having found that all the dividends were in fact paid out of surplus profits, its judgment was given in favor of the defendant upon that ground alone. The plaintiff appeals from the judgment and from an order denying its motion for a new trial.

The record upon which the decision of the superior court is to be reviewed is exceedingly voluminous, and consists in great part of tabulated statements and accounts intended to show the gross earnings, the current and other expenses, of the plaintiff, the amount and nature of its assets and indebtedness, and, in short, the exact condition of its affairs at the date of each of the 18 dividends in question. We are, however, spared the labor of deducing for ourselves the results of these involved and conflicting statements by reason of the fact that counsel for both parties have agreed to accept the results stated by the learned judge of the superior court in an opinion filed by him in connection with his decision of the cause, and which has been included in the transcript of the record. It appears therefrom that the plaintiff was incorporated in March, 1877, with a nominal or share capital of $5,000,000, divided into 50,000 shares of $100 each. The object of the incorporation was to carry on hydraulic mining, etc., and the defendant was, from the beginning down to September, 1879, a stockholder and director in the company. In April, 1877, plaintiff acquired all the property of the Excelsior Water Company, consisting of mining ground, farm, ditches, flumes, store, and merchandise, stock in other mining companies, bills, notes, bullion in flumes, etc., giving in exchange 36,732 shares of stock; and shortly afterwards it obtained a like conveyance and transfer of all the property of the Pactolus Mining Company in exchange for 3,000 shares of its stock. These, with a few others, amounting in all to 39,809 shares, were the only shares ever issued by plaintiff. The Excelsior Water Company and Pactolus Mining Company were largely indebted at the time they transferred their property to plaintiff, and this indebtedness was assumed by plaintiff as a part of the pur. chase price of the property. Its net amount, over and above the solvent credits transferred by the two companies, was $173,710.80, which was paid during the directorship of the defendant. During the same time the sum of $233,723.60 was expended by plaintiff in the purchase of other mining property, the construction of ditches, tunnels, permanent improvements on farm, machinery on mine, procuring United States patents for mining ground, and in assessments on stock in other com. panies. During the same time the plaintiff was carrying on its mining and other multifarious business, and it received from sale of bullion and water, and as profits of its store and farm and other investments, the gross sum of $1,095,719, while its outlay for operating its mines, salaries, taxes, interest, and other strictly current expenses was $638,303, leaving a balance of earnings of $457,416. The amount of the 18 dividends declared and paid during this time was only $241,629, or $215,724

less than the net earnings. But the plaintiff contends that the surplus profits were only about $98,000, and that about $143,000 over and above the surplus profits were divided, while the defendant claims that much less than the surplus profits was divided. This difference between counsel for plaintiff on the one side and the superior court and counsel for the defendant on the other arises out of a difference of theory as to what constitutes surplus profits of a mining corporation. Counsel for plaintiff contends that the payment of the debts which plaintiff assumed as part of the price of the property acquired from the Excelsior Water Company and the Pactolus Mining Company, as well as most of the items of expenditure for construction of tunnels, levees, ditches, etc., should be rated as current expenses, and charged against its gross earnings, in order to ascertain the actual surplus profits of its business; while counsel for defendant contends, on the contrary, that the payments of the principal of its indebtedness, and its investments in what are called “betterments of its property” should not be charged to current expenses of the business. As to the payment of the debt assumed by the plaintiff when it commenced business, or that incurred in making improvements, we do not understand its counsel to contend that it was necessary to pay them off before any dividends could be declared, but merely that whenever any part of its gross earnings was applied to the payment of a debt it was unlawful thereafter to replace such sum with the proceeds of a loan, and thereupon declare a dividend. The fact is not disclosed by the opinion of the judge of the superior court, but it seems to have been proved, that in several instances money was borrowed by the plaintiff in order to any dividends, and it seems to have happened in this way: The debts assumed by the plaintiff became due from time to time, and the permanent improvements on its property were made from time to time, so that large payments on both accounts were constantly occurring. Instead of borrowing money to make such payments at the time of making them, any money that happened to be on hand in the company's treasury was used as far as it would go, and afterwards replaced by the proceeds of bonds, overdrafts, or notes of the company, which, to the extent necessary, were used to pay the regular dividends. It is in this course of proceeding that counsel claims that defendant was clearly guilty of a violation of section 309 of the Civil Code, irrespective of any difference of views as to what are and what are not current expenses justly chargeable against the gross receipts of a mining corporation, in order to determine its net or surplus earnings or profits. To determine the question presented by this aspect of the case it will be necessary, in the first place, to lay down some general propositions which we think are clearly established by the authorities to which we shall refer.

