Enos v. Picacho Gold Mining Co.

The defendant, Nipissing Mining Company, Ltd., appeals from a judgment in favor of the plaintiff.

The plaintiff, who is a mining engineer, was one of the organizers and first directors of Picacho Gold Mining Company, a corporation organized in 1934 in the State of Ohio, which will be hereinafter referred to as the Ohio company. He was appointed its general manager, and rendered sundry services to it, for which there was due to him on January 28, 1935, the-sum of $7,850; and on that date a note in his favor for the sum stated, due on or before one year from its date, was executed and delivered to him by the Ohio company. The validity of this note is conceded by appellant. No security was given for the note, and by its terms interest was to be paid only out of the maker’s net income—which has not yet made its appearance. Soon after the Ohio company was formed it obtained from one of its promoters an assignment of a contract, referred to in the record as a “bond and lease,” by which it could acquire title to a certain gold mining property, on payment of a price, the balance of which appears then to have been $145,900. Thereafter the Ohio company acquired another similar contract for purchase of some adjoining mining property. This property was all in the Picacho Mining District, Imperial County, California, and no mines appear to have been in operation or opened thereon at the time these contracts were acquired. The Ohio company also made a conditional sale contract to purchase a considerable amount of mining machinery. The Ohio company had, as far as appears, •no other property and no means of obtaining title to this mining property under these contracts unless it could obtain money from some source. All its stock except five shares was issued in exchange for the assignment above mentioned. It made several attempts, extending over a period of two years or more, to obtain a loan from the Reconstruction Finance Corporation. An application for such a loan was approved, but nothing came of it. The Ohio company borrowed some money from its stockholders with which to make payments on the contracts above mentioned. While this was going on plaintiff, on June 20, 1935, severed his connection, except as stock

The plaintiff brought this action against all the corporations above mentioned, as well as some individuals, and by his amended complaint, filed at the trial “to conform to the proof,” he sought a judgment against all the defendants on his promissory note, and also, as to Nipissing, a decree that his claim is a charge on the mining property prior to that of Nipissing. The trial court made findings in plaintiff’s favor, gave him judgment for the principal of the note against the Ohio company and decreed that the transfer of the mining property by the Ohio company to the California company was void as to plaintiff and that he had a lien on the mining property which was paramount to the mortgage of Nipissing. In support of this judgment plaintiff relies on two propositions. First, he claims that by the contract between the Ohio company and Nipissing the two became joint adventurers in relation to the mining property; and, second, he contends that the Ohio company's transfer of its assets to the California company and the latter’s mortgage to Nipissing were made with intent to delay and defraud plaintiff as a creditor of the Ohio company, and were void as to him. Subordinate

The contention regarding a joint adventure is based on the terms of the contract between the Ohio company and Nipissing, and to its understanding a further knowledge of the terms of that contract is essential. It is too long to insert here, but its salient provisions—those which must control its interpretation in this respect—may be stated as follows: After referring to the Ohio company’s contracts for the purchase of the mining property, on which it recited that not more than $125,000 was then due, and stating that the Ohio company desired Nipissing to advance to it or the new company hereinafter mentioned $200,000 to be secured by a first mortgage on the mining property, the contract provided that Nipissing would incorporate a new corporation, under the laws of California, to which the Ohio company would cause the mining property to be transferred, that Nipissing would advance to this California company $200,000 to be secured by first mortgage executed by the California company on the mining property, that the balance of the price of this property should be paid from the loan, and that pending the completion of that transaction Nipissing would advance to the Ohio company $25,000 or more to finance current mining operations, which was to be repaid out of the loan. The California company was to assume certain debts of the Ohio company—which do not seem to include that to plaintiff. So long as any part of the money secured by the mortgage remained unpaid, Nipissing was to have full control and management of operations on the mining property. Nipissing was to have an option to buy 51 per cent of the stock of the California company (other than six directors’ shares), at any time within two months after the loan was paid, for $333,000, on which any amount unpaid on the loan would be credited. The Ohio company was then to receive the other 49 per cent of the stock. In the meantime all the stock except six directors’ shares was to be issued to and held by a trustee and not voted. Six directors’ shares were to be issued as full paid, three to nominees of the Ohio company and three to nominees of Nipissing. If the option was not exercised Nipissing was to cause the three directors’ shares held by its nominees to be transferred to the Ohio company, and the latter was to receive from the trustee all the stock to be held by it. The terms of this contract were substantially carried out, the

