Tidewater Southern Railway Co. v. Merz

This is an action brought by plaintiff to recover the sum of two thousand five hundred dollars, together with seven per cent interest thereon from November 14, 1911, upon the following contract:

“Agreement to Purchase Stock.

“I, the undersigned, hereby subscribe for 2000 shares of the common stock of The Tide Water and Southern Bailroad Company, a corporation, formed and existing under the laws of California, and having its principal place of business in the City of Stockton, State of California.

“I hereby agree to pay for such stock the sum of $2500.00, one year note, the full par value thereof, and to make such payments, to said corporation at the time and in the manner following: $2500.00 upon the signing of this agreement, and a further payment of $ on or before the until the full purchase price of said shares shall have been paid, when a certificate of stock shall be issued to purchaser.

“Said corporation, to which I agree to make payments as aforesaid, is hereby authorized to demand, collect and recover the money hereby agreed to be paid.

“Payment must be made direct to The Tide Water and Southern Bailroad Company, at its offices, room 4, Physicians’ Building, Stockton, California.

‘ ‘ Witness my hand this 14th day of November, 1911.

“Name. G. Merz.

“Street and Number. Lemoore Bank.

“City or Town. Lemoore.

“State. Cal.

“Written by Avery.”

The cause was tried by the court without a jury and defendant had judgment from which plaintiff appeals.

It is alleged in the complaint and found by the court that The Tidewater & Southern Bailroad Company was a duly organized corporation in 1910, and continued so to be until March 11, 1912; that about the sixteenth day of February, 1912, and continuously thereafter to and including Mafich 11, 1912, The Tidewater & Southern Transit Company was a railroad company duly organized; that on or about March 11, 1911, “the said Tide Water & Southern Bailroad Company duly amalgamated and consolidated its capital stock, properties, roads, equipments, adjuncts, franchises, claims, demands, contracts, agreements, obligations, debts, liabilities,

It is alleged in the complaint that prior to said consolidation the said The Tide Water & Southern Railroad Company gave to defendant and defendant received due notice of said intended consolidation, “and did not dissent or object thereto, and has, at all times, acquiesced therein and consented thereto.” That at all times since the subscription of defendant for stock in said The Tide Water & Southern Railroad Company, and continuously thereafter to March 11, 1912, the said The Tide Water & Southern Railroad Company was at all times ready, able, and willing to deliver to defendant the said stock in the said The Tide Water & Southern Railroad Company, and that since said consolidation the said The Tide Water & Southern Railroad Company and The Tide Water & Southern Transit Company and plaintiffs have, and each of them has, at all times been and are now and is able, ready, and willing to deliver to defendant the said stock in said Tide Water Southern Railway Company. It is further alleged that on November 14, 1911, the said agreement to purchase stock was accepted by said The Tide Water & Southern Railroad Company, “and it and plaintiff, and each of them, have duly performed all of the conditions of said subscription agreement to be performed by them to this time.” “That said agreement, constituting new articles of association or

A general demurrer to the complaint was overruled and defendant answered: Denied on information and belief the averments in the complaint as to the organization of the various corporations and their consolidation and the facts in relation thereto. Denied that plaintiff succeeded to or became the owner of said subscription agreement. Denied that prior to said consolidation or at any time or at all the said The Tide Water & Southern Railroad Company “or anyone else gave to defendant, and defendant received, due or any notice of said intended alleged consolidation or amalgamation of the said The Tide Water & Southern Railroad Company with the said The Tide Water & Southern Transit Company, and denies that defendant has, at any or all times, acquiesced therein or consented thereto.” Denied that said companies or either of them had, as alleged, or at all, been or now is ready, able, or willing to deliver to defendant the said stock in the said The Tide Water & Southern Railroad Company. Denied that on or about November 14, 1911, or at any other time or at all, defendant “subscribed or signed the agreement set forth in paragraph IX of said complaint.” Denied that the plaintiff, Tidewater Southern Railway Company, demanded payment from defendant of the amount mentioned

