PACIFIC STATES SAVINGS LOAN CO v. HISE BUILDING AND LOAN COM STATE GUARANTY CORPORATION INTERVENER

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

PACIFIC STATES SAVINGS & LOAN CO. v. HISE, BUILDING AND LOAN COM'R (STATE GUARANTY CORPORATION, INTERVENER).

Civ. 12349.

Decided: March 03, 1944

Hanna & Morton and John L. Mace, both of Los Angeles, John L. McNab, of San Francisco, and Leon B. Brown, of Los Angeles, for appellants. Robert W. Kenny, Atty Gen., and John J. Dailey, Deputy Atty Gen., for respondent.

The appeals herein involve questions of the justification of a seizure by the Building and Loan Commissioner of the State of California of the property of Pacific States Savings and Loan Company, a corporation, Building and Loan Act, sec. 13.11; Stats. 1931, pp. 483–539, and the judgment of dismissal which in effect means liquidation.

The main appeals are by State Guaranty Corporation, intervenor, and Pacific States Savings and Loan Company from a judgment made and entered on December 29, 1941. Several changes occurred in the office of Building and Loan Commissioner and substitutions have been duly noted and filed. Ralph W. Evans, the commissioner in charge at the time of the seizure, consented to a substitution on or about May 8, 1942.

The names of several other corporations closely allied with Pacific States Savings and Loan Company, hereinafter referred to as Pacific States, appear throughout the proceedings. Pacific States was incorporated as a building and loan association in 1889 and from that time until the date of its seizure continued to do business as such. State Guaranty Corporation, hereinafter referred to as State Guaranty was incorporated in 1927 and shortly thereafter acquired all of the guarantee capital stock of Pacific States. A majority of the stock of the State Guaranty appears to be owned by the general public. State Guaranty Auxiliary Corporation, referred to hereinafter as Guaranty Auxiliary, at the time of the seizure owned a large block of the stock of the State Guaranty. All of the outstanding stock of another allied corporation, the Pacific States Auxiliary Corporation, referred to herein as States Auxiliary, has since the date of its incorporation been held by State Guaranty. Robert S. Odell, whom we will refer to as Odell, became president of Pacific States in 1928, subsequent to the incorporation of the other companies, and has been its president ever since. It is respondent's contention that so far as voting is concerned, the “Odell group” directly or through proxies controls all of the corporations.

Pacific States and States Auxiliary are operating companies. State Guaranty and Guaranty Auxiliary are holding companies. The theory of the commissioner seems to be that Pacific States, with the connivance of Pacific Auxiliary, intended to freeze out its own investing certificate holders, and hoped to form a large real estate holding company. Whatever may be the purpose of the holding and operating corporations, respondent states, and it is borne out by the evidence, that “The record does not contain any evidence showing that Odell or any other officer or director of any of the allied corporations profited directly from the transactions referred to.” It is, however, suggested that there was the “hope of very substantial profits.” The record shows that whatever profit might accrue would be to the advantage of the stockholders. The majority of the stock of State Guaranty was held by the public so that as far as stock is concerned the general public stockholders would have benefitted to a greater extent than Odell or his associates. While the Pacific Auxiliary was incorporated in 1927, no capital stock was issued until 1929 when the corporation became active. It was organized to purchase real estate, foreclosed by Pacific States, on a ten per cent down payment and monthly installments, and to dispose of the same. It also acted as trustee in Pacific States foreclosures and as transfer and escrow agent. Appellants contend that at that time it was good practice to have a separate corporation which could deal with such properties as a private company.

While Pacific States was incorporated in 1889 and has continued in business since that date, the other corporations were organized some thirty–five or forty years thereafter. The trial court adopted the alter ego theory as to at least three of the corporations. Since the operating companies are Pacific States and States Auxiliary, it is their transactions which are the particular subject of examination herein.

At the end of the year 1929 Pacific States was in good financial condition. It had assets in excess of $53,000,000, of which nearly $7,000,000 were in cash and government bonds and $46,000,000 in mortgage loans on real estate. It had a large capital surplus and undivided profits, substantial holdings in real estate, and there were no unpaid withdrawal notices on file and no indebtedness due banks. The depression which followed caused real estate holdings in large numbers to be forced upon the company through surrender and foreclosure. There was little or no call for properties for sale or rental, and the combined expense of maintenance of 3,870 pieces of vacant and widely scattered small properties which had been so taken over by Pacific States up to December, 1933, and loss through vandalism, was very heavy. Further, by reason of the severity of the depression borrowers failed to pay loans, investors were unable or unwilling to invest in building and loan associations and many of the old investors demanded withdrawal.

In the meantime, in 1931 Fidelity Savings and Loan Association of Los Angeles, referred to herein as Fidelity, having become involved in financial difficulties and being unable to meet its withdrawals, the then building and loan commissioner served notice that he would take over the company unless it consolidated with some other building and loan association. Banking institutions and the commissioner persuaded Pacific States to take over Fidelity, and thereafter its obligations became quite a drain on Pacific States. On the deal, Pacific States took over assets (no cash or liquid assets) of the value of about $40,000,000, issued definite term certificates in excess of $24,000,000 and assumed liabilities in excess of $13,000,000.

In 1931 the outstanding investment certificate liability of Pacific States was approximately $91,000,000, which through careful management was reduced over a period of years to $46,000,000.

Pacific States was faced with the problem of disposing of the large volume of realty it had taken in on foreclosure. The market was such that the real estate for the most part could not be sold for the amount due upon the loans plus foreclosure expenses. If a parcel was sold for less than the amount owing, the books of Pacific States would reflect a loss. But if such property could be transferred at its cost to Pacific States in exchange for its investment certificates at their face value, and the certificates then be cancelled, there would be no such loss, and if certificates of a face value of $5,500 were received for a piece of property carried at a value of $5,000 there would be a profit of $500.

Due in part to the “depression,” States Auxiliary became unable to pay the taxes, monthly payments, etc., on properties it had taken over from Pacific States, whereupon it re–transferred such holdings of realty to Pacific States, and thereafter, as escrow and transfer agent, it participated in investment certificate transactions whereby a market for certificates held by those in immediate need of cash was created at prices varying according to the demands and certificates available, which certificates were turned over by it to Pacific States at face value in exchange for property purchased by investors in many instances at substantial discount. Throughout the transactions, States Auxiliary, originally financed by State Guaranty, made no profit, and the transactions worked to the ultimate advantage of certificate holders who desired to continue with the company and protect their investments.

On March 4, 1939 the commissioner, purporting to act under section 13.11 of the Building and Loan Association Act, suddenly took possession of the property, business and assets of Pacific States, excluded its executive officers from its operation and premises and placed a custodian in charge. Sec. 13.13. On the first day available, Pacific States, as an alleged aggrieved party, challenged the right of seizure, and prayed the superior court to enjoin the commissioner from further proceedings and that the business, assets, etc. be surrendered to the company. Sec. 13.12. Section 13.11 provides: “If the commissioner as the result of any examination or from any report made to him or to any association doing business in this state or its investors or any thereof, shall find that such association is violating the provisions of its articles of incorporation or charter or by–laws or any law of this state, or is conducting its business in an unsafe or injurious manner, he may by an order addressed to such association direct a discontinuance of such violations or unsafe or injurious practices and a conformity with all the requirements of law; and if such association shall not comply with such order within the time specified therein, or if it shall appear to the commissioner that any association is in an unsafe condition or is conducting its business in an unsafe or injurious manner such as to render its further proceeding hazardous to the public or to any or all of its investors, or if he shall find that its assets are impaired to such an extent that, after deducting all liabilities other than to its investors they do not equal or exceed the sum of the value of its outstanding shares and investment certificates and the par value of its outstanding stock, or if any association shall refuse to submit its books, papers and accounts to the inspection of the commissioner or any of his examiners, deputies or assistants, or if any officer thereof shall refuse to be examined upon oath concerning the affairs of such association, then the commissioner may forthwith demand and take possession of the property, business and assets of such association and retain such possession until such association shall with the consent of the commissioner resume business, or until its affairs be liquidated. Such association may, with the consent of the commissioner, resume business upon such conditions as may be approved by him.”

Except for short continuances and a longer one to permit certain exhibits to be introduced in a criminal proceeding involving the same subject matter in another county, the trial of the case lasted for a period of over two years. Judgment was rendered in favor of the commissioner. The transcript of evidence comprises in excess of 26,000 pages. An opening brief of over five hundred pages was followed by respondent's brief and a supplement thereto of more than four hundred fifty pages, which was followed by appellants' closing brief of two hundred seventy–eight pages exclusive of an appendix.

