AUSTIN ET AL. v. HALLMARK OIL CO. ET AL.
The pleadings in this case were heretofore presented and considered by this court. Austin v. Turrentine, 30 Cal.App.2d 750, 87 P.2d 72, 88 P.2d 178. The nature of the action is there fully set forth. We will not repeat it here. Suffice it to say, after trial, and upon the pleadings therein discussed, the court found generally in accordance with the allegations of the respondents' complaint with certain exceptions which, so far as material here, will be hereinafter noted. Appellants' statement of facts as to what the evidence showed and the conclusions to be drawn therefrom is quite at variance with respondents' statement. Resort by this court to an 1,800–page transcript of the evidence, voluminous depositions, and several hundred exhibits, was made necessary to properly differentiate the interpretation given the evidence by the respective parties. We will tersely review the evidence.
Plaintiff and respondent John W. Austin, hereinafter referred to as Austin, in June, 1934, was a promoter and was interested with one John K. Porter in the acquisition and sale of oil leases and lands near Bakersfield. Austin was a resident of that city. He had had some limited experience in drilling for oil and in the operation of an oil well. The defendant and appellant Charles H. Forward, hereinafter referred to as Forward, was an attorney at law, residing in San Diego. His brother, appellant James D. Forward, and Reuben E. Harrison resided in San Diego. They had little, if any, experience in the drilling of oil wells or acquiring oil leases. Appellant Frank D. Carroll was a friend of Austin, not known to the other appellants prior to the time he entered into the transaction here involved, and resided in Los Angeles. He was also inexperienced in such oil drilling operations. The property involved in this action and in which an interest was acquired by the appellants through a lease, and upon which leased property oil was finally developed, comprises about thirty acres and is situated in Kern County, near Taft. The property was owned by Julius Fried and the Merritt Annex Oil Company, a corporation. Although Austin and appellants were formerly acquainted, Austin's first contact with Harrison in reference to the leasing of oil lands was in July, 1934, when he entered into an agreement with Harrison concerning the proposed purchase of other oil leases, by which agreement Austin was to furnish his services in managing the oil drilling operations. Harrison was to raise the money to buy the property and bring it into production. Austin was to receive a 50 per cent interest in it after Harrison obtained his money back from the production of oil therefrom. Harrison put up $500 with Austin for this purpose but the deal did not go through. During the course of Austin's efforts he contacted Porter, who directed Austin's attention to an oil lease that is in no way involved in this litigation. Austin inspected the property and rejected it. As a result, however, of the negotiations that had thus taken place between Austin and Porter, Porter suggested to Austin that he obtain three or four people to put in $100 apiece and allow Porter to make use of the money to scout for leases over a wide territory. In pursuance thereof an agreement between them was drawn up and Austin gave Porter his check for $100. Austin was unsuccessful in interesting anyone else. He communicated this inability to Porter who then said to him “that he would use the $100 as far as it would go to look up leases on the west side,” with the understanding that they should each have a common share.
Austin testified that the lease in the present action grew out of Austin's and Porter's activities in the performance of that agreement; that during the course of Porter's investigations he reported to Austin that a man named Campbell had a lease on the property here in controversy; that Austin went to Los Angeles and talked to Fried, the owner of the property and learned that he would be willing to make a lease with Austin and Porter, provided they were ready to go ahead with drilling at once; that he secured the promise of a lease of the property on a one–sixth royalty basis. Austin then testified that he had previously contacted appellant Harrison and told him that Porter was an oil man; that he was looking up leases for him; that he advanced him $100 for that purpose; that they were sharing on a fifty–fifty basis; that he and Porter had the lease and explained the basis upon which it could be obtained; that he had told him that he had investigated the property and considered it promising; that he intended to organize a company and drill on the property; and that he and Porter had a plan to turn the lease over to a corporation with the understanding that those who invested money should first have their money returned with interest and thereafter 50 per cent of the profits should flow to Austin and Porter. The record shows that on September 2, 1934, Austin wrote Harrison telling him that Porter was then out after leases. However, the record also shows that at this particular time Porter had a lease in his own name which included the thirty acres here involved from Julius Fried and the Merritt Annex Oil Company, dated June 22, 1934, but very little development work had been done under it. Harrison, after an examination of the property here involved, manifested considerable interest in it. Austin at once went to attorney Fred Welsh, at Bakersfield, and arranged with him to organize a California corporation to handle the project in a way that would carry out their intentions. Harrison brought appellant Charles Forward, his personal attorney, to Austin's office in Los Angeles to meet Porter and look over the lease. Austin explained to Forward the steps he had taken and Forward at once denounced the plan as adopted by Austin's attorney as impracticable and declared that a Nevada corporation should be organized to handle the whole situation. Forward was then asked by Austin if he desired to put any money in the venture and his reply was that he did not wish to. On September 22, 1934, Austin, at a meeting in Los Angeles, proposed to Harrison and Forward that they join with him and acquire a lease on the property above mentioned and that other persons mutually agreeable be induced to contribute and that they associate Porter with them, who would receive for his services as expert oil driller one–half of the net proceeds from oil developed on the property.