By an amendment to the answer, defendant further denied • that either of said companies has “duly or at all performed all or any of the conditions of said subscription agreement to be performed by them to this time or at all.” Denied that by the agreement constituting new articles of association or incorporation referred to in the complaint, all or any of the stockholders in each of said constituent corporations, or either of them, “should forthwith, or otherwise or at all, or ipso facto or otherwise or at all be, or become stockholders in the plaintiff corporation to the same extent or any extent, and in the same amount or in the same amount, as they or each or any of said stockholders respectively held stock in either of said constituent corporations respectively at the time of the consummation of the alleged consolidation, or otherwise or at all.”

For further and separate answer, alleges: “That the only contract or agreement to purchase stock that this defendant ever made with said The Tide Water & Southern Railroad Company was a conditional contract wherein and whereby said defendant had the right to return the stock mentioned in said contract at any time within ten (10) months after receipt thereof, and receive back his note or cash, and that said subscription contract was in the words and figures following, to wit”: (Then follows a copy of the contract as set out in plaintiff’s complaint). And it is alleged:

“And that as a part and portion of said contract, and as the consideration for entering into said contract on the part of the defendant, there was, on said. 14th day of November, 1911, indorsed on the back of said contract, and signed by the sales manager, the following:

“ £Nov. 14/11.

“ ‘On ten days’ notice ten months after date to The Tide Water & Southern Railroad Co., bearer of this contract No. 9489, can return the within named stock and receive his note back or cash back or pay note and keep stock.

‘ ‘ ‘ Tide Water & So. Railroad Co.

“ ‘By Frank Avery,

“ ‘Sales Mgr.’

“And that said defendant would not have entered into any contract or agreement to purchase any stock whatever from said The Tide Water & Southern Railroad Company had not said sales manager, as a part of said contract and as .the consideration therefor, moving to said defendant, signed the said contract above mentioned.”

In addition to the findings of the court in accordance with the averments of the complaint relating to the organization and consolidation of the several companies named and the capitalization as therein alleged, and the purposes for which said companies were organized and that plaintiff succeeded to and became the owner of all the interest of The Tide Water' & Southern Railroad Company in and to said contract mentioned in plaintiff’s complaint, the court found that it is not true that prior to the consolidation of the said companies the said The Tide Water & Southern Railroad Company gave to defendant, and defendant received, due notice of said intended consolidation. “It is true that defendant did not dissent or object thereto, but it is not true that defendant has at all or any times acquiesced therein or consented thereto.” That it is true that at all times since November 14, 1911, to on or about March 11, 1912, the date of said consolidation, the said The Tide Water & Southern Railroad Company was at all times able, ready, and willing to deliver to defendant the said stock in said company mentioned in the agreement set forth in plaintiff’s complaint, and its certificate or certificates therefor; that since said consolidation of said The Tide Water & Southern Railroad Company and The Tide Water & Southern Transit Company, the said plaintiff has been at all times, and now is, able, ready, and willing to deliver to defendant stock in said Tidewater Southern Railway Company, and its certificate or certificates therefor

That it is true that on or about November 14, 1911, defendant signed 1 ‘ a certain document in writing wherein he agreed to subscribe for two thousand shares of the common stock of the said The Tide Water & Southern Railroad Company, a corporation, and agreed to pay therefor the sum of two thousand five hundred dollars, by giving his note upon the delivery to him of the certificates for said two thousand shares, but that said agreement to purchase stock was a conditional contract wherein and whereby said defendant had the right to return the stock mentioned in said contract at any time within

“That it is not true that said agreement to purchase stock was on the fourteenth day of November, 1911, or at any time or at all, accepted by the said The Tide Water & Southern Railroad Company; but the whole of said contract, including the said portion of said contract indorsed on the back of the duplicate above mentioned, was never submitted to nor presented by said sales manager to said corporation last named and was never accepted by said corporation; and by reason thereof, no contract or agreement was ever entered into between said The Tide Water & Southern Railroad Company, a corporation, and the said defendant; it is not true that it, said The Tide Water & Southern Railroad Company, and plaintiff or either of them, have duly or otherwise performed all or any of the conditions of said subscription agreement to be performed by them to this time.”

