for the purpose of liquidation, to the date of payment.

Rehearing denied.


source: Caselaw Access Project

author: SHENK, J.

license: Public Domain

text:
    [L. A. No. 16682.
    In Bank.
    February 8, 1940.]
    In the Matter of PACIFIC COAST BUILDING-LOAN ASSOCIATION OF LOS ANGELES, CALIFORNIA (a Building and Loan Association). JUSTUS F. CRAEMER, Building and Loan Commissioner, etc., Respondent, v. H. P. DRAKE et al., Appellants. In the Matter of PACIFIC COAST BUILDING-LOAN ASSOCIATION OF LOS ANGELES, CALIFORNIA (a Building and Loan Association). JUSTUS F. CRAEMER, Building and Loan Commissioner, etc., v. CLARICE B. HOLMES et al., Appellants.
    [L. A. No. 16699.
    In Bank.
    February 8, 1940.]

      H. L. Carnahan and J. W. McKinley for Appellants in L. A. 16682.
    John C. Campbell, Otto A. Ehlers and Franz R. Sachse for Appellants in L. A. 16699.
    Robert Lee Collins and James C. Ingebretsen for Respondent.
   SHENK, J.

In the case of In re Pacific Coast Building-Loan Association, L. A. No. 16540 (ante, p. 134 [99 Pac. (2d) 251]), this day decided, the Building and Loan Commissioner, as liquidator of Pacific Coast Building-Loan Association, petitioned the superior court for instructions concerning the ranking of claims of investment certificate holders and membership shareholders of the association. His petition showed that investment certificate holders had been or would be paid the principal of their claims in full, and a question had arisen as to whether they should be paid interest thereon for the period of liquidation, in which event the assets would be insufficient to pay even the principal of the claims of membership shareholders. A hearing was had, at which various investment certificate shareholders and membership shareholders appeared by counsel and argued the matter at length. The trial court decided in favor of the claims of membership shareholders, ordering payment of their principal before any interest during liquidation might be paid to investment certificate holders. On appeal, we have affirmed the order.

After the lower court’s order, two groups of counsel representing the successful membership shareholders moved the court for an allowance of attorneys’ fees for their services in the proceeding, to be paid out of the assets of the association. The court denied the motion. In its memorandum opinion explaining the denial of the motion of H. P. Drake et ah, the court declared that in its opinion the services were of the value of $15,000, and that said sum would be allowed if the moving parties were entitled to any allowance. But the court further declared “that this proceeding is not of the character which entitles a successful group to recover attorneys’ fees from the common fund and upon that ground alone the application was denied”. A similar order was made with respect to the application of counsel for Clarice B. Holmes, et al., who sought an allowance of $3,000. (In re Pacific Coast Building-Loan Association, L. A. No. 16699.) An appeal was taken from the order in each case. As the same question is involved in both, the appeals will be disposed of in this opinion and order.

The record in the main appeal leaves no doubt as to the ability and industry of counsel for these groups of membership shareholders, and we find no reason to question the trial court’s conclusion as to the value of their services. The sole question, as said court pointed out, is whether the proceeding was a proper one for the award of attorneys ’ fees. In our opinion it was not.

The doctrine invoked by appellants is one well established in equity. In brief, the rule is that where a common fund exists to which a number of persons are entitled, and a representative suit is brought by one or more for the benefit of the others, to obtain, preserve, or protect the fund, such party or parties suing may be awarded costs, including counsel fees, out of the fund. By this means all of the beneficiaries of the fund pay their share of the expense necessary to make it available to them. (See, generally, Trustees of Int. Imp. Fund v. Greenough, 105 U. S. 527 [26 L. Ed. 1157] ; Sprague v. Ticonic Nat. Bank, 307 U. S. 161 [59 Sup. Ct. 777, 83 L. Ed. 1184] ; notes, 49 A. L. R. 1149; 107 A. L. R. 749; McCormick on Damages, p. 237.) The doctrine was applied in this state in Alemany v. Wensinger, 40 Cal. 288, and approved, though denied application in County of Tulare v. Dinuba, 205 Cal. 111 [270 Pac. 201], where the court discussed its limitations. In the latter case the county was entitled to a fund, and a suit was brought by a private attorney to obtain it for the county. Attorneys’ fees were denied on the ground that the county had official legal representation by its own law department, under a statutory duty to perform that very service. This court observed (p. 127) : “The fact that one may be benefited by an action brought by another is not of itself sufficient to justify a court in assessing costs against the one who also profits by said action. Some contractual relation or some equitable reason sufficient to support an allowance of costs must be shown to exist to justify a court of equity in making such assessment.”

