Randall v. Beber

Plaintiffs Harry Randall and. Edward Randall appeal from the judgment rendered against them and in favor of all of the defendants in an action brought by them for damages allegedly caused by the sale to them' of 200 shares, at $100 per share, of the capital stock of Churchill’s Frozen Foods, Inc., a corporation.

The complaint states two causes of action for damages? one predicated upon the asserted ‘ statutory liability of each of the defendants, and the other against defendant Beber, alone, for his alleged fraud and deceit in the sale of these

The asserted statutory liability of the several defendants to the plaintiffs turns, principally, upon the question whether or not there was a “sale” prior to the granting by the State Commissioner of Corporations of a permit for the issuance of the shares, and, if so, whether or not the defendants knowingly authorized, directed or aided in the sale of those shares, or caused or assisted in causing them to be sold. The defendants are Harold F. Churchill, A. Schapiro, and Edward Beher, individually, and Harold F. Churchill Company, a partnership consisting of Harold F. Churchill and Edmund E. Nies, general partners, and A. Schapiro, limited partner.

The following significant facts appear without conflict in the evidence: The members of defendant Harold F. Churchill Company decided to incorporate for the purpose of expanding and improving the business of the partnership, that of processing and freezing fruits and vegetables at Stoektón. In February, 1946, a preincorporation stock subscription agreement was prepared at the instance of Churchill and forwarded by him to Schapiro, for use in San Francisco. The agreement recited a proposal to incorporate and apply for a permit to issue stock and declared that the undersigned agreed with each other and with the proposed corporation that they severally subscribed for the number of shares set opposite their names and would pay par value therefor, upon the conditions that the corporation be incorporated “within _days” and would with reasonable diligence secure from the State Commissioner of Corporations a permit “authorizing the issuance of the shares of stock conditionally subscribed for herein.” The corporation was formed March 7, 1946, with the name Churchill Frozen Foods, Inc. In the latter part of March, 1946, Harry Randall signed the stock subscription agreement, undertaking to purchase 200 shares of stock at $100 per share, and delivered to one Richard G-. Kobritz his check dated March 30,1946, for $20,000, payable to Churchill’s Frozen Foods, Inc. (Randall testified he did not read the text of the agreement. We find in the record no evidence that either of the plaintiffs read or was informed of any of the provisions of the agreement, other than that it was a subscription agreement.) This check was transmitted to Churchill. On or about April 3, 1946, it was endorsed in the name of the corporation by Churchill as president and deposited by him in a special bank account in the name of the

Not until April 19, 1946, was an application made to the Commissioner of Corporations for a permit for the issuance and sale of shares of its capital stock by the corporation. The applicant requested permission to issue a certain number of shares of its stock in exchange for the business and properties of the Churchill partnership, and to sell 1,500 shares at par for cash to the public. It made no mention of the preincorporation subscription agreement or of the fact that any subscriptions had been made. It stated that no time had been fixed to commence to sell its securities, that it proposed to sell them upon the issuance of a permit therefor.

The permit, issued May 8, 1946, authorized the corporation to sell and issue not exceeding 1,500 shares at par for cash, after it had issued the shares to the Churchill partners and received the consideration therefor. The permit was issued upon the express condition “That a true copy of this permit be given to each subscriber prior to the taking of his subscription and to each purchaser prior to the sale to him of the securities permitted to be issued.”

The minutes of a meeting of the board of directors of the corporation held May 15, 1946, contain the following statement: “President Churchill reported that heretofore under the provisions of a certain Subscription Agreement, certain individuals had subscribed to 810 shares of the capital stock of this corporation to be issued to them upon the incorporation of this corporation. That the Subscription Agreement was presented to the meeting and filed with the Secretary; said Subscription Agreement indicating the names of the subscribers, the date of the subscription and the number of shares subscribed to respectively by the persons signing said agreement. President further stated to the meeting that it was