That it is true that by the provisions of the agreement or consolidation referred to in the complaint, all of the stockholders in each of the constituent corporations of said consolidated corporations “should forthwith and ipso facto be and become stockholders in the plaintiff corporation to the same extent and in the same amount as they, and each of said stockholders, respectively held stock in either of said com stituent corporations respectively at the time of the consummation of the aforesaid consolidation.”.

That it is trae that prior to the commencement of this action, plaintiff Tidewater Southern Railway Company demanded payment from defendant of the foregoing mentioned amounts; that it is true that the defendant has not paid the principal, two thousand five hundred dollars, and interest thereon, and it is true that defendant has not paid any part thereof.

That it is true, also, that defendant did not make, execute, or deliver to plaintiff or The Tide Water & Southern Railway Company the two thousand five hundred dollar note referred to and mentioned in the agreement set forth in the complaint, or any note or any writing other than said agreement.

As conclusions of law, the court found that the defendant is entitled to judgment against plaintiff and for his costs of suit.

There was evidence sufficient to support the findings; that the defendant had no notice of the consolidation referred to in the complaint or that the plaintiff corporation was the result thereof, and that defendant did not consent to or acquiesce in said consolidation; that the contract signed by defendant was indorsed by the sales manager of the Tidewater & Southern Railroad Company in the terms as shown -by copy thereof, and that said indorsement formed a part of the contract entered into by defendant and as the consideration therefor, and that defendant would not have entered into any contract to purchase said shares had not the sales manager, signed the contract as above mentioned; that neither of said companies has duly or otherwise performed all or any part of the conditions of said subscription agreement referred to in the answer to be by them performed.

Defendant testified that he refused to sign the proposed subscription agreement in its then form, and on his refusal the sales manager, Avery said: “Well, I will send this whole thing in (including the indorsement) and they can accept it or reject it as they see fit,” and the defendant said: “All right; with that I will sign it.” He further testified that he was never notified by The Tide Water & Southern Railroad Company that his subscription was accepted; that he was never offered any shares of its stock nor did anyone ever tender or offer to him any shares of the plaintiff company until counsel for plaintiff at the trial introduced and tendered two thousand shares of said company’s stock. , He testified further that he visited the office of The Tide Water & Southern Railroad Company at Stockton “within the ten months after November 14, 1911,” and saw the secretary, who knew “what he wanted to find out about,” but was told that the president, Mr. Bearce, for whom he inquired, was not there; that he then went to San Francisco, to the office of the company there, but failed to meet Mr. Bearce, and was

Mr. Bearce, president of plaintiff corporation, who was also secretary of The Tide Water & Southern Railroad Company when this subscription agreement was signed, testified that Avery was a stock salesman of the latter company in November, 1911; that he was furnished with subscription blanks and literature which were to be made in triplicate, and “was sent out to solicit subscriptions for that company”; that the agreement set forth in the complaint was 'sent in to the office and recorded in the subscription book in November, 1911; that he loaned Avery two hundred dollars “on account of his commission for this sale”; that these subscriptions were always considered as accepted Avhen sent in, and that there was a form of letter which was sent out thanking the subscriber; (there was no evidence that defendant received any letter acknowledging receipt of the agreement and he testified he' never received from the company any notice of any kind) ; the witness testified that the salesmen, of AA?hom there were thirty, were under his charge; “that agents could sell on time or partial payments; in fact, probably four-fifths of the stock AAras sold on partial payments.” He testified that the writing on the back of the agreement set out in the answer “is Avery’s handAArriting.”, “The Court: Q. Did you, when you sent , your agents out, give them any written instructions in regard to their authority to sell stock? A. No; when they Avent to work Ave gave them a prospectas outlining the proposition and we gave them a lot of indorsements from Stockton and

Appellant states in its brief: “There is only one question presented, and that is whether or not defendant executed the subscription agreement above referred to,” the one set out in the complaint. If this were the only question, there could be but one answer, for it is admitted that defendant .signed this agreement. Realizing, however, that there is something more in the case, defendant takes up the question of “the effect of the writing upon the back of the duplicate [given defendant], which was not embodied in the subscription agreement sent to the company.”