We cannot see in this contract, or in the acts of the parties in carrying it out, anything which can properly be deemed a joint adventure. In Dempsey-Kearns Theatrical & Motion Picture Enterprises v. Pantages, (1928) 91 Cal.App. 677 , 682 [ 267 P. 550 ], the court gave this definition of a joint adventure: “ ... in order to bring a contract within the legal designation of a copartnership or a joint enterprise, it must appear that the parties thereto are associated together with the joint benefit of all; that they are joint owners of the property belonging to the association and share jointly in the profits as well as in the same proportion bear the losses that might result from the enterprise.” This statement was approved and followed in Quinn v. Recreation Park Assn., (1935) 3 Cal.2d 725 , 728 [ 46 P.2d 144 ], and United Farmers Assn. v. Sakiota, (1935) 7 Cal.App.2d 559 , 560 [ 46 P.2d 770 ], as well as other cases; and the Sakiota case was cited in Stoddard v. Goldenberg, (1941) 48 Cal.App.2d 319 , 324 [ 119 P.2d 800 ], as authority for the proposition that before the relationship of partners or joint adventurers can exist, “it must be shown that there is a community of interest and an agreement to share jointly in the profits and losses resulting from the enterprise.” In Spier v. Lang, (1935) 4 Cal. 2d 711 , 716 [ 53 P.2d 138 ], it was held that the element of joint participation in the conduct of the business is necessary to constitute the parties joint adventurers.

In the present case, Nipissing, before it exercises its option to buy stock of the California company, is merely a lender of money. It did, indeed, stipulate for certain other matters, such as its right to nominate three directors of the California company and to have control of operations on the property, which might conduce to the safety of its loan; and it required the proceeds of the loan to be applied to purposes which would enhance its security. None of these matters, however, can suffice to convert its loan of money into any other sort of transaction. It appears also that Nipissing had been engaged in the gold mining business for a long time,

Since the option has not yet been exercised, the situation to arise upon its exercise is not important here, except as it may throw light on the prior situation. After exercise of the option, Nipissing would be a stockholder in the California company, the Ohio company would be the holder of the other stock therein, except for directors’ shares, and the California company would be the operator of the mine. As suggested in McSherry v. Market Corp., (1933) 129 Cal.App. 330 , 333 [ 18 P.2d 776 ], cited by plaintiff, a corporation may be but an instrumentality to carry out a joint adventure, and hence the mere fact that a corporation is interposed as an operating agent between two parties who hold its shares does not prevent them from being joint adventurers. But, on the other hand, that mere fact does not make them joint adventurers. The elements of a joint adventure must be found in other matters. Here they do not so appear.

But even if there were a joint adventure, it is not apparent how that fact would impose on Nipissing any liability for plaintiff’s note or make its mortgage subject thereto. The note was executed long before the joint adventure, if any, was created, so that plaintiff can claim nothing on the theory of appearances, or estoppel by reason thereof to deny liability. There is nothing in the agreement out of which the joint adventure, if any, must be constructed, to suggest an assumption by either party of previous debts of the other. Cer

Coming now to the question of fraud on plaintiff as a creditor, it is to be noted that in his amended complaint plaintiff alleged only that the Ohio company made the various conveyances, assignments and transfers of its property to the California company “with the intent to hinder, delay and defraud plaintiff, as a creditor” of the Ohio company, “intending thereby to put the said property beyond the reach of plaintiff, as its creditor,” and that the California company accepted them with the knowledge of that fraudulent intent, and with the intent to assist in the fraud. The findings are to the same effect. In neither complaint nor findings is there any statement that Nipissing knew of or in any way aided or participated in this fraudulent intent of the Ohio company and the California company, or that Nipissing itself had any such intent. Appellant contends that there was no evidence to support such a finding, had it been made. Respondent does not dispute this contention and we have noted nothing contrary thereto in the record; we therefore accept it as correct. It does appear, from complaint, findings and evidence that before Nipissing made the loan and received the mortgage, it was informed that plaintiff was a creditor of the

