THOMAS v. MATTHIESSEN.
CERTIORARI TO THE CIRCUIT COURT OF APPEALS" FOR THE SECOND CIRCUIT.
No. 171.
Argued January 19, 1914.
Decided February 2, 1914.
While a corporation cannot, without authority from the stockholders, make them answerable in a way not contemplated by the charter, a provision in the charter of a corporation organized in one State authorizing it to do business in another State may subject the stock- *222' holders to the liability imposed in the latter State, notwithstanding there are other provisions in the charter exempting stockholders from liability for debts of the corporation.
Stockholders of a corporation organized in one State under a charter expressly authorizing it to do business in another State create the corporation then agent for the making of contracts within the latter State in accordance with its laws.
Stockholders of. a corporation organized in- Arizona .under a charter which expressly authorized the corporation to do business in California held, in this case, subject to the liability imposed by § 322, Civil Code of the latter State.
Under the laws of California a stockholder is liable for his proportion of the debts of the corporation as a principal and not as a surety; nor in this case was he relieved of liability on notes held by a bank which had deposits to the credit of the corporation and did not apply the same to.payment of the notes.
192 Fed. Rep. 495, reversed.
The facts, which involve the liability under the laws of California of a stockholder of a corporation organized in Arizona for the purpose of carrying on business in California, are Stated in the opinion:
Mr. Alfred Adams Wheat, with whom' Mr. Philip Ash-ton Rollins was on the brief, for petitioner:
This case is controlled by Pinney v. Nelson, 183 U. S. 144, the doctrine enunciated in which has been accepted by the courts of California and has been approved by State v. New Orleans Warehouse Co., 109 Louisiana, 72. See also Peck v, Noee, 154 California, 341.
In Thomas v. Wentworth Hotel Co., 158 California, 275, the court met every point that could be . used to distinguish this case from Pinney v. Nelson, except the facts that defendant is not a resident of California, and that there is a finding of fact that it was the purpose and intent of subscribers that their obligations as such and as stockholders should be controlled and determined by the articles of incorporation of said company and by the laws of Arizona. Neither of these findings supplies a sound rea*223son for varying the rule and therefore defendant is liable under the law of California.
The fact that the articled of incorporation contain a declaration, as authorized by the Arizona law, that the stockholders shall not be personally liable for the debts of the corporation, does not distinguish this case from Pinney v. Nelson. See 26 Am. & Eng. Enc. (2d ed.), 1017; Terry v. Little, 101. U. S. 216; Citizens Savings Bank v. Owensboro, 173 U. S. 636, 644; Knights of Pythias v. Weller, 93 Virginia, 605, 613; Danville v. Water Co., 178 Illinois, 299, 306.
The finding that it was the purpose and intent of the stockholders that their obligations should be controlled by the articles of incorporation and by the laws of Arizona, does not distinguish this case from Pinney v. Nelson. Risdon Iron Works v. Furness, L. R. (1906) 1 K. B. 49, does not apply. See Keener on Quasi-Contracts, p. 5.
The fact that defendant is not a resident of California does not distinguish this case from Pinney v. Nelson.
As defendant contracted to assume the liabilities imposed by the California law for debts incurred by the corporation in that State the place of his residence is not material.
The stockholders’ liability imposed by the law of California is contractual in nature. Kennedy v. California Bank, 97 California, 93; Flash v. Conn, 109 U. S. 371; Whitman v. Oxford Bank, 176 U. S. 559; 26 Am. & Eng. Enc. (2d ed.), 1020.
Plaintiff pursued the proper remedy in a court of adequate jurisdiction.
The United States courts have jurisdiction to enforce such a liability outside of the State where it was created. Bernheimer v. Converse, 206 U. S. 516, 529; Whitman v. Oxford Bank, 176 U. S. 558, 563; Flash v. Conn, 109 U. S. 371; Cook on Corp., § 223, n. 2; Ferguson v. Sherman, 116 California, 169, 173.
*224The California statute provides no peculiar remedy and therefore the general liability created thereby may be enforced by a common-law action in the Federal court. Mills v. Scott, 99 U. S. 25; National Park Bank v. Peary, 64 Fed. Rep. 912; Aldrich v. Anchor Coal Co., 24 Oregon, 32.