Appellants testified that at this meeting it was agreed that Harrison and Austin would each contribute $2,500 and that other persons acceptable to them would be induced to contribute a like amount each, up to the sum of $16,000. Respondent Austin's testimony in this respect is not clear and is more or less evasive as to whether he agreed to put up any money or buy any stock at that particular time. He testified that “I never represented that I would put any amount of money into the venture with anybody––in the beginning of the venture.” On December 16, 1934, Austin wrote to Forward that “I will take $1,000 of the $3,850 yet to be subscribed.” And on October 31, 1934, Austin wrote to Harrison that he (Austin) and one Carroll would put in at least $5,000. The evidence is most convincing that he agreed to take at least $2,500 worth of stock and put that amount into the corporation.
The trial court found in this respect that “* * * subsequent to the organization of said Hallmark Oil Company, to wit, on or about the 5th day of November, 1934, and at other times the plaintiff John W. Austin agreed with the said Hallmark Oil Company, Inc., its officers and agents, to subscribe for $2,500 worth of the capital stock of the said corporation at the par value thereof and pay for the same with his own money or with moneys which he was authorized to use for that purpose. That he paid the said corporation only the sum of $1,300 on account thereof * * *.”
Austin did not at that meeting suggest that he had any interest in the lease between Porter and the Hallmark Oil Company. Forward agreed to incorporate the corporation for a $100 interest. He later advanced $185 to pay the costs of incorporation and the further sum of $50. A few weeks later he joined with others and advanced a total sum of $1,000. It was further agreed at the meeting that a lease should be obtained immediately and that the lease should be taken in the name of John K. Porter and should thereafter be assigned by Porter to the corporation which was to be formed as agreed.
On September 24, 1934, they entered into a written lease of the premises. The term of the lease was twenty years from its date and so long thereafter as oil was produced in paying quantities. There were other provisions in the lease respecting the time to commence the drilling, together with certain provisions in reference to default and quitclaim. It also provided for landowner's royalty of one–sixth of the proceeds received from the sale of oil and other substances extracted; that the lessee must drill four wells; that upon the failure of the lessee to commence the drilling of any well within the time specified, the lease and agreement should “ipso facto and without notice cease and terminate.” Immediately upon the execution of the lease, Harrison advanced and paid Austin the sum of $500 to be used for the installation of drilling equipment upon the premises. Porter commenced the installation of equipment for drilling for oil. It was agreed that Austin would give his personal attention to the enterprise; that he would receive and disburse the moneys contributed to the venture by the appellants and would pay out such money as would be necessary for the conduct of drilling operations. Porter also agreed to devote all his time to the drilling operations and to supply his expert skill, knowledge and experience. Austin received sums of money from Forward and Harrison between the 25th day of September, 1934, and about the month of March, 1935, and from other persons who thereafter became associated with them, equaling approximately $18,000, which Austin claimed he paid out to, or on bills contracted by, Porter.
In pursuance of the agreement entered into on September 22, 1934, the appellant Charles H. Forward, on October 3, 1934, requested one McNamee, an attorney at law at Las Vegas, Nevada, to organize a corporation in Nevada with a capital stock of $50,000, divided into 5,000 shares of the par value of $10 each. The details of the organization were placed in the hands of McNamee. The Hallmark Oil Company, Inc., was there incorporated on October 13, 1934. The original directors and officers were local and named by McNamee. On October 30, 1934, Hallmark Oil Company Inc., as party of the first part, entered into a contract and agreement with Porter. In this agreement the lease between Porter and Fried, et al., is recited. Porter agreed to cause the leasehold and all of his rights thereunder to be assigned to the company. The company agreed to pay, in connection with the drilling of wells on the leasehold, amounts necessary to pay the bills incurred by Porter in connection with the drilling of wells, not to exceed the sum of $16,000 (later increased to $18,000), and that out of the proceeds of the lease, sale of oil, etc., additional sums would be paid for the drilling of wells. It was further agreed that the sum of $18,000 should be repaid to the corporation with interest thereon at the rate of 7 per cent per annum whenever the drilling operations were fully completed, from the income from said leasehold; that Porter would perform all of the agreements on his part to be performed as provided in the lease between himself and Fried, et al., provided the money to be supplied by the company was made available; that in the event of the failure of Porter to faithfully fulfill and perform the obligations to be performed by him as provided in said lease, the company would have the right to terminate all the rights of Porter under the agreement; that Porter should be then entitled only to a one–half interest in and to the proceeds to be thereafter received from the production of oil, gas or other substances which may have been theretofore brought into production after all payments had been made as provided for in the agreement. Bills greatly exceeding the $18,000 agreed upon were contracted and considerable correspondence ensued in regard to them and also as to further advances to be made in carrying on the drilling operations. Just before oil was struck, considerable excitement was manifested by all parties concerned. Additional appropriations were made quite freely by appellants. The thrilling anticipation of becoming potential millionaires overnight was reflected in the correspondence. At the request of Forward, Austin on several occasions forwarded to McNamee in Las Vegas, a statement of the amount of advances claimed to have been made from time to time by the several parties interested and suggested that stock of the corporation be issued in the several amounts. On March 11, 1935, Austin wrote to McNamee as follows:
“You have cancelled checks to the amount of $11,252.43, being money that was advanced for the purpose of drilling the oil well, by the following contributors, and in the following amounts:
for which please issue stock of the Hallmark Oil Company to each of these individuals to the amount of their contributions, as set forth above.”
