Court Opinion

ID: 3299148
Source: CourtListenerOpinion
Date Created: 2016-07-05 17:15:59.549276+00
Date Added: 2024-06-11T13:35:04.523688
License: Public Domain

I dissent from the order denying a rehearing of this case.
By the act under which the California Mutual Life Insurance Company was incorporated (Stats. 1865-66, p. 752), it was forbidden to make any insurance until it had a cash capital of at least one hundred thousand dollars fully paid up, and a guaranty fund of two hundred and fifty thousand dollars, composed of the promissory notes of solvent parties, approved by the board of directors and by each other, — no note to exceed five thousand dollars. Such notes were required to be payable absolutely and at all events, at the company's option, and to be negotiable, in order that they might be indorsed and transferred, or converted into cash, or otherwise dealt with by the company in its discretion, without reference to any contingency of losses, expenses, or otherwise. And it was provided that such notes, or the proceeds thereof, should remain with the company as a fund for the better security of its dealers, and should be assets of the company, *Page 48 
liable for its debts, obligations, and indebtedness, next after its assets from premiums and other sources, exclusive of capital stock, until the net earnings of the company over and above its expenses, losses, and liabilities should have accumulated in cash, or securities in which the net earnings had been invested, to a sum which, with the capital stock, should be equal to the aggregate of the original amounts of the guaranty fund and of the capital stock, which should thereupon become and remain the fixed capital of the company not subject to division, etc.
And it was further provided, that until the fixed capital had been so accumulated, and the fact formally proven and published, no guaranty note should be withdrawn from the fund without the substitution of another note unanimously approved by the directors then in office, and by all the other notemakers. (See Stats. 1865-66, p. 752, secs. 8, 9, 10.) By these provisions, and others of similar tendency, the legislature sought to protect the policy-holders and other creditors of such insurance companies by exacting the creation of an inviolable fund, out of which their claims should be payable; but, according to this decision, the whole purpose and policy of the law can be frustrated by the unlawful act of the corporation in surrendering or canceling a single one of the guaranty notes without compliance with the conditions prescribed in the statute. Without any fault on the part of the policy-holders or other creditors of the corporation, five sevenths of the fund which the legislature has been at such pains to create for the satisfaction of their demands is swept out of existence by an act of the directors which is expressly forbidden by law.
It would seem that there is some fault in the logic which can achieve so startling a result, and the fault, I think, is not far to seek. It consists in assuming as the basis of the argument that the corporation can surrender or cancel one of the guaranty notes, without observing the conditions prescribed by the act. I think, on the contrary, that any such attempt would be clearlyultra vires, void and nugatory. The corporation might cancel and surrender the note, but the act, being forbidden by law, would be of no legal efficacy. The maker of the note would remain liable, notwithstanding the attempted release, and notwithstanding the actual surrender of the paper upon which the note was written. In a suit to enforce payment for the benefit of creditors, or contribution for the benefit of his co-sureties, no court would listen for a *Page 49 
moment to the plea that the note had been canceled or surrendered. The ready answer would be, that the corporation had no power to release it or surrender it; that it had never been held by the corporation for its own benefit, but in trust for the security of others; and that the attempt to withdraw it was an attempted fraud. If these views are correct, the whole basis of the Department opinion is swept away. No wrong was done to the defendant in this case by the withdrawal of the notes of other guarantors, because their liability remained just the same as before. And as to the neglect of the corporation to present claims against the estates of deceased note-makers, it may be answered that the surviving note-makers could themselves have made such claims, and it was their duty to do so if they desired that protection. The opinion of the Department seems to assume, in reference to this point, that if one of several sureties dies solvent, the survivors are all discharged, if the obligee fails to present a claim against the estate of the decedent. No authority is cited to sustain the proposition, and it is clearly in conflict with the principle decided in Sichel v. Carillo,42 Cal. 493, and the cases there referred to, and the later cases approving the same doctrine. There is therefore no basis for the conclusion that the failure of the corporation to present claims against the estates of deceased note-makers released the survivors; and unless we are prepared to hold that an act done in defiance of express statutory inhibition is legally effective, there was no release of any surviving note-maker by the surrender of their notes.
It is also, in my opinion, a fundamental misconception of the act of 1866 to suppose that the execution of the guaranty notes created the ordinary relation of surety and obligee between the makers and the corporation. They were sureties for the corporation, not to it; and the notes, though payable to the corporation, were held — or if collected, the proceeds were held — for the benefit of the policy-holders and other creditors. The corporation, as to the notes, was a trustee for the benefit of others; and even if there had been no express statutory inhibition, the makers of the notes, knowing the fiduciary capacity in which the corporation held them, would have been guilty of a fraud in withdrawing them, and could not thereby have avoided their liability to the beneficiaries.
Another distinction between these guarantors and ordinary sureties is that they were not gratuitous obligors. They *Page 50 
were, with respect to the receipts and income of the corporation, far more favored than the ordinary stockholders, who contributed the cash capital of a hundred thousand dollars. The stockholders could receive no dividends unless there were profits, but the makers of the guaranty notes, without paying in a dollar, were to have a "commission" of five per cent per annum on the amount of their notes, and if they made any payments on their notes, they were to have twelve per cent on the amounts so paid. (Stats. 1865-66, p. 752, sec. 10.) As the amount of the guaranty fund was two hundred and fifty thousand dollars, the commissions paid to the note-makers during the time the company was in business must have been twelve thousand five hundred dollars per annum, or one eighth of the whole cash capital. It is scarcely a matter of surprise that the company became insolvent, and it may be safely assumed that the note-makers drew down their commissions as long as it continued to do business. Their liability, therefore, is a meritorious liability — a liability arising out of a contract under which they were the principal gainers.
As to the right of the plaintiff to maintain the action, there can be no doubt upon that point, if the assignee in insolvency could have maintained it. His vendor purchased the note at a sale made by the assignee in pursuance of an order of court, and whatever title and right of action the assignee had passed to the plaintiff. The assignee represented the interest of all creditors of the corporation. It was his right and his duty to collect these notes, or under the order of the court to sell them, and to apply the proceeds to the payment of the company's debts. His vendee stands in his shoes, and in enforcing the obligation is just as much a representative of the creditors as the assignee would have been if, instead of selling the note, he had sued upon it.
If the foregoing views are correct, the decision in this case is rested upon principles which will constitute a very inconvenient precedent in future controversies, and for that reason it ought to be reconsidered. It may be that upon some of the other grounds urged by counsel for appellant in their briefs a reversal of the judgment and order of the superior court would be necessary, but as these matters have not been adverted to by the court, it would be idle for me to discuss them.
  Temple, J., concurred in the dissenting opinion. *Page 51