In order to determine whether an award was appropriate in the present ease we must see what proceedings were taken. The first step was the commissioner’s petition on March 25, 1937, in which he set forth certain payments, described the remaining assets, asserted that he was a “disinterested stakeholder”, and requested a decree declaring the relative rights of the rival claimants. The court fixed a date for hearing of the petition, directed notice to be given by publication and mail, and authorized any interested party to appear and file pleadings or points and authorities. Counsel appeared on behalf of custodians of Telluride Association, substantial holders of investment certificates. Thereupon H. P. Drake, a large holder of membership shares, communicated with many other such shareholders, informing them •that he had engaged counsel to represent them and asking -subscriptions for this purpose, adding that counsel, if retained, would petition the court for an allowance of fees and expenses. A large number of shareholders responded, and from their subscriptions Mr. Drake paid his attorneys a retainer of $1,000. At this time counsel also- appeared for Clarice Holmes and several others who joined with her and are appellants herein. Thereafter said counsel filed points and authorities and argued the matter. The result, as already pointed out, was a decision in favor of the membership, shareholders.

The appellants contend that the action taken by Drake and the others was necessary to preserve the rights of the entire group of membership shareholders because the commissioner took a neutral position, and made no attempt to decide the issue of priority or to advise the court thereon. The particular complaint, however, is simply that the commissioner did not take sides. In fact, he did advise the court; through his counsel he furnished points and authorities covering the issues of fact and law, and participated in the oral argument. It is not, and could not be seriously contended, that he acted other than in good faith, and we have no reason to doubt the adequacy of the legal presentation to the court. It is quite obvious that he had to take an impartial position, seeking that form of distribution which was in accord with legal and equitable principles. And there is nothing in the record to show that the court was not fully advised on the law by counsel for the commissioner, despite the fact that they did not appear as advocates of either group of claimants.

Under these circumstances, it does not seem to us that a proper case was presented for the doctrine invoked by appellants. The proceeding was not, in the first place, a suit to obtain or protect a common fund. The fund was already there, and was under the administration of a statutory officer charged with its protection and proper distribution. Counsel for appellants did not make it available; the commissioner made it available. In the second place, this was not a representative suit on behalf of beneficiaries of the fund, against adversaries improperly withholding a fund. It was a proceeding initiated by the commissioner for the purpose of making an equitable and proper distribution of the fund. Appellants appeared by invitation of the court, but they did not commence nor control the proceeding. All the steps taken in the proceeding which ultimately benefited the shareholders were commenced by the commissioner and the proceedings would have followed the same course if appellants had not appeared. In short, the commissioner, legally charged with the duty of protecting the interests of the membership shareholders as well as other claimants, presented the legal issue of priority to the court, and the court, in the exercise of its judgment, decided the issue in favor of the membership shareholders. To assert that the efforts of counsel for appellants were necessary to create or preserve the fund, is to imply incompetency or dereliction in duty in the commissioner or the court, and no such charge is in fact made, or could be made. As the court said in General Finance Corp. v. New York State Rys., 3 Fed. Supp. 975, 976: “In the case at bar the petitioning attorney did not create this fund. The fund existed and was in the hands of the receivers for distribution. It cannot be said that the efforts of the petitioner secured the fund. The receivers were represented by counsel, and there was no danger that the fund would be dissipated or negligently administered. ...” (See, also, County of Tulare v. Dinuba, supra.)

Indeed, appellants must really rest upon the narrow ground that their legal presentation was more able, more convincing, and therefore more valuable, than that of the commissioner. But this cannot be a basis for the award of fees to private counsel where the services are already subject to performance by a public officer and official counsel, and these parties have properly performed their duties. Nor is it possible to say that the mere existence of conflicting claims between the parties entitled to distribution herein makes this a characteristic representative suit to obtain a fund. It does not take much imagination to conceive of a fund which would be properly administered by a statutory liquidator, and distributed among numerous conflicting claimants, but which could be wholly dissipated if each rival group treated the distribution as an adversary proceeding, and all produced private counsel to assert their priorities.

It follows that the lower court was correct in concluding that counsel fees should not be allowed.

The orders are affirmed.

Gibson, J., Carter, J., Edmonds, J., and Waste, C. J., concurred.

Curtis, J., concurred in the judgment.

Rehearing denied.


author:
THE COURT.
      GIBSON, J., Concurring.

text:
    [Crim. No. 4257.
    In Bank.
    February 14, 1940.]
    In the Matter of the Petition of FRANK S. CONNOR for a Writ of Habeas Corpus.

      Frank S. Connor, in pro. per., for Petitioner.
    Earl Warren, Attorney-General, and Everett W. Mattoon, Deputy Attorney-General, for Respondent.
   THE COURT.

This is a motion by the attorney-general of this state for a diminution of the record and further certification herein.

