Hollywood State Bank v. Wilde

These actions were consolidated for trial. They had been instituted for the purpose of enforcing the payment of the balance of a $20,000 promissory note of the Chapman Chinchilla Sales Company, hereinafter referred to as the “Company,” which had pledged to plaintiff certain contracts executed severally by respondents for the purchase of chinchillas. The defendants prevailed below upon the defenses that the contracts and their assignments were void in that they were made and assigned in violation of the Corporate Securities Act and of the federal Securities Act of 1933. On this appeal by the bank from the consolidated judgment we are to determine whether the evidence justifies the findings and the judgment. A recital of a portion of the findings will serve to demonstrate the nature of the contracts and the justice of the court’s conclusions.

The Facts Found

The company is a Nevada corporation which operated in some twenty-eight states of the union. A number of its officers participated in the organization of another corporation under the laws of Delaware, to wit, National Chinchilla Breeders of America, Incorporated, hereinafter referred to as the “Breeders,” and they continued to act as directors thereof. The

In purchasing their chinchillas respondents severally be

Conclusions Were Unavoidable

Prom the facts found it is readily apparent that the investor in chinchillas did not rely alone upon the processes of nature to enrich him. He reckoned upon sharing in profits to be earned by an intelligent, experienced and industrious organization in the care, breeding and sales of the rodents. The company candidly represented that it was selling its ingenious services along with the chinchillas and it promised to invest the moneys received according to the “Chinchilla Dollar.” Therefore it was not an investment in the animals only but in a service as well. It was the acquisition of the right to participate in an enterprise for the growing and selling of the animals and their pelts that induced respondents to execute the contracts in question. By making such investments respondents had no thought but that they would profit by the combined and organized efforts of the two corporations with the cooperation of all chinchilla owners.

The established facts left no alternative for the trial court other than to hold that the contracts were securities. The inducements offered by the company—of a controlled market, of a unified sales agency, and of the services of both of the interlocking corporations in achieving these ends—gave character to the investment. The national control of the industry as argued by the salesmen, the availability of the fur farms where all chinchillas would be kept, the sales of all animals and pelts by the company as against the helplessness of a lone investor without a farm, without skill in rearing the rodents,

The Law Applicable

That the contracts pledged to appellant are void has been established by both state and federal courts. (Securities and Exchange Com. v. Payne, 35 F.Supp. 873 ; Securities and Exchange Com. v. Bailey, 41 F.Supp. 647 ; Penfield Co. of Cal. v. Securities and Exchange Com., 143 F.2d 746 ; Atherton v. United States, 128 Fed.2d 463; People v. Yant, 26 Cal.App.2d 725 , 735 [ 80 P.2d 506 ] ; People v. Davenport, 13 Cal.2d 681 [ 91 P.2d 892 ]; People v. Jackson, 24 Cal.App.2d 182 [ 74 P.2d 1085 ]; Moore v. Stella, 52 Cal.App.2d 766 [ 127 P.2d 300 ].) These cases are all apropos and illustrative of the application of the law.

The facts of the Payne case are quite similar to those in the cases at bar. In purchasing fifty pairs of silver foxes from the Garveys, Payne agreed that they should remain in the possession of the vendors who should ranch them for five years for an agreed price per pair. The foxes were identified and conveyed by Hi-11 of sale and Payne was supplied with the numbers of the pens enclosing them. The vendors guaranteed an annual increase of three pups per pair and losses on any account within the year after purchase of breeding foxes to be replaced. Subsequently Payne actually sold many animals under similar contracts. But after citing section 2 (1) of the Securities Act of 1933 and quoting a case from the Seventh Circuit Court of Appeals the court said that it is “controlled by an act of Congress which is intended to prevent overreaching and to mandate fair disclosure”; that “to determine whether a transaction involved is a security the real nature of the transaction is the controlling element . . . that what was designated as a sale of foxes was nothing more or less than an investment. . . and that the contracts between the so-called seller and the so-called buyer were and are securities as defined by the Act.”

The Bailey ease arose out of selling small tracts of two and one-half, five or ten acres of land in Florida to be planted in

In the Yant case it was represented to investors in small tracts of land that the entire tract would be leased by Yant’s corporation for a monthly rental and that the investor could join in a community lease and receive a pro rata share in the oil production. It was found from the evidence that the purpose of the vendor was to sell an interest in oil that might be produced upon the land, that no profits were ever to be received by the investors on account of anything done by them but only from the work of those who took a community lease, and that therefore the transactions were in violation of the Corporate Securities Act. The case demonstrates how the substance and not merely the form of a transaction constitutes the proper test for determining its real character. The Jackson case is equally illuminative. While the offenders sold and conveyed parcels of land the “mineral deeds” issued were in reality “certificates of interest in oil titles.”

