Reset A A Font size: Print

District Court of Appeal, Second District, Division 1, California.


Civ. 8764.

Decided: February 20, 1935

E. T. Young, of Los Angeles, for appellant Durex System, Limited. Julius V. Patrosso, of Los Angeles, for respondent.

Durex System, Limited, a corporation, appeals from a judgment rendered against it in an action brought on its guarantees of three promissory notes originally secured by deeds of trust.

Metropolitan Capital Corporation, formerly known as Metropolitan Guaranty Corporation, during the time of the transactions in controversy owned stock in the Security Building & Loan Association and some of its officers had an executory contract for the purchase of 1,200 additional shares. These with what the Metropolitan Corporation owned constituted a controlling interest. C. T. Owen was vice president of the Metropolitan Corporation and president of the building and loan association. M. M. Hurford was vice president of the building and loan association and an officer and director of the Metropolitan Corporation.

In April, 1930, one H. C. Von Stein entered into a contract with the Metropolitan Corporation under which he agreed to incorporate Durex System, Limited, to engage in the business of constructing buildings. It was provided that stock in the Durex corporation amounting to a controlling interest was to be issued to the Metropolitan Corporation in consideration of its agreement to advance to the former money with which to carry on its business. The corporation was thereafter organized and at the time of the transactions in question had as officers Owen, second vice president; Von Stein, vice president and general manager; and Hurford, secretary. Its stock, although subscribed for, was never actually issued.

The agreement of the Metropolitan Corporation was to provide money for salaries, advertising, operating expenses, and other incidental items for nine months after the organization of Durex corporation. These advances were not to be a capital investment, but were to be repaid before any dividends were declared. The apparent understanding was that, in addition to providing money for expenses, Metropolitan Corporation was to finance the building operations of Durex corporation. The contract does not contain any provision to this effect, but there is a stipulation that Metropolitan Corporation was to be paid 5 per cent. of each building contract to cover financing charges.

The three corporations had offices in the same rooms and Owen is described as the dominating character of all three. Apparently, he directed the officers of each corporation. The extent to which this was done is indicated by the testimony of Hurford that he did not know whether he was secretary or treasurer of the Metropolitan Corporation in addition to being a director; that he signed the minutes of directors' meetings of Durex corporation as Owen prepared them; that Owen often brought him various papers to sign as an officer of one corporation or the other; and that he always did so without question.

Shortly after the organization of the Durex corporation, it obtained a contract to erect a building for Anna L. Seibert. This building was financed with her note for $24,000, secured by a deed of trust which was a first lien, and three notes made by her, two for $2,500 each and one for $9,667, all three being secured by a deed of trust which was a second lien. All of the notes were dated May 21, 1930, and were payable to the Durex corporation. These notes, according to Von Stein, were turned over by him to Gates and Owen of the Metropolitan Corporation for safe-keeping for the Durex corporation. They were thereafter passed on to the plaintiff in transactions manipulated by Owen under circumstances in which much is left to inference.

The three notes originally secured by the second trust deed and sued upon in this case each bear the following: “Los Angeles, Cal., Sept. 4, 1930. For value received we hereby assign and transfer to the Metropolitan Capital Corporation the within trust deed note together with all rights accrued or to accrue by virtue of deed of trust securing said note and do hereby guarantee payment of principal and interest and waive demand protest and notice of protest covering said note. Durex System, Ltd., C. T. Owen, Vice-President, M. M. Hurford, Secretary. (Seal.)” Plaintiff, to whom the notes were thereafter transferred by the Metropolitan Corporation, brings its action upon these contracts of guaranty.

Hurford's remembrance of the execution of the guarantees was exceedingly hazy. He remembered having signed them at Owen's request. He was the secretary of the Durex corporation and was charged with responsibility for the seal, but Owen kept it. He had no recollection of affixing the corporate seal to the notes, but expected Owen to affix the seal to any papers where it was necessary. He did not know of any consideration received by the Durex corporation for the assignments or the guarantees, nor the purpose of the transfers and he never heard the subject of the notes discussed. The minute book of the Durex corporation contains no resolution authorizing or ratifying the assignments or guarantees or any mention of them whatever until a later contract was made.

During construction of the Seibert building, money was advanced to the Durex corporation by the Metropolitan Corporation. Von Stein, who was general manager of the Durex corporation, testified that he received it “as the building progressed as usual”; that the contract of the Metropolitan Corporation provided for financing the job through advancing money for construction; and that he understood that they had capital sufficient to do this. According to him, notes and deeds of trust received by the Durex corporation from its customers were to be used by the Metropolitan Corporation after the completion of the buildings.