By an information filed by the district attorney of Los Angeles County the petitioner was charged in four counts with the robbery of gasoline stations and in a fifth count with the theft of an automobile. He was also charged with prior conviction of robbery, for which he had served a term of imprisonment, and with unlawfully carrying firearms. On February 18, 1932, he was arraigned before the superior court on said charges. He stood mute, pleas of not guilty were entered as to all the charges, and the case was set for trial on March 17, 1932. On the trial before a jury the petitioner was found guilty on all counts of robbery and that they were robbery of the first degree, and was found guilty of the theft of the automobile. He was also found guilty of the prior conviction for robbery for which he had suffered a term of imprisonment. No appeal was taken from the judgment of conviction and the petitioner was delivered to the warden of the state prison at Folsom on April 8, 1932, at which institution he has since been confined. About two years later, on May 31, 1934, the petitioner made a motion in the trial court to vacate the judgment of conviction on the ground that it was indefinite and uncertain in that the term of imprisonment provided in the commitment could not be ascertained. The motion was denied. On appeal the order of denial was affirmed on January 16, 1935. (People v. Connor, 3 Cal. App. (2d) 642 [40 Pac. (2d) 316].) The petitioner’s application to have this court hear and determine the appeal after decision by the District Court of Appeal was denied on February 14, 1935. (3 Cal. App. (2d) 644.)'

On August 21, 1939, the petitioner filed in this court his petition for a writ of habeas corpus wherein he claimed the right to his discharge from the state prison at Folsom because of the alleged invalidity of the judgment of conviction in that his rights under the federal and state Constitutions had been violated, and particularly that he had been denied the assistance of counsel in his defense as guaranteed by those instruments and as also provided by section 987 of the Penal Code of California. In his petition he set forth the dates of his arraignment, trial, sentence and imprisonment as above indicated, and set forth as exhibits a copy of the information; a purported copy of the transcript of the proceedings at the time of his arraignment and plea; a purported copy of the reporter’s transcript of the trial proceeding; a copy of the verdict on each count; and a copy of the judgment on each count.

The consideration of the petition for the issuance of the writ came on regularly before this court in bank on September 11,1939, and the petition was denied.

On the consideration of the petition, the record of this court on the petitioner’s application for a hearing by this court, after decision by the District Court of Appeal on his appeal reported in 3 Cal. App. (2d) 642, was taken into account. It was there disclosed that the petitioner had, in a regular proceeding before the trial court, challenged the validity of the judgment he is now attacking; that he made no mention in that proceeding of the ground now relied upon to set aside the judgment. He could have urged the point in that proceeding and no special circumstances were shown why he should have been permitted, contrary to the general rule, to try out his contentions piecemeal. (In re Drew, 188 Cal. 717, 722 [207 Pac 249].) He could also have raised the point on appeal from the judgment of conviction. Not having done so, he may not, as he now attempts, attack the judgment collaterally. (France v. Superior Court, 201 Cal. 122 [255 Pac. 815, 52 A. L. R. 869] ; In re Gutierrez, 1 Cal. App. (2d) 281 [36 Pac. (2d) 712]; In re Northcott, 71 Cal. App. 281 [235 Pac. 458].)

Furthermore, the function of habeas corpus is to test the jurisdiction of the court to render judgment. It is not limited to the face of the proceeding, but extends to the record of the court below when necessary to determine jurisdiction. (In re Connolly, 16 Cal. App. (2d) 709, 715 [61 Pac. (2d) 490].) There was before us upon a consideration of the petitioner’s application on September 11, 1939, a certified copy of the transcript of the proceedings on the arraignment for plea of the petitioner on February 18, 1932. An inspection of that transcript, the authenticity of which could not be disputed, disclosed that the defendant on his arraignment was asked if he had an attorney and he replied: “I don’t need any.” Through inadvertence the transcript of said proceedings was not ordered filed in the office of the clerk of this court at the time the order of denial of the petition herein was entered on September 11, 1939, and diligent search has failed to locate that particular document. However, a duplicate certified copy of that transcript has since been obtained and should be made a part of the record herein.

Undoubtedly the record of the proceedings on arraignment, in which the petitioner stated that he did not need a lawyer, was within the contemplation and memory of the trial judge, when during the trial he stated to the petitioner, upon his then request for counsel, “I pointed out to you in the absence of the jury just what your status is so far as that is concerned. ’ ’

The right of an accused to the assistance of counsel in his defense is guaranteed by both the federal and state Constitutions. To supplement the requirements of the fundamental law the legislature in 1872 adopted section 987 of the Penal Code, which provides:

“If the defendant appears for arraignment without counsel, he must be informed by the' court that it is his right to have counsel before being arraigned, and must be asked if he desires the aid of counsel. If he desires and is unable to employ counsel, the court must assign counsel to defend him.”