There was a direction also in the letter to deliver the stock certificates to “bearer, James D. Forward.” Stock certificates were issued by McNamee and turned over to James D. Forward as requested, which included stock certificates to John W. Austin for $1,000 and $300 respectively, to Helen P. Austin for $100, and to Luethel Austin for $100. These stock certificates were ordered canceled and so marked by the corporation and retained by it after they had been returned to the corporation by James D. Forward.
Appellants claim at all times that this stock was retained by the company, not only because Austin had contributed nothing whatever to the company, but because he had paid no consideration for the shares of stock. Plaintiffs' shares above listed are the ones involved in this action.
The evidence shows that on November 2, 1934, Porter, in writing, assigned to John W. Austin one–half of all income, under the terms of the drilling contract dated October 30, 1934, between the company and him, and authorized the company to pay directly to Austin all sums due under that assignment. That assignment was acknowledged on January 22, 1935, and was recorded January 31, 1935, in Kern County. Appellants claim that the assignment was a secret agreement between the parties and that appellants had no knowledge of it until some time after the date of its recordation.
On January 28, 1935, Austin induced one McGuire to contribute $4,000 to pay some of the outstanding bills of the corporation. Austin had Porter assign to McGuire, in consideration therefor, 15 per cent of Porter's interest in the proceeds under his agreement with the corporation. On January 29, 1935, Austin assigned to McGuire a 5 per cent interest. After these purported assignments Austin was then the purported owner of a 20 per cent interest and Porter was the owner of a 10 per cent interest. Subsequent to April 9, 1935, the corporation contracted with McGuire in reference to his claimed 20 per cent interest. He was given an option to purchase stock in the corporation in the sum of $4,000, or the return of the investment. Harrison purchased the option to take the stock and divided it with Forward. The assignment to Austin, it is claimed by appellant, was a secret assignment in violation of the mutual trust relationship, and violative of the provisions of the Corporate Securities Act, St. 1917, p. 673, forbidding the sale of securities without a permit.
On November 4, 1935, appellants undertook the organization and incorporation, under the laws of California, of another corporation named Hallmark Oil Company. Incorporators of the new corporation were Charles H. Forward, James Forward and Reuben E. Harrison, secretary. This corporation was apparently formed without Austin's knowledge or consent, and no mention was made in any of the proceedings of him or respondents' claimed stock in the dissolved corporation.
An application was made for a permit to issue 4,550 shares of the common stock of the California corporation. On February 26, 1936, the permit was issued and allowed the company to deliver to the Hallmark Oil Company, Inc. of Nevada, 1,700 of its shares of stock in consideration of the transfer to it of all the property and assets of that corporation, including the lease on the property herein involved. The California corporation assumed the obligations of the Nevada corporation. Thereafter the Nevada corporation was dissolved. Stock of the California corporation was thereafter issued to the stockholders of the Nevada corporation according to their respective interests. No stock was issued to any of the respondents for the claimed reason that they had advanced nothing to either corporation and had paid no consideration to either corporation for the issuance of any stock to them and were not entitled to the issuance of any stock whatsoever.
The record shows that commencing about January 1, 1935, all parties, including Austin, were dissatisfied with the manner in which Porter was managing the affairs of the company in reference to the payment of bills, and as a result of a conference Austin, in a writing dated January 23, 1935, was designated manager for the corporation. On April 9, 1935, Forward wrote Austin notifying him that he had been ousted as company agent. On March 28, 1935, Porter, in writing, purported to relinquish and abandon all right, title and interest that he had under the agreement between himself and the Hallmark Oil Company dated October 30, 1934. In this agreement it is recited that Porter ceased all efforts to carry out his agreement before the 28th day of March, 1935, and that he fully and completely abandoned all further work and effort and services in respect to the contract and lease. The trial court found that this agreement “was not entered into or executed in good faith or for an adequate or any consideration.” Porter was killed in an accident on November 27, 1936. After this action was filed appellants secured from Porter's wife a release of any community interest she may have had in and to the lease or agreement in consideration of the sum of $26,441.67. Seven wells were thereafter financed by the company and drilled by the employees of the Hallmark Oil Company, Inc. The employment of these men and the supervising of the work was done by the appellant Forward who was the president of the corporation. The complaint in this action was not filed until February 2, 1937.
