A. C. Frost Co. v. Coeur D'Alene M. Corp. , 60 Idaho 491 ( 1939 )

Wall v. Basin Min. Co., Ltd., 16 Idaho 313, 101 P. 733, 22 L.R.A., N.S., 1013, considered only the status of stock with the words upon its face, "fully paid and non-assessable," as the statute stood then and prior to 1929, and neither that decision or those following it on that point cited by respondent (Reinersten v. Idaho Power etc. Co., Ltd., 32 Idaho 353,182 P. 851, Whicher v. Delaware Mines Corp., 52 Idaho 304,15 P.2d 610, Porter v. Northern Fire Marine Ins.Co., 36 N.D. 199, 161 N.W. 1012, and Lum v. American Wheel Vehicle Co., 165 Cal. 657, 133 P. 303, Ann. Cas. 1915A, 816) considered whether such stock could be made assessable by subsequent legislation under the reserved power of the legislature to amend statutes governing corporations bottomed on article 11, section 2, of the Constitution.¹

The earliest case we have found under a Constitution identical with ours, and on the precise point herein, isGarey v. St. Joe Min. Co., 32 Utah, 497, 91 P. 369, 374, 12 L.R.A., N.S., 554, which held as follows:

"Bearing in mind that the corporate charter is a dual contract — one between the state and the corporation and its stockholders, the other between the corporation and its stockholders — and that under the reserved power the state may alter or amend the former, but not the latter, the question is: Under which do the legislative enactment of 1903 and the action taken by the majority of the stockholders fall? We are of the opinion that they do not pertain to any right, privilege, or immunity which the state had granted to the corporation or to its stockholders, and that the action by such stockholders in no wise affected or was related to the contract existing between the state and the corporation. It merely pertains to and affects the contract existing among the stockholders themselves. Neither the enactment nor the stockholders' amendment of the articles purport to be for the benefit of the public. Thereunder no right or privilege in favor of creditors or the public is created, and thereunder no creditor could assert any right or claim that could not have been asserted by him prior to the enactment. In the original articles of incorporation each stockholder agreed, one with the other, that his full-paid capital stock should be nonassessable. . . . . To permit the Legislature to confer authority upon any number of stockholders less than the whole to bind a dissenting minority to another and a different agreement in such respect is to force them into a contract which they never made and which they are not willing to make. To do so is to confer the power on the majority to determine the amount of contributions that each stockholder is required to make. . . . . The exercise of such power is something which affects the very core of the contractual relations of the stockholders among themselves; and a legislative enactment which confers such a power is, in our judgment, an impairment of the obligation of a contract which is protected by the federal Constitution."

Somerville v. St. Louis Min. Mill. Co., 46 Mont. 268,127 P. 464, 465, 466, L.R.A. 1915B, 811, reached the opposite conclusion without specifically mentioning Garey v. St. JoeMin. Co., supra, but nevertheless evidently cognizant of it:

"Certain principles of law relating to corporations are so well settled that, as to them, there is not any difference of opinion. (1) The charter granted by a statement to a corporation, when accepted, becomes a 'contract' within the meaning of the contract clause of the federal Constitution.Dartmouth College v. Woodward, 4 Wheat. 518, 4 L. Ed. 629, (2) Such contract operates in a threefold relationship, viz.: (a) Between the state and the corporation; (b) between the corporation and its stockholders inter sese. (3) A state may reserve the right to alter or amend the charter of a corporation, or to alter, amend, or repeal the laws under which the corporation was organized. And (4) the provisions of our state Constitution and the statutes referred to above constitute such a reservation of power and authority.

. . . . . . . . . . . . .

". . . . The legislation in force at the time of the organization of a corporation enters into and becomes a part of the contract, to the same extent as if set forth at length in the contract; and, upon the theory which we have adopted, there was read into the charter of the Ajax Mining Company this statement, in effect: This corporation shall not without the unanimous consent of its stockholders dispose of all the corporate property, until such time as the Legislature may authorize it to do so. And upon the same theory, the recital in the charter of the St. Louis Mining Milling Company that its stock should be non-assessable is to be read, in the light of the reserved power, to mean: This stock shall be nonassessable until such time as the Legislature shall provide that it shall be assessable, or until such time as it is rendered assessable pursuant to legislation authorizing such change. If our theory of the reserved power is correct, and these stipulations are to be read into the charters of these companies, it follows, as of course, that section 511, Civil Code, above, does not impair the obligation of the contract entered into when the St. Louis Mining Milling Company accepted its charter."