The books of the Metropolitan Corporation show that on September 3, 1930, it had advanced to the Durex corporation amounts aggregating $30,000, most or all of which was undoubtedly for paying the cost of construction of the Seibert building. On September 4th its books show the Durex corporation credited with $38,367 on account of the transfer to it of the four Seibert notes. This represents their face value less $300 which is immaterial here. No mention is made in the books of the Metropolitan Corporation of any guaranty of the notes, nor was any contingent liability set up in connection with them.

According to Von Stein, nothing was ever said to him by any one on the subject of transferring the notes and trust deed. The first time he knew that the notes had been transferred or attempted to be transferred was some months later when a settlement of the affairs of the Metropolitan Corporation and the Durex corporation was worked out. In a contract executed by the two corporations in March, 1931, for the purpose of adjusting their accounts, Durex corporation assigned and delivered to Metropolitan Corporation “all right, title and interest which it now has or may hereafter at any time have in and to a second trust deed made, executed and delivered by Anna L. Seibert.” No mention of any guaranty is made in this contract, nor is any previous transfer of the notes referred to. At that time, Von Stein testified, he thought all three notes sued upon were still in the possession of the Durex corporation.

Appellant claims that this evidence is insufficient to justify the decision and findings of the trial court, and that the findings and decision and the judgment based thereon are against law. The principal point raised is that the evidence does not show any contract of guaranty which binds the Durex corporation.

This is not the usual case where the acts of an officer or agent of a corporation are challenged. Here Owen was acting for all three corporations. They were all managed and controlled by him. He apparently passed the notes from one to the other without consulting any other officer of either corporation. He assumed to act with the property of the three corporations as he would have done if he had been the individual owner of them.

While it is true that the corporate seal on each of the three guarantees is prima facie evidence that they were executed by authority of the corporation, the defendant fully met the burden of proof which thereupon shifted to it. The Durex corporation had five directors at the time. There is no evidence that any director other than Owen and Hurford ever knew anything about the transaction. All Hurford knew of it was that Owen told him to sign and he did so. There is here no conflict between the presumption of regularity and the evidence. All of the material facts stand practically undisputed. The case of Gray v. Fred B. Neuhoff Co., 124 Cal. App. 567, 12 P.(2d) 1036, so strongly relied upon by respondent does not, therefore, apply.

The authority of an agent or officer to act for a corporation may be proven by evidence other than the minutes of its board of directors or by a contract in writing. Davis v. Pacific Studios Corp., 84 Cal. App. 611, 258 P. 440. But such proof must be of acts or conduct showing that the corporation itself, by direction of its directors individually if not in formal meeting, or by giving one of the officers authority to negotiate and act for the corporation, or in some other way, authorized the particular act to be done. Where authorization is shown, courts will not demand formal record of such authorization. But this rule cannot aid the respondent in the face of the evidence that the corporation never directed the act to be done, or conferred upon Owen any general authority under which he could have acted in this particular case.

The by-laws of Durex corporation provided: “The Board of Directors, except as in these By-Laws otherwise provided, may authorize any officers, officer or agent or agents of the Corporation to enter into any contract or execute and deliver any instrument in the name and on behalf of the corporation, and such authority may be general or confined to specific instances, and, unless so authorized by the Board of Directors, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable pecuniarily for any purpose or to any amount.” There is no evidence that either Owen or Hurford ever executed any other instruments without express authorization except the assignment of the first trust deed note of $24,000. The assignments of the four notes were all parts of the same transaction, although it does not appear that the assignment of the first note included a guaranty. No course of dealing between the parties is shown. The Seibert deal must have been about the first business undertaken by the Durex corporation after its organization and before any business practice had been established. “It is well settled that a corporation is not bound by any act or acts of its officers or employees unless they are by the corporation vested with general authority to transact any and all of the business falling within the scope of its corporate purposes, or vested with special authority, through formal action of its board of directors, to do some particular act within the limits of its charter powers, or unless the corporation has held such officers or employees out to the public as possessing authority to act for it according to the general usage, practice, and course of its business.” Title G. & T. Co. v. Hammond Lbr. Co., 62 Cal. App. 245, 254, 216 P. 953, 957.