The commissioner presents numerous facts and assigns many reasons for the seizure, in justification whereof it is not necessary to pass upon all of the alleged grounds if any one is technically sufficient. Among the grounds relied upon appears the fact that certain papers, which appellant claims were not a part of the records of the company, were not delivered upon demand of the commissioner. It appears in fact that such records had been destroyed after demand for their inspection. It is not a defense on the part of the company to say that the papers contained in great part data relative to obsolete cases, or that the same or similar data could be obtained from oher records. If the papers were actually used in the conduct of the business, as they were, the commissioner had a right upon refusal of inspection to make the seizure. In view of this determination, it will not be necessary to discuss the merits of any other alleged ground for the seizure and we expressly do not at this time pass upon justification thereof upon other stated grounds. Some of them will be mentioned as connected with other points on appeal.

There is a great deal of difference between the right of seizure and the subsequent right of liquidation. Seizure is an integral part of the process of liquidation. Evans v. Superior Court, 14 Cal.2d 563, 96 P.2d 107; Yager v. Superior Court, 139 Cal.App. 84, 33 P.2d 451. In Evans v. Superior Court, 20 Cal.2d 186, 189, 124 P.2d 820, 822, the court said: “True, it may develop that liquidation will not follow, but that consequences does not alter the obvious fact that under the act possession is a prerequisite to liquidation and must be deemed to be the first step in that process. Since it is such a prerequisite it should be considered as part of the process of liquidation in a case when an injunction proceeding has been commenced.”

The complaint charges that the commissioner intended to liquidate the association. The commissioner answered by general denial and this was the main issue on the trial. The order of dismissal was a determination of the issue of liquidation after the commissioner filed a notice of intention to liquidate. If the only issue had been the right of seizure this proceeding could have been concluded in two days instead of two years. The notice of intention to liquidate was given approximately a year and a half before judgment. The commissioner has never renounced his intention to liquidate.

The evidence introduced was primarily for the purpose of showing grounds for liquidation. The Supreme Court of this state has recognized that liquidation is in process in this case. In Trede v. Superior Court, 21 Cal.2d 630, at pages 634 and 632, respectively, 134 P.2d 745, at pages 747, 746, referring to the present proceedings the court said: “In the Building and Loan Association Act, supra, the state has not authorized the commissioner to liquidate the assets of an association without an opportunity to review his determination concerning the institution's solvency [of] or its failure to comply with particular statutory requirements. * * * As an incident of such a suit, the right of the commissioner to liquidate the association's assets is delayed until there has been a determination of the issues concerning solvency or compliance with statutory requirements.” “No order restricting the commissioner's action pending appeal has been made by the superior court, and he is proceeding to liquidate the Pacific States' assets.”

In Hise v. Superior Court, 21 Cal.2d 614, 630, 134 P.2d 748, 756, referring to the same commissioner, the same court and the same proceeding, the Supreme Court, recognizing that the trial court was taking part in the liquidation, said: “It must be expected that the commissioner will perform his duties and that the court which is supervising the liquidation will be quick to protect the rights of all concerned in the event there is any deviation from statutory requirements.”

If respondent's position that the only issue before the court is “seizure” is correct, and that if that issue is determined in favor of the commissioner liquidation is a matter entirely within his discretion and outside of the jurisdiction of the court, then we are faced factually with the following problem: The commissioner in the present case is liquidating under the supervision of the court. If the court finds from the bids submitted for various parcels of property that values have increased to such an extent that there is no impairment, may the commissioner persist in liquidation? “The merits,” as used in the act, means that in justice to both sides the matter should be determined on all of the issues, including liquidation when that becomes an issue, as in this case upon the filing by the commissioner of a notice of intention to liquidate. “Upon taking possession of the business,” sec. 13.13, and retaining “such possession,” sec. 13.11, the commissioner may permit a resumption of business upon conditions outlined by him, but after injunction proceedings heard upon “the merits,” sec. 13.12, there is no provision for resumption of business. Irrespective of the findings and conclusions with reference to a resumption of business, the judgment, which denied all injunctive relief prayed for, directs a dismissal. The only course the commissioner may pursue is liquidation, which in fact is proceeding.

Under the terms of the act wide latitude is given the commissioner falling short, however, of authority to finally determine the judgment in a court proceeding under section 13.12. It is necessary before articles of incorporation of a proposed building and loan association are filed with the secretary of state that approval be obtained from the commissioner. Sec. 2.04. After incorporation, but prior to transacting business, the issuance of a license rests with the commissioner, sec. 12.02, and, except in the case of delinquent stock no such association shall sell or issue any of its stock without a permit from him.

In carrying out its purpose, namely, the protection of the certificate holders, stockholders and the public generally, in the conduct of the business of building and loan associations, the act should be liberally construed. Evans v. Superior Court, 14 Cal.2d 563, 96 P.2d 107; Evans v. Superior Court, 20 Cal.2d 186, 124 P.2d 820. In the Evans case, 14 Cal.2d 563, 573, 574, 96 P.2d 107, 113, the court said: “As was said in Richardson v. Superior Court, 138 Cal.App. 389, at page 394, 32 P.2d 405, at page 407, ‘While it thus appears that the authority of the commissioner over the property and business affairs of the association when in his custody is subject to certain prescribed judicial review and control, the principal characteristics of his position as administrator are those of a public officer charged with a statutory duty which, for reasons of public policy, has been made to include a trust in private property.’ * * * and in Re Union Building & Loan Association, 16 Cal.App.2d 301, 60 P.2d 562, his status was compared to that of a guardian. * * * but it is equally clear that he does acquire a new status and that his powers and duties must be considered in the light of such status as the trustee of such private trust. Carpenter v. Pacific Mutual Life Ins. Co., 10 Cal.2d 307, 74 P.2d 761.”

It was not the intent of the legislature that a company should be liquidated unless all reasonable efforts had been exhausted to preserve the interests of the certificate holders, for such liquidation generally means a loss to them. The acts of the commissioner should be carefully scrutinized. This is demonstrated by the added powers granted the commissioner for the purpose of safeguarding the interests of the company, authorizing him, upon discovery of impairment of assets or neglect to conform to the provisions of the articles of incorporation, charter or by–laws or the law of the state or the rules promulgated by him for the conduct of business, to issue a “cease and desist” order, to put an end to the practices and questionable methods. Sec. 13.11. In the event of a deficiency of assets the commissioner may require that such deficiency be made good within sixty days. Sec. 7.06. During such period the company may levy an assessment against its stockholders. In the event of neglect or refusal to pay the assessment the stock may, after notice, be sold at public auction. The commissioner or a receiver “appointed by any court” may take possession of the property of the association for the purpose of carrying into effect the provisions of the section 7.06. In addition “The commissioner is authorized and empowered after due notice and hearing to revoke, or to suspend for such period as he shall determine, the license of any association the solvency whereof shall have become imperiled by losses or irregularities or which shall have wilfully violated any of the provisions of this act.” Sec. 12.02. The commissioner without resort to the provisions of the above sections may seize and liquidate unless the company asserts its rights under section 13.12. From the above it is apparent that the advisability of liquidation and the steps leading thereto should be carefully considered, always with a view to protecting primarily the investors.

The evidence may be considered in connection with the findings, which contain over a hundred paragraphs. The majority are attacked by appellants. On appeal respondent dismisses the attacks with the statement that most of the criticized findings “are proper findings of ultimate fact” and “such findings find ample support in the record.” Respondent's theory is that no particular action pursued by the company authorized the seizure, but that the company was unsafe and impaired, and that this condition resulted from a series of improper actions. Under the circumstances we feel justified in considering a few designated findings, and the rest generally or in group form.

One of the vital questions in determining the sufficiency of the evidence and the findings is whether the taking of possession and subsequent liquidation must be based upon facts and conditions existing at the time of the seizure or whether prior alleged violations of the law, diversion of assets and funds, failure to maintain necessary reserves and inability to pay debts––all of which respondent claims to have existed for some eight years or more––may be made the basis for upholding the findings and a judgment resulting in possible liquidation. The answer is that under the provisions of the statute, if the company is “unsafe” to the extent of rendering “further proceeding hazardous to the public or to any or all of its investors” or “its assets are impaired,” sec. 13.11––note that this is all in the present tense and refers to the approximate date of seizure––the commissioner is given authority to act.