It may be true that the terms of the statute were not literally complied with at the arraignment of the petitioner for plea in the superior court. This was not true upon his arraignment before the magistrate on his preliminary .examination, for he was then and there fully advised of his right to counsel and otherwise. From what took place on both occasions, we conclude that there was a substantial compliance with the statute and that the rights of the petitioner were not prejudiced by the form in which he was advised of his rights. When he said that he did not need counsel the court was justified in taking him at his word and was not permitted to force counsel upon him. (Dietz v. State, 149 Wis. 462 [136 N. W. 166, Ann. Cas. 1913C, 732].) His attitude was equivalent to a declination of counsel, the right to which could be waived. (People v. Rocco, 209 Cal. 68 [285 Pac. 704] ; Gatlin v. State, 17 Ga. App. 406 [87 S. E. 151] ; State v. Terry, 201 Mo. 697 [100 S. W. 432] ; State v. Raney, 63 N. J. L. 363 [43 Atl. 677] ; Barnes v. Com., 92 Va. 794 [23 S. E. 784] ; State v. Yoes, 67 W. Va. 546 [68 S. E. 181, 140 Am. St. Rep. 978] ; State v. Fulco, 138 La. 995 [71 So. 134]; Stokes v. State, 73 Ga. 816; 16 C. J. p. 821.) The petitioner had been a bank clerk. He had been in the toils of the criminal law before, and had served a term after conviction of robbery. It may be assumed that he was not unfamiliar with court proceedings and that there is no injustice to him to apply the rules of waiver to his case in view of his undoubted familiarity with such matters and his attitude in court A month intervened between his arraignment and his trial and there was no showing that he made any effort during that time to obtain the aid of counsel or of the court in procuring counsel. When he was confronted by a jury and the trial was on, he then for the first time demanded the assistance of counsel. Under these circumstances, the petitioner may not rightly claim that he was not afforded opportunity to obtain counsel to assist him.

The conclusions of the court at the time of the petition herein was denied on September 11, 1939, were based on the matters then before the court and now sought to be made a part of the record to be certified to the Supreme Court of the United States in pending certiorari proceedings. The additional matters should also be included, in order to correct the misstatements and omissions in the transcript of the proceedings inadequately incorporated in the petition. The motion for diminution should be granted and a supplemental return be certified accordingly.

It is so ordered.

GIBSON, J., Concurring.

I concur in the order. Not having been a member of the court at the time of the consideration of the petition for habeas corpus, I cannot join in the recital of what occurred at that time.


text:
    [L. A. No. 17040.
    In Bank.
    February 14, 1940.]
    In the Matter of the Estate of ANNA BAXTER., Deceased. F. L. RICHARDSON, Administrator, etc., et al., Appellants, v. ROYAL INDEMNITY COMPANY, Respondent.

      Wade Garfield and F. L. Richardson for Appellants.
    Gray, Cary, Ames & Driscoll and Burton D. Wood for Respondent.
    Clarence A. Henning as Amicus Curiae on Behalf of Respondent.
   SHENK, J.

This appeal is from an order settling the first and final account and report of the administrator of the decedent’s estate. It is presented on a bill of exceptions.

On April 18,1919, Charles T. Chandler was duly appointed the guardian of the estate of Anna Baxter, an incompetent person. On March 2, 1922, Anna Baxter died. Chandler was then, on May 8, 1922, duly appointed the administrator of her estate. In June, 1922, he filed his third and final account in the guardianship proceeding, showing a balance in his possession as guardian of $31,295.25. That account was approved and settled by the court in the same month, and Chandler was ordered to deliver all property in his hands as guardian of the incompetent to himself as administrator. As such administrator he filed an inventory in the decedent’s estate showing the sum of $31,700.25 as the total appraised value of all property which had come into his possession. On May 11, 1925, Chandler as administrator filed his first and final account and report, and a petition for distribution. That account showed receipts of $32,279.81, and disbursements of $31,001.78, which included partial distribution to three surviving brothers of the decedent, Joseph W. Hale, Charles N. Hale and Thomas H. Hale, leaving a balance on hand of $1278.03. At the hearing, pursuant to stipulation dated May 29, 1925, between the attorney for Chandler as administrator, and Clarence A. Henning, as administrator of the estate of the deceased Thomas H. Hale, said first and final account and petition for distribution was stricken from the calendar and it was agreed that an amended final account would be filed in the ordinary course. Thereupon the court ordered a reduction in the bond of the administrator from $30,000 to $2,000 upon the showing that less than the latter amount remained in the possession of the administrator and that no additional funds or estate were expected to come into his possession.

