Court Opinion

ID: 3300694
Source: CourtListenerOpinion
Date Created: 2016-07-05 17:17:03.372347+00
Date Added: 2024-06-11T13:29:13.476935
License: Public Domain

This appeal is from the judgment for the purpose of reviewing the order sustaining the respondent's demurrer to the complaint. The action was brought by plaintiff, as assignee of certain depositors of the Savings Bank of San Diego County, to recover of respondent and others the sum of $376,359.46 claimed to have been misappropriated by the officers of the bank. The proceeding is under the latter clause of section 3 of article XII of the constitution, which reads as follows: —
"The directors or trustees of corporations and joint-stock associations shall be jointly and severally liable to the creditors and stockholders for all moneys embezzled or misappropriated by the officers of such corporation or joint-stock association during the term of such director or trustee."
The plaintiff in his brief concedes "that the allegations which connect Mr. Mabury are not claimed to hold him further than the same allegations would impose a liability upon other directors not implicated." As this appeal is for the purpose of reviewing the order sustaining Mabury's demurrer to the complaint, we need not discuss the allegations of the complaint as to any other defendant. It is stipulated that the plaintiff must recover, if at all, on the provisions of the constitution quoted. *Page 450 
There has been no legislation for the purpose of aiding or assisting in carrying into effect the said provision. The character of action that may be brought, the proportion of recovery to be paid respectively to the creditors and to the stockholders, whether the creditors are to be paid first, and whether judgment creditors or contract creditors merely are meant, whether the creditors or stockholders must have been such at the time of the alleged embezzlement or misappropriation before they can complain, whether a creditor can complain if the bank is solvent, or whether a creditor in any case can recover more than the amount due him, or whether an action can be maintained by the creditors without the stockholders, or viceversa, and many other questions of similar import, are all matters of judicial construction, if the provision is self-executing. But, under the view we take of the complaint, it is not necessary here to decide as to whether or not the provision is self-executing. The remedy seems to be given to "creditors and stockholders," or at least the aim is to create a liability in their favor. Whether or not, in such case, the action to recover for such liability may be maintained by an assignee, being a person not named in the provision, need not be determined. If it be conceded that the provision is self-executing — which we do not intimate to be the case — and that an assignee of a contract creditor can maintain the action, yet the demurrer was properly sustained as to Mabury. The provision imposes a liability upon the honest, faithful director or trustee for all amounts embezzled by any officer of the corporation. The honest official is made to pay for the moneys stolen or embezzled by the dishonest one. The action is therefore in its nature a penal action. (Carr v. Rischer, 119 N.Y. 117;Globe Publishing Co. v. State Bank, 41 Neb. 175.) Therefore, the provision must be strictly construed and the liability claimed must be shown, not by implication, but by unambiguous language.(Askew v. Ebberts, 22 Cal. 264; Occidental etc. Assn. v.Sullivan, 62 Cal. 395.) The liability is for "moneys embezzled or misappropriated" by another. In this case there is no claim or allegation that the money was embezzled, but the attempt is to show that it was misappropriated. What, then, is the meaning of the word "misappropriated" as used in the constitution? It is used in connection with "embezzled," and does not mean merely applying money in a manner not authorized by law. It is *Page 451 
used in a criminal sense in section 1 of article II of the constitution, where it is provided: "And no person hereafter convicted of the embezzlement or misappropriation of public money shall ever exercise the privilege of an elector in this state." The Penal Code (sec. 504) makes the fraudulent appropriation to any use or purpose not in the due and lawful execution of his trust, by any officer of a corporation, of property which he has in his possession by virtue of his trust, embezzlement. In speaking of the word "misappropriation," as used in the provision, this court said in Fox v. Hale  Norcross S.M. Co.,108 Cal. 426: "But in my opinion the word `misappropriation' is to be construed by the maxim, Noscitur a sociis; it means something like embezzlement, or, in other words, it means the misapplication of funds intrusted to an officer for a particular purpose by devoting them to some unauthorized purpose, and does not apply to the payment of an extravagant price for services or materials properly appertaining to the business of the corporation."
It is therefore evident that unless the complaint, in view of the above definitions, alleges fully a misappropriation of the funds of the corporation, by some officer thereof, while Mabury was a director, it states no cause of action against him. The complaint contains twenty-seven separate statements as to the alleged misappropriations. As they are all of the same general nature, it will not be necessary to examine each in detail. One or two will suffice for the purposes of this case.
The first is as follows: "1. On the twenty-ninth day of November, 1887, said defendant Bryant Howard, who was then the attorney in fact of defendant Hiram Mabury, directed John Ginty, who was then the secretary and treasurer of said savings bank, to pay to said Consolidated National Bank of San Diego, out of the funds of said savings bank, for the benefit of said Hiram Mabury, the sum of $20,000 upon the pretended purchase by said savings bank from said Hiram Mabury of a note of Guion, Hamilton 
Hartley, payable to said Hiram Mabury, of that date, due February 29, 1888, with interest at 12 per cent., for $20,000, which note was not then secured in any way, which sum of $20,000 said John Ginty, as such treasurer, on said November 29, 1887, did unlawfully pay out of the funds of said savings bank to said *Page 452 
Consolidated National Bank, for the benefit of said Hiram Mabury; by reason of which misappropriation and pretended purchase the said savings bank and its depositors have suffered a loss, including interest, amounting to $54,236.65."