The court specifically found that appellants, and particularly Charles H. Forward, in these several transactions, did not act in pursuance of any fraudulent intent, with certain exceptions, particularly as to the stock transfers; that originally Porter and Austin entered into an agreement to procure the oil lease for the equal benefit of Porter and Austin; that the lease was to be taken in the name of Porter, and Austin was to give his time and efforts toward securing the investment of other persons' funds to be used for the purpose of drilling an oil well upon the land, and that the parties making the investment were to be given a 50 per cent interest in the lease and to have returned to them all moneys by them so invested with interest, when and as the same could be returned and paid to them from the net proceeds of the said lease; that when funds for such purpose were secured Porter should devote his time to the drilling operations upon the property and appellant Austin should devote his time to financial matters and “that they should have equal interests in the said lease and all profits to be realized therefrom.”
The court specifically found in respect to the assignment (dated November 2, 1934) to Austin from Porter of one–half of all income and profits due or to become payable to him under the agreement of October 30, 1934, “that said corporation had knowledge thereof at least as early as the early part of January, 1935,” and “that at all times subsequent to the organization of the said corporation said corporation knew that the plaintiff John W. Austin owned a portion of said lease”; and “that the defendant Charles H. Forward knew that said plaintiff owned an interest in the said leasehold property prior to the formation of either of said corporations, and had knowledge of said assignment and agreement at least as early as the early part of January, 1935, and that the defendant Reuben E. Harrison knew of the making of said agreement prior to any of the negotiations with any of the other defendants, and had knowledge of the making of said assignment at least as early as the early part of January, 1935”; that “Austin * * * did not make any secret or any profit in any capacity wherein he bore a fiduciary relationship”; that “the facts and circumstances of which the defendants are shown to have had notice and knowledge were sufficient to put a prudent man upon inquiry as to whether the plaintiff John W. Austin had an interest in said leasehold, and by prosecuting such inquiry,” they “might have learned and ascertained that he had such interest and the nature and extent thereof; and because of such facts and circumstances the court finds that the defendants had, in addition to the actual notice as hereinbefore found, constructive notice of said plaintiffs' said interest; that from the very nature of the proposition as first and subsequently submitted by John W. Austin, whereby he was to devote his personal services to the venture over a long period of time without any considerable investment on his part, constructive notice was thereby given that he had an independent interest in the proposed venture.”
It was then found that Austin agreed to subscribe for $2,500 of the capital stock of the corporation; that he had paid $1,300 thereon. Prior to March 21, 1935, one McFadden, a worker on an oil well outfit, gave Austin $1,000 to use for the benefit of the corporation in its drilling operations. Austin was authorized to procure, as consideration therefor, 100 shares of the stock of the corporation to be issued in Austin's name. The trial court so determined and found that this was done with the knowledge and approval of the corporation and of Forward and Harrison. The evidence sustains this finding. This sum represents $1,000 of the amount found to have been paid by Austin to the corporation in payment on his subscribed stock. The remaining portion found to have been paid into the corporation by Austin was accounted for as being erroneous overpayments by Austin from his personal funds on bills of the corporation, which erroneous overpayments were discovered in the final audit of the books of the corporation.
As a result of the accounting had before the trial court it was found that the net income from the leasehold, from 1934 to 1940, was $960,588.47; that the dividends on stock in the corporation for the same period amounted to $99.75 per share. The court then concluded and so adjudged that Austin “now is, and during all the times mentioned in the complaint herein was, the equitable owner of a twenty per cent (20%) interest in the leasehold described in the said complaint (i. e. entire leasehold), and in the net profits realized and to be realized therefrom, subject to the provisions of that certain agreement between John K. Porter and Hallmark Oil Company, Inc. * * *” and that the “Hallmark Oil Company holds the title to said lease as trustee for said John W. Austin to the extent of his aforesaid interest therein.” It gave judgment in favor of John W. Austin (being his 20 per cent interest) in the sum of $192,117.67, plus interest, “less the deduction therefrom of the sum of $1,200 hereinafter referred to. * * *” It was then concluded by the court that Austin was “entitled to have issued to him and in his name two certificates of the capital stock of the said corporation, one for ten shares, and one for 100 shares (which he apparently holds in trust for McFadden), the said certificates to be dated as of the date of the issuance of stock of the said corporation,” and ordered that dividends be paid thereon in the sum of $10,972.50, plus interest, totaling $12,910.43. The court also found that Austin was still obligated to pay to the corporation on account of the balance of the $2,500 worth of stock which he originally agreed to take, and ordered that the balance, i. e. $1,200, be paid, by “deducting the same from the amount to be recovered by said plaintiff” from the 20 per cent above mentioned as found owing to Austin under his assignment from Porter. The trial court then found that Helen P. Austin and Luethel Austin, as of the time of the original issue of stock, were entitled to ten shares each. Judgment for the amount of dividends thereon in the sum of $997.50 each was ordered, plus interest. The evidence clearly supports the conclusion that the last two mentioned respondents each paid $100 into and for the benefit of the corporation and that the appellants concurred or at least acquiesced in the agreement to issue stock to them as of the date found. Stock in the corporation was ordered issued accordingly. Appellants now appeal from this judgment and order.
