creation of the excess debt (notes and mortgages) was not prohibited by that section.25

In a case26 which was exhaustively argued and thoroughly considered, it was decided that this section 309 does not declare debts in excess of the subscribed capital stock void, nor does it deprive the corporation itself of the power to create such debts, but merely creates a remedy in favor of the corporation and its creditors against the directors for the improvident or fraudulent exercise of this power and the creation of debts in excess of the subscribed capital and beyond the ability 25 Underhill v. Santa Barbara Land etc. Co., 93 Cal. 300, 28 Pac. 1049; to same effect as to bonds secured by deed of trust, Smith v. Ferries etc. R. Co., 5 Cal. Unrep. 889, 899, 921, 51 Pac. 710, in a case involving dividends out of capital stock, after quoting this section, 309, quite fully, the court says, "it is to be observed that this section is aimed at the directors alone . . . and does not make such acts of the directors void," Baldwin v. Miller & Lux, 152 Cal. 454, 463, 92 Pac. 1030; Hawke v. California Realty etc. Co., 28 Cal. App. 152 Pac. 959, 963.

An interesting discussion of the legality of such excess bonded debt is contained in the opinions of the attorney general and of the commissioner of corporations in June and July, 1915, in the Matter of the Application of Huntington Land & Improvement Co. for leave to issue bonds in excess of its capital stock, the former holding that a domestic corporation could not make such an issue, while the latter held that it could. The attorney general said, however, that a foreign corporation was not affected by the prohibition contained in Civil Code, section 309. 26 Underhill v. Santa Barbara Land etc. Co., 93 Cal. 300, 28 Pac. 1049. See Smith v. Ferries etc. R. Co., 5 Cal. Unrep. 889, 51 Pac. 710, by an equally divided court. But the prohibitions contained in this section are held to run against the corporation and the stockholders as well, Tapscott v. Mexican etc. Land Co., 153 Cal. 664, 667, 96 Pac. 271; Burne v. Lee, 156 Cal. 221, 228, 104 Pac. 438; Schulte v. Boulevard Gardens Land Co., 164 Cal. 464, 468, Ann. Cas. 1914B, 1013, 44 L. R. A. (N. S.) 156, 129 Pac. 582, a principle directly opposed to Underhill v. Santa Barbara Land etc. Co., 93 Cal. 300, 28 Pac. 1049. But see, contra, Baldwin v. Miller & Lux, 152 Cal. 454, 462, 92 Pac. 1030. See Hawke v. California Realty etc. Co., 28 Cal. App., 152 Pac. 959, 963; and for a discussion of persons to whom the benefit of this liability should ultimately go, see Moss v. Smith, 171 Cal. Pac.

of the corporation to pay. The court says further that if such a debt is void it would be absurd and unjust to make the directors liable to the corporation itself (as this section appears to do), especially if the corporation had received a consideration equal in value to the debts created; but that "as indemnity to the corporation, in case it should be compelled to pay such debts, or to its creditors in case of the insolvency of the corporation, such liability of the directors is reasonable and just," and that on any other construction the corporation could receive and retain the consideration and repudiate the debt. But if the corporation had received full value for the debt, how the latter consequence (indemnity liability) could be reasonable and just does not clearly appear.

The court adds that this section does not purport to limit the power of the corporation, but only to regulate and check the exercise of that power by the directors, as might have been done by a by-law, though probably a by-law could not go to the extent of making the directors liable for the excess of debts. It would seem that this difference between the power of the corporation and the power of the board of directors (as a corporation can create no debt except through its board of directors) is a distinction without a difference. The real condition existing is that the power, being in the corporation, as a consequence exists in the directors.

If no consequence of this act had been declared by the state, under the well established rule where an act is expressly forbidden, the act would be void; but, as the court says, the consequences having been expressly declared by the statute, under another familiar rule where a statute expressly states the consequences, no others follow.

This was a decision of the court in bank, two of the seven judges dissenting without filing opinions, and

Cal. Corp.-29

was rendered in 1892. No case on this point has since gone to the appellate courts, except the Smith v. Ferries etc. R. Co. case, decided by an equally divided court, and this decision, remaining neither modified nor reversed for nearly twenty years, may be regarded as settled law.