The liability of a stockholder under the California law is not that of a surety but is primary, absolute, unconditional, and in no wise contingent, and it is distinct from that of the corporation. A suspension or bar of the remedy against the corporation does not suspend or bar it against the stockholder. It is not affected by any security given to or held by the creditor or by any lien acquired by him through judgment, attachment or otherwise. It is not released or diminished by any extension of time given to the corporation, and if the stockholder discharges his liability to a creditor he can recover no portion of the same back, either by subrogation or otherwise. Mokelumne Hill Co. v. Woodburn, 14 California, 265; Davidson v. Rankin, 34 California, 503; Young v. Rosenbaum, 39 California, 646; Sonoma Valley Bank v. Hill, 59 California, 107; Faymonville v. McCullough, 59 California, 285; Mitchell v. Beekman, 64 California, 383; In re California Ins. Co., 81 California, 364; Hyman v. Coleman, 82 California, 650; Knowles v. Sandercock, 107 California, 629; Herman v. Hecht, 116 California, 553; Sacramento Bank v. Pacific Bank, 124 California, 147; Morrow v. Superior Court, 64 California, 383; Neilson v. Crawford, 52 California, 248.
Even though the personal liability of a stockholder under the California law were merely that of a surety the facts alleged in the supplemental answer would not constitute a defense.
A bank, the payee or holder of a note, does not discharge a surety by failing to apply money of the maker which happens.to be on deposit at or after the time the note matures. Strong v. Foster, 17 C. B. 217; Citizens Bank v. Elliott, 9 Kans. App. 797; Martin v. Mechanics *225Bank, 6 Har. & J. (Md.) 235; McShane v. Howard Bank, 73 Maryland, 135; Citizens Bank v. Booze, 75 Mo. App. 189; Houston v. Braden, 37 S. W. Rep. 467; Bank of British Columbia v. Jeffs, 15 Washington, 230; National Bank v. Peck, 127 Massachusetts, 301; Voss v. German-Am. Bank, 83 Illinois, 599; National Bank v. Smith, 66 N. Y. 271; Glazier v. Douglass, 32 Connecticut, 383.
Plaintiff’s failure to prosecute diligently his action, against the corporation did not release defendant, even though his liability was merely that of a surety. Lowman v. Yates, 37 N. Y. 601; Douglass v. Ferris, 138 N. Y. 192; McKin v. Williams, 134 Massachusetts, 13; Greenway v. Orthwein Grain Co., 85 Fed. Rep. 536; Hunt v. Purdy, 82 N. Y. 486; Jones v. Allen, 85 Fed. Rep. 523; Biggins v. Raisch, 107 California, 210; Monroe County v. Otis, 62 N, Y. 88; Clark v. Sickler, 64, N. Y. 231.
The judgment should be reversed, and, as all the material facts have been stipulated and the damages recoverable are liquidated, no new trial should be awarded and the court below should be directed to render the proper judgment against defendant. Rathbone v. Board of Commissioners, 83 Fed. Rep. 125; Irvine v. Angus, 93 Fed. Rep. 629; Churchill v. Buck, 102 Fed. Rep. 38; Ft. Scott v. Hickman, 112 U. S. 150; Allen v. St. Louis Bank, 120 U. S. 20; Saltonstall v. Russell, 152 U. S. 628.
Under the California law the stockholder is liable for his pro rata share of interest as well as principal. Wells, Fargo & Co. v. Enright, 127 California, 669.
Mr. Arthur C. Rounds, with whom Mr. Harold Otis was on the brief, for respondent:
Pinney v. Nelson, 183 U. S. 144, does not establish the right of the petitioner to a recovery. In that case the only question decided by the California court was the constitutionality of § 322 of the Civil Code of California. That was the sole question presented for determination.