Appellants claim that the findings and judgment are not supported by the evidence mainly in that (1) there is no evidence to support the finding that the defendants had knowledge of the so–called secret agreement or that Austin had any interest in the leasehold. As to the first question the evidence is confusing, vague and uncertain, and is by far an all–important question to be determined on this appeal. It has been uniformly held that associates in a common enterprise under whatever guise, have a duty to each other to make full disclosure of any preference or profit not common to all of the associates and a promoter of a corporation occupies a fiduciary relation to the subscribers and is bound to truthfully declare to his associates any personal interest that he has in the matter. Without such disclosure he cannot legally profit at the expense of his associates, and if he is guilty of any misrepresentation of facts or expression of truth in relation to his personal interest in the proposed transaction, the corporation is entitled to set aside the transaction or recover compensation for any loss which it has suffered. Munson v. Fishburn, 183 Cal. 206, 190 P. 808; Lomita Land & Water Co. v. Robinson, 154 Cal. 36, 97 P. 10, 18 L.R.A.,N.S., 1106. It has been repeatedly stated by the courts of this state that joint adventures are governed by the same rules as partnerships, and the joint adventurers owe the same duties to each other as do partners. Menefee v. Oxnam, 42 Cal.App. 81, 183 P. 379. That Austin occupied such a position can be established by the evidence and the court practically so found. It is alleged in plaintiffs' complaint that prior to the commencement of the drilling operations it was agreed between Austin and the defendants Forward and Harrison and Porter: (1) that this plaintiff should go to Bakersfield, California, and take charge of disbursements of moneys on said project; (2) that the said John K. Porter should devote his time to the physical drilling operations; and (3) that all moneys which might be secured from any source for the purpose of conducting the same drilling operations should be sent to this plaintiff and be by him disbursed and expended for such purpose.” The court found all of these allegations to be true and that the oral agreement took place before any corporation had been actually formed.
The so–called secret agreement between Porter and Austin was dated November 2, 1934. This assignment was made just three days after the execution of the agreement between Hallmark Oil Company and Porter. It was acknowledged on January 22, 1935, and not recorded until January 31, 1935. We find no written disclosure of this secret interest or assignment in any letters to appellants or otherwise until mention of it was made in the agreement with McGuire dated January 29, 1935. Austin testified that he thought he sent a copy of the McGuire agreement to Forward and Harrison. However, they both denied receiving it or having any knowledge of the claimed secret assignment until about February 27, 1935. They testified that they suspicioned Austin prior to that time but did not definitely know about the assignment or that Austin had not paid any sums into the corporation until an auditor employed by them discovered that fact, and that it was at that time they accused Austin of having such a secret agreement and that he neither denied nor admitted such an agreement. The voluminous accounts of correspondence between the parties rather indicates that there is much merit to appellants' testimony in this respect. However, a conflict has been created in the evidence because Austin testified that although he did not know the exact date, he did discuss the proposed method of leasing the property here involved with Harrison prior to the time Forward became interested in the deal. His testimony is as follows: “There were no definite arrangements any more than arrangements that I have already related here that we were willing to turn the lease into a corporation and that the corporation should get * * * the investors should get its money back with 7 per cent interest and then the balance of the proceeds or any further production of the lease should be divided fifty–fifty, 50 per cent. to the investors and 50 per cent. to Porter and myself.”
At a meeting held about September 22, 1934, in Los Angeles, Austin claims he again discussed these same arrangements with Harrison, at which time Forward was present as Harrison's personal attorney. Austin testified, however, that “the first I remember of telling Mr. Forward and Mr. Carroll of my interests with Mr. Porter was that meeting in the El Tejon Hotel, along in January (1935). * * * At the time we discussed the McGuire transaction. I don't recall any prior discussion.” However, he testified that he had previously informed Harrison. Appellants testified that this meeting at the hotel was in March, 1935. The McGuire agreement in which the so–called secret assignment was mentioned was dated January 28, 1935. Mr. Carroll, one of the original subscribers to stock in the corporation, testified in his deposition that on October 23, 1934, he advanced money toward the success of the corporation in pursuance of the original oral agreement had in the latter part of September, 1934, in which conversations Austin told him that “there was a fellow named John Porter who is a very good oil man and had worked for different companies out there. He said he was in with him on the lease * * *;” that at the meeting at the El Tejon Hotel the so–called secret interest of Austin was discussed. He testified that “there was something brought up about that and Forward told me, he says, do you know anything about Austin getting a cut–back, and I says no, and he says him and Porter, that is Austin and Porter, has an arrangement whereby he has a 25 per cent interest in Porter's interest.” At the trial this witness, however, contradicted most of this testimony.