No further proceedings were taken in said estate until the filing of the amended final account hereinafter mentioned. On May 24, 1935, Charles T. Chandler died, and on June 12, 1937, P. L. Richardson was appointed administrator de bonis non of the estate of Anna Baxter, deceased. On September 10, 1937, R. P. Smith was appointed administrator of Chandler’s estate. On March 5, 1938, Smith, assuming to act on behalf of the estate of Charles T. Chandler, filed in the matter of the estate of Anna Baxter, deceased, an account designated “Amended Pinal Account” of Chandler’s administration of the Baxter estate. In that amended final account Smith alleged that Chandler as guardian of the estate of Anna Baxter, an incompetent person, had received funds or property in excess of the amount reported by Chandler as such guardian to the extent of $17,901.53, and that Chandler at the time of his death was therefore indebted to the estate of Anna Baxter, deceased, in said amount. Royal Indemnity Company, respondent herein, filed objections to said amended final account in the form of a denial of the allegations thereof. On the hearing of said account and the first and final account previously filed by Chandler which had been put off calendar, and the objections thereto, the court found receipts totaling $32,279.81, and disbursements pursuant to appropriate orders in the sum of $31,655.98. It concluded that Chandler, as administrator, was chargeable with the difference between those sums, or $623.83, with interest on a portion thereof compounded annually.

Richardson, as administrator of the estate of Anna Baxter, deceased, Joseph W. Hale, as heir at law, and R. P. Smith, as administrator of Chandler's estate, appealed from the order.

The ground of the appeal is that the court erred in not settling the final account of Chandler in accordance with the amended final account as filed by Smith.

The bill of exceptions shows that on the hearing herein the court declined to receive in evidence the original and supplemental inventories and the first and second annual accounts and reports of Chandler as guardian, and the ninth annual account of James R. Baxter who preceded Chandler as guardian of the incompetent; and that the court based its findings and order upon the third annual account of Chandler as guardian, the order settling the same, the first and final account of Chandler as administrator, and the testimony of F. L. Richardson that all vouchers showing the disbursement of the funds had been lost or destroyed.

It is the theory of the appellants that the offered evidence showed that certain moneys or securities came into the possession of Chandler as guardian which were not accounted for by him in the guardianship proceeding, but which subsequently continued in his possession as administrator; and that the orders settling the accounts of the guardian as to such items as were claimed to have been unaccounted for or omitted were not final or conclusive herein. Reliance is placed upon Estate of Clary, 203 Cal. 335 [264 Pac. 242], and similar decisions and authorities to the effect that the settlement of accounts and reports is not conclusive as to any items which were not included in and actually passed upon by the court. It is contended that the items alleged in the amended final account filed by Smith were of that character, and that the probate court in this proceeding should have received the rejected evidence for the purpose of discovering such omitted items of property or money which had come into Chandler’s possession as guardian and remained unaccounted for by him.

We conclude that the court’s ruling was proper. If the amended final account, filed pursuant to section 932 of the Probate Code, and the evidence introduced or offered in support thereof, had indicated that certain moneys or property belonging to the Baxter estate were actually in the possession of the representative of Chandler’s’estate, the probate court would undoubtedly have had jurisdiction, notwithstanding the settlement of any prior account, to receive the report of the administrator to that effect, and to make any appropriate order of settlement and distribution. But such is not the import of the application in the present proceeding. The record does not show, nor do the appellants purport to claim, that Smith, as administrator of Chandler’s estate and on behalf of that estate, is reporting as a fact that there is money or property in his possession in the amount alleged which belongs to the Baxter estate. On the contrary, the plain inference is that the representative of the estate of Chandler has no such property, but that the object in filing the amended final account is to establish by judicial decree in the administration proceeding a debt due from the estate of Chandler to the estate of Baxter resulting from a claimed omission or defalcation in the accounts of Chandler in the prior guardianship proceeding. That this is so appears from the following facts:

All of the appellants herein are represented by F. L. Richardson as attorney or in propria persona. F. L. Richardson also represented Chandler during his administrations as guardian and as administrator of the Baxter estate. He testified that he had a contingent fee contract of employment whereby Joseph W. Hale agreed to pay him a fee equal to fifty per cent of any money or property recovered for Hale from the Baxter estate. It therefore appears that parties whose interests normally would be opposed are shown united in a joint effort to establish such defalcation on the part of Chandler; and that the only opposing party and respondent herein is the surety on Chandler’s bond. No evidence was produced or offered to indicate that Chandler at any time as administrator received any funds or property in addition to that accounted for by him as such administrator and as found by the court on the hearing herein. In that connection the appellants are content to rely upon inferences to be drawn from the accounts offered in evidence and filed by Chandler in the guardianship proceeding, and their contention that any unaccounted for funds or property received by him as guardian are presumed to continue in his possession in his new capacity as administrator. They point to the following apparent discrepancies appearing in the accounts offered in evidence and rejected by the probate court: The last account of James R. Baxter, filed in February, 1919, and approved by order of court on March 7, 1919, showed a balance of cash in banks belonging to the estate on the 15th day of November, 1918, in the sum of $47,265.33. The original inventory and first account of Chandler as guardian showed the receipt by him of $30,309.98, and no more, as “cash from the University Avenue Bank”. In so far as the record shows, there is no explanation for the discrepancy in these two amounts. A supplemental inventory filed by Chandler in the guardianship proceeding showed the receipt of certain certificates of deposit issued by Baxter Bros. Bank in Iowa totaling in value the sum of $23,122.55, which by order of court were accepted in settlement of a claim against that bank. The first three certificates totaling $8,000 became due on or before March 1, 1922, and the balance between September 1, 1922, and September 1, 1924. The third annual account of Chandler as guardian filed on June 5, 1.922, reported the amount of cash on hand as of June, 1921, taken from his second annual account, and in addition $11,-512.11 subsequently received from all sources. The latter amount, it is admitted, includes $8,000 proceeds from the certificates of deposit falling due prior to the filing of that account. The proceeds of the additional $15,000 plus of such certificates are reported by Chandler in his first and final administrator’s account as constituting one of the items of property in the estate which had come to his possession, thus showing receipt by him as administrator of $14,672, cash in bank, $15,500.25 proceeds of certificates of deposit, and two further items which were the proceeds of notes and receipts from interest, making a total of $32,279.81. It is apparently the theory of the appellants that since Chandler reported at the outset the receipt of approximately $30,000 in “cash”, and later received some $15,000 as proceeds from the certificates of deposit, he must have received a total of more than $45,000 instead of the reported sum in excess of $30,000. Exit', in ho far as the present record is concerned, there is nothing to show that the $15,000 worth of certificates of deposit were not “cash”, or a substitute for credits designated as “cash”, and included in the $30,000 originally reported by Chandler as guardian. Therefore, had the court received all of the rejected evidence, and based its present findings thereon, we would not be able to say that its findings were not supported by the record including such rejected evidence.

However, the rule relied on by the appellants did not authorize the court in the present proceeding to investigate the accounts filed by Chandler in the prior guardianship proceeding, approved and settled by an order of the court which has since became final. The appellants may not invoke the jurisdiction of the probate court herein for the purpose of establishing a debt due to the Baxter estate from the estate of Chandler, in effect a money judgment, by virtue of some alleged act committed by Chandler in a different capacity. In so far as the present proceeding is concerned the purported attack upon the accounts of Chandler as guardian must be deemed to be collateral, and under familiar principles the order approving and settling such accounts in the prior guardianship proceeding are final and conclusive herein. (Security-First Nat. Bank of Los Angeles v. Superior Court, 1 Cal. (2d) 749 [37 Pac. (2d) 69) ; Estate of McGue, 180 Cal. 413 [181 Pac. 637] ; Estate of Madsen, 31 Cal. App. (2d) 240 [87 Pac. (2d) 903] ; 11A Cal. Jur., p. 180, and cases cited.) The rule relied on and stated in the Clary case was applied there in the same and not in a subsequent proceeding. What application it may have in an appropriate proceeding to reopen the guardianship matter or in a court of equity is not a question with which we are here concerned. Furthermore, if a recoverable loss was sustained by reason of any act of Chandler as guardian, it was chargeable against him “in what was then his true character”, and not in his capacity as administrator. (24 Cor. Jur., p. 52, see. 470.)

There is no merit in the contention that the court should have allowed interest on the whole of the amount found to be due from Chandler as administrator.

The order is affirmed.

Curtis, J., Carter, J., Waste, C. J., Gibson, J., and Edmonds, J., concurred.

Rehearing denied.


text:
    [L. A. No. 16169.
    In Bank.
    February 14, 1940.]
    JESSIE BERYL PORTER, Respondent, v. HARRY G. VAN DENBURGH, as Administrator, etc., Appellant.

      Oscar S. Elvrum and Girard F. Baker for Appellant.
    Kelby, Lawson & Garroway for Respondent.
   SHENK, J.

The plaintiff filed an action to impress a trust on certain personal property and for an accounting. Judgment was rendered in her favor to the effect that she was the owner of and entitled to have issued to her, as successor in interest of her husband, L. E. Porter, 60,939% shares of the capital stock of Tungsten Reef Mines Company. The defendant appealed.