The position taken by appellant is that “in cases of subscriptions for stock any contract, written or oral, which is not made a part of the contract filed with the company and is thereby kept from the knowledge of the other stockholders, is a constructive fraud on the other stockholders and is void,

In the Yance case the facts were, as stated in the opinion, that “on December 14, 1911, the defendant executed a subscription for five hundred shares of the capital stock of the Tidewater Southern Railroad Company, for which he agreed to pay $625 on or before ten months after date, giving his promissory note for that amount. The authorized agent of the corporation who solicited and received the subscription had two copies thereof, one marked ‘original’ and the other ‘duplicate,’ both of which were signed by the defendant and the agent on behalf of the corporation, the original being retained by him for the company and the duplicate being delivered to the defendant. On the back of the duplicate the following memorandum was written: ‘Dee. 4, ’ll. Ten months after date if holder of this contract is for any reason dissatisfied we agree to return note or cash equivalent.— IT. C. Coffin, Tidewater Southern Railroad Co.’ This writing was not indorsed on the back of the original subscription retained by the agent for the company. "Within ten months of the date of his subscription, the defendant requested the return of his note, which request the corporation refused to comply with, but, on the contrary, transferred the note to the plaintiff herein, who brought this suit. The defendant pleaded the foregoing facts by way of defense to the action,

It will be noted that the subscription contract contemplated payment for the shares by the execution of a promissory note, which for some unexplained reason he was never called upon to execute and never did execute. The indorsement on the back of the contract, it is true, contemplated the giving by defendant of notice to The Tide Water & Southern Railroad Company that he desired to return the stock ‘ ‘ and receive his note back or cash back or pay note and keep stock.” It seems to us that treating the indorsement as an indivisible part of the contract, defendant lost none of his rights by not giving the notice contemplated in the indorsement, and that considering all the facts of this case and the facts upon which the Vance case was decided, the latter case is here applicable.

A somewhat similar question as here involved was before this court in Tidewater Southern Railway Company (the same plaintiff as here) against Harney, 32 Cal. App. 253 , [ 162 Pac. 664 ]. In that ease the defendant subscribed in writing for five hundred shares of the stock of the Tidewater & Southern Railroad Company, for which she agreed to pay five hundred dollars. The subscriptions were made out in triplicate, as in the present case, and at the time of subscribing the defendant executed her note for five hundred dollars for said stock. The duplicate subscription, retained by defendant, had written on the back thereof the following: “July 25-11. Ten months from date, if holder of contract wishes, we agree to take said stock off purchasers hands at the purchase price of $1.00 per share—Tidewater & Southern R. R. Co. by R. U. Morey, See. Dept.” This was not written"upon the original subscription retained by the company. Some time after the consolidation of the companies as referred to, and after the organ

It is also held in that case that there was no merit in the contention of plaintiff that the defendants should have resorted to an independent action for damages to enforce her claims under the contract, for the reason that “the consideration for the note was involved, and of course that can be set up as a defense to an action on said note. Or if we view the element of fraud to which we have adverted, attention may be directed to the established and permissible procedure as set forth in Field v. Austin, 131 Cal. 379 , [ 63 Pac. 692 ], and other cases, recognizing three methods by which a party defrauded may obtain relief as follows: (1) Cancellation or rescission, whereby the defrauded party procures an instrument to be set aside and himself to be restored to his original position; (2) affirmative relief by an action to recover a pecuniary compensation for the injury sustained by the fraud of the defendant where no cancellation is necessary as the basis of such recovery, and (3) defensive relief (which is in the present ease resorted to), whereby the fraud is set up by way of defense to defeat an action brought to enforce an apparent obligation or liability. ’ ’

We are satisfied with the conclusions reached by the trial court, and the judgment is, therefore, affirmed.