*226The decision in that case that when a corporation is formed in one State and “by the express terms of its charter it is created for doing business in another State and business is done in that State it must be assumed that the charter contract was made with reference to” the laws of the latter State, was expressly based upon the special and peculiar provision of the charter there under consideration, that the company was “created for doing business” in the other State. The court did not hold that if it clearly appeared upon a fair construction of the charter that the parties in fact contracted with a view'to the laws of the incorporating State, the court must nevertheless assume the contrary in order to impose upon the stockholders a liability which they never agreed to assume and from which they were exempt by the laws of the incorporating State' and by the company’s express charter provisions. Risdon Iron Works v. Furness, L. R. (1905) 1 K. B. 304, S. C., L. R. (1906) 1 K. B. 49; Thomas v. Matthiessen, 192 Fed. Rep. 495.
In this case the charter provided that the capital stock should be non-assessable, and that the private property of the stockholdérs in the company should be forever “exempt from all liability for its debts and obligations.”
The trial below having been by the court without a jury, the court’s findings of fact are not a mere report of the evidence, but a statement of the ultimate facts on which the law of the case must determine the rights of the parties. Norris v. Jackson, 9 Wall. 125. And see Miller v. Life Ins. Co., 12 Wall. 285; Raimond v. Terre Bonne, 132 U. S. 192; Collins v. Riley, 104 U. S. 322.
The law cannot read into the contract of the incorporators and stockholders an agreement to assume a liability under the California statute which is inconsistent with their actual intent and with the express stipulations of the charter. Grover & Baker v. Radcliffe, 137 U. S. 287.
Nor is the obligation gxtasf-eontractual. Buchanan v. Rucker, 9 East, 192; Pennoyer v. Neff, 95 U. S. 714, 722, *227Huntington v. Attrill, 146 U. S. 657, 669; Freeman v. Alderson, 119 U. S. 185, 188.
The right of a corporation to exist rests upon and is derived from the laws of the incorporating State and its powers are conferred upon it by those laws subject to such restrictions and limitations as they may prescribe. Canada Southern R. R. Co. v. Gebhard, 109 U. S. 527, 537; Nashua Savings Bank v. Anglo-American Co., 189 U. S. 221, 320; Christopher v. Norvell, 201 U. S. 216, 228.
No court outside of California has ever considered that the Pinney Case declared or was authority for any such rule of liability as petitioner contends. Coulter Dry Goods Co. v. Rosenbaum, 74 Misc. (N. Y.) 579. For other cases involving the existence or enforceability of liability of stockholders of this corporation, see Thomas v. Wentworth Hotel Co., 158 California, 275; S. C., 16 Cal. App. 403; Peck v. Noee, 154 California, 351. State v. New Orleans Warehouse Co., 109 Louisiana, 72, distinguished.
If, under any such rule of liability as plaintiff contends for, innocent stockholders are chargeable not merely with the liabilities imposed by the law of the domicil of the corporation, but as well with the varying liabilities prescribed by the laws of the various States where the corporation under its charter powers, may engage in business, corporate stock is liable to become in this country ah uncertain and even dangerous asset. Thomas v. Matthiessen, 192 Fed. Rep. 495, 498; Leyner Engineering Works v. Kempner, 163 Fed. Rep. 605, 608.
Defendant when he subscribed for his stock contracted with reference to the laws of Arizona. He did not agree to assume any liabilities under the California law. And the debts, which the hotel company subsequently contracted in California, were not binding upon or enforceable against him as contractual obligations.
The mere fact that the articles provided that the principal place of the company outside of Arizona should be in *228California is not sufficient to overcome the inference as to the intent of the incorporators to contract with reference to the laws of Arizona.
While the laws of a foreign State in which the company may attempt to do business may prevent the doing of business or limit the exercise of the corporate powers, Relfe v. Rundle, 103 U. S. 222, 226, such laws cannot enlarge the powers of the corporation or provide for the conduct of its business in a way which is not permitted by the law of its incorporation. Nor can such laws affect the position of the stockholders in the company by enlarging, limiting or modifying their rights as members of the corporation or by. altering their liabilities to its creditors as fixed by the law under and subject to which they became stockholders. Railway Co. v. Allerton, 18 Wall. 233, 235; Christopher v. Norvell, 201 U. S. 216, 226; Miles v. Woodward, 115 California, 308, 311; Morawetz on Corporations, §874; Nashua Savings Bank v. Anglo-American Co., 189 U. S. 221, 230; Canada Southern R. R. Co. v. Gebhard, 109 U. S. 527, 537. See also, Glenn v. Liggett, 135 U. S. 533, 548; Hawkins v. Glenn, 131 U. S. 319, 322; Relfe v. Rundle, 103 U. S. 222, 226; Converse v. Hamilton, 224 U. S. 243, 253; O’Connor v. Witherby, 111 California, 523, 527; Merrick v. Van Santvoord, 34 N. Y. 208, 216; Converse v. Aetna Bank, 79 Connecticut, 163, 169; Risdon Locomotive Works v. Furness, L. R. 1906, 1 K. B. 49; S. C., L. R. 1905,1 K. B. 304; Leyner Engineering Works v. Kempner, 163 Fed. Rep. 605.