The factual matters may be divided into specific periods; the emergency period, from 1933 to 1937, and that from 1937 to the date of the seizure. The last transaction in which certificates were accepted in payments of loans was in 1937; the last transaction in which bonds were exchanged for certificates in the same year; the last transaction in which real estate was exchanged for certificates was in 1936. As a matter of fact some of the evidence pertains to, and some of the findings in whole or in part refer to, direct or indirect actions by the company specifically permitted from 1933 to 1937 as “emergency” measures. Stats.1933, p. 313; Stats.1935, p. 1504. Amendments clarifying and assisting in interpretation, and in defining applicability of the act, appear in Stats.1933, pp. 4, 309, 1098, 1101, 315; Stats.1935, pp. 800, 806, 1508. The emergency period extended from March 10, 1933, to February 1, 1937. Findings or parts thereof based upon such facts may not be approved, though some of the evidence may have been admissible as introductory or explanatory of the subsequent actions of the company, but not as the basis of a finding tending to prove violations of the law. In the interest of brevity and in view of the final order herein, it seems inadvisable to discuss in detail this phase of the evidence, introduced during the hearings from time to time over a period of two years, except to say that if any technical violations of definite statutes occurred, but had ceased, and no impairment existed, it would hardly be in consonance with present day thought to inflict such drastic punishment as the taking away of property, particularly if the violations had outlawed or ceased.

Respondent contends that Pacific States stepped outside of the statutory provisions during the emergency period and adopted means and methods, which in fact were used as a subterfuge, in the accomplishment of ends which the law did not contemplate. Appellant argues rather persuasively that the practices redounded to the financial benefit of the company and the majority of certificate holders, and justifies such actions upon the ground that the commissioner was aware of the methods used and approved them; in some instances by writing; in others, by acquiescence. Respondent claims that when Pacific States through its officers informed the commissioner verbally of actions past or contemplated, all necessary information was not in each instance given. This contention is not substantiated by reference to the transcript. In that regard it would have been a comparatively easy matter during the two year period of trial to have presented the testimony of former commissioners.

Referring to the 1933 amendment, St. 1933, p. 314, sec. 6.07, which permitted an association, whether or not it had paid its withdrawal claims, to accept its own investment certificates in payment of property sold or in payment of loans, the approval of the commissioner was required to such transactions. Shortly after the amendment went into effect the commissioner, by a circular letter to all building and loan associations, stated his views in part as follows:

“One of the most important things in the new emergency law (Assembly Bill 556) is the permission given building and loan associations to exchange real estate for certificates. A very few associations are putting on campaigns to make such exchanges, and they are proving not only successful, but profitable. I would urge upon every association the importance of trading its non–income bearing real estate for certificates, as fast as possible. In every case such exchange should be made at a profit to the association, and this will not only help the financial structure of the association, but will be of benefit to the remaining certificate holders.

“The indications are that people are rapidly coming to the conclusion that the safest and best investment is real estate, and if associations will take advantage of this opportunity and make exchanges at a profit, it will prove beneficial in every way. Those who trade their certificates for real estate will feel more satisfied, and will have a chance of gaining if the real estate should enhance in value.

“The law particularly says that all such exchanges of real estate for certificates can be made only with the prior approval of the commissioner, and I am enclosing a blank form which I wish you would use in all such cases. You may have these forms either printed or mimeographed, conforming to the wording thereof.

“Accepting certificates in payment of loans:

“The law provides that with the prior approval of the commissioner certificates may be accepted, at the option of the association, in partial or full payment of loans. These exchanges should be considered with great caution, as, clearly, an association can not give up its good income bearing loans without sacrificing its financial position, but in cases where loans are doubtful or are too high, then it would seem to me to be the part of wisdom for the association to accept a certain percentage of payment in certificates, to the amount of say 20 or 25 per cent. Another blank is enclosed to cover cases of this kind.

“Of course, it is understood that in cases where borrowers, as of March 10, 1933, held certificates prior to that date, they may make offsets of certificates on their loans, at their own option, and without the approval either of the association or of this office.

“May I suggest that if you will go at this matter vigorously, you will be able to put your association in good order and dispose of real estate which is bringing little, if any, income and is a burden on account of taxes and other expenses.” (Italics added.)

That the method adopted was known to the commissioner is demonstrated by a report made by one of his examiners on January 24, 1935. He described the certificate transactions as follows:

“Investment Certificates of the Pacific States Savings and Loan Company are acquired by the Pacific States Auxiliary Corporation to be used primarily in real estate transactions of the Pacific States Saving and Loan Company, and in the repayment of its loans. To a limited extent bonds are received from the Pacific States Savings and Loan Company by the Auxiliary Corporation who sells them converting the cash to Investment Certificates which are turned over to the Pacific States Savings and Loan Company. Also for purchases by investors of the Pacific States Savings and Loan Company for credit to their certificate account.

“The Pacific States Auxiliary Corporation has purchased Investment Certificates of a face value of approximately $9,800,000 at an average cost of 53.3% during the period January 1, 1934 to November 30, 1934. This includes Fidelity Definite Term Certificates of approximately $2,700,000.00. Since August 1, 1934, purchases have been at a rate in excess of $1,000,000.00 per month.

“In handling real estate transactions, three way escrows are arranged. The Pacific States Savings and Loan Company delivers title to the real estate; the purchaser the cash; and the Pacific States Auxiliary Corporation the certificates. The cost of the certificates to the Pacific States Auxiliary Corporation, determines the face value of certificates which they will deliver to the escrow in return for the cash therein. In arriving at this figure, the cost of the certificates on hand and the commitments made by the Pacific States Auxiliary Corporation are considered. Through this method no profit will accrue to the Pacific States Auxiliary Corporation.”

Other exhibits appearing later in the record evidence the commissioner's knowledge of the existence of the corporations heretofore mentioned, their structure and method of procedure.

There is ample evidence that while Pacific States fixed the amount of discount on certificates, it so advised the certificate holders; on many occasions by circular letter. The following dated January 31, 1934, September 3, 1935, and November 9, 1935, respectively, are samples: “No investor is urged to part with his certificate at today's market, but if he does it is not unreasonable that he must expect to take the discount today's values have imposed upon investments generally. It is apparent every time an investor sells his certificate today he is strengthening the margin of security for the investor who holds his certificate.” “This” (tender) “plan is presented without thought of suggesting to any certificate holder that he dispose of his certificates. This institution has shown notable progress in meeting its depression problems and we have kept investors fully informed of our improving conditions. Our confidence in brighter prospects was clearly revealed in our letter to all investors in June and at this time we have the pleasure of reporting still further improvement.” “We desire to emphasize that no investor is obliged to tender his certificates. This arrangement calls for an entirely voluntary offer of certificates and is not designed to force truly distressed certificate holders to part with their certificates at a discount.”

As above stated all of the transactions involving the certificate investment exchanges and the conversion of the smaller, widely scattered, non–income properties into larger income properties, including hotels, apartment houses, ranches, etc., were consummated long before the seizure, and in each instance the transaction was consummated with the full knowledge and approval of the commissioner. It is self–evident, therefore, that the commissioner, in the exercise of the broad discretionary power conferred upon him as the administrator of the Building and Loan Association Act, believed that the method adopted by Pacific States in handling the certificate investment exchanges and in the acquisition of the larger properties was well within the scope of the emergency act and operated to the financial gain of Pacific States. In fact no contention is made by respondent that the acquisition of the larger and more valuable income properties resulted in any financial disadvantage to the company. One of the earlier commissioners called as a witness testified that he knew about the exchange of properties for investors' certificates; that with respect to an attempt to foster exchanges of that character, “we had a system that, whenever an association wanted to make an exchange like that, they had to submit it to us and we examined it; and, if satisfactory, approved it”; that “there were several associations that were so weak that I advocated” reducing their holdings by acquiring investors' certificates, which reduced their indebtedness; that after the adoption of the emergency legislation, applications were made from time to time by Pacific States to approve exchanges of property owned by it for certificates issued by it and also issued by Fidelity; that “the main thing we were interested in was that the deal was made at a profit to the association”; that he thought the exchange of properties for certificates tended to hold up the price of the certificates; that it did make a market for them; that the extent to which certificates were received by the association in exchange for property determined the outstanding obligations of the association; that it was his recollection that “Pacific States endeavored upon a number of occasions to exchange residential property and other holdings for larger properties”; that he gave those transactions consideration before they were concluded; that he “even considered ahead of time; every one which was presented was looked into carefully”; that he thought the exchanges made by Pacific States of parcels of smaller properties for larger holdings “were advantageous and I think the experience of time has shown that they were very advantageous”; that he recalled the acquisition by Pacific States of the Clift Hotel, also the acquisition of the Plaza Hotel; that he recalled both of those transactions because of their magnitude; that there was an investigation made as to each transaction before his approval was given; that he “was convinced, after investigation, that both the Clift and Plaza deals were beneficial to the Association, and hence, beneficial to the certificate holders of the Association.”

Appellants contend that in the final order, which in effect means liquidation, the court was not justified in passing upon the activities of the company during the 1933–37 period. Certainly the findings and conclusions upon which the judgment is based are not in accord with the views expressed in recent decisions in this state.