Hart, J., and Burnett, J., concurred.

Appellant has petitioned for a rehearing in the above-entitled cause after decision rendered by this court affirming the judgment of the lower court.

The material facts involved in the controversy clearly appear in the former opinion, and need not here be reiterated. In that opinion it was said: “It seems to us that treating the indorsement as an indivisible part of the contract, defendant lost none of his rights by not giving the notice contemplated in the indorsement, and that considering all the facts of this ease and the facts upon which the Vance case was decided, the latter case is here applicable.” This language, it is claimed, lends itself to some confusion, and petitioner herein takes the position that by the Vance and Harney eases the option on the back of the duplicate must be regarded as a part of the contract (and those cases so hold), binding upon both parties, though said option was never communicated to petitioner, that thereupon it became the duty of Merz, if he desired to terminate this relationship, to so notify the corporation within the ten months specified in the said option, and that, therefore, the court is in error if it intends to say that Merz need not so notify the appellant corporation within the said time.

Even conceding that this contention of petitioner is correct, we are of the opinion, after a very careful re-examination of the record, that petitioner is not entitled to a rehearing, and that the result reached by the trial court was a correct one.

It is to be remembered that upon being solicited for a subscription by appellant’s agent, Avery, Merz declined to enter into any agreement unless he was given a ten months’ option to return his stock and receive his money back. It is at once apparent that the negotiations between Avery and Merz constituted at least one of two things; either they amounted to an offer from the company through its agent to Merz or constituted an offer from Merz to the company.

If the former be the true aspect in which to view the transaction, then we should indeed have a similar condition to that existing in the Vance and Harney cases; namely, that Avery,

But appellant overlooks the effect of Merz’s testimony as to the negotiations, which is the only evidence upon this phase of the case. Merz was asked: “Q. Now, just state to the court what was said by Mr. Avery with regard to the acceptance or nonacceptance of this contract, and what, if anything, Avery was going to do with this contract—whether or not he was to submit it to the company, as was stated.” And his answer was: “A. He stated that it was customary to make a payment on this, these subscription agreements for stock, and I refused to make that, and he says, ‘Well, I will send this whole thing in and they can accept it or reject it as they see fit,’ and I says, ‘All right, with that I will sign it.’ ” This shows clearly that in taking the contract, Avery did not purport to act with authority to bind the company or to assume the responsibility of accepting for the company a subscription on the conditions imposed by Merz, but that both parties understood that Merz’s proposition was an offer to be submitted to appellant for such action as it might take. Therein does this case differ substantially from the Vance and Harney cases, where the offer came from the agent acting and purporting to act within the apparent scope of his authority. And in this connection it is now settled that where the proposition or offer does not come from the corporation, but from the subscriber, the subscription must be accepted by the corporation. Appellant then argues that “it has been repeatedly held that the subscription is accepted by the corporation when it makes an entry thereof in its books, spends money on the faith of it, or otherwise treats the subscription as being accepted. (Clark and Marshall on Private Corporations, sec. 439b, p. 1366.) ” Even assuming this to be a correct statement of the law of this state, it has no application here, for the very obvious reason that the offer or proposition of Merz was never submitted to appellant. The entry upon its stock

Whatever is said in our former opinion regarding the application of the Vance and Harney cases-to the instant case must likewise be understood in the light of what is here said. There is nothing at all inharmonious between those cases and this.

The petition for rehearing is denied.

A petitiori to have the cause heard in the supreme court, after judgment in the district court of appeal, was denied by the supreme court on January 24,1918.