The suggestion that a stockholder is liable under the statute as upon a contract because the corporation is the agent of the stockholders for the purpose of subjecting them to the liability, Kennedy v. California Savings Bank, 97 California, 93, 96; McGowan v. McDonald, 111 California, 57, 71, cannot be sustained, as the relationship between a stockholder and the corporation cannot prop*229erly be described as that of principal and agent or the liabilities of the stockholders be supported on principles of agency.
The court has found that the defendant agreed with the company, its incorporators and stockholders, that neither the company, its officers or agents should have power to subject the defendant or the other stockholders to any personal liability for the debts or obligations of the company.
It was competent for the creditors to waive their right of recourse against the stockholders. Robinson v. Bidwell, 22 California, 379, 388; French v. Teschemaker, 24 California, 518, 559-560; Wells v. Black, 117 California, 157, 161; United States v. Stanford, 161 U. S. 412.
The power of the company and its officers to bind the defendant for the debts of the company as defined and limited in the charter and by the agreement of the parties could not as against him, a non-resident of California, be enlarged by the statutes of that State. Pope v. Nickerson, 3 Story, 465, 475, 480; Liverpool Steam Co. v. Phoenix Ins. Co., 129 U. S. 397, 449; King v. Sarria, 69 N. Y. 24, 33; Grover & Baker Co. v. Radcliffe, 137 U. S. 287, 299.
If the partnership articles restrict the powers of a partner to act for the firm or pledge the credit of his co-partner, notice of the restriction binds the creditor. Johnson v. Haws, 47 App. Div. 597; aff’d, 168 N. Y. 654; Ensign v. Wands, 1 Johns. Cases, 171; Story on Partnership, § 130; King v. Sarria, 69 N. Y. 24; Ward v. Joslyn, 186 U. S. 142, 151. See also Boyd. v. Herron, 125 California, 443, 455; Thomas v. Wentworth Hotel Co., 16 Cal. App. 403, 414.
The California statute could not and did not impose upon the defendant below, a non-resident of California and not subject to its jurisdiction, any liability to the creditors of the company for debts incurred in California or elsewhere. Flash v. Conn, 109 U. S. 371, 377; Christopher *230v. Norvell, 201 U. S. 216, 229; Richmond v. Irons, 121 U. S. 27, 65; Whitman v. Oxford Natl. Bank, 176 U. S. 559, 563; Bernheimer v. Converse, 206 U. S. 516, 529; Hawthorne v. Calef, 2 Wall. 10, 22; Howarth v. Lombard, 175 Massachusetts, 570, 573; Howarth v. Angle, 162 N. Y. 179, 187; Kennedy v. Bank, 97 California, 93.
No State can by its law prescribe the terms and conditions upon which a non-resident may become a stockholder in a foreign corporation or impose liabilities upon him as such. Morawetz on Corporations, § 874; Pennoyer v. Neff, 95 U. S. 714. And see Huntington v. Attrill, 146 U. S. 657, 669; Freeman v. Anderson, 119 U. S. 185, 188; Buchanan v. Rucker, 9 East, 192; Story on Conflict of Laws, 8th ed., §§ 7, 20; Cooley’s Const. Lim., 7th ed., p. 176.