The power of the commissioner is largely discretionary. The act should be construed liberally to uphold his actions. Evans v. Superior Court, 20 Cal.2d 186, 124 P.2d 820. This does not mean that a second commissioner may liquidate the property of an association merely because he believes his predecessor abused his discretion. A third commissioner might hold still another view. Conducted in such a way the business of the association could not be carried on with safety. The officers of the association, compelled under the provisions of the act to obey a commissioner's direction, would live in fear and dread of a seizure and liquidation by his successor. Under such circumstances of conflict of discretionary power, liberality of construction of the act might well be extended to the orders, directions and conduct of the first commissioner unless it should appear that he had conspired with the officers of the association to practice a fraud upon the certificate holders, the stockholders or the public, or at least had acquiesced therein. No evidence of fraud on the part of the commissioners appears in this case, and respondent does not so contend.

A recently filed majority opinion by this court (the order therein has not become final) expressed the thought, relative to a change of personnel of a board and a change of judgment on the part of its members, that “If a school board could thus change the service status rating of those already in the department every time the personnel of the Board happened to change, or every time the members of the Board determined to change policy, the teachers would have no security at all in their employment and in their seniority rights.” Aebli v. Board of Education, Cal.App., 145 P.2d 601, 627.

Appellants took the position before the trial court and it is their contention here that none of the transactions which had terminated prior to the seizure could serve as legal justification for the seizure, nor as the basis of findings of fraud, particularly since the commissioner had authorized and approved the same, and that therefore all evidence relating thereto was and is neither material, competent nor relevant. Assuming that the evidence was admissible, under respondent's theory that it was entitled to show an intention to continue the policy which respondent considered hazardous, we are convinced that since those transactions were not illegal, and were fully consummated under the authority and with the approval of the commissioner, they could not, several years thereafter, be used as grounds for liquidation or as the basis of findings of fraud on the part of the association. Stated another way, the authorization and approval by the commissioner of such transactions and conduct amounted to a ratification by the officer within whose discretionary powers it was to grant such authorization and give such approval, and therefore operated as an estoppel in favor of the association. The decision rendered in the recent case of Farrell v. County of Placer, Cal.Sup., 145 P.2d 570, and the authorities enumerated therein support this view.

It is true that ordinarily estoppel must be pleaded, but such is not the absolute rule. One of the well recognized exceptions thereto is where a party has no opportunity to plead estoppel. In those circumstances he may rely upon estoppel with the same conclusive effect as if it had been pleaded; and no opportunity is given a plaintiff to plead estoppel of the defendant to assert defenses in jurisdictions such as ours, which have a system of pleading under which no replication or reply can be made to the answer. See 19 Am.Jur. p. 836. Furthermore, as said at page 838 of the same volume: “Another circumstance under which a party has no opportunity to plead is where he has no knowledge of the facts constituting the matter until they appear in the evidence at the trial; under this circumstance he may rely on the estoppel in pais.” Here the proceeding pursuant to which the trial was had is purely statutory. Thereunder no court proceeding is necessary to authorize a seizure by the commissioner, but upon seizure, if the association deems itself aggrieved thereby, it may within 30 days apply to the superior court to enjoin further proceedings by the commissioner; thereupon an order to show cause is issued, directed to the commissioner, and the court afterwards proceeds to hear the allegations and proofs of the commissioner in response to the order to show cause. In that situation an association has no way of knowing the particular acts or conduct upon which the commissioner intends to rely as justification for the seizure until he has introduced his evidence; and in the present case it consumed approximately two years for the commissioner to produce such evidence. It is apparent, therefore, that neither under the statutory procedure prescribed by the act, nor as a practical matter, did the association have any opportunity to plead estoppel; nevertheless under the rules above referred to it was and is entitled to the benefit of the application of such doctrine.

The second period, subsequent to the emergency, including the date of seizure, may now be considered. In 1938 the commissioner wrote a letter to Pacific States in which he advised the conservation of cash, but whatever prompted the writing of the letter it evidences a knowledge of the customs and practices of Pacific States in that respect. After conferences and communications the commissioner evidently did not deem that any departure from correct practice existed to warrant it in issuing a “cease and desist” order as provided in the statute.

During this period Pacific States accepted its own investment certificates in payment of rentals due from tenants. In February 1939 Pacific States received a “discontinuance” order from the commissioner, which order was complied with promptly. The practice had been discontinued at the time of seizure and therefore, standing alone, may not be considered unless it caused or tended to cause an impairment. This subject will be later considered.

Some matters noted by respondent are without the semblance of merit and need not be discussed. Others are somewhat frivolous, as for example the refusal of the officers of a private company holding stock directly or indirectly in Pacific States to submit its records and files to the commissioner prior to the seizure. Such records may be used if voluntarily submitted, but our attention has not been called to any authority given the commissioner to seize the records of a private corporation not engaged in the building and loan business. The proper method was the institution of court proceedings.

The alleged diversion of funds, and the charge of keeping fictitious and false book accounts, are matters that may be ascertained from the record. Respondent severely criticizes the method adopted by the accounting department of Pacific States stating that it is a violation of the uniform classification of accounts established and prescribed by the commissioner. Appellants argue, in justification of the method, that it had the approval of the accounting department in the commissioner's office. In addition, the accounts were sent to the commissioner and at various times he inspected and reported on them. At any rate in his brief respondent states: “We do not claim these improper accounting practices standing alone constitute the grounds for seizure.” If this is admitted, then, standing alone, the practice was not good ground for liquidation unless the accounts showed an impairment of assets.

With regard to the theory of respondent, stressed in his brief––that Pacific States intended to freeze out its own investors and hoped subsequently to become a real estate company dealing in large holdings––our attention has not been called to evidence that certificate holders who sold at a discount or paid rental with certificates on a discount basis were dissatisfied.

The contention of respondent that appellants hoped to turn the building and loan association into a huge holding company is a mere surmise and conjecture not based upon evidence called to our attention. However, if the commissioner before the seizure believed that such was the case and that by reason thereof the company's further retention of its properties would be in violation of the terms of the act he could, using sound discretion, have followed a procedure less precipitate and one that would not suddenly have jeopardized the assets of the company. He could have resorted to the courts for assistance and a determination of the legality of its retention.

If it had been the intention of the association to cast off its functions as a building and loan association, it would have been necessary to obtain the approval of the commissioner. Incidentally, it would be necessary to satisfy 40,000 certificate holders by the payment of over $46,000,000. Odell testified in effect that if the company had been given an opportunity to clean up its large holdings, which had been of material advantage in staving off impairment, it was the intention to discontinue the policy which the company had by reason of circumstances been compelled to follow.

In all of these transactions, referred to by respondent as “racketeering in the certificate business”, there is not one word of evidence that, in taking over large pieces of property, Odell or any of his associates personally benefited financially, whereas, on the other hand, the record shows that as the result of these transactions, the net income from real estate increased $600,000 a year, and the average monthly operating expenses decreased from $109,150 in 1933 to $51,774 in 1938.

Among additional matters charged by respondent is failure to maintain necessary and proper reserves. If a reserve was in fact set up, then it is claimed it was insufficient. The “reserve” includes such sums as the directors transfer from surplus or undivided profits. Pacific States declared no dividends subsequent to 1931 but as a matter of fact set up a loan reserve which amounted just prior to the seizure to the sum of $600,000. In addition to the loan reserves, other reserve accounts were set up, the largest, according to the commissioner's examination, amounting in 1934 to $6,668,679.78. But respondent contends that additional reserve accounts should have been maintained. As an instance––that a reserve should have been set up against possible claims of persons to whom interest had been paid at a lesser amount than that specified in the certificates. During the emergency period the payment of the amount of interest specified in the certificate was prohibited by statute. Paul v. Craemer, D.C., 24 F.Supp. 353. In one instance the claim is made that a reserve fund should have been set up to meet additional income taxes found to be due. It appears that the particular claim by the government in this respect was not called to the attention of Pacific States until after the date of the seizure. There are many other similar contentions, the grounds for which, if correct, could have been eliminated by an order by the commissioner.

Respondent contends that “The Pacific States was at the time of its seizure by the Commissioner and had been for a long time conducting its business under numerous fictitious names.” This appears to be a serious charge, but the facts show that certain hotels, the property of Pacific States, were operated under their own names, which were familiar to patrons and the public. In view of the fact that, although it made large purchases of furnishings, not being in the furniture business, it could not buy wholesale, the Pacific States deemed it advisable to organize the Granada Furniture Company, which in fact was a furniture purchasing department of Pacific States. Likewise a storage company was organized, an Allied Properties Company to manage certain properties, and an insurance company. Respondent fails to point out any resulting liability, except contingent, that could injure Pacific States. Appellant points out savings of many hundreds of thousands of dollars a year. The incorporation of the insurance company appears to have been a distinct advantage. Again, in all of these matters it is not claimed that Odell or any of his associates received any personal or financial benefit, either legitimately or illegitimately.

