Regan v. Albin

The above-entitled actions were brought to enforce stockholders’ liability for debts of a corporation, under the law existing prior to 1931. They were consolidated and tried under an agreed statement of facts.

Pasadena Milling Company, Inc., incorporated in California, had on November 30, 1925, an indebtedness of $146,241.92. On that date it secured a permit from the corporation commissioner to sell stock. The conditions of the permit were that it could (1) sell one share of common stock to each of five directors at $100 per share for cash; (2) sell 760 shares of common stock to Pasadena Milling Company for its assets, subject to the above-stated indebtedness; and (3) sell 500 shares of preferred and 235 shares of common stock at par, for cash, but not until sale and receipt of the consideration for the shares to be issued under provisions (1) and (2), supra. The permit also read: “This permit is issued itptm the condition that a true copy of said permit be exhibited and delivered to each prospective subscriber for or purchaser of said securities before his subscription therefor shall be taken or any sale thereof made.” Included in the document were figures showing the financial condition of the corporation. Upon the granting of the

Defendants attack the validity of the sales of their shares in the following particulars: First, the subscriptions were in all cases taken without exhibiting or delivering to the subscribers a copy of the permit, and in two instances, no subscription agreements were signed at all. Second, the five shares were sold to the directors, but none of them paid cash as required by the permit. An attempt is made by plaintiffs to avoid the effect of the failure to exhibit the permit by pointing out that the subscription agreement had printed on its reverse side a copy thereof, and on the front a reference thereto. Gridley v. Tilson, 202 Cal. 748 [ 262 Pac. 322 ], is cited, but the passing observation on the point, which was not an issue in the case, is not controlling here. Besides, the failure to sell the five directors’ shares for cash has precisely the same effect as a violation of any other condition. Hence it appears from the admitted facts that all of the stock sold to defendants was issued in violation of some condition of the permit. Under these circumstances, are the defendants stockholders, or liable as such to creditors ?

The rule that a security issued without a permit or in violation of the terms of a permit is void under former section 12 of the Corporate Securities Act, has been frequently declared, and must now be taken as well settled in this state. (See cases cited, infra.) In 1931, a provision making such a security voidable was substituted for the old section (see Ballantine, California Corporation Laws, sec. 513), but this has no application to the instant case.

There remains the question whether the defendants, though they may not be actual stockholders, are estopped to set up this fact against plaintiffs. In this connection it is urged that plaintiffs extended credit to the corporation, and that defendants received dividends and made no attempt to rescind their contracts of sale for over three years. It

In addition to the definite lack of factual basis for this position of plaintiffs, there is the companion rule to the one first stated herein, that an estoppel cannot ordinarily be invoked to give validity to a contract which is void through violation of law. This rule has likewise been repeatedly declared, and has been applied in a number of cases in this state dealing with shares of stock void because of the absence of, or nonconformity with a permit. (See Walker v. Harbor Realty etc. Corp., 214 Cal. 46 [ 3 Pac. (2d) 557 ] ; Pollak v. Staunton, 210 Cal. 656 [ 293 Pac. 26 ] ; Reno v. American Ice Machine Co., 72 Cal. App. 409 [ 237 Pac. 784 ].) The precise question now before us has also received the attention of the appellate courts in this state. In Herkner v. Rubin, 126 Cal. App. 677 [ 14 Pac. (2d) 1043 ], shares had been issued in violation of conditions of the permit, and creditors sought to hold the defendant stockholder liable. It was held that no liability could be imposed. An application for a hearing in this court was denied. In Honn v. Hamer, 81 Cal. App. 276 [ 253 Pac. 336 ], and Live Oak Cemetery Assn. v. Adamson, 106 Cal. App. (Supp.) 783 [ 288 Pac. 29 ], the same conclusion was reached.

With the authorities in this state so uniformly contrary to the position of plaintiffs, their principal reliance is upon certain decisions of the federal courts, which, upon examination, do not conflict with the views expressed above. Typical of these is In re American Aluminum Metal Products Co., 15 Fed. (2d) 234. In that case one Dempsey agreed to purchase shares in a corporation in which he subsequently became a director and officer. The permit authorized sales only for cash. He paid only partly in cash and his contract gave him an option to cancel. Subsequently he gave notice

Plaintiffs have also referred us to our recent decisions in Eberhard v. Pacific Southwest Loan & Mortgage Co., 215 Cal. 226 [ 9 Pac. (2d) 302 ], and Braunstein v. Title Guarantee & Trust Co., 216 Cal. 780 [ 17 Pac. (2d) 104 ], and to the District Court of Appeal decision in Kehrlein v. Builders Mortgage Co., 131 Cal. App. 714 [ 22 Pac. (2d) 242 ]. These cases are all distinguishable in that in each the party guilty of the illegal act sought to take advantage of his own wrong. Thus, in the Eberhard case, the corporation, having issued securities in violation of the law, attempted to assert their invalidity against the innocent purchaser thereof, in order to escape payment.

We conclude that defendants are not liable as stockholders for the debts of the corporation.

The judgment is affirmed.

Curtis, J., Thompson, J., Seawell, J., and Waste, C. J., concurred.

I dissent.

I cannot indorse the doctrine pronounced in the foregoing opinion. I do, however, realize that to hold otherwise would require a disapproval of several cases, principally opinions of the District Court of Appeal, and also differentiation of some of the eases decided by this court.

The theory of the present holding seems to be based on the postulate that the corporation would have no standing in a suit on the stock subscription agreement nor any defense to an action for rescission of the sale of stock under such conditions; hence a creditor of the corporation would have no better standing. This conclusion, I think, is unsound and does not follow from the premises.

The liability of the stockholder to the creditor is a primary one. The creditor has not been a party to violation of any of the terms of the permit. The alleged violations of the permit offend no rule of public policy and violate no mandate of statute. The conditions imposed by the permit were such as sprang only from the exercise of a discretionary power by the commissioner who issued it. .The stockholder may have condoned or even participated in the violation of the terms of the permit. Estoppel should apply because, of a wait of three years by the stockholder without complaint and the receipt during all that period of dividends upon the stock. Now that insolvency has overtaken the corporation, the claimed invalidity is urged. Would such claim have been made had the corporation continued on its career of prosperity? I think the whole doctrine of this class of cases should be recast and that a proper line of distinction should be drawn between cases where estoppel does and cases where estoppel does not apply.

Rehearing denied.

Preston, J., dissented. ■