A State cannot enlarge the authority of an agent for a non-resident principal beyond that actually conferred. Pope v. Nickerson, 3 Story, 465, 475; King v. Sarria, 69 N. Y. 24, 33; Liverpool Steam Co. v. Phoenix Ins. Co., 129 U. S. 397, 454; Grover & Baker Co. v. Radcliffe, 137 U. S. 287, 299; Leyner Engineering Works v. Kempner, 163 Fed. Rep. 605.
The defendant at the time of the transactions in question was and still is a non-resident of California. It does not appear that he has ever been in California or has ever been subject to its jurisdiction or laws.
The company is a distinct legal entity, having its own property, its own rights and powers, and subject to its own liabilities. Conley v. Mathieson Alkali Works, 190 U. S. 406; People v. American Bell Telephone Co., 117 N. Y. 241, 255. See also Peterson v. Chicago &c. Ry. Co., 205 U. S. 364, 391; Risdon &c. Works v. Furness, L. R. 1906, 1 K. B. 49, 59; United.States v. American Bell Telephone Co., 29 Fed. Rep. 17; Richmond Const. Co. v. Richmond R. R. Co., 68 Fed. Rep. 105, 108.
Section 322 of the Civil Code, properly construed, did *231not extend or purport to extend to the stockholders of the corporation. National Park Bank v. Remsen, 158 U. S. 337, 344; Young v. Moore, 162 Michigan, 60; Williams v. Gaylord, 186 U. S. 157, 165; Miles v. Woodward, 115 California, 308, 311; London Bank v. Aronstin, 117 Fed. Rep. 601, 609.
Statutes imposing liability upon stockholders are in derogation of the common law and are to be strictly construed. Brunswick Terminal Co. v. The Bank, 192 U. S. 386, 390; Davidson v. Rankin, 34 California, 503; Buchanan v. Rucker, 9 East, 192, 194.
The notes here in question having been payable at the banking houses of the First National Bank and . Union Savingé Bank, respectively, the plaintiff’s assignors, those banks were bound to apply to their payment at maturity the deposits then or thereafter on hánd and applicable thereto. Having failed to do so the plaintiff is not entitled to charge the defendant for the resulting loss. Aetna Natl. Bank v. Fourth Natl. Bank, 46 N. Y. 82, 88; Indig v. National City Bank, 80 N. Y. 100, 106; 5 Cyc. 555. See 2 Morse on Banks, 4th ed., §§ 557-563, pp. 949-956; 5 Cyc. 554; Fullerton v. Bank of United States, 1 Pet. 604, 617; Bank of United States v. Carneal, 2 Pet. 543, 548.
This should be the rule in favor of an endorser, surety or guarantor of the note. Pursifull v. Pineville Banking Co., 97 Kentucky, 154; Commercial Bank v. Henninger, 105 Pa. St. 496; German Bank v. Foreman, 138 Pa. St. 474; Bank v. Petty, 176 Pa. St. 513; Dawson v. The Bank, 5 Arkansas, 283; McDowell v. The Bank, 1 Harr. (Del.) 369.
While the liability may be primary in the sense that the stockholder can be sued in the first instance even though no effort has been made to enforce the claim against the company, , a stockholder'in a solvent company who has been sued by a creditor and compelled to pay his proportion of the debt, as against the- company and his fellow *232stocldiolders is entitled to be reimbursed from its assets. Be California Mutual Life Ins. Co., 81 California, 364, 365; Prince v. Lynch, 38 California, 528, 538.
A bank holding a note due at its office discharges a surety by failing to apply money of the maker it holds on deposit at or after the time the note matures.
In Bank v. Peck, 127 Massachusetts, 298; Strong v. Foster, 17 C. B. 201; Bank v. Smith, 66 N. Y. 271; Citizens Bank v. Booze, 75 Mo. App. 189; Bank of British Columbia v. Jeffs, 15 Washington, 230; Voss v. German-American Bank, 83 Illinois, 599; Citizens Bank v. Elliott, 9 Kan. App. 797, and Martin v. Mechanics Bank, 6 Har. & J. (Md.) 235, the notes were not or did not appear to have been made payable at the bank. Huston v. Braden, 37 S. W. Rep. 467; Glazier v. Douglas, 32 Connecticut, 393; McShane v. Howard Bank, 73 Maryland, 135, are also distinguishable.