The question for determination is whether the evidence supports the 'findings and the judgment. There is practically no conflict in the evidence. The controversy centers mainly on the interpretation of an instrument relied upon in part by the plaintiff as the basis of her cause of action. Briefly, the following facts appear:

In 1916, L. E. Porter obtained an option from W. P. Yaney on the purchase of 18 tungsten properties in Inyo County, California, for a price of $30,000. The properties were in two groups, known as the Noble group and the Aeroplane group. The purchase prices of the groups were designated as $7,000 and $23,000, respectively. The Noble group was resold by A. J. Clark for $60,000. Book accounts of Clark received in evidence disclosed that a division was effected between the two men of an amount representing the original purchase price of the claims and that a balance was reserved for investment in an account designated as the Standard Tungsten Account kept by Clark. The Aeroplane and other groups of claims were transferred to Standard Tungsten Company, Nevada corporation formed about the same time, and two certificates of its capital stock, representing 55,000 shares each, were issued in the name of A. J. Clark. Advances to the extent of $45,000 were made to that company from the Standard Tungsten Account. Advances also were made to the company by persons named Fraser and Abercrombie. A cash dividend of 7% cents a share on the issued stock was paid to Clark and was divided equally with Porter. The record indicates that because of Porter’s financial difficulties the ownership of the stock was retained in Clark’s name.

The affairs of the Standard Tungsten Company did not progress satisfactorily, and its operations were discontinued. Its equipment was sold and its assets distributed. The amount realized was not sufficient to reimburse Fraser and Abercrombie fully for their investments after advances to the Standard Tungsten Account were repaid. Tungsten Reef Mines Company was then formed in June, 1918. Its entire capital stock consisting of 400,000 shares was issued in the name of Clark. The property of that company consisted of certain mining claims in Arizona, the option or down payment of which was paid for out of the Standard Tungsten Account. In 1921 the balance of the Fraser and Abercrombie obligations was satisfied by payment of cash and the transfer of a portion of the stock of the new company. A large portion of the stock of the company was held as treasury stock and sold to investors, until finally and at the time of Clark’s death 121,879 shares only remained in his name.

In the meantime and on September 5, 1919, A. J. Clark signed and delivered to L. E. Porter an instrument in the following words: “This is to certify that L. E. Porter is entitled to one-half of the profits that come to me from my stock interest in the Tungsten Reef Mines Co., after all salaries, expenses of very kind have been paid, subject to any contract or agreements made by me prior to this date or any contract or agreements that I may hereafter make. It is understood and agreed that this agreement is not assignable. ’ ’

L. E. Porter died in 1921 and Clark followed him in 1927. In June, 1934, Clark’s widow passed away. The present action was brought in November, 1934, by the surviving widow of L. E. Porter against the administrator of the estate of Mrs. Clark.

The trial court found that Clark and Porter were copartners as to all of the foregoing transactions, and that Clark held the ownership of one-half of the shares last referred to in trust for the use and benefit of Porter. It found that Clark executed and delivered the quoted instrument as evidence of such ownership and trust; that said agreement or understanding subsisted during their lifetimes, unchanged and unmodified, and that the plaintiff was the present' owner thereof; that after Porter’s death both Clark and Mrs. Clark recognized the plaintiff as the successor to her husband’s interest and consulted and reported to her concerning the operation and management of the mining property and of the- corporation ; that all contracts and agreements to which said stock had been subjected had been discharged and that said stock was not subject to any contract or agreement except the claim of the plaintiff to the extent of one-half thereof. The court also found .and concluded that the plaintiff was not guilty of laches in asserting her right to a one-half ownership of said stock. It entered judgment that the plaintiff was entitled to one-half of the shares.

On the appeal the defendant contends that, assuming she was entitled to something, the plaintiff was entitled only to “profits” from the stock and was not entitled to any of the stock itself. However, the ambiguity inherent in the word “profits”, as used in the instrument relied upon by the plaintiff, justified the court in investigating all the surrounding facts and circumstances to ascertain what was meant by the word employed in the declaration signed by Clark. “Profits” and “Dividends” may be considered to have entirely different concepts in relation to stock shares where, as here, mining ventures are involved and the entire purchase price of the property and stock is paid for out of profits realized from a prior venture. In such case the resulting acquisition is still “profits” in the minds of the co-venturers. That “profits” in this case referred to the stock itself is still further borne out by the fact that the stock was subjected to contracts and agreements of Clark, as for instance to the agreement to reimburse Fraser and Abercrombie for their advances to the Standard company. The foregoing and other facts appearing in the record, together with the peculiar wording of the declaration itself, amply support the trial court’s conclusion that the interest of Porter was in the stock itself, and not alone in dividends to be derived therefrom.

The defendant also contends that the plaintiff’s cause of action was barred by her failure to file a claim in the estate of A. J. Clark, and that the testimony of the plaintiff relating to the transactions involved was incompetent under the provisions of section 1880, subdivision 3, of the Code of Civil Procedure. These contentions are necessarily predicated upon the assumption that the plaintiff’s right is based on a claim against the estate as distinguished from a claim to ownership of the stock. Since the claim is not to any part of the estate but one of ownership, it follows that the defendant’s additional argument that the cause of action is barred by the statute of limitations and that the plaintiff was not a competent witness to testify to matters or facts occurring prior to the death of the defendant’s intestate cannot be sustained. (Bollinger v. Wright, 143 Cal. 292 [76 Pac. 1108]; Maguire v. Cunningham, 64 Cal. App. 536 [222 Pac. 838].)