The term "capital stock" has a double meaning as applied to corporations. ln

one sense it is the sum mentioned in the articles of incorporation as the amount of the capital stock; in other words, it is the share capital or nominal capital, and does not necessarily represent a corresponding amount of actual capital. In case of mining corporations it is always arbitrary, and generally extravagant in amount. The capital stock referred to in the statute, however, (Civil Code, § 309,) is the actual property of the corporation contributed by the shareholders of the nominal capital. In this case the nominal or share capital of the plaintiff was $5,000.000. Its actual capital was its mining and other property (less the debt with which it was incumbered) received in exchange for the shares which it issued, and this actual capital was what it was forbidden to divide. This inhibition, however, did not extend to the net proceeds of its mining operations; for a mining corporation, like any other corporation organized for the purpose of utilizing a wasting property-a property that can be used only by consuming it-as a mine, a lease, or a patent, is not deemed to have divided its capital merely because it has distributed the net proceeds of its mining operations, although the necessary result is that so much has been subtracted from the substance of its estate. Mor. Priv. Corp. § 442; Lee v. Asphalte Co., 41 Ch. Div. 24. It may distribute its net earnings, although the value of its mine is thereby diminished. But it may not sell the mine, or any part of it, and distribute the proceeds. In this sense, and in this sense only, provisions of law similar to those of section 309 of our Civil Code have been held to apply to mining corporations. If the mine belonging to a mining corporation when it commences opera tions is free from debt, and provided with all the necessary openings and appliances for its convenient working, the problem of ascertaining the amount of its surplus profits from time to time would be very simple, and would consist in merely deducting the gross outlay from the gross receipts; and the balance, less a reasonable reserve to meet contingencies, would be the legitimate subject of a dividend. But when the mining property has been taken subject to a debt, or when, as a preliminary operation, it becomes necessary to incur a debt in running an expensive tunnel, or sinking an expensive shaft, the problem becomes complicated. Must the whole of such debts be paid out of the first earnings before making a dividend, or must only a part be paid, and, if so, what part? We do not think it would be necessary to pay, in the first place, the whole of such debts, but it would be necessary to pay accruing interest, and to provide & sinking fund suffi cient to extinguish the principal before the mine was exhausted. There can be no doubt, we think, that this is a correct theory; but in case of a property of such uncertain, fluctuating, and precarious value as a mine, it would undoubtedly be extremely difficult in most cases to prac. tically apply it. Fortunately, however, the right of the creditors to insist upon

payment of their demands as they fell due, and the prudence of capitalists to whom the company would be compelled to resort for loans with which to extend the payment of its maturing indebtedness, would always furnish a sure corrective for any disposition of the directors of a corporation to provide an inadequate fund for the extinguishment of its indebtedness, and it may be safely assumed that in the case supposed, unless the debts of the corporation were paid at a rate satisfactory to its creditors, they would put a stop to the payment of dividends by the means within their power. At all events, we are clear that the directors of a mining corporation which has become indebted either by acquiring its property incumbered with debt, or by making permanent improvements for the thorough and systematic working of its mines and other property, are not guilty of an iufraction of section 309 of the Civil Code merely because they declare and pay dividends out of the net proceeds of their mine without first pay. ing the whole of such debts. On the con. trary, if they have fairly and honestly applied towards the payment and extinguishment of the debts of the company a share of the net earnings satisfactory to its creditors and reasonably proportioned to the amount of its indebtedness, the extent and permanence of its mine, or the rate at which it is being exhausted, they may properly and safely pay out the remainder in dividends, because such remainder may in such cases be justly regarded and treated as surplus profits of the business.