Section 19 of the Civil Code provides: “Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact.”
Constructive notice may be a matter of general inference presumed in support of the judgment, or it may be an ultimate fact found by the trial court who, under the circumstances, is the best judge of what the actors at the time believed or ought to have believed, and then knew or ought to have known. Barthelmess v. Cavalier, 2 Cal.App.2d 477, 488, 38 P.2d 484; Grant v. Long, 33 Cal.App.2d 725, 92 P.2d 940. If a corporation has full means of knowledge by inquiry, its actual knowledge, like that of an individual under similar circumstances, is immaterial and it is also immaterial that the particular agent or officer did not have it.
The familiar rule that a principal is bound by the knowledge of his agent acquired in the course of his agency is applicable to corporations. These rules rest upon the presumption that the agent will communicate to the corporation the facts learned by him, as it is his duty to it, and whether he performs such duty or not, the corporation is bound. Irvine & Muir Lumber Co. v. Holmes, 26 Cal.App. 453, 147 P. 229; First National Finance Corp. v. Five–O Drilling Co., 209 Cal. 569, 289 P. 844; Vol. 6–A Cal.Jur. p. 1166, sec. 663. While the evidence in this case is not entirely satisfactory on the question of knowledge of Harrison or Carroll or the corporation, and particularly Forward, as to the so–called secret agreement, we are unable to hold, as a matter of law, even though the evidence might well support the contrary view, that it does not, in this respect, support the trial court's finding. Dunbar v. Redfield, 7 Cal.2d 515, 522, 61 P.2d 744; South Penn Collieries Co. v. Sproul, 3 Cir., 52 F.2d 557; Victor Oil Co. v. Drum, 184 Cal. 226, 232, 193 P. 243; Sanders v. Magill, 9 Cal.2d 145, 153, 70 P.2d 159.
The next question then presented is what interest Austin was and is entitled to have under the agreement and the evidence above recited. Austin was never made a party to the original lease nor does his interest appear anywhere therein. Any claimed interest he may have had in that lease could have been only the result of some oral agreement with Porter. Porter assigned all of his interest in and to the lease to the corporation with the apparent consent and approval of Austin. The only interest in the lease retained by Porter was by virtue of the written agreement dated October 30, 1934. This agreement specifically provided that if there was any failure of Porter to faithfully fulfill and perform the obligations to be performed by him the company would have the right to terminate all of his rights in the lease and thereafter he was to receive only 50 per cent of the proceeds to be thereafter received from the well or wells brought into production prior to the breach of his obligations after all payments had been made as provided in the agreement. By the assignment of 50 per cent of his interest to Austin, Austin acquired no greater interest in the lease than that held or retained by Porter, which interest would also be subject to the same conditions of breach and forfeiture. Western Oil & Refining Co. v. Venago Oil Corp., 218 Cal. 733, 738, 24 P.2d 971, 88 A.L.R. 1271. By the so–called secret assignment or agreement between Austin and Porter dated November 2, 1934, any prior oral agreement or arrangement must be considered as merged into the final written agreement between them. Civ.Code § 1625; Oakdale Mercantile Co. v. Baer, 128 Cal.App. 350, 354, 17 P.2d 779. The evidence conclusively shows this and it must be so held. Therefore, any right that Austin has must be measured by the written assignment and by the terms of the contract from which the proceeds were to come. Alpers v. Hunt, 86 Cal. 78, 90, 24 P. 846, 9 L.R.A. 483, 21 Am.St.Rep. 17; First National Bank v. Perris Irrigation District, 107 Cal. 55, 64, 40 P. 45; Suhr v. Metcalfe, 33 Cal.App. 59, 164 P. 407; Becker v. Highboy Coaster Trust, 112 Cal.App. 219, 296 P. 651. There can be no question but that Porter abandoned his contract with the company after well No. 1 was producing, and failed to furnish his personal services in drilling for or causing to be drilled any additional wells as provided for in the lease. The evidence is also clear that he contracted bills greatly in excess of the $18,000 provided for in the agreement, for which appellants became liable and which amount they paid as well as additional amounts to place the well upon a production basis. The lease mentioned in this contract provides that upon completion or abandonment of the first well, in order to keep the lease valid, the lessee shall, within sixty days after the completion, loss or abandonment, begin the actual drilling of another well and that four wells must be drilled with the same intervals between them; that in the event there is a failure to commence the drilling of any well within the times specified, that the lease shall ipso facto and without notice cease and terminate.