The Proof Supports the Findings

The court’s findings are abundantly fortified by the evidence. Mr. Carlson testified that the salesman who contacted him stated that the payment of $1,600 should be made in cash, the balance to be paid by returning a pair of chinchillas when his pair should have quadrupled; that the breeders and the company had complete control of the industry; that they worked cooperatively and jointly in the control of the price, in the registry of the chinchillas and in making all sales through the company. Whenever he should have any for sale the company would purchase them for $1,600, sell them for $3,200 and disburse the profit in the manner indicated by the “Chinchilla Dollar” which he then exhibited. The salesman displayed a folder provided by the company by which it was demonstrated that, based upon past experience in the increase of the rodents, the sales value of the progeny of three pairs would amount to $100,000 at the end of seven years. He ex

Mr. Wright testified that he had received instructions at the company’s office from Mr. Prestwich, the general sales manager, and had used the forms for sales contracts, for application for membership in breeders, pooling contracts and other materials furnished by the company in his sales talks. Mr. Wright in general confirmed all of the testimony of Mr. Carlson and emphasized that he did not wish anyone to invest unless he would be protected by the breeders which had authorized the company exclusively to make the sales of the animals.

Substantially the same testimony as that of Carlson and Wright was given by respondents Wilde and Edwards and by Eugene Dent, the salesman who made the contracts with them; also by Harold Koonz, who established that Prestwich confessed it to be the policy of the company to take back animals. Besides the testimony numerous documents published by the company were introduced, showing that the policy and plans of the company were to issue a security contrary to the cited statutes.

Respondents Justified

The authorities cited by appellant (People v. Davenport, 13 Cal.2d 681 [ 91 P.2d 892 ]; People v. Anderson, 35 Cal.App.2d 23 [ 94 P.2d 627 ]; People v. Steele, 2 Cal.App.2d 370 [ 36 P.2d 40 ]) do not present a state of facts at all akin to the chinchilla epic. It confesses that if the company had sold the animals under agreement to keep them on ranches which it controlled for the purpose of making profits from the sale of offspring to be shared in by respondents and the company “there is no question but that a sale of securities would have taken place.”

In the light of the authorities and of the evidence the trial court could not felicitously or comfortably have derived findings that the statutes were complied with by the company in obtaining the contracts or by the subsequent assignments. Every piece of literature published by the company, every application for purchase and for membership in breeders and all of the arguments presented by the salesmen under the tutelage of the officials of the two interlocked corporations lead to but one conclusion, namely, that the corporations operated a unified scheme; that in ostensibly selling chinchillas they actually sold an organized service; that it was clearly intended that the investors were not to convey the rodents to secluded localities, there to embark upon careers of growing and marketing the animals or their pelts, any more than the purchasers of the Florida acres were expected to engage in producing tung oil upon the ten-acre tracts which they acquired from Mr. Bailey. Respondents were neither furriers nor growers of fur-bearing animals. Their investments having caused the issuance and assignment of nonnegotiable instruments contrary to law, the latter were void and recovery thereon is forbidden by law.

Parol Proof Was Properly Admitted

Appellant next contends that it was prejudicial error to allow parol proof of the representations of the company made at the time of and prior to the execution of the contracts. This contention is based upon the presence in those instruments of the following passages:

“It is agreed that this instrument contains the entire agreement between the parties hereto, and that no warranty, statement, promise, or inducement made by any party hereto, employee or agent of either party hereto, which is not contained in this written contract, shall be binding or valid as to the parties hereto. This agreement shall be binding on the heirs, successors, executors and assigns of the parties hereto. No