Now in this case it appears that out of the net earnings, amounting to $457,000, (I use round numbers for the sake of brevity,) only $241,000 were paid in dividends, while $216,000, or nearly one-half, was applied in payment of the debts of the corporation, originally assumed in the acquisition of its capital stock, and afterwards incurred in making permanent improvements thereon. It further appears that a large and valuable part of plaintiff's capital consists of property other than its mining ground, which will remain after the mine is exhausted; and there is evidence in the record, though there is no finding to that effect, that the mine itself has been but slightly encroached upon. It does not appear that any creditor has been defrauded, or his claim even endan. gered; and, in short, there is nothing to show that the capital of plaintiff has been impaired. True, its debt has increased, but not in an amount equal to the value of its betterments. The fact, however, remains, that money was borrowed to pay some of the dividends, and the question remains whether such a course admits of justification. We think there are circumstances which do justify it. A mining company is working its mines at a profit, but discovers that they can be worked to better advantage by constructing a new tunnel; that is to say, it will be wise economy to incur an expense of say a hundred thousand dollars to construct such a tunnel; that it will in fact add more than that sum to the value of the

property. Clearly, we think, the corporation would be justified in incurring a debt to that amount to carry out the object, and that it could go on declaring dividends after providing for the payment of the accruing interest, and for the gradual extinction of the principal of such debt. But suppose, instead of borrowing in advance to meet payments on the tunnel, it makes some of the payments out of the current profits of its mining operations,— profits justly applicable, at its option, to the payment of dividends, but not presently needed to meet a declared dividend. Afterwards it borrows money,-no more than it might have borrowed originally on account of the tunnel,-and out of the money so borrowed replenishes the fund applicable to dividends. In such a case the result is precisely the same as if the money had been borrowed sooner, and the identical money borrowed paid out on the tunnel. Nothing has been accomplished beyond what the directors had a right to do, and surely the mode in which it has been done can make no difference. In fact the transaction may be regarded as a temporary borrowing from the dividend fund of a sum necessary to meet an immediate demand, with the advantage to the corporation of keeping its money employed, and saving it the payment of interest.

more

If the general results stated by the superior judge in his opinion and accepted by counsel are correct, the defendant in this case did nothing more than borrow from the fund applicable to the payment of dividends in the manner outlined above; or if it was the earlier, rather than the later, dividends that were paid with borrowed money, then such borrowed money was finally repaid out of the dividend fund; for, taking the whole period covered by the declaration of the 18 dividends, it appears that no than the legitimate surplus profits were divided. We say that this fact appears, but we do not lose sight of the fact that counsel for appellant insists upon his contention that $143,000 in excess of surplus profits was divided, and it is proper that we should state more specifically the ground of our contrary opinion. To make up this sum of $143,000, counsel for plaintiff in his estimate of net earnings or surplus profits includes in his current expense account a number of large items, which we think are improperly there; or, to speak more accurately, there is evidence to sustain the finding of the superior court (implied in its general finding) that they are improperly there. We need specify only two of these items, viz.: Assessments Deer Creek tunnel, $113,295.55; machinery and Blue Gravel branch tunnel, $43,962.65; making a total of $157,258.20; which more than overbalances the $143,000 which plaintiff claims to have been paid out of capital or borrowed money. Plaintiff was a stockholder in the Deer Creek Company, and paid its assessments for the construction of its tunnel run for the purpose of working its miues. Clearly this was an investment of capital, and not a current expense. The other item

mentioned stands on similar grounds, and so do a number of others, aggregating a large amount, which we have not mentioned. It is argued by plaintiff that a number of these investments turned out to be unprofitable in the end, and reference is made to the fact disclosed by the evidence in his case, and otherwise notorious, that all these hydraulic mines have been shut up by injunction, sued out by the riparian proprietors on the streams into which they were washing their earth. This is undoubtedly a serious misfortune to the present stockholders in the various companies, including the plaintiff; but the defendant is not responsible for the losses they may have suffered in consequence of the injunctions, nor is the wisdoin or the prudence of his investments to be measured by a result which at the time few persons anticipated. When the expenditures were made they were no doubt considered judicious, and, if the event has proved the contrary, the result must be treated as a loss of capital, and the expend. itures must not be converted ex post facto into a current working expense.

