Case Name: VINCENT NEALE, Special Administrator, etc., Respondent, v. A. E. HEAD, Appellant
Court: Supreme Court of California
Jurisdiction: California
Decision Date: 1901-05-25
Citations: 133 Cal. 42
Docket Number: S. F. No. 2172
Parties: VINCENT NEALE, Special Administrator, etc., Respondent, v. A. E. HEAD, Appellant.
Judges: 
Reporter: California Reports
Volume: 133
Pages: 42–50

Head Matter:
[S. F. No. 2172.
Department One.
May 25, 1901.]
VINCENT NEALE, Special Administrator, etc., Respondent, v. A. E. HEAD, Appellant.
Life Insurance Companies — Guaranty Fund—Statute Part of Notes.—The provisions of the act of April 2,1866, relating to the establishment of a guaranty fund for mutual life insurance companies incorporated under that act, requiring such fund to consist of the notes of solvent parties, approved by the board of directors and by each other, and declaring that such notes, or the proceeds thereof, shall remain with the company, and not be withdrawn without substituting another note of equal solvency, nor without the unanimous approval of the board of directors and of all the other parties liable on the rest of the notes, must be considered as if written into each of the guaranty notes, and as giving to each note-maker the right to require their enforcement as to all other note-makers.
Id. — Eights of Guarantors — Sureties—Non-liability to Corporation— Unprotected Successor in Interest.—The makers of the guaranty notes are the mere sureties of the corporation and its stockholders for the payment of the company’s debts, and are entitled to stand upon the very letter of their contract. They are liable to unpaid creditors of the corporation, unless discharged by non-compliance with the statute; but they cannot be held liable to the corporation merely, nor to itfe unprotected successor in interest.
Id.—Action upon Guaranty Note—Insufficient Complaint.—In an action upon a guaranty note of a mutual life insurance company incorporated under the act of April 2, 1866, brought by the successor in interest of the insurance company, a complaint which does not show that the plaintiff is a protected purchaser of the note, or that he is a creditor of the company, or an assignee of a creditor or creditors thereof, or that any of the requirements of the statute respecting the guaranty fund were complied with, is insufficient to sustain the action.
Id.—Findings—Violation of Statute—Discharge of Guarantor.— Where the answer in such action averred numerous departures from and violations of the statute regulating the guaranty fund, and the findings sustained the answer, and showed that numerous guarantors were discharged from liability without the substitution of any note, money, or property, and without the consent of the defendant, the defendant is thereby shown to be discharged from liability, and the action cannot be sustained.
Id.—Purchase of Negotiable Guaranty Note at Judicial Sale— Caveat Emptor.—The purchaser of a negotiable guaranty note of a mutual life insurance company of this state, at judicial sale, takes it under the rule of caveat emptor, and holds it subject to all equities existing against it in the hands of the original maker or assignor. Such purchase is not a transfer in due course.
APPEAL from a judgment of the Superior Court of the City and County of San Francisco and from an order denying a new trial. W. R. Daingerfield, Judge.
The facts are stated in the opinion of the court.
Garber, Boalt & Bishop, Bishop & Wheeler, Thomas B. Bishop, and William Rix, for Appellant.
Vincent Neale, for Respondent.

Opinion:
VAN DYKE, J.
The appeal is taken from the judgment and also from the order denying defendant's motion for a new trial.
The action was brought in the superior court of the city and county of San Francisco, by one Joseph E. Shain, for whom the present plaintiff was substituted as plaintiff at the trial. The action is founded upon a promissory note of the defendant, constituting one of the so-called guaranty notes, of which the following is a copy:-—
" Office of the California Mutual Life Insurance Company. "$5,000. San Francisco, Jan. 6,1868. " Five days after actual demand, for value received, I promise to pay to the order of the California Mutual Life Insurance Company the sum of five thousand dollars, in United States gold coin, with interest at the then legal rate from and after such demand. A. E. Head."
The case was heard in the court below on the second amended complaint, filed by the original plaintiff, and the answer thereto, and the supplemental complaint, substituting the present plaintiff.
The California Mutual Life Insurance Company was incorporated in the year 1867, under an act of the legislature of this state, entitled " An act to provide for incorporation of mutual insurance companies for the insurance of life and health and against accident. Approved April 2, 1866." (Stats. 1865-66, p. 752.) After obtaining the guaranty fund as provided by said act, the said insurance company engaged in business, and carried on the same during the years 1868, 1869, 1870, 1871, and 1872. In the year 1873 it sold out its business to the Republic Life Insurance Company of Chicago, an Illinois corporation, and ceased to do further business. In 1885, said insurance company being insolvent, proceedings in involuntary insolvency were, on the 7th of March of that year, commenced against it, and thereafter it was adjudicated insolvent, and the court decreed, among other things, that the assets of the insolvent, including the notes constituting the guaranty fund, should be sold, and in pursuance of said decree said notes were, by the assignee, sold; the note of the defendant being sold to one James H. Dobinson for three hundred dollars, who, as alleged in the second amended complaint, transferred and assigned the same to the original plaintiff; and, September 22,1888, on demand being made on defendant, and refusal to pay, the action was commenced in 1891; and the original plaintiff, before the trial, transferred the claim to the present plaintiff. By the act under which the company was organized and operating, a guaranty fund of not less than two hundred and fifty thousand dollars is required, which " shall consist of the notes of solvent parties, approved by the board of directors and by each other," which notes so given by any one person should not exceed the sum of five thousand dollars, exclusive of interest. It is also provided that when the fixed capital of the company shall have been obtained, a sworn declaration of the amount and nature of the same shall be filed with the original certificate of incorporation, and " until such time no guaranty note shall be withdrawn from the fund, unless another note of equal solvency shall be substituted therefor, and unless with the unanimous approval of the board of directors then in office, and of all of the other parties liable on the rest of the notes comprising the guaranty fund." In this case there were fifty notes of five thousand dollars each. There is no averment in the complaint of compliance with any of these requirements. The contrary, however, is expressly alleged in defendant's answer, and the findings substantially support the allegations of the answer. The findings show that five of the guaranty notes were, during the existence of the company, surrendered to the makers of the same, and withdrawn from the said guaranty fund, without any substitution or attempt at substitution of other securities, and without the knowledge, approval, or consent of the defendant. It is also found that eight of the makers of said guaranty notes had died, and had left solvent estates sufficient to pay their respective notes and other debts, and that the company neglected and failed to present any claim whatever against the estate of said deceased solvent note-makers, or to take any steps whatever for the collection of the same, until the same had become barred by limitation; that said company, without the approval, consent, or knowledge of the defendant, transmitted all of said notes constituting said guaranty fund, including the note in suit, to the Republic Life Insurance Company, a corporation existing under the laws of the state of Illinois, without substituting or procuring to be substituted therefor any note, money, or property whatever; that, after the commencement of this action, and without defendant's approval or consent, said company surrendered to the makers thereof thirty-two of said notes, constituting said guaranty fund, without any substitution of other notes or security, other than the execution of a bond in the sum of twenty-five thousand dollars, in favor of the assignee in insolvency.