It is urged most earnestly that the quoted language is so explicit in fortifying the company and its successors in interest against defenses based upon oontemporaneous oral declarations that the writings lose their contractual force if they may be so readily ignored, contrary to such express stipulation to be bound by the writing in any event. In support of its argument it cites the cases of Pacific States Securities Co. v. Steiner, 192 Cal. 376 [ 220 P. 304 ] and Cobbs v. Cobbs, 53 Cal.App. 2d 780 , 784 [ 128 P.2d 373 ], These authorities are not pertinent. They merely declare the general statutory rule (Civ. Code, § 1625) that a written contract supersedes all previous negotiations or stipulations concerning its matter. The Code of Civil Procedure (§ 1856) provides two exceptions to the general rule that “no evidence of the terms of the agreement other than the contents of the writing” may be received, namely “ (1) where a mistake or imperfection of the writing is put in issue ... (2) where the validity of the agreement is the fact in dispute. ” It is commonplace to say that a written contract cannot be modified by a contemporaneous oral agreement in direct conflict with the writing. (Civ. Code, § 1625.) But that does not meet the situation where facts are pleaded showing the illegality of the contract. When the evidence reveals that the relations of the parties to a transaction are illegal and against public policy the court will deny relief based upon their contract. (American National Bank v. A. G. Sommerville, 191 Cal. 364 , 365 [ 216 P. 376 ] ; Bank of Orland v. Harlan, 188 Cal. 413 [ 206 P. 75 ].) Because of the public concern with illegal agreements courts are in duty bound to be on guard lest by virtue of the innocent guise with which such transactions may be camouflaged they should triumph under the eyes of the chancellor. So pronounced is this rule that a party may not “by stipulation at the time of the execution thereof or afterward, waive his right to urge the illegality in any action thereon instituted by the other party thereto.” Thus the parties to such instrument cannot give a quasi validity to such illegal writing by waiver of a defense against a claim of its illegality. (American National Bank v. Sommerville, supra. The parol evidence rule does not preclude evidence showing that the consideration for the con

The Contracts op Sale Are Not Negotiable Instruments

Appellant’s final assignment is that error was committed in denying the bank recovery upon the contracts in view of the stipulation on the face of the writings that they contained the entire agreement and that no representations other than as set forth were made, the bank having accepted the contracts without knowledge of their infirmities. In other words, it contends that the contracts are negotiable instruments and are subject to no defenses in the hands of an innocent purchaser. In support of this contention appellant cites the conclusive presumptions (1) that facts recited in a written instrument are true as between the parties or their successors in interest; and (2) that a party who has by his own declaration deliberately led another to believe a particular thing to be true, cannot in subsequent litigation be permitted to falsify such declaration. (Code Civ. Proc., § 1962, subds. 2 and 3.) Also, it invokes the rule that if one of two innocent persons must suffer by the act of a third, the sufferer must he he by whose negligence the act occurred. (Civ. Code, § 3543.) But the contracts in question were nonnegotiable instruments. (Civ. Code, § 3086.) Consequently the transferee thereof took them subject to all their vices.

The authors of such writings may not impart negotiability thereto under the general law merchant or by statutes. The character of negotiability must appear not by force of the stipulation of the parties that it shall he negotiable “but must be implied by law as the result of the form and effect of the instrument itself.” (American National Bank v Sommerville, supra.) It is statutory that while a nonnegotiable written contract for the payment of money may be transferred by endorsement conveying thereby all rights of the assignor thereunder, yet it is “subject to all equities and defenses existing in favor of the maker at the time of the indorse-

In none of the authorities cited by appellant under the contention here under discussion was there an illegal contract. In Baillarge v. Clark, 145 Cal. 589 [ 79 P. 268 , 104 Am.St.Rep. 75 ], plaintiff’s husband abstracted from her trunk a deed she had executed but had not delivered. After an innocent purchaser from the husband’s vendee had with the wife’s knowledge made permanent improvements on the property and paid'the taxes she was estopped to assert her ownership in an action filed three years subsequently. In Green v. Caribou Oil Mining Co., 179 Cal. 787 [ 178 P. 950 ], one Lewis while secretary of defendant fraudulently procured the issuance of a certificate of 3,500 shares of its stock which he pledged to Green as collateral for a loan, representing himself to be the owner thereof. The company was estopped to deny Lewis’ ownership by reason of the negligence of its officers for a long time prior to the issuance of his stock to examine the certificate books and stock transfers which would have disclosed that numerous other certificates had been similarly issued by Lewis, and because the vice president had signed them without investigating or attempting to ascertain the legality of their issue. In Butler v. Woodburn, 19 Cal.2d 420 [ 122 P.2d 17 ], nothing more was decided than that in accordance with a- long line of decisions the vendee of land under an executory contract of purchase “cannot remain in possession of the land under the contract and successfully resist either the vendor’s action for the purchase price or an action to recover possession of the land upon the ground that the vendor’s title is defective.’’ (P. 423.)

For the reasons recited the consolidated judgment is affirmed.

Wood (W. J.), J., and McComb, J., concurred.