or

It is proper, in conclusion, to refer to some of the authorities which support the positions herein assumed. For a definition of net earnings used in the sense of surplus profits, we refer to Railroad Co. v. U. S., 99 U. S. 420, note to Goodwin v. Hardy, 99 Amer. Dec. 762. The case in 99 U. S., and Park v. Locomotive Works, 40 N. J. Eq. 114, 3 Atl. Rep. 162, and Minot v. Paine, 99 Mass. 101, are also authority for the proposition that the apportionment of net earnings to the payment of cash dividends, stock dividends, increase of capital, reserve contingent fund, or to provide for future obligations, is largely one of policy, intrusted to the discretion of the directors, which, when honestly and intelligently exercised, will not be lightly overruled. See, also, Stringer's Case, L. R. 4 Ch. App. 490, and Williams v. Telegraph Co., 93 N. Y. 187. The case of Minot v. Paine, supra, is cited by counsel for plaintiff to sustain his proposition that money of a corporation, when once expended in the purchase of new capital, or in improvements, can never be reclaimed for the purpose of paying dividends. We do not think it sustains the proposition. It goes only to the extent of holding that a trustee of shares for the purpose of paying the income to A. during life, and the principal to B. on the death of A., holds additional shares issued as a stock dividend subject to the same disposition. It rests upon the ground that such is the only safe rule for a trustee, rather than upon the justice of the rule, which is very questionable. But, conceding its correctness upon the point decided, it does not hold that surplus capital cannot be used for making cash dividends; but, on the contrary, expressly holds that, while it can never be regarded as income of the stockholders until converted into a dividend, it may nevertheless be income to the corporation, and as such the subject of a dividend in the discretion of the directors. We find no error in the record. Judgment and order affirmed.

We concur: MCFARLAND, J.; SHARPSTEIN, J.; PATERSON, J.

The other justices of the court, not having heard the argument, did not participate in the decision.

(90 Cal. 43)

JACOBS V. WALKER. (No. 13,049.) (Supreme Court of California. June 30, 1891.) SCHOOL LANDS-APPLICATION TO PURCHASE-FINDINGS-AGRICULTURAL LANDS.

1. In a contest for school land, a finding that defendant made an application and affidavit, as required by the California statute, on the 23d day of February, 1883, and that the affidavit was true, and on the 3d day of June, 1883, a certificate of purchase was issued accordingly, and that on the 18th day of April, 1884, plaintiff made an application and affidavit as required, which was not true, is sufficient to sustain a judgment that plaintiff is not entitled to patent.

2. Under Const. Cal. art. 17, § 3, which provides that "lands belonging to this state which are suitable for cultivation shall be granted only to actual settlers," the fact that land was heavily timbered, and more valuable for timber than agricultura. purposes, did not render it "unsuitable for cultivation," although it would not produce ordinary agricultural crops in average quantities, and patent will not issue where there has not been an actual settlement.

Commissioners' decision. Department 2. Appeal from superior court, Mendocino county; R. MCGARVEY, Judge.