The court found fraud on the part of the company. The basis of the finding of fraud appears in finding 26, which is followed by fifteen others to the same effect. Finding 2 places responsibility for the alleged gathering of the various corporations into one entity upon Odell as the dominating and controlling figure. It may be assumed that the court was justified in concluding that whatever policy was thus adopted was conceived in the mind of Odell and put into operation by him. These various claims of respondent, upon which the findings of fraud were based, were denied or explained by Odell, or at least his version was given when he was called as a witness by respondent or when he appeared as a witness in support of a motion for witnesses' and attorneys' fees.

Respondent does not justify the particular findings except in a general way. Appellants minutely attack each and argue that the evidence does not justify the conclusion reached by the court. Appellants' contention is based in great part upon the testimony of Odell and the exhibits in the case. Respondent's only reply is that Odell's testimony is not corroborated. We purposely refrain from discussing this matter until we reach the question of the refusal of the court to grant attorneys' and witnesses' fees.

Respondent contends: “The determination of the facts under section 13.11 of the act is within the discretion of the commissioner and in the absence of an abuse of that discretion his determination cannot be disturbed by the court.” It is true that ordinarily when a question of fact has been presented for the determination of a board or commission, courts will not interfere unless there is an abuse of discretion. Bank of Italy v. Johnson, 200 Cal. 1, 251 P. 784; North American Building & Loan Ass'n v. Richardson, 6 Cal.2d 90, 56 P.2d 1221. This does not mean that if a building and loan commissioner seizes a company because it refuses to submit its records for examination, or because the commissioner believes the assets to be impaired, that courts must accept his determination if the records show that the company was precluded from presenting evidence upon vital issues. It may be assumed that no court would countenance liquidation merely because of failure to produce records, particularly if the data or the major part thereof is otherwise available, unless in conjunction therewith an impairment appeared. It is true that Pacific States urged brokers doing business with States Auxiliary to become active in the purchase of certificates, but this was in consonance with the “urge” sent out by the commissioner as a protective measure for certificate holders who needed ready cash and were being pressed by private investors who desired to purchase the certificates at distress prices and resell to States Auxiliary at a profit.

In view of respondent's admission that none of the foregoing facts which the court found to be true would justify liquidation, we hold that neither do they justify it taken together unless there was an impairment, although they might furnish sufficient ground for seizure. In view of the fact that the primary purpose of the act is the protection of certificate holders, liquidation should be adopted only as a last resort. This brings us to the crux of the case––was there sufficient evidence to justify a finding of impairment?

Prior to a discussion of impairment it may be well to consider the subject of appraisement. Appraisement is the result of opinion and is subject to all the infirmities of opinion evidence. Under the court's definition of market value, hereinafter considered, the court found impairment of capital to the extent of $10,234,422.22, based upon an audit and appraisal by an expert appointed by the court. In this day and age accumulation of assets of large financial corporations or associations run into hundreds of millions of dollars. An impairment should be judged by its relationship to the whole. In the present case the impairment is approximately twenty per cent. In view of the rule of market value adopted by the court and the wide diversion in the appraisals, this is not necessarily a large amount. The evidence shows that the properties carried by Pacific States at a book value of $37,842,826 had been appraised prior to the trial of the criminal case at a maximum of $42,812,176 and a minimum of $41,236,898.

Among the appraisals presented during the trial was one by a witness for the commissioner who appraised one of the larger pieces of improved property at $920,000. In 1930 he had placed its value at $1,403,500; in 1933 he appraised the land only without regard to the improvements thereon at $1,050,000. In 1937–38, notwithstanding the expenditure of $500,000 on the property in additions and remodeling, he fixed its value as stated, as of March 4, 1939 (when the worst of the depression years were over), at only $920,000. Some of the appraisers were unfamiliar with real estate in the part of the state wherein the properties in question were located. Some of the appraisals were based upon the witnesses' general knowledge of real estate business; some were made without knowledge of cost; others without inquiry as to sales recently made in the district, or whether there had been any. Each appraiser who testified accepted the definition presented by the court. There was also testimony of witnesses that the appraisals would be the same under either the court's definition or a modified form as presented by counsel for appellants. The appraisals were fixed approximately as of the date of seizure.

The building and loan commissioner took possession of Pacific States on March 4, 1939. Under section 13.11 of the Building and Loan Association Act the seizure was authorized if on that date its assets were impaired to such an extent that, after deducting all liabilities other than to its investors, its assets did not equal the sum of the value of its outstanding stock. In a proceeding under section 13.12 where the commissioner relies on impairment of assets to support his seizure the question is whether the assets were in fact impaired at the time of seizure, which is to be determined by the court on the basis of the evidence presented. That is, if in fact assets were not impaired, retention by the commissioner is not authorized simply because he acted properly in the first instance in taking possession upon his finding or belief of impairment.

Traditionally investors in building and loan associations became members or shareholders, whose interests were withdrawable unless insolvency intervened. “Insolvency” as applied to such associations acquired a distinctive meaning. As to corporations generally, no allowance is made for liability to stockholders in computing solvency. 19 C.J.S., Corporations, § 1372, p. 1086, citing cases. But building and loan associations in the nature of things are unlikely to be insolvent in the sense of insufficiency of assets to discharge their obligations other than to their investors. They are held to be insolvent when they cannot pay back the contributions of their members or shareholders dollar for dollar. Rummens v. Home Sav. & Loan Ass'n, 182 Wash. 539, 47 P.2d 845, 100 A.L.R. 570; Mott v. Western Savings & Loan Ass'n, 142 Or. 344, 20 P.2d 236; People ex rel. Barrett v. Logan County Bldg. & Loan Ass'n, 369 Ill. 518, 17 N.E.2d 4; State ex rel. McCormack v. American Bldg. & Loan Ass'n, 177 Tenn. 385, 150 S.W.2d 1048; McPherson v. Railway Sav. & Bldg. Ass'n, 93 Colo. 155, 25 P.2d 388; In re Home Sav. & Loan Ass'n, 189 Wash. 442, 65 P.2d 1249, 1250; 12 C.J.S., Building and Loan Associations, p. 528, § 110; 98 A.L.R. 111, note. The Federal Bankruptcy Act is expressly made inapplicable to building and loan associations. 11 U.S.C.A. § 22.

In this state building and loan associations are authorized to provide for issue of investment certificates to nonmembers, as well as for membership shares, and to provide also for guarantee stock, which is not withdrawable. See discussion, In re Pacific Coast Bldg.–Loan Ass'n, 15 Cal.2d 134, 99 P.2d 251. Section 13.11 is adapted to such structure, without using the word insolvency. A determination of solvency or impairment of assets involves a valuation of assets.

In the case herein the court prepared written definitions of value for the experts to use in appraising the assets of Pacific States. The court was of the view that market value was the standard to be applied. The first instruction submitted to the experts is as follows:

“Market value is the amount this property would sell for if put upon the open market, and sold in the manner in which property is ordinarily sold for cash in the community in which it is situated, with a reasonable time being given to find a purchaser buying with knowledge of all the uses and purposes to which it is best adapted and for which it is capable of being used and make the sale.”

The second direction, in form a question, is as follows: “In considering the value of property ‘Blank’ as of March 4, 1939, and without giving any consideration to what this property was worth to the plaintiff for speculation, or merely possible uses, nor what the plaintiff claims or may claim it was worth to it, nor what it may be worth to the plaintiff for purposes other than the highest and best use to which this property was adapted, nor what this property would bring at a forced sale, nor what this property would sell for under special or extraordinary circumstances, but considering only the highest and best use for which this property was adapted and its fair market value, if offered in the market under ordinary circumstances for cash, a reasonable time being given to make the sale, and considering market value to be the amount this property would sell for if put upon the open market, and sold in the manner in which property is ordinarily sold for cash in the community in which it is situated, with a reasonable time being given to find a purchaser, buying with knowledge of all the uses and purposes to which it is best adapted and for which it is capable of being used, what, in your opinion, was the fair market value of this property on March 4, 1939?” By this direction the experts were told what they were not to consider as well as what they were to consider.

Subsequently, during examination of some of the experts by respondent, the court permitted the following definition of market value: “The highest price, estimated in terms of money, which the property would bring if exposed for sale in the open market with reasonable time allowed in which to find a purchaser buying with full knowledge of all the uses and purposes to which the property was adapted and for which it was capable.”