Stock Certificate No. 9, dated May 15, 1946, evidencing the ownership " of 200 shares of the corporation by Harry and ¿Edward Randall, was mailed to them May 17, 1946, with a letter; of transmittal bearing the signature of Churchill as ¡¡.¿president ,.of the - corporation. This letter recited, also, the ¡ enclosure- therewith of a: copy of the permit and a copy of . the - resolution- of the board of directors. (An employee of -the corporation testified that he enclosed copies of the permit -■¿andfthe -resolution with each letter transmitting a stock certificate. Harry Randall, -testified he did not receive a copy - of ‘tjie - permit with-his certificate. We do not find in the .«reqord any evidence.that the matter of- a permit, and its issuance- or- not, was orally mentioned to either of the plaintiffs.) .j?. The evidence most favorable to the defendants concerning jftbd. circumstances .under. which the plaintiffs subscribed for jtthese shares, and paid- the consideration therefor, was fur-3nished by -the testimony of defendants’ witness Richard G. ¿Robritz, He testified that he and the Randalls were neighbors . and -that-he knew Ed Randall very well; that Ed visited at . -Epbritz’- home frequently and they would often discuss fi.,-na-nces ¡and investments, and that Ed told him one time that . ,i£,Eobri:tz; heard,of any good investments to let him know. In

This was not an isolated transaction. Churchill testified that some 10, 12 or 15 persons signed the subscription agreement, including Churchill, Nies, Schapiro, Beber, Johnson, Arata, one of the Randalls, Krieg, Helms, and Bevanda. Among the subscribers who testified, Phillip Krieg said he first heard of the deal through Kobritz and met Beber through Kobritz at the office of Allied Produce Company; that Beber told him about the profits made by the Churchill partnership and that the money was going to be used to put up a freezing

Sehapiro testified that he was the representative officer of the corporation in San Francisco (the principal office of the corporation was in Stockton); that at his request receipts similar to that which Harry Randall received were prepared in Stockton and sent to him; that he signed them in blank and left them in his desk in the offices of Allied Produce Company for use when stock was sold; that he was acting as vice-president of the corporation at the time of signing; at the time of signing he did not know in what name the funds were going to be deposited prior to issuance of the stock (although the name used in the receipts was that of the partnership, it was also the name by which the proposed corporation was designated in the subscription agreement); that all the partners of Allied Produce Company had access to his desk; that he expected most of the stock to be sold in San Francisco; that there was no direct authorization to anybody to sell the stock but he did make them understand that if they did sell any stock, or if anyone sold any stock, they could use one of the receipts he had signed in blank; that he signed the receipts in blank for the reason that the corporation commissioner had not yet given permission to issue the stock; that it was a sort of temporary receipt until the stock was to be issued. Asked if the partners in Allied Produce Company were supposed to sell the stock, he said, “I don’t know who was supposed to sell it. We were all going to go out

Schapiro testified that the corporation paid no dividends and went into bankruptcy January 2, 1947, and that the stockholders would receive nothing of value. The Randalls testified they had received no dividends on the stock, and nothing of value.

These facts demonstrate that a sale of 200 shares of the capital stock of the corporation was made to the plaintiffs when they subscribed for them and paid the purchase price to the corporation in late March and early April, 1946, prior to the issuance of a state permit therefor. “Sale,” as used in the Corporate Securities Act at the time of this transaction, included “every disposition, or attempt to dispose, of a security . . . for value,” also “an attempt to sell, an option of sale, a solicitation of a sale, subscription or an offer to sell, directly or by an agent, or a circular letter, advertisement or otherwise” (Corp. Sec. Act, § 2, as amended by Stats. 1945, pp. 853-854).

The acts of the president and vice-president, each a director, of the corporation, in planning the sales and in furthering this sale, and the receipt of the purchase price for and its deposit in bank in the name of the corporation, would support a finding that the corporation made this sale. Such a sale is proscribed by the Corporate Securities Act. “No company shall sell any security, except upon a sale for a delinquent assessment against such security . . ., or offer for sale, negotiate for the sale of, or take subscriptions for any security of its own issue until it shall have first applied for and secured from the commissioner a permit authorizing it so to do” (Corp. Sec. Act, § 3, as amended by Stats. 1941, p. 2064). This subscription, although in terms a preincorporation subscription agreement, was not within the sanctions accorded by section 33 of the act. That section permitted only subscriptions “made prior to the incorporation” of the corporation, and did not permit “the collection of any portion of the consideration to be paid on account of such subscriptions, unless and until a permit shall

The evidence of the activities of the defendants in furthering this sale, and other sales, would support a finding that they knowingly authorized, directed, or aided in this sale or assisted in causing it to be made.