The defendant’s contention that the plaintiff was guilty of laches as a matter of law finds no support in the record. The defendant argues that the doctrine of estoppel by laches is applicable in this ease because both Porter and Clark and the latter’s widow are now dead and their testimony is not available in defense of the plaintiff’s claim. But the book accounts and the testimony of a witness who was secretary and treasurer of the corporations while Clark was alive, and who kept the accounts, furnish independent credible evidence in support of the findings and judgment.

There is likewise no merit in the contention that the plaintiff was estopped to claim ownership in the stock because neither the agreement nor the stock was listed as an asset of the estate of L. E. Porter until some time after the decree of distribution therein, at which later time a decree was entered distributing to the plaintiff the asset as after-discovered property. The elements of estoppel are not present. The failure of the plaintiff until a later date to list the property as an asset of the estate was not a representation to the Clarks, nor was it any statement upon which they were entitled to rely. Furthermore, the evidence shows possession by them of a copy of the agreement and also their understanding of its terms.

The foregoing disposes of all of the defendant’s contentions.

The judgment is affirmed.

Curtis, J., Gibson, J., Carter, J., Waste, C. J., and Edmonds, J., concurred.


author: THE COURT.

text:
    [L. A. No. 17105.
    In Bank.
    February 14, 1940.]
    ZILLA GRACE SEE, Appellant, v. LIZZIE JOUGHIN, Executrix, etc., et al., Respondents.
    D. G. Kling and D. A. Knapp for Appellant.
    Bonpane & Prince and Eckman & Lindstrom for Respondents.
   THE COURT.

This is a motion by - the plaintiff and appellant to modify and make more certain an order of this court made on December 5, 1939, pursuant to the motion presented on that day by counsel for the defendants and respondents for a “diminution of the record and for an order permitting the correction of an error and defect in the transcript on appeal, by filing as an amendment thereto a document entitled, ‘ Order Amending Engrossed Bill of Exceptions, Nunc Pro Tunc’ ”, a certified copy of which order was appended to the notice of motion. In granting the motion the following minute order appears: “Appellant allowed thirty day to file supplemental transcript and opening brief; usual time for further briefs.”

The appellant’s opening brief was on file at the time the foregoing motion for diminution was made.

The appeal herein is from a judgment dismissing the action on the ground that the issues had been determined between the parties in a former action (See v. Joughin, 18 Cal. App. (2d) 414 [64 Pac. (2d) 149], action No. 369870 in the superior court), and were therefore res judicata. Counsel on the present appeal apparently concluded that the bill of exceptions did not adequately include the judgment roll in the former action, an inspection of which caused the trial court to dismiss the action. To safeguard the point counsel for respondents obtained from the trial court an order, nunc pro tunc as of the day of the settlement of the bill of exceptions, including in said bill the judgment roll in the former action. The motion of respondents for diminution of the record was based on the claim, supported by affidavit of the trial judge, that he had examined the judgment roll in the former action, had determined therefrom that the issues in the present action were res judicata and that said judgment roll had inadvertently, been omitted from the bill of exceptions on this appeal. The motion in this court was for diminution of the record to include in the record on this appeal the nunc pro tunc order and the judgment roll in the former action. The motion was granted on December 5th last, but the minute order did not specify how the judgment roll in the former action should be brought up. Counsel for the appellant suggests several alternatives, but only one need be employed. The clerk’s transcript on the appeal in the former action is now lodged with the clerk of this court. That transcript contains the judgment roll in the former action, with very little additional matter. There appears to be no good reason why that transcript should not be considered a part of the record on the appeal in the present action without further printing or transcribing, and be referred to in all respects as though it had been included originally in this bill of exceptions.

The minute order of December 5th should therefore be modified to read as follows:

" Motion for diminution of the record is granted; and it is ORDERED that the certified copy of the nunc pro tunc order, appended to the respondent’s notice of motion for diminution of the record filed herein, be deemed a part of the record on this appeal, and that the judgment roll in the case of See v. Joughin, Los Angeles Superior Court, No. 369870 in the Superior Court, as contained in the Clerk’s transcript of the record on appeal in the former action, be deemed a part of the bill of exceptions on the appeal in the present action, all without prejudice, however, to the consideration on this appeal of the validity and effect of said nunc pro tunc order. Appellant is allowed thirty days from and after the filing of this order to file a supplemental opening brief, usual time for further briefs.”

It is so ordered.

Petition for rehearing denied.