The definitions given in the directions to the experts were based on the decision in Sacramento, etc., R. R. Co. v. Heilbron, 156 Cal. 408, 104 P. 979, an eminent domain case in which the plaintiff railroad sought to condemn a strip of land. The court said (page 409 of 156 Cal., page 980 of 104 P.): “* * * the rule is of universal acceptance that the measure of this damage is the market value; that is to say, the highest price estimated in terms of money which the land would bring if exposed for sale in the open market, with reasonable time allowed in which to find a purchaser, buying with knowledge of all of the uses and purposes to which it was adapted and for which it was capable.”

This language, practically verbatim, is embodied in the third definition presented by respondent on examination of witnesses. The court's first instruction does not mention highest price, but generally is in line with this statement in the Heilbron case, adding the element of a cash sale, in accordance with an instruction given in the Heilbron case. The court's second instruction to the experts herein plainly is modeled after instruction VI to the jury in the Heilbron case, although not identical. The standard of value as prescribed by the Heilbron case has been followed in later condemnation cases. City of Oakland v. Pacific Coast Lumber, etc., Co., 171 Cal. 392, 399, 153 P. 705; Joint Highway Dist. No. 9 v. Railroad Co., 128 Cal.App. 743, 755, 18 P.2d 413; City of Redding v. Diestelhorst, 15 Cal.App.2d 184, 193, 59 P.2d 177. Upon the cases––condemnation proceedings––respondent seeks to justify the definitions of value, but no California case has been cited in which the court has been called upon to decide the standard of valuation for a determination of solvency or impairment of assets.

Pacific States contends that the definitions embodied in the instructions to the experts herein, based as they were on standards laid down for condemnation suits, are incorrect as applied to valuation for the purposes of determining an impairment of assets under section 13.11 of the Building and Loan Association Act. Pacific States further contends that even if the same general standard of market value is applicable, the definitions given herein are an erroneous and incomplete statement of that standard.

Specifically, appellants contend “that the rulings of the Court in adopting these formulas and in limiting cross–examination accomplished the following: (1) The rule of fair market value, as interpreted by the Court, was adopted as the controlling rule of value. (2) No allowance was made for ‘going concern value.’ (3) The element relating to value of the amount a prudent owner willing, but not forced to sell, would accept, was excluded. (4) The element of an existing fair market was excluded. (5) The element of a cash price was required, to the exclusion of sales on terms.” It is interesting to note that in Wilson v. Superior Court, 2 Cal.2d 632, 637, 43 P.2d 286, 288, a building and loan act case, the court used the following language: “The act is designed to accomplish an important and beneficial public service, the liquidation of insolvent associations in the interest of creditors and claimants. The ‘liquidation’ of a business is the winding up or settling with creditors and debtors (see Lafayette Trust Co. v. Beggs, 213 N.Y. 280, 283, 107 N.E. 644; Ex parte Amos, 94 Fla. 1023, 1035, 114 So. 760), and the term does not have the restricted meaning urged by petitioner, namely, the sale of the assets for cash. The successful achievement of the object of the statute requires broad rather than limited powers, and justifies a liberal rather than a strict construction. Not only is this sound policy, but it is in accordance with the unmistakable language of the act itself.” If any of the contentions presented by appellants herein relative to value are sound, the definition adopted in this case is erroneous. For the reasons hereinafter stated it will not be necessary therefore to consider each specific objection raised by appellants.

The rules for determining value differ according to the purpose of the valuation. “The basic principle of judicial appraisals is clear: The standard of the valuation must be the one which is best suited to the purpose for which it is made.” In re Warren Bros. Co., D.C., 39 F.Supp. 381, 385, quoting from Finletter, The Law of Bankruptcy, p. 558; 1 Bonbright, Valuation of Property (1937) p. 5. It is apparent that the problem of value which arises in determining whether there is an impairment of assets under section 13.11 is more akin to the problem of determining solvency under the Federal Bankruptcy Act, or under other statutes in which solvency is a factor, than to eminent domain valuation. The Bankruptcy Act does not define value except to prescribe that the appraisal of the debtor's property shall be at a “fair valuation.” 11 U.S.C.A. § 1 (19), formerly sec. 1(15).

The problem of valuation under the Bankruptcy Act “depends largely on the fundamental question whether the definition of insolvency [there given] refers to an insufficiency of assets to cover all the debts in the event of liquidation, or whether it refers to the inability of the debtor to clear himself from his debts in a reasonable period of time by continuing in his business. This distinction between the two possible interpretations of insolvency under the Bankruptcy Act is vital, for on the choice between them depends the whole theory, not merely as to what property should be included in ‘the aggregate of the debtor's property,’ but also as to what principles of valuation should be applied to this property.” 2 Bonbright, Valuation of Property (1937) p. 755. At page 759 the following appears:

“Bearing in mind the peculiar function of a valuation in the cases under discussion––to determine, namely, whether or not the debtor is in such a position that he may be expected to pay off his debts in full––one might assume at first that the test of liquidation value is the only valid one; for the most obvious way in which assets can be used for paying a debt is by their sale and by the application of the proceeds to the payment of the obligations. On further consideration, however, the assumption that liquidation value is the only significant value for measuring debt–paying ability may well be challenged. The ground for criticism is that a normal business pays its debts out of its regular earnings and not out of the sale of its entire assets, fixed as well as current. Under these circumstances, the value of the fixed assets for purposes of paying the debts by a continuation of the business may well be far greater than the price which these assets would bring if offered for sale. Many a businessman whose assets, if left in the business, would be quite sufficient to enable him to clear off his debts in a reasonable time, would be ‘insolvent’ under a liquidation–value test.

“The second suggested basis of valuation calls for an appraisal of the assets on the assumption that the business will be continued by the debtor and that the fixed assets will be available for debt payment not directly, through their liquidation, but indirectly, through their contribution to the earnings of the business. To be sure, the debtor's stock in trade and accounts receivable might still be valued at realization prices, for they are designed for sale rather than for use in the business.”

A standard of “market” value, such as was given to the experts herein, implies adherence to the liquidation theory of valuation. The liquidation assumed is generally held not to be liquidation by a trustee in bankruptcy, a type of sale calculated to depress price, but, rather, a liquidation by the owner with a reasonable time allowed to dispose of the property. In re Studebaker Corp., D.C., 9 F.Supp. 426; Knowles v. Crow, 289 Ill.App. 108, 6 N.E.2d 892; Pruett v. Midkiff, 273 Ill.App. 142, 147; 2 Bonbright, Valuation of Property, p. 762.

Appellants' fundamental objection as we see it is that the definitions as submitted to the experts failed to make any allowance for “going concern” value. Going concern value is variously defined. Sometimes it is said to be the amount by which the value of the assets as a whole, assembled together for use in conduct of a business, exceeds the aggregate of the value of the separate items of property. Again, going concern value is defined as the value which the business has as a going concern for purposes of enabling the owner to clear his debts within a reasonable time. See 2 Bonbright, Valuation of Property, p. 760. If liquidation values govern in determining impairment of assets under section 13.11, then the nature of the test excludes going concern values in the sense of value to the owner for debt paying purposes.

As we have heretofore said, the value of assets for purposes of paying debts by a continuation of the business may well be far greater than the price which these assets would bring if offered for sale. Many a businessman whose assets, if left in the business, would be quite sufficient to enable him to clear his debts in a reasonable time, would be insolvent under a liquidation–value test.

In a period of depression, real estate sales values may sink so low that owners, except those in necessitous circumstances, are unwilling to sell at prices which can be obtained, with the result that property may be virtually unsalable. Yet the earnings from the property may be such as to indicate that the owner if he continues to employ the property in the conduct of his business will be able to discharge his debts in full, while not himself suffering the loss of his business incident to liquidation. On the other hand, if he is thrown into bankruptcy, and his assets subjected to sale by the trustee in bankruptcy, or other official liquidator, they will likely bring even less than the values estimated in determining solvency on the basis of liquidation by the owner himself. It is obvious that in such a situation regard for creditors, as well as the debtor, favors permitting him to continue in business.

If notwithstanding liquidation or realization values of the debtor's property are less than his total indebtedness, the reasonable prospect is that use of such property in the conduct of his business will yield income sufficient to discharge the owner's indebtedness within a reasonable time, then the value of the property in use to the debtor for the purpose of enabling him to pay his creditors is greater than the present salable value of the property, and, likewise, such value in use for the purpose of determining solvency or impairment of assets may be said to be in excess of liabilities.