The statute imposes penalties upon a corporation making such a sale, and upon each person who knowingly authorizes, directs, or aids in the sale. “Every company which shall directly or indirectly offer for sale, or negotiate for the sale of or sell, or issue, or cause to be issued any security contrary to the provisions of this act, . . . shall be guilty of a public offense and shall be punishable by a fine not exceeding ten thousand dollars” (Corp. Sec. Act, § 17, as amended by Stats. 1931, p. 950). “Every officer, agent, or employee of any company and every other person, who knowingly authorizes, directs, or aids in the issue or sale of, or issues or executes, or sells, or causes or assists in causing to be issued, executed, or sold, any security, in nonconformity with a permit of the commissioner then in effect authorizing such issue, or contrary to the provisions of this act, ... is guilty of a public offense and shall be punished by imprisonment ... or by a fine . . . or by both ...” (Corp. Sec. Act, § 18, as amended by Stats. 1931, p. 950).

From the imposition of these penalties in such a statute, a legislative intent to void the proscribed “sale” is inferred. This illegality infects the final act in the transaction, the issuance of the shares of stock, even though that act occurs after the issuance of a state permit, if that act stems directly from the illegal sale without any intervening circumstance such as the making of a new agreement between the parties after issuance of the permit and in accordance with its terms. It is the validity of the sale, not the validity of the shares or their issuance, which is the crucial question. The collection of the money, a significant part of a sale for value (People v. Beber, 104 Cal.App.2d 359 , 369 [ 231 P.2d 516 ], and cases cited), occurred at a time when there could be no legal sale. The corporation actively participated in this transaction, made a “sale,” at least as early as the date when it received, accepted,- and deposited the purchase price check. The illegality which attached to and inhered in this sale prior to obtaining a permit, could not be removed, cured, or rendered innocuous by issuance of the shares after obtaining a permit, if such issuance was based upon and stemmed directly from the illegal sale without any intervening circumstance to break

In such a case the law does not necessarily leave the parties to the illegal contract where it finds them. The applicable statute was designed for the protection of the public. Its penalties run against the corporation and those persons who participated with it in making a “sale” contrary to its provisions, not against a member of the purchasing public. If such a purchaser is not in pari delicto, the law accords him relief against the corporation and against any person who aided the corporation in making the sale or participated in the general scheme to sell securities. (Mary Pickford Co. v. Bayly Bros., Inc., 12 Cal.2d 501 , 514-516 [ 86 P.2d 102 ].) Mere knowledge that no permit has been issued does not necessarily bring a purchaser in pari delicto. (Idem., p. 516.) When the purchaser’s action is for damages (as in this case), such a participant need not have received any of the consideration paid for the stock. (Randall v. California L. B. Syndicate, 217 Cal. 594 , 598-599 [ 20 P.2d 331 ], distinguishing Pollak v. Staunton, 210 Cal. 656 [ 293 P. 26 ], which was an action for money had and received.)

We will now consider the findings which the trial court made, based upon the evidence which we have summarized.

The trial court found: (1) Churchill was president of the corporation from March 18 to December 13, 1946; Schapiro, vice-president from March 18 to November 12, 1946; (2) the

Concerning the part played by the defendants in this transaction, the trial court found: (11) None of the defendants participated in making a sale of 200 shares of the stock of the corporation to plaintiffs between March 18 and April 3, 1946; none of the defendants conducted any negotiations for, or directed or aided in, said sale or any sale to plaintiffs; Beber was not an agent of the corporation; Beber did not conduct any negotiations resulting in, nor did he participate in making, said sale or any sale; none of the defendants participated in the sale of said stock to plaintiffs prior to the issuance of a permit, nor without giving a copy of the permit to the plaintiffs prior to the sale thereof; (12) none of the defendants received any part of the money or any benefit therefrom except such incidental benefit as plaintiffs and other stockholders received mutually from each other by reason of their community of interest and investment in the corporation.

The finding that plaintiffs’ purchase price check for $20,-000, made payable to the corporation and endorsed in the name of the corporation by its president (which the evidence shows was receipted for by Schapiro, acting as vice-president of the corporation), was deposited by the corporation in an account specially maintained for the deposit and holding of funds paid by plaintiffs and other subscribers pending the issuance of the stock that had been conditionally subscribed

•The finding that the board of directors of the corporation adopted a resolution directing that stock certificates be issued to “said subscribers in consideration for the delivery to the corporation of $100 each for each share so subscribed for,” further identifies the corporation with the sale which was made prior to the issuance of a permit.