T. L. Carothers, for appellant. J. A. Cooper, for respondent.

BELCHER, C. C. This is an action to determine a contest between the plaintiff and defendant as to which of them is entitled to purchase certain school lands. The court below gave judgment for the defendant, and the plaintiff appeals therefrom on the judgment roll. The court found the facts of the case to be, in substance, as follows: On the 23d day of February, 1883, the defendant filed in the office of the state suveyor general his affidavit and application to purchase the N. E. and the S. 1⁄2 of the N. W. 4 of a certain thirtysixth section of land in Mendocino county. He was at the time qualified to purchase school lands, and his affidavit was in the form then prescribed by section 3495 of the Political Code, and all the facts set forth therein were true. On the 3d day of May, 1883, the application was duly approved by the surveyor general; and thereafter, on the 16th day of June following, defend. ant paid 20 per cent. of the purchase money and the first year's interest on the balance, and received from the register of the land-office a certificate of purchase for the land, in the usual form. On the 23d day of February, 1884, the plaintiff went upon the land in dispute, and began to build a cabin thereon for himself, and ever since has been and now is an actual settler on the land. At the time of his settlement there was no one in the adverse possession of the land, or any part thereof; but about the 27th of the same month one Thomas Dingwall went upon a portion of the land, and commenced erecting a cabin thereon. He completed the cabin, and moved into it, with his family, prior to the 18th of April, 1884, and continued to

live in it with his family till about the middle of June following. Dingwall claimed the land, and offered to sell out his claim to plaintiff, and plaintiff knew of his possession, and that his family were in the cabin prior to April 18th. While Dingwall was on the land, he was engaged a part of the time getting out redwood timber for the defendant. On the 18th day of April, 1884, plaintiff made an affidavit and application to purchase the whole of the N. of the said section 36, and on the 6th of May following filed the same in the office of the surveyor general. He was also qualified to purchase school lands, and his affidavit was in proper form, and all the facts therein set forth were true, except the statement that there was no adverse occupation of the land, which at the time of making and filing the affidavit was untrue.

The land in controversy "is situate on the top and sides of a high ridge, and is covered heavily in most places with redwood timber and brush, and is now chiefly valuable for its timber. The surface is broken, cut up with deep ravines in places, and steep, while in places there are a few acres level enough that it could be plowed if it were cleaned of timber. The soil is poor and rocky in places. There are two or three of the 40's in dispute that, if the timber was moved therefrom, the greater part thereof would be suitable for cultivation, but would not produce ordinary agricultural crops in average quantities, and is more valuable for timber than for agriculture." The conclusion drawn from the facts was that the plaintiff take nothing by his action, and that the defendant was entitled to a patent for the land applied for by him, upon his surrendering his certificate of purchase, and paying the bal. ance due for purchase money and interest. That the judgment was properly entered against the plaintiff appears to be clear. He stated in his affidavit that there was no occupation of the land applied for by him adverse to any that he had, and this statement was found by the court to be untrue, so far as regards the land in controversy. It is contended that this finding was not justified by the probative facts found as to Dingwall's occupation, but we think it was. Dingwall built a cabin on the land, and was living in it with his family. He claimed the land, and offered to sell his claim to the plaintiff; and the plaintiff knew of his residence and claim when he made his application. But, even if these probative facts were not sufficient to justify the finding, still the evidence is not before us, and we cannot say that that did not justify it. It results that, under the well-settled rule in such cases, the plaintiff acquired by his application no rights to the land in contest which can be enforced in the courts. McKenzie v. Brandon, 71 Cal. 209, 12 Pac. Rep. 428; Mosely v. Torrence. 71 Cal. 318, 12 Pac. Rep. 430; Plummer v. Woodruff, 72 Cal. 29, 11 Pac. Rep. 871, and 13 Pac. Rep. 51; Harbin v. Burghart, 76 Cal. 119, 18 Pac. Rep. 127.

It is further contended that judgment should at least have been entered in favor of the plaintiff for the 80 acres applied for

by him, and not included in the application of defendant. But there was no contest as to that 80-acre tract, and the court had therefore no jurisdiction to determine the plaintiff's rights to it. The judgment was necessarily limited to the land in contest, and could determine nothing in regard to land not in contest.