Does section 13.11 demand that there be applied in all cases, to the exclusion of other tests of value, a rigid standard under which assets must be appraised on a liquidation basis according to their present salable value? We are of the view that it does not. Section 13.11 does not prescribe the basis of valuation to be followed. Section 16.04 of the Building and Loan Association Act provided: “For the purpose of this article, real property, contracts for the sale of real property, loans, and all other assets (whether like or unlike the foregoing) shall be valued at what may reasonably be expected to be realized therefrom in the orderly and proper conduct of a going business.” That section was part of Article XVI, entitled “Rehabilitation, Readjustment, Consolidation, Merger or Reorganization of Associations,” which was adopted as part of the emergency legislation and did not continue in effect beyond February 1, 1937. Stats. 1935, p. 816. We are of the view that under section 13.11, which prescribes no basis for valuation, such going concern values as well as liquidation values should be considered in appraising assets. Since the theory is that the sales or realization values of the assets are a measure of the owner's debt paying ability, where, in the particular circumstances, such value is not a true index of that ability, evidence of the value of the property in use to the owner, that is, its going concern value, should be admitted. The Bankruptcy Act prescribes a “fair valuation” and such a valuation is implied, though not expressly called for, by section 13.11 of the Building and Loan Association Act. A valuation based solely on the liquidation standard may in some circumstances not be fair either to creditors or the debtor.

Decisions involving insolvency under the Bankruptcy Act reveal that while the courts in general subscribe to the test of liquidation values, they do not apply that test without exception. Thus it has been held that bonds which were not in default should be valued at par notwithstanding their market value on an exchange is below par. In re Cleveland Discount Co., D.C., 9 F.2d 97; Hutchinson v. Fidelity Inv. Ass'n, 4 Cir., 106 F.2d 431, 133 A.L.R. 1061; In re Warren Bros. Co., supra.

Recognition of the propriety of considering going concern values in the sense of value in use to the owner, is found in cases arising under section 77B of the Bankruptcy Act (now 11 U.S.C.A., § 501 et seq., formerly sec. 207). In re Reading Hotel Corp., D.C., 10 F.Supp. 470; In re Warren Bros. Co., supra; In re Gibson Hotels, D.C., 24 F.Supp. 859, 863; In re Reb Holding Co., D.C., 35 F.Supp. 716; In re Geiser Mfg. Co., D.C., 18 F.Supp. 506, 508; In re Wickwire Spencer Steel Co., D.C., 12 F.Supp. 528, 533; 2 Bonbright, Valuation of Property, p. 885. A determination of solvency in reorganization proceedings under the above provisions may be required for several purposes. The definition of insolvency contained in section 1 of the act, heretofore quoted, which simply calls for a “fair valuation,” is applicable to such proceedings as to others under the act. In re Reading Hotel Corp., supra.

Indicative of the judicial attitude in possible reorganization proceedings is the following from In re Warren Bros. Co., supra, 39 F.Supp. page 384: “It is well settled that the words ‘fair value’ need not mean liquidating value, nor need they be regarded in law as equivalent to present realizable value. Duncan v. Landis, 3 Cir., 106 F. 839, 858; In re Geiser Mfg. Co., D.C., 18 F.Supp. 506, 508; In re Gibson Hotels, Inc., D.C., 24 F.Supp. 859, 863. And especially is this true when we consider that the purpose of 77B [11 U.S.C.A. § 207] is to enable corporations in financial difficulty to readjust their indebtedness and continue in business without a forced liquidation of their assets. In re Geiser Mfg. Co., supra; In re Reb Holding Co., D.C., 35 F.Supp. 716, 717.”

“In Gerdes on Corporate Reorganizations, § 93, p. 245, it is stated: ‘In a number of decisions it has been held that the going concern value of an active business must be considered in determining the fair value of its property. Fair value is not the value of the property after its going concern value has been reduced or destroyed by the intervention of bankruptcy proceedings, or by a levy and execution on the property of the debtor.’ ” In re Geiser Mfg. Co., supra, 18 F.Supp. page 508.

In In re Gibson Hotels, Inc., supra, 24 F.Supp. page 863, considering insolvency under the Bankruptcy Act, the court said: “The ‘fair valuation’ contemplated by the statute is not the value at which such assets could be converted into cash on a distressed market or at forced sale, but is the value of the assets taken in their relationship to the business of the hotel as a going concern. In re Bucyrus Road Machinery Co., 6 Cir., 10 F.2d 333; In re Nathanson Bros. Co., 6 Cir., 64 F.2d 912. To apply this test of value to a hotel property, it is necessary to take into consideration all of the elements entering into the intrinsic, as well as the selling value of the real estate, and also the earning power of the property.”

In Duncan v. Landis, 3 Cir., 106 F. 839, 859, the court said: “Again, the act expressly says that a man shall be deemed insolvent only when the aggregate of his property, at a fair valuation, shall not be sufficient to pay his debts; but the court below gives an unwarranted construction to this definition, by adding to the plain meaning of a ‘fair valuation’ the requirement that the debtor must be able to realize from his property a sufficient amount to pay his debts. This seems to us to clearly depart from the plain requirements of the statute, by adding a condition not therein set forth. A man's property, at a fair valuation, may amount to sufficient to pay his debts, although he might not be able to realize at once the amount of that valuation.”

In re Crystal Ice & Fuel Co., D.C. 283 F. 1007, 1009, contains the following: “Salable value and fair valuation are not synonymous and the conclusion ‘wholly insolvent’ because of the fact that the ‘salable value’ of the company's property was less than its debts may be and is proven to be not at all the insolvency of the Bankruptcy Act, viz. insufficiency of its property at fair valuation to pay its debts. * * * That is, although his property be not presently salable for enough to pay his debts, its fair valuation may be more than enough; and if so, he is not insolvent nor subject to bankruptcy for insolvency.”

Two more recent statements are of interest: “Section 1 of the Bankruptcy Act, 11 U.S.C.A., § 1, provides that a person shall be deemed insolvent within the provisions of this title ‘whenever the aggregate of his property * * * shall not, at a fair valuation, be sufficient in amount to pay his debts.’ This court has held that in arriving at such fair valuation the property of the alleged bankrupt must be considered as the property of a going concern, that is, as property adapted to and used for the purpose of carrying on the business in question.” In re Nathanson Bros. Co., 6 Cir., 64 F.2d 912, 913.

“It follows, therefore, that the question of insolvency at the time of the appointment of the receiver must be determined by the valuation of the property at that time as that of a going concern. As the special master and the trial judge adopted a different basis, and as it is certainly not clear on this record that they would have found insolvency on the basis of a going concern valuation, the decree of adjudication must be reversed.” In re Bucyrus Road Machinery Co., 6 Cir., 10 F.2d 333, 334.

Where the question is whether, under section 13.11 of the Building and Loan Act, an association should be permitted to continue in business, the answer should be that it may, provided the prospect is that it can discharge its liabilities through continued operation notwithstanding the amount for which its assets could be sold is less than its liabilities; that in such circumstances its assets are not impaired. The instructions given to the experts herein confined their consideration to liquidation values, excluding going concern values, and are, therefore, erroneous.

That cash value was the only value considered by the court is demonstrated by the record. After the leading and supervising experts testified, they were recalled and questioned specifically relative to the two definitions given by the court and that framed by the attorneys for the commissioner, and the evidence shows that the appraisals were based upon the court's definition.

That the trial court adhered to the test of cash value is shown by the fact that prior to the denial of appellants' motion for attorneys' fees, the court, in an endeavor to determine whether appellants could proceed, specifically interrogated Odell on the question of the possibility of the production of evidence under the rule of the cash value test. Odell frankly admitted that under the court's definition of cash value no such evidence was available. The court thereupon asked Odell whether evidence could be produced under the definition adopted by the attorneys for the commissioner. Odell replied in effect that there was such a possibility. The purpose of the examination was to determine whether attorneys' fees would be allowed, so that appraisals could be introduced on behalf of appellants.

If bad faith as set forth in the findings, based upon alleged fraudulent transactions, was the sole reason for the denial of the motion for attorneys' fees, then no purpose was served in the investigation of further evidence on “valuation.” If impossibility of production of evidence of value which would be admitted in evidence was in part the basis for the denial of the motion, then the court must have eliminated the commissioner's value test, as appellants, though not approving, indicated a willingness to proceed under that test. In view of these facts we must conclude that the court in fixing the valuation of the assets adhered to the “cash” value, which eliminated going concern value.

“Going concern” may not be strictly defined to fit all cases. It is sufficient to say that ordinarily any element that tends reasonably and legitimately to enhance the value of property rights based upon the existence of the business in which they are involved, may be taken into consideration in ascertaining the full value of those rights. Reasonable discretion should be used in determining the meaning of this term as in the case of determining any market value; fair market, cash, actual cash, full cash, true cash, intrinsic, normal or other designated values not defined by the governing statute.