From an examination of the lease and the agreement there can be no question but that when Porter left the lease and failed and refused to proceed with the drilling of the second well he breached the terms of his agreement with the Hallmark Oil Company, Inc., and having breached the agreement and having been unable to perform, his rights were fixed accordingly. Porter then would have been entitled only to one–half of the proceeds from any well that had theretofore been brought into production. Porter's rights being thus fixed, there is no possibility, under any theory, of Austin acquiring any greater or other right than Porter was entitled to. The law is clear that Austin's rights must be measured by the rights of Porter.
The evidence is positive and uncontradicted that the only well started before Porter abandoned the contract and the leasehold was the first well known as well No. 1. In addition to the evidence on this subject there was a written abandonment signed by Porter which the trial court, for some reason, found was not entered into in good faith and for a consideration. This agreement recites that the company had performed all of its obligations under the agreement; that Porter was without funds to commence the drilling of a second well as provided in the lease; that the company was threatened with possible loss of its lease and well; that no money was available from the sale of oil or gas for use in drilling additional wells by Porter; that in order to mitigate any damage to the company he renounced all rights he might thereafter have under the agreement; it grants and quitclaims to the company any rights Porter had or which he may hereafter acquire or which may hereafter accrue to him to share in the income of wells hereafter completed, and he acknowledged his inability to meet the requirements of the agreement. This agreement was signed by Porter and the corporation on March 28, 1935. On March 12, 1935, the lessor wrote Forward granting the company an extension of fifteen days in which to start the drilling of the second well. Within that extended time the drilling of that well was commenced under the supervision of Forward. Porter had left the leased property and did no further drilling under the contract.
Under what evidence this agreement was found not to be entered into in good faith and for lack of consideration and was accordingly void, is not pointed out by respondents, and after an examination of the record we are unable to discover any supporting evidence for the finding. Appellants challenge respondents to point out such evidence but they have failed to do so. This duty falls upon respondent and not upon the appellate court. Wantz v. Union Bank & Trust Co., 137 Cal.App. 98, 29 P.2d 882, 31 P.2d 826. We must therefore hold that the evidence does not support the finding in this respect as to that agreement and quitclaim. The evidence itself, notwithstanding the agreement, clearly indicates an abandonment on the part of Porter. Rehart v. Klossner, 48 Cal.App.2d 40, 119 P.2d 145; Hall v. Augur, 82 Cal.App. 594, 256 P. 232.
The contention that notwithstanding Porter's failure to comply and his abandonment of his agreement the assignment of a portion of his interest in and to the oil and gas produced on the leasehold was an interest in real property and therefore could not be canceled by abandonment or violation of the contract on the part of Porter is untenable. La Laguna Ranch Co. v. Dodge, 18 Cal.2d 132, 114 P.2d 351, 135 A.L.R. 546; Dutton v. Interstate Investment Corp., 19 Cal.2d 65, 69, 119 P.2d 138; Phillips v. Bruce, 41 Cal.App.2d 404, 106 P.2d 922.
Plaintiffs alleged in their third amended complaint that Porter had assigned to Austin “one–half of all income, profits, monies and credits then or thereafter to become due or payable under the terms of the contract referred to * * *.” The court found this allegation to be true, but nevertheless awarded a 20 per cent interest in the entire leasehold and the net profits therefrom.
From what has already been said it is clear that Austin only acquired, by reason of the assignment, a 20 per cent interest in the profits of well No. 1; that the assignee, Austin, acquired no greater rights than his assignor, Porter, and that when Porter abandoned his contract and left the lease and failed to carry out the terms of his contract and even executed a written relinquishment and quitclaim of all his interest in the leasehold, the rights of the assignee were likewise terminated to the same extent. The most, therefore, that Austin could possibly take under his assignment, were the profits in well No. 1.
The assignment of the 25 per cent interest in the Porter contract, under the circumstances here related, did not constitute a sale of a security within the meaning of the Corporate Securities Act, Stats. 1933, p. 2308, chap. 898. In view of the findings, the entire transaction, in this respect, may have been considered as a preorganization agreement of which appellants had notice and participated. It is a fundamental maxim that “No one can take advantage of his own wrong.” § 3517, Civ. Code. This is but a recast of the doctrine abundantly supported by authorities and applied in cases similar to this one. See Julian v. Schwartz, 16 Cal.App.2d 310, 322, 60 P.2d 887; Pollak v. Staunton, 210 Cal. 656, 293 P. 26; Michell v. Grass Valley Gold Mines Co., 206 Cal. 609, 275 P. 418; Braunstein v. Title Guarantee & Trust Co., 216 Cal. 780, 17 P.2d 104; Security–First National Bank v. J. C. Ruddle Properties, Inc., 218 Cal. 435, 23 P.2d 1016; Western Oil & Refining Co. v. Venago Oil Corp., supra; Hale v. Harbor Petroleum Corp., 139 Cal.App. 455, 33 P.2d 1039; Staples v. Leidecker, 216 Cal. 604, 15 P.2d 514. Appellants cannot rightfully claim the benefits of a 5 per cent interest assignment of the Austin agreement under the McGuire purchase, and then also claim Austin's agreement void in its entirety. We are therefore of the opinion that under the circumstances the defense that no permit was given to assign the proportionate interest of Porter to Austin cannot avail appellants.