Garey v. St. Joe Min. Co., supra, has generally not been followed. (Davis v. Louisville Gas Elec. Co., 16 Del. Ch. 157,142 A. 654; Barth v. Pock, 51 Mont. 418, 155 P. 282,285; Schroeter v. Bartlett Syndicate Bldg. Corp.,8 Cal. (2d) 12, 63 P.2d 824; annotation, 72 A.L.R. 1259, note III.) The Montana case has been more generally considered to be the correct rule under a Constitution like ours. (Mid-Northern OilCorp. v. Walker, 65 Mont. 414, 211 P. 353; Rainey v.Michel, 6 Cal. (2d) 259, 57 P.2d 932, 105 A.L.R. 148;Security State Bank v. Sharpe, 170 Minn. 454, 212 N.W. 801, 803; Wasson v. Planters' Bank Trust Co., 188 Ark. 343,65 S.W.2d 528, 531, 90 A.L.R. 141.

The Utah case considered there would be an impairment of the obligation of contract because, by the change the individual could be deprived of his stock; on the other hand Wall v. BasinMin. Co., Ltd., supra, and Somerville v. St. Louis Min Mill.Co., supra, as well as a later Utah case (Weede v. Emma CopperCo., 58 Utah, 524, 200 P. 517), point out the same result ultimately follows if the stock may not be changed into assessable stock. That is, if no assessment may be levied the corporation might be unable to continue and all stock be lost.

If the constitutional provision of article 11, section 2, means anything at all it must mean that the legislature has the power and authority to change the statutes regulating preexisting corporations or previously issued stock, for the legislature without constitutional authority — since there is no restriction thereon — has the undoubted right to legislate with respect to subsequent corporate actions or subsequently issued stock.

It is asserted that this construction of the statute results in unfairness to the stockholders. Let us examine the other side of the picture a moment and see what results from the majority construction of the statute.

Respondent owns such a large block of stock that his refusal to pay assessments thereon might force the corporation to lose all its property, whereupon the property of the corporation might be repurchased by respondent at a low figure. and the other stockholders frozen out. Under such construction the corporation and minority stockholders lose everything. If an enforceable assessment is made any stockholder failing to pay would alone lose his stock but the corporation would be able to retain its property.

It is of course to be kept in mind that we are dealing with assessment of stock after it has been fully paid for and not the question of so-called single or double liability as considered in Fralick v. Guyer, 36 Idaho 648, 213 P. 337.

The point is made that section 2, article 11, reserves power to legislate only as to the relationship between the corporation and the state, and not between the corporation and stockholders and among others, Haberlach v. Tillamook County Bank, 134 Or. 279,293 P. 927, 72 A.L.R. 1245, and Schramm v. Done,135 Or. 16, 293 P. 931, are cited as supporting such thought and the holding in Garey v. St. Joe Min. Co., 32 Utah, 497,91 P. 369, 12 L.R.A., N.S., 554.

The Oregon cases are distinguishable from the case herein for three reasons: First, they do not rely upon the distinction as to the relationship between the corporation and the state and its stockholders, since they cite with approval the Dartmouth College case, 4 Wheat. 518, 4 L. ed. 629, which did not involve the relationship between the corporation and stockholders; second, the Oregon Constitution has no such provision as section 2, article 11, and of course the applicability of such constitutional provision was not considered, but evidently the effect of such provision was in mind because of this language in Schramm v. Done, supra:

"Although there is some conflict in the decisions, the prevailing rules are as follows: Where the state has not reserved the power to alter, amend, or repeal the charter of a corporation, the provision of the Constitution of the United States (article 1, § 10) against laws impairing the obligation of contracts protects the contract between the corporators or members, and between them and the corporation, as well as the contract between the state and the corporators or corporation (Dartmouth College v. Woodward, 4 Wheat. 518, 4 L. Ed. 629), and therefore any material or fundamental amendment of the charter by or under legislative authority, or by a constitutional amendment, in order that it may be binding, must have the unanimous assent of all the stockholders or members, and the Legislature cannot authorize acceptance of or assent to such an amendment by a majority of the stockholders or members so as to bind the minority. 14 C.J., p. 187, § 193."

In the third place the imposition upon the stockholders there considered was not an assessment as herein, but involved single or double liability, which was not that considered herein, as expressly stated herein, referring to Fralick v. Guyer, 36 Idaho 648,supra.

The judgment should therefore be reversed and remanded with instructions to enter judgment in favor of appellants.

Morgan, J., concurs in this dissent.

Petition for rehearing denied.

¹ Idaho Constitution, article 11, section 2, provides:

"No charter of incorporation shall be granted, extended, changed or amended by special law, except for such municipal, charitable, educational, penal, or reformatory corporations as are or may be, under the control of the state; but the legislature shall provide by general law for the organization of corporations hereafter to be created: provided, that any such general law shall be subject to future repeal or alteration by the legislature."