At the time of the transaction in question it was subject to the provision of section 3439 of the Civil Code, as it stood before the 1939 amendment, that “Every transfer of property or charge thereon made . . . with intent to delay or defraud any creditor or other person of his demands, is void against all creditors of the debtor ...” In the application of this rule it is settled that “A conveyance made for a valuable consideration may not be attacked by the grantor’s creditor, even though the transaction was entered into by the debtor with intent to delay or defraud his creditors, unless the grantee so intended or participated in or had knowledge of the fraudulent intent.” (Kuhlman v. Pacific States S. & L. Co., (1941) 17 Cal.2d 820 , 821-822 [ 112 P.2d 620 ].) The same rule is applicable to a mortgage or other incumbrance as to a conveyance.

. [5] Mere knowledge by Nipissing that plaintiff was a creditor of the Ohio company is not enough to show an intent on its part to defraud him or to charge it with notice of such intent, if any, entertained by the Ohio company (Kuhlman v. Pacific States S. & L. Co., supra). In this connection plaintiff places considerable emphasis on a provision of the contract between Nipissing and the Ohio company that the latter “shall obtain and deliver such consents or other agreements or take such steps or proceedings as may be necessary to effectively postpone all claims” of its creditors other than trade creditors so that the title of the new company shall be clear of all claims of such creditors and the transfer ... to such new company binding upon all such creditors. ’ ’ Nothing was done under this provision regarding plaintiff’s claim, and appellant, we assume, is to be charged with notice of this fact. However, nothing was necessary to accomplish the result indicated by the language quoted. As a purely unsecured creditor plaintiff had no lien or claim on the property, and the transfer, if made for a valuable consideration, was binding upon him. He could be placed in a better position only if the transaction was made in fraud of creditors—a proposition which cannot be deduced from the terms of the contract it

The court found that after the contract between the Ohio company and Nipissing was made and the conveyances and mortgage provided for by it were executed and delivered, the Ohio company withdrew from the State of California, where it had previously been authorized to do business, and undertook to dissolve its corporate existence, and is now “a dormant corporation.” We do not understand this to mean that the corporation was actually dissolved, and certainly the evidence does not go that far. As a part of a plan of reorganization the Ohio company undertook to organize a Nevada corporation to which its property was to be transferred. Stock of this Nevada corporation was to be issued to stockholders of the Ohio company and the latter was then to be dissolved. Plaintiff asserts that this plan made no provision for paying him, but this assertion is not accurate, for the plan did provide that the Nevada corporation would assume and pay all liabilities of the Ohio company. However, we do not regard these proceedings of the Ohio company as of any importance here, for two reasons: first, it does not appear that this plan of reorganization was ever carried to completion; and second, it does not appear that Nipissing in any way participated in this plan or was even informed of its existence. Whatever tendency the adoption of this plan by the Ohio company may have to show its intent to defraud plaintiff, certainly it cannot, in the absence of a showing that Nipissing knew of it, tend at all to show such intent on the part of Nipissing. Plaintiff contends that this action of the Ohio company was “done pursuant to the requirements of” Nipissing, the requirements referred to being the provision of the contract above discussed that the Ohio company would take such steps as were necessary to postpone the claims of its creditors to the transfer to the California company. We can see no connection between this term of the contract and the acts now under discussion. As already stated, plaintiff had no lien on the property and no such steps as these were necessary to the carrying out of the contract.