It is urged that Owen and Hurford had ostensible authority to execute the contract. But to be bound by the rule of ostensible authority, the corporation must hold out to the world as its agents persons apparently clothed with power to transact its ordinary business. When it does so, third parties will not be permitted to suffer from the acts of such agents by the corporation's attempted defense that the ostensible authority was not in fact conferred. Newton v. Johnston Organ, etc., Mfg. Co., 180 Cal. 185, 180 P. 7. Under this rule there must be a more or less habitual course of conduct of the officer or agent and acquiescence by the corporation in his acts. Where there is no knowledge that an officer or agent is presuming to act for it, without authority so to do, the corporation cannot be bound by one isolated transaction of which it had no information at any time.

The building and loan association can hardly be said to be a third person in the ordinary legal use of that term. Owens and Hurford were each an officer in all three corporations. If Owen and Hurford, as officers of Durex corporation, were held out by that corporation as possessing certain authority, then Owen and Hurford, as officers of the building and loan association, knew the extent of their authority. The rule of ostensible authority is only extended for the benefit of persons dealing with the corporation's agent in good faith and in ignorance of any limitations on his authority. Davis v. Pacific Studios Corp., supra. Under the facts in this case, the contracts sued upon cannot be upheld upon the ground that the guarantees were executed with ostensible authority.

Counsel urges on the authority of Utah Const. Co. v. Western Pac. Ry. Co., 174 Cal. 156, 162 P. 631, that the knowledge of Owen or Hurford, as officers of the building and loan association, was not knowledge of the corporation. The knowledge of the officer in the case cited was held not imputable to the corporation on the ground that knowledge of the agent is only knowledge to the principal in matters which are within the agent's authority to act. In later cases the rule has not been limited so strictly. In the case of Jan Wai v. Smith-Riddell Co., 55 Cal. App. 59, 63, 202 P. 952, 954, the court said: “Appellant contends that–There is no ‘evidence to show that F. H. Smith was the agent of defendant, or that he had any power to bind appellant in any manner whatever.’ It must be kept in mind that this is not the ordinary case of simple agency, but that Smith was president of the defendant corporation, and, in so far as the evidence discloses, was in the active management of its affairs. * * * He, of course, had full knowledge of his agreement with plaintiffs. Being president of the corporation, his knowledge was equally the knowledge of the corporation. In Balfour v. Fresno Canal, etc., Co., 123 Cal. 395, 397, 55 P. 1062, it is said: ‘The president of a corporation is a proper person to whom notice, which is to affect a corporation, is to be given. The corporation has no eyes, ears, or understanding save through its agents. The president is considered the head of the corporation, and it is his duty to report to the trustees information affecting the interests of the corporation. And the presumption is that he does so. Usually this is a conclusive presumption. * * * Corporations can only be reached through their agents; it behooves them to be especially careful in regard to the conduct of their agents. In no other way can knowledge be conveyed to the fictitious entity, or negotiations be had with it. It is not usual for parties dealing with a corporation to be brought before the directors to negotiate their contracts.’ See, also, Lowe v. Yolo County, etc., Water Co., 157 Cal. 503, 513, 108 P. 297; Swartz v. Burr [43 Cal. App. 442], 185 P. 411.” See, also, Davis v. Pacific Studios, supra. Under either statement of the rule, if either Owen or Hurford had authority to accept the notes for the building and loan association, the knowledge of either one of them that the guarantees had been executed without any authority is imputed to that corporation.

Respondent further contends that as the Durex corporation received and retained the benefits of the transaction, it cannot repudiate liability and escape the burdens upon the ground that the transaction was not authorized. But what benefits did the Durex corporation receive?

According to the evidence, some time prior to the execution of the guarantees, the Metropolitan Corporation had advanced money to the Durex corporation. Even if it was not obligated to do this under its contract, the advances had been made prior to the transfer of the notes. There is no evidence that the Durex corporation received the money under any agreement express or implied that it was to furnish any security for the indebtedness, nor transfer in payment or otherwise any trust deeds which it had theretofore taken for the Seibert job. The contract of the parties provides that Durex corporation was to keep its own paper and collect the payments thereon. Under such circumstances, defendant is not estopped from asserting the invalidity of the unauthorized transfers and guarantees.

The evidence is insufficient to sustain the judgment. Judgment reversed.

EDMONDS, Justice pro tem.

I concur: CONREY, P. J. I concur in the judgment: HOUSER, J.

Copied to clipboard