The appellant contends,—1. That, having made the note in suit on certain conditions, he is not hable, because the conditions have not heen complied with; and, being a guarantor, is discharged from liability, in consequence of the acts and transactions referred to as having been found by the trial court; 2. That the claim, if any ever accrued, is barred by limitation.
1. The note in suit, as already shown, was given in pursuance of and in accordance with the provisions of the statute of 1866. Among the other provisions of that act, it is declared that such notes, or the proceeds thereof, should remain with the company, and should not be withdrawn from the guaranty fund without substituting therefor another note of equal solvency, nor without unanimous approval of the board of directors, and all of the other parties liable on the rest of the notes. These provisions of the law must be considered as having been written into the note, and they are in harmony with the general rules of law for the protection of a surety or guarantor. Each note-maker had the right to require that there should be, in all, fifty solvent note-makers, each of the sum of five thousand dollars, and it was also his right to have that number of such solvent note-makers continue, subject to the same conditions and liabilities as himself. The reason of this provision in the law is very obvious. The corporation and its stockholders are primarily liable for the company's debts. (Morrow v. Superior Court, 64 Cal. 383.) The parties who executed the guaranty notes are the mere sureties of the company and its stockholders for the payment of the company's debts (In re California Mut. Life Ins. Co., 81 Cal. 364); and, as sureties, each note-maker, if required to pay in discharge of the company's debts, is entitled to contribution from such note-makers as may not have paid an equal amount. As a guarantor, the defendant is entitled to stand upon the very letter of his contract. (Brandt on Suretyship, 2d ed., secs. 93, 254; Miller v. Steward, 9 Wheat. 680, 702, 703; Tomlinson v. Simpson, 33 Minn. 443, 446; Independent District v. Reichard, 50 Iowa, 98.)
It was held in In re California Mut. Life Ins. Co., 81 Cal. 364, that this guaranty fund was liable only for the debts of the company, and as an additional security to the parties dealing with said company, over and above the liability of the company and its stockholders; and as • between the makers of these notes and the company and its stockholders, the money paid by stockholders cannot be made a charge upon such guarantors. It is very clear, therefore, that the company could not have maintained an action on this note under the circumstances, and there is nothing to show that the plaintiff is, or that his assignors were, creditors of the company. It is alleged in the second amended complaint on which the case was tried, " that, pursuant to said decree, the said note was sold to one James H. Dobinson, who transferred and assigned it to this plaintiff," and in the supplemental complaint, after averring the appointment of the plaintiff as special administrator of the estate of James Laidley, deceased, it is said, " that since the commencement of this action, to wit, in the month of November, 1895, Joseph E. Shain, the original plaintiff in the above-entitled action, transferred to the plaintiff, as special administrator of the estate of James Laidley, deceased, the promissory note sued upon, and all his right, title, and interest in the above-entitled action." The title to the note in question passed from the insurance company, to which it was originally given, to Dobinson, by means of a judicial sale, and from him by mesne assignments to the present plaintiff. The plaintiff therefore stands in no better position than the company itself would have stood, had it brought suit on the note. The finding of the court that Dobinson transferred to the executors of Laidley in extinguishment of a claim against the insolvent. company, held by said estate of James Laidley, deceased, is altogether outside of the issues raised in the pleadings, and is therefore without support.
One who buys at judicial sale a negotiable promissory note takes it under the rule of caveat emptor, and holds it subject to all equities existing against it in the hands of the original maker or assignor. It is not a transfer in due course. (2 Parsons on Notes and Bills, pp. 46 et seq.; Rorer on Judicial Sales, 474; Civ. Code, sec. 312; Code Civ. Proc., sec. 368.) The small price paid for the note at such sale would indicate that the purchaser so understood it.
For the foregoing reasons, bearing upon the first point relied upon by appellant, we are of the opinion that upon the findings of the court within the issues raised by the pleadings the defendant was entitled to judgment. This view of the case renders it unnecessary to consider the other points made by appellant. Judgment and order reversed.
Harrison, J., and Garoutte, J., concurred.
Hearing in Bank denied.
Beatty, C. J., dissented from the order denying a hearing in Bank, and filed the following opinion on June 26, 1901:—