We may eliminate from the above specification the words "pretended," "unlawfully," and "misappropriation." While the words are unpleasant, they are not sufficient to dispense with the necessary statement of facts. (Water Works v. San Francisco,82 Cal. 321; Ambler v. Choteau, 107 U.S. 590; Pehrson v. Hewitt,79 Cal. 598.)
The character of the transaction must be determined by the facts alleged, and not by the epithets used by the pleader. We, then, have the allegation, that Ginty, the treasurer of the savings bank, under the direction of Howard, the president, on November 29, 1887, paid to the Consolidated National Bank of San Diego the sum of $20,000, upon the purchase of the note of Guion, Hamilton  Hartley, payable to Mabury, for the sum of $20,000, with interest at twelve per cent, due February 29, 1888; that said note was not secured in any way, and the sum was paid for the benefit of Mabury. As the note was payable to Mabury in the first place, it would of course follow that the payment of the purchase price was for his benefit. It is not alleged that the makers of the note were not solvent at the time it was purchased. In fact, it is nowhere alleged that they were ever insolvent, nor that the note has not been paid. It is alleged as a conclusion that the depositors have suffered a loss in consequence of the purchase, including interest, amounting to $54,236.65. Whether this loss was caused by the fact that the money, if kept, could have been loaned at a higher rate or used in speculation does not appear. It is not alleged that the money was embezzled by any officer of the corporation. It is not alleged that it was used for any unlawful purpose or converted by any officer to his own use. It may be, and probably is, true that the money of the savings bank should not have been loaned without security, but we cannot think that a loan made by an officer of a bank, in good faith, for the bank and not for his own gain, would be a misappropriation within the meaning of the constitutional provision. The fifth specification of facts relied upon to constitute a misappropriation is as follows: —
"5. That on the twenty-second day of October, 1889, the *Page 453 
said Bryant Howard, as president of said savings bank, directed said John Ginty, as such secretary and treasurer, to pay said Consolidated National Bank the sum of $88,210, upon the pretended purchase of certain notes held by said Consolidated National Bank of one R.W. Waterman, which notes were then long overdue, were not secured in any manner, and which had been in large part protested, and which notes were not transferred to said savings bank, in pursuance of which the said John Ginty did, on said twenty-second day of October, 1889, as such secretary and treasurer, unlawfully pay out of the funds of said bank to said Consolidated National Bank the sum of $88,210, by reason of which misappropriation said savings bank and its depositors have suffered a loss, including interest, of $23,696.52."
Here it appears that on the twenty-second day of October, 1889, the treasurer of the savings bank, under direction of the president, paid to the Consolidated National Bank, $88,210, for the purchase of certain notes held by the Consolidated National Bank, made by one Waterman, which were overdue, and which had been in part protested. It is alleged that the notes were not secured, but there is no allegation that the maker was then or ever was insolvent. The amount of said notes is not shown; neither is it shown that they were not paid. It is alleged that by reason of the purchase the savings bank suffered a loss, including interest, of $23,696.52. Whether this loss was from the amount due on the face of the notes or by reason of the bank not having the money to loan or use for other purposes does not appear. The savings bank may have received the entire amount back and thousands of dollars interest, and yet all the allegations concerning this transaction may be true. There is no allegation that any officer of the bank embezzled or appropriated to his own use a single dollar of the money. It is provided in section 5209 of the Revised Statutes of the United States: —
"Every president, director, cashier, teller, clerk, or agent of any `national banking association,' who embezzles, abstracts, orwillfully misapplies any of the money, funds, or credits of the association . . . shall be deemed guilty of a misdemeanor."
This section came before the supreme court of the United State in United States v. Britton, 107 U.S. 666, and the court in construing the section said: — *Page 454 
"To constitute the offense of willful misapplication, there must be a conversion to his own use, or use of some one else, of the moneys and funds of the association by the party charged; . . . there is no averment of a conversion by the defendant to his own use, or the use of any other person, of the funds in the purchase of the shares. The counts, therefore, chargemaladministration of the affairs of the bank, rather than amisapplication of its funds."
The central idea of the provision is "embezzlement or misappropriation" by the officers to their own use. It was not the intention to make every director of a bank responsible for the business mistakes of his associates. Neither is it the policy of the law to allow a stockholder to profit by an investment if it proves to have been a good one, and to hold the directors responsible if it proves to have been a bad one. Corporations are managed by their agents and directors. If, after using their best judgment, an investment should not prove profitable, it is no more than happens to individuals in the every-day transactions of life. Banks have their financial crises, when assets that were at the time they were taken ample become valueless. In all cases the directors and officers should be honest and held criminally for any embezzlement or misappropriation of funds to their own use.
The individual directors should not be held for the acts of others with which they are in no way connected, unless under the plain mandates of the law. In this case the facts alleged do not make respondent liable for the acts of other officers.