These findings, coupled with the recitals in the minutes concerning the subscription agreement, demonstrate that in issuing the stock certificates the corporation acted in response to and in acceptance of the offer tendered by the signers of the subscription agreement.' As to the plaintiffs herein, nothing happened after the delivery of the purchase price money by them and before the action taken by the board of directors of the corporation at its meeting of May 15, 1946. We find in the record no evidence even of any conversations during that period between either of the plaintiffs and any representative of the corporation, or any of the other subscribers, or any of the defendants herein, concerning the purchase of shares of stock of the corporation. The issuance of the certificates to the plaintiffs stemmed directly from the illegal sale of March-April, .1946, without any intervening circumstance. There is no. basis in fact for an inference or a legal conclusion that the issuance and the mailing of the certificate to the plaintiffs was a new, separate and independent offer by the corporation which resulted or could result in a new, separate and independent agreement between the corporation and the plaintiffs upon the reception and retention of the certificate by the plaintiffs. Even the letter of transmittal was not suggestive of a new and independent transaction. It merely recited the enclosure of the stock certificate and copies of the permit and the resolution, directed attention to the fact that the resolution waived all rights for promotional stock to the incorporators, and concluded: “I appreciate, very much, your investing with us and hope you will realize considerable pleasure and profit from the investment.” Nor is this a case in which the rights of innocent third parties, such as creditors, have attached. The principles applied in Moore v. Moffatt, 188 Cal. 1 [ 204 P. 220 ]; Waring v. Pitcher, 135 Cal.App. 493 , [ 27 P.2d 397 ], and Robbins v. Pacific Eastern Corp., 8 Cal.2d 241 [ 65 P.2d 42 ], are inapplicable -here, for the reasons stated by this court in Bourke v. Frisk, supra, 92 Cal. App.2d, at pages 29-31.

The findings that the sale occurred at the time of the receipt and retention of the stock by the plaintiffs, that prior thereto there was no agreement on the part of the corporation with plaintiffs to sell, and that the sale was not made prior to the issuance of a permit, are, in reality, erroneous legal conclusions stemming, perhaps, from erroneous application of the concept of “sale” ordinarily used in relation to the sale of personal property, a vastly narrower concept than that used in defining “sale” for the purposes of the Corporate Securities Act.

The finding that the defendants did not participate in making, or directing or aiding in, any “sale” to plaintiffs, obviously is based upon the erroneous legal conclusion that no “sale” occurred prior to the issuance and delivery of the stock certificate. We do not know what the trial court would have found concerning participation by the defendants in this transaction, had the court used and applied the legally applicable definition of the word “sale.”

The finding that plaintiffs signed the subscription agreement knowing that no permit had been issued, and did so with full and equal knowledge with the other parties thereto that no permit had been issued, could have been based, at most, upon an inference that Harry Randall read the agreement before signing, despite his testimony that he was told merely that it was a subscription agreement, and that he signed without reading it. There was no testimony that the subject of a permit, or the lack of one, was ever mentioned to either plaintiff, and Kobritz testified that Edward Randall was not present when Harry signed. In view of these circumstances, we do not construe this as a finding that the plaintiffs were in pari delicto and for that reason not entitled to recover, especially in the light of the finding that no sale occurred prior to the issuance of a permit and the finding that plaintiffs could have withdrawn their subscription and demanded return of the money prior to their receipt and acceptance of the stock certificate. A right to recover the consideration paid is not a right which the law accords a purchaser who is in pari delicto, if the consideration was illegally collected. (Campbell v. Julian Merger Mines, 111 Cal.App. 649 [ 295 P.

The finding that the stock, although now worthless, was worth what the plaintiffs paid for it when issued, does not bear upon plaintiffs’ statutory right of recovery if other facts established such a right, however appropriate it might be in an action for rescission for fraud or deceit. In such a case as this, the purchaser, if not in pari delicto, may bring an action for the damages suffered, measured by the money which he paid or the value of the property which he conveyed for the stock. (Randall v. California L. B. Syndicate, supra, 217 Cal. 594 , 598-599.)

The finding that a copy of the permit was shown and given to plaintiffs prior to the sale of the stock to them, is predicated upon, and falls with, the erroneous finding that no sale took place until plaintiffs received and retained the stock certificate.