Plaintiff contends, however, that the Ohio company, by the transfer of its several contracts to the California company, divested itself of all its property, that it received no consideration for the transfer, and that by reason thereof it became insolvent. If such were the case, the transfer would be fraudulent and void as to plaintiff, an existing creditor, under the provision of section 3442, of the Civil Code, as it existed at the time of the transfer, that “any transfer or incumbrance of property made or given voluntarily, or without a valuable consideration, by a party while insolvent or in contemplation of insolvency, shall be fraudulent, and void as to existing creditors.” In such case, it would not be necessary for plaintiff to show fraudulent intent of the transferee, or its knowledge of any fraudulent intent of the transferor. (Tobias v. Adams, (1927) 201 Cal. 689 , 695 [ 258 P. 588 ].) Indeed, where both insolvency or contemplation thereof on the paifi of the transferor and lack of a valuable consideration for the transfer appear, the transfer is void under section 3442 without any showing of actual intent to defraud by

(Security Trust Co. v. Silverman, (1930) 210 Cal. 578 [ 292 P. 636 ].) We do not agree that the transfer by the Ohio company to the California company was without consideration. By the terms of the agreement for the transfer the California company was to assume and agree to pay the balance due from the Ohio company for purchase of some machinery, amounting to $57,000, certain other debts of the Ohio company amounting to not over $25,000 and all further operating debts it might incur up to the transfer. Such an assumption of liability is a sufficient consideration to uphold a transfer against such an attack as we are now considering. (Bacciocco v. Curtis, (1938) 12 Cal.2d 109 , 114 [ 82 P.2d 385 ] ; Mix v. Yoakum, (1934) 138 Cal.App. 290 , 294 [ 31 P. 2d 1071 ] ; Hasenjeager v. Voth, (1928) 91 Cal.App. 394 , 398 [ 267 P. 146 ]; 12 Cal.Jur. 1015,1021.) Furthermore, the agreement provided that the Ohio company was to receive shares of stock of the California company for its transfer. If Nipissing does not exercise its option to buy part of the stock the Ohio company will receive all of it, and thus, in effect, it will own the same property it had before, but greatly improved and freed from conditions of payment formerly attached to it. If Nipissing does exercise its option, the Ohio company will receive only 49 per cent of the stock, but Nipissing must pay the California company $333,000, either all in cash, or partly in cash and partly by cancelling its loan, and this would bring the value of the 49 per cent of the stock received by the Ohio company nearly up to the value that all of it would have if the option were not exercised, on the valuations written into the contract and not disputed here. This is sufficient to comply with former section 3442 of the Civil Code, above quoted. One who transfers property to a corporation and in exchange for it receives all of the stock of the corporation, or even a substantial part of it where the corporation has other substantial assets, has received a valuable consideration for the property, within the meaning of section 3442.

Plaintiff calls our attention to the fact that no stock of the California company, except the six directors’ shares, has yet been issued, and contends that by reason thereof the Ohio

Moreover, the loan of $200,000 by Nipissing and the use made of it cannot be ignored in considering the question of consideration. Had that loan be.en made directly to the Ohio company and a mortgage made by that company to Nipissing, the money loaned being used as it was here, to pay for and to improve the mortgaged property, no question could have been raised regarding the existence of a valuable consideration for the mortgage, nor would the facts in the case, if otherwise the same as they are, lend any countenance to the theory that the transaction was in fraud of plaintiff or any other unsecured creditor of the mortgagor. The interposition of the California company between the Ohio company and the lender, Nipissing, does not alter the essential nature of the transaction in this respect, nor afford a basis for the charge of .fraud.

Other matters advanced by plaintiff in support of the judgment have been considered but are not deemed to merit more detailed discussion. Plaintiff’s attempt, throughout the case, is to appeal to rules of equity. We see no equity in a judgment which gives to a previously unsecured creditor of a moribund corporation, whose only asset is a conditional right to acquire property by the payment of money which it has no means of paying, a lien on that property after its acquisition by means of the proceeds of a loan, paramount to that of a mortgagee who in good faith makes that loan and takes as security a mortgage which attaches to the property at the very instant of its acquisition. Such is the judgment here.

Shinn, Acting P. J., and Wood (Parker), J., concurred.

Respondent’s petition for a hearing by the Supreme Court was denied March 25, 1943.