The only remaining question is as to the rights of defendant. The rule is settled that, when one seeks to purchase land from the state, he must state in his affidavit, and state truly, all the facts required to be stated therein; and, when a case is brought into court for the determination of conflicting claims to the land, each party must set forth in his pleadings, and show by his proofs, that he has strictly complied with the law, and by such compliance has become entitled to make the purchase. If he fails to do this, judgment will be entered against him. Gilson v. Robinson, 68 Cal. 543, 10 Pac. Rep. 193; McKenzie v. Brandon, 71 Cal. 211, 12 Pac. Rep. 428; Harbin v. Burghart, 76 Cal. 119, 18 Pac. Rep. 127. The constitution provides that "lands belonging to this state which are suitable for cultivation shall be granted only to actual settlers, and in quantities not exceeding three hundred and twenty acres to each settler, under such conditions as shall be prescribed by law." Article 17, § 3. The statute in 1883 (Pol. Code, § 3495) provided that an applicant to purchase any portion of a six. teenth or thirty-sixth section must state in his affidavit, among other things, "that he is an actual settler thereon," without regard to the character of the land. This section was amended in 1885, so as to read: "The affidavit must also state whether the land is or is not suitable for cultivation; and, if it is, that the applicant is an actual settler thereon." The defendant stated in his affidavit that he was an actual settler on the land applied for, and the court found that the affidavit complied with the law, and all the facts set forth were true. The affidavit was therefore sufficient at the time it was made, and it was not rendered insufficient by the subsequent change in the statute. He alleged in his answer that he was an actual settler on the land when he filed his application, and when the certificate of purchase was issued to him, but as to this averment there was no finding. He also alleged that the land was not suitable for cultivation, and the only finding as to the cultivatable character of the land was that above quoted. Now, as there was no finding that defendant was an actual settler on the land when he obtained his certificate of purchase, it must be presumed that he was not. It follows, if one-half or more of any legal subdivision was suitable for cultivation, that as to such subdivision the certificate was improperly issued, and the defendant acquired no rights thereto under it.

The question, then, is, was the land or some portion of it suitable for cultivation? The finding is of somewhat doubtful import, but, as we construe it, we think the question must be answered in the affirma. tive. The language used is: "There are two or three of the forties in dispute that, if the v.27p.no.2-4

timber was moved therefrom, the greater part thereof would be suitable for cultivation, but would not produce ordinary agricultural crops in average quantities." The fact that the land in most places was heavily covered with redwood timber and brush did not render it unsuitable for cultivation, within the meaning of the constitution. Manley v. Cunningham, 72 Cal. 236, 13 Pac. Rep. 622. Nor did the fact that it would not, when cleared, produce ordinary agricultural crops, in average quantities, render it so. To make an average, some lands must necessarily produce less than the average, while others produce more; and it would seem absurd to say that all lands producing less than the average must, for that reason, be held unsuitable for cultivation. Nor do we think the fact that the land was more valuable for timber than for agriculture decisive of the question. Land may be very valuable for the timber upon it, and also be valuable for agricultural purposes after it is cleared; and this may be true of the land in question. It follows that, if any of the 40's were suitable for cultivation, within the meaning of the constitution, they should not have been included in the judgment for defendant. We advise, therefore, that the judgment, in so far as it is against the plaintiff, be affirmed; and that, in so far as it is in favor of the defendant, it be reversed; and the cause remanded to the court below for a new trial.

Where, in an action against non-residents to enforce payment of subscription to the capital stock of a corporation, an attachment was issued against land in this state belonging to defendant, a writ of prohibition will not lie to restrain plaintiff from proceeding in the cause upon the ground that it is not a cause wherein an attachment would lie, since there is a plain, speedy, and adequate remedy, in the ordinary course of law, by appeal.

In bank. Appeal from superior court, city and county of San Francisco; F. W. LAWLER, Judge.

Edward J. Pringle, for petitioners. Pillsbury & Blanding, for respondent.

MCFARLAND, J. This is an application for a writ of prohibition, commanding the respondent to refrain from entering default or judgment against petitioners in a certain action in which Charles Kohler, assignee in insolvency of the California Land & Timber Company, a corporation, is plaintiff, and these petitioners and others are defendants. It appears from