Many other arguments are presented and cases cited insisting that respondents have no place or standing in court because they did not come into court with clean hands. The trial court's finding in this respect was not in favor of appellants. We cannot hold otherwise as a matter of law.
We next approach the last finding complained of, i. e., that respondent Austin is entitled to have 2,500 shares of stock of the corporation issued to him by virtue of his subscription. The evidence is clear that Austin paid $1,000 to the corporation for its benefit. These funds were apparently held in trust by him to be invested for the benefit of McFadden. Stock should have been issued to Austin in this amount. The question of any trust agreement in relation thereto is a matter purely between the trustor and trustee of the stock. The evidence in respect to the accounting might support the fact that an additional $300 was paid in to the corporation by Austin from his private funds, even though one of the auditors reported that Austin failed to account for nearly $1,800 of the funds turned over to him. The trial court's findings in respect to the amount of stock available to Austin are ambiguous and hopelessly in conflict with the judgment and conclusions of law reached by the trial court, and we are unable to determine which finding the court intended to follow to support its judgment and conclusions. Although neither appellants nor respondents have raised the point, the mathematical calculations in respect to the amount of stock Austin is entitled to receive and the amount remaining due thereon must be in error. We have endeavored to analyze and harmonize the findings and judgment without avail. The trial judge in a memoranda opinion stated that “Austin did agree, at some time during the proceedings, to put up or invest $2,500, and he must pay in enough to make up that sum or amount on any settlement; * * * McFadden's $1,000 should be recognized with stock to Austin. How he and McFadden deal with this is their own affair. Perhaps this may be part of the $2,500 he was to invest; if so, with his $300 he would have $1,200 to put up; otherwise $1,500.” Then in finding XLVI it was specifically found that “* * * Austin agreed with the said Hallmark Oil Company, Inc., its officers and agents, to subscribe for $2,500 worth of the capital stock of the said corporation at the par value thereof * * * that he has paid said corporation only the sum of $1,300 on account thereof * * *.” In finding XIII it is found to the contrary, that is, “that it is not true that the said stock was issued in consideration of the sum of $300 theretofore paid to the said corporation by the said plaintiff. The court finds, however, that $100 of the said sum had been theretofore paid said corporation by said plaintiff, and that said stock was duly and regularly issued only to the extent of 10 shares thereof.” The judgment then orders the appellant corporation to issue to Austin “* * * three certificates of its capital stock as follows: one for ten shares to be dated as of the date of the first issuance of stock by said corporation; one for 100 shares to be dated the same date; and one for 120 shares to be dated as of the date of the entry of judgment herein.” According to our calculations this amounts to 230 shares or $2,300 in stock in all. The conclusions of law recite that Austin is obligated to pay $1,200 balance due on the $2,500 worth of stock which he agreed to purchase. If Austin paid in $1,100 on his total subscription of $2,500 it appears to us there would be $1,400 remaining due thereon and he would be entitled to 140 more shares. If he has paid in $1,300, he would be entitled to have issued as of that date 130 shares rather than 110 shares as indicated in the judgment.
The trial court should correct and clarify the findings in this respect and enter judgment accordingly. The judgment in favor of John W. Austin finding that he is entitled to a 20 per cent interest in the entire leasehold and in the net profits realized and to be realized thereon should be reversed and the trial court ordered to make findings and enter judgment not inconsistent with the conclusions here reached.
We therefore hold that that portion of the judgment awarding John W. Austin a 20 per cent interest in the entire leasehold and in the net profits realized and to be realized thereon is reversed and the trial court is directed to take further evidence, if necessary on the question of the net amount due appellant John W. Austin from well No. 1 only, make findings and enter judgment in an amount supported by the evidence and in accordance with the agreement between Hallmark Oil Company and John K. Porter dated October 30, 1934, as modified, and the conclusions here reached. The portion of the judgment ordering the appellant corporation to issue to John W. Austin as part of his $2,500 subscription of capital stock, 100 shares at the par value of $10 per share, totaling $1,000, and that portion of the judgment holding that he is entitled to have issued to him 10 shares at $10 per share, totaling $100 are affirmed. That portion of the judgment fixing the amount of stock yet available to Austin on the total subscription of 250 shares and fixing the balance due thereon is reversed and the trial court is directed to make findings and enter judgment in accordance with the evidence produced, and then allow John W. Austin a reasonable time after the judgment of the trial court becomes final in which to pay for the balance of stock to which he is found to be entitled. The judgment in favor of Helen P. Austin and Luethel Austin is affirmed. Respondents Helen P. Austin and Luethel Austin to recover their costs. Neither respondent John W. Austin nor appellants to recover costs.
BARNARD, P. J., and MARKS, J., concurred.