This decision also declares that notes executed to a payee, without the words "or order" (that is, nonnegotiable in form), though secured by mortgage, are not a "bonded indebtedness" within the meaning of article 12, section 11, of the constitution requiring the consent of the majority of the stock, and that if a by-law of the corporation prohibits the creation of such excess debt the stockholders may waive the prohibition of the by-laws, either by resolution passed by a vote equal to that required to adopt the by-laws, or by their conduct or acquiescence, and that slight evidence of acquiescence is all that is required; and that want of knowledge on the part of some of the stockholders who voted for the ratification does not affect it, for "shareholders can not avoid responsibility for the unauthorized acts of their agent by abstaining from inquiry into the affairs of the company, or by absenting themselves from the company's meetings, and at the same time reap the benefit of their acts in case of success.''27

It is permissible to file a certificate for the original creation, as distinguished from an increase, of a bonded debt in excess of the stock subscribed at that time, but the bonds can not be issued (which is the time of the creation of the debt) except as the stock is subscribed; the bonds may be issued from time28 to time as rapidly as the stock is subscribed.

27 This quotation was approved in San Diego etc. R. Co. v. Pacific Beach Co., 112 Cal. 53, 62, 64, 33 L. R. A. 788, 44 Pac. 333; Lady Washington Consol. Co. v. Wood, 113 Cal. 482, 489, 45 Pac. 809, and this rule is declared in Morawetz on Private Corporations, section 629.

28 Merced River Electric Co. v. Curry, 157 Cal. 727, 109 Pac. 264.

REDUCTION OF CAPITAL STOCK

The conversion of stock by a corporation refusing to make a transfer of the same on its books is not a reduction of its capital stock, for the stock may be reissued, 29 but this reason hardly meets the case; it is true its authorized capital is not reduced, but its actual capital is, by the amount of damages recovered for the conversion. It was the latter.evil this section was intended to prevent that is, the improper withdrawal of the funds of the corporation. It was held that a purchase by a corporation of its stock is such a reduction.30

CAPITAL STOCK NOT TO BE DIVIDED

We already have seen in the preceding paragraphs what is the interpretation given to the term "capital stock" by our courts. The prohibition on stock dividends has been upheld by our courts to the fullest extent.31

DIRECTOR'S LIABILITY

For the liability of directors for making unlawful distribution of dividends, and for doing other acts prohibited by this section, see chapters on Director's Liabilities.

29 Ralston v. Bank of California, 112 Cal. 208-214, 44 Pac. 476. 30 Tulare Irr. Dist. v. Kaweah etc. Co., 5 Cal. Unrep. 330, 44 Pac. 662; Bank of San Luis Obispo v. Wickersham, 99 Cal. 655, 34 Pac. 444; Schulte v. Boulevard Gardens etc. Co., 164 Cal. 464, 468, Ann. Cas. 1914B, 1013, 44 L. R. A. (N. S.) 156, 129 Pac. 582. 31 Martin v. Zellerbach, 38 Cal. 300, 309, 99 Am. Dec. 365; Bank of San Luis Obispo v. Wickersham, 99 Cal. 655, 661, 34 Pac. 444; Ralston v. Bank of California, 112 Cal. 208, 213, 44 Pac. 476; Vercoutere v. Golden State Land Co., 116 Cal. 410, 48 Pac. 375, and cases cited in those decisions. Acknowledged in Schulte v. Boulevard Gardens Land Co., 164 Cal. 464, 468, Ann. Cas. 1914B, 1013, 44 L. R. A. (N. S.) 156, 129 Pac. 582.

CHAPTER XIX

ASSESSMENTS-DIRECTORS MAY LEVY

Section 331 of the Civil Code is as follows:

§331. The directors of any corporation formed or existing under the laws of this state, after one-fourth of its capital stock has been subscribed, may, for the purpose of paying expenses, conducting business, or paying debts, levy and collect assessments upon the subscribed capital stock thereof in the manner and form, and to the extent provided herein. (Amended March 30, 1874;

amendts. 1873-4, p. 206.)

This section, as originally adopted in 1872, did not contain the condition that one-fourth of the capital must first be subscribed; this condition was added by the amendment of 1874, since which the section has remained unchanged.

The first case1 arising under this section contains an interesting and instructive discussion of the preceding statutes which, to a considerable extent, were the basis of this section. In this case it was held that a corporation may levy and collect assessments upon full paid · shares. The questions of the extent and limitations of assessments will be considered under the two following sections.

Ordinarily a requirement of payment upon a subscription, or to pay up stock to par, is designated by

1 Santa Cruz R. Co. v. Spreckles, 65 Cal. 193, 3 Pac. 661, 802; Green v. Abietine Medical Co., 96 Cal. 322, 31 Pac. 100; Sayre v. Citizens' Gas Light & Heat Co., 69 Cal. 207, 208, 7 Pac. 437, 10 Pac. 408.