The judgment must be reversed and the cause remanded for trial of the issues presented by the first cause of action, based upon the alleged statutory liability of the defendants.

As to the cause of action for damages for the alleged fraud of Beler in the sale of the stock to plaintiffs, the findings of fact are supported by the evidence. There is a sharp conflict in the evidence concerning the representations made by Beber and the reliance thereon by the plaintiffs. That conflict was resolved by the trial judge, who observed the witnesses and heard their testimony.

Kobritz testified that Beber said to plaintiffs, “I understand you intend to come into the Churchill Frozen Foods”; told them how long the company had been in existence, and said he thought they did very well in the business and expected to do even better in the future by expanding their operations, by putting in new equipment; explained the future of the frozen fruit industry and said it looked good to him, like a good thing; that the Churchill company was making money in the previous years and intended to expand in order to develop a larger production. He said he intended to take some stock in the company; did not say how many shares he was going to take. Beber had no papers in his hand during the time he was talking with the plaintiffs and no papers were signed by anybody at that time. Beber had no papers with him that contained signatures of people who were going to buy stock in the company. He had no such document. Beber said he was glad the plaintiffs were coming in as friends of Kobritz but “Don’t take my word for it; go see Kelley-Clarke Company,” brokers for the Churchill company, who could give plaintiffs any information they desired. Plaintiffs asked for and Beber gave them the address of Kelley-Clarke.

John Chaddoek, of Kelley-Clarke, testified that both the plaintiffs came to see him and Robert Dodd in March, 1946; that they discussed the merits and hopes of the Churchill company; that plaintiffs said Beber sent them there or that it was Beber’s office they were coming from; that plaintiffs said they were contemplating investing in the Churchill company and wanted to know its merits and its prospects.

Robert F. Dodd, of Kelley-Clarke, testified that plaintiff Edward Randall came to see him and Chaddoek. He thought

Dodd also testified that the frozen food industry had prospered prior to 1946, but during that year, due to low ceiling prices and credit restrictions, sales dropped and packers were unable to move their products, with the result that many firms went through bankruptcy or were on the verge of it.

These and other facts support the trial court’s findings that Beber did not represent that he intended to purchase stock for cash; that the corporation intended to use a portion of the proceeds of the sale of its stock for the purchase of additional machinery and equipment, and entered into contracts for the purchase of the same; that the corporation’s business flourished until August, 1946, when the business generally suffered a severe slump from overproduction and shrinkage of bank credit, causing substantial losses to the corporation, bringing about its adjudication as a bankrupt; that the statements which Beber did make to plaintiffs were in good faith, based on information he reasonably believed true, and was true; that those statements were opinions, not representations; that plaintiffs knew and should have known that they were opinions and not representations; and that plaintiffs did not rely upon any of said statements but made and relied upon an independent investigation as to the advisability of investing in stock of the corporation.

That portion of the judgment which decrees that plaintiffs take nothing by the second cause of action of the complaint should be affirmed.

The denial of plaintiffs’ motion lo amend the complaint by substituting the names of Kobritz, Johnson, and Allied Produce Company for certain defendants fictitiously named, is assigned as error.

The motion was made on the last day of the trial and renewed upon written notice about a month later. The notice states that the participation of these proposed parties in the sale to plaintiffs, and their liability to plaintiffs was not discovered until the second day of the trial.

The trial court further found that the joinder of these persons “at this stage of the proceedings [the conclusion of the trial] Avould result in hardships and unfairness to the original defendants. ’ ’ That, too, was peculiarly within the province of the trial court to determine. We find no abuse of discretion in the denial of plaintiffs’ motion. The fact that the trial court, in its order of denial, expressed the opinion (whether correctly or not) that the evidence in the case did not furnish a basis for liability against Kobritz, Johnson or Allied Produce Company, does not alter our conclusion. The three reasons

From what has been said it is clear that the trial court properly exonerated defendants on the second cause of action, but erroneously exonerated them on the first cause of action. The issues presented by the first cause of action must be retried.

The judgment appealed from is reversed. Each party shall pay his own costs upon this appeal. '

Peters, P. J., and Bray, J., concurred.

A petition for a rehearing was denied December 29, 1951, and respondents’ petition for a hearing by the Supreme Court was denied January 24,1952. Schauer, J., voted for a hearing.