The difference between “going concern” and “cash” value is of paramount importance in this case. It is the difference between a business operating in an orderly manner, whether under good or difficult conditions, and with the chance of working out in case of the latter, and one suddenly arrested, the immediate result of which is to eliminate the element of going concern, and to place assets at the mercy of speculators regardless of the interests of certificate holders who are vitally concerned in whether their investment shall be given a chance to survive.

The question of impairment, depending on value, is the crux of the case. The definitions submitted by the court to the appraisers placed a false basis of evaluation and permitted the appraisers to fix minimum figures. Objections to questions regarding going concern value were sustained. The findings were based on estimates under the terms of the definitions. Pacific States was not permitted to introduce evidence tending to show the true going concern value. The definitions and the findings thereon are not only erronous, but prejudicially erroneous. The judgment herein will necessarily be reversed.

It has been suggested that, irrespective of the erroneous definition of value, and the admission by respondent that any of the various other alleged improprieties if standing alone would not justify seizure or subsequent liquidation, still the court found that Pacific States was the alter ego of the other interested corporations and that the alleged improprieties taken as a whole constituted a fraud. The only persons who could derive benefit from the certificate exchanges were the certificate holders who held on to their certificates. The only ones who could be injured were the holders who sold their certificates at a discount. The present record, so far as our attention has been called thereto, is devoid of proof that any Pacific States certificate holder claimed to have been defrauded. Even in the case of Eggert v. Pacific States S. & L. Co., 57 Cal.App.2d 239, 242, 136 P.2d 822, the question was not one of fraud, but merely the construction of the terms of a document.

It has been suggested that there is a case pending involving the rights of the certificate holders who sold at a discount. The pendency of that case, if it may be here considered, is in fact an argument that their rights may be determined without resort to liquidation. That proceeding is an independent one and should play no part in the determination of this appeal. Respondent commissioner recognizes this fact and accordingly makes no reference thereto, but in view of the suggestion that such a case is pending it seems proper to say that neither the complaint therein, nor the findings, nor the judgment in favor of the Pacific States, indicate that fraud was an issue therein, and the commissioner on appeal does not recognize fraud as an issue. The judgment therein is primarily based upon the doctrine of estoppel.

At this point it is not inappropriate to mention that it appears from the record herein that Odell and some of his associates were indicted and tried in the federal court on charges of fraud based upon the exchange transactions herein involved, and that they were exonerated by a directed verdict, from which no appeal was taken.

If the certificate holders who sold at a discount believed they had been defrauded they could have had recourse in an action to remedy the wrong without damaging the interests of their fellow certificate holders through liquidation on the present cash appraisal basis, necessitating their acceptance of a part of a dollar for the whole, and that “part” necessarily materially decreased by the payment of expenses attending seizure, trial and liquidation. The liquidator, under the provisions of the Building and Loan Association Act occupies a position analogous to that of a receiver. This court once expressed the following thought: “Receivers are often legal luxuries, frequently representing an extravagant cost to a losing litigant. When it appears that no reasonably certain benefit will result to one litigant, and a distinct disadvantage will result to another, courts should weigh carefully the propriety of appointing a receiver.” Elson v. Nyhan, 45 Cal.App.2d 1, 5, 113 P.2d 474, 476.

Notwithstanding the present appraisal, if through liquidation the properties should be sold for cash, and on account of a possible material increase in the value of real estate, etc., sell for an amount equal to or in excess “of the value of its outstanding shares and investment certificates”, etc., sec. 13.11, then what justification could there be for the liquidation?

The above prompts us to say that while the commissioner's duty is to offer proof of value as of the date of seizure, if in fact at the time of this hearing the appraised value had been shown to be equal to or in excess of the value of the outstanding certificates, etc., any order resulting in liquidation would not have been factually or legally justifiable. We repeat that the purpose of the act is not the protection of officers or of stockholders of building and loan associations, but primarily the conservation of assets for the certificate holders.

Pacific States also filed separate appeals from an order denying an application for attorneys' fees for services thereafter to be rendered in the action resisting the seizure by the commissioner. The prayer was that the court direct the commissioner to pay to Pacific States' attorneys for services to be rendered thereafter in the action from the assets of Pacific States a reasonable sum, on a periodic basis, to be fixed by the court. Such a motion, addressed to the discretion of the court, if made upon reasonable ground and in good faith should be allowed. Anderson v. Great Republic L. Ins. Co., 41 Cal.App.2d 181, 106 P.2d 75; Arakelian v. Sears, 53 Cal.App. 646, 200 P. 757; Simonton v. Los Angeles T. & S. Bank, 205 Cal. 252, 270 P. 672; O'Malley v. Continental Life Ins. Co., 343 Mo. 382, 121 S.W.2d 834; Flynn & Emrich Co. v. Federal Trade Comm., 4 Cir., 52 F.2d 836; Pratt v. Robert S. Odell & Co., 49 Cal.App.2d 550, 122 P.2d 684; Evans v. Superior Court, 14 Cal.2d 563, 96 P.2d 107.

It is interesting to note that during the progress of the trial there were many changes of attorneys on each side––in some instances without explanation appearing in the record. It may be assumed that the attorneys for the commissioner were paid in whole or in part. The present record does not show the full amounts paid each attorney or the appraiser. The commissioner paid one attorney $3,500 a month; another $4,000 a month. One appraiser, for at least a time, was paid $200 a day by the commissioner. Some of the attorneys for the Pacific States refused to continue without compensation. One seems to have refrained from taking an active part in the hearing after the court defined “value.” Apparently no order has ever been made allowing fees to the attorneys who represented the Pacific States. The conduct of the case, as it appears from the transcript was a demonstration of legal efficiency by the representatives of the respective parties. The trial court denied the motion and specifically found that Pacific States did not commence or prosecute this action in good faith or upon reasonable grounds, but on the contrary that the company acted in bad faith.

Inferences might have been drawn the other way. While its determination was not binding upon the trial court herein another tribunal, as shown by the present record, had found that there was no bad faith but that the acts and conduct of the officers of Pacific States were legally justifiable.

The transactions that occurred during the emergency period were permitted by statute. Even though it be deemed that Pacific States did not operate strictly in accordance with statutory provisions, it operated with the consent or acquiescence of the commissioner. The latter statement is practically true of the time from the close of the statutory emergency period until the date of seizure except as regards the payment of rentals with certificates and matters akin thereto, discontinued upon the order of the commissioner shortly before the seizure.

Throughout the record there is not one particle of evidence––or at least attention has not been called to any––that reflects upon the integrity or honesty of purpose of the prior commissioners who were at all times aware of the procedure adopted by Pacific States. It is not claimed that there was a conspiracy among any of the commissioners and the officers of Pacific States or its allied corporations. It may be repeated here that no one gained an advantage in the various transactions except the holders who retained their certificates. Of course the holders of preferred stock of the allied corporations would benefit before the holders of common stock, in which latter classification are found Odell and his wife.

The findings of fraud and the determination that Pacific States acted in bad faith are questions of fact. If it be assumed for the purpose of discussion that some fact or an inference drawn therefrom justified the finding that the practices of the company resulted in loss and detriment to certificate holders, and that this condition was brought about through the bad faith of the officers of Pacific States, even under such circumstances we are forced to the conclusion that there was an abuse of discretion for the following reason: The primary purpose of the provisions of the Building and Loan Association Act is to protect the certificate holders, if possible without seizure as seizure generally tends to destroy confidence on the part of the public, which in itself is a species of impairment of assets. In the present case the record shows 40,000 certificate holders at the time of seizure. Even if it be assumed that seizure is justifiable, still the terms of the act indicate that liquidation should not be resorted to except under the compulsion of necessity.

If an association deems that it is aggrieved, it may apply for relief to the superior court. The court will hear the matter upon the merits and may direct the commissioner “to surrender such business, property and assets to such association” or it may dismiss the proceedings. Under any circumstances, when the act is read in its entirety, its purpose is plain, namely, the conservation of the assets of an association for the benefit of the certificate holders.

Others than Odell owned the controlling stock in the parent companies, one of which––the State Guaranty––respondent delights in referring to as the “foster parent.” Here was a distinct interest, in addition to that of the Pacific States certificate holders, entitled to have the Pacific States' side of the story presented.

Whether the trial court concluded that the alleged fraud was attributable to one or to all of the officers, it was still incumbent upon that court, if financially and reasonably possible, to permit those accused of fraud or bad faith to defend against such serious charges. A glance at the record of payment of attorneys' fees by the commissioner to his legal staff, employed to act in this particular case, does not indicate that there was such financial embarrassment as to preclude the payment of reasonable fees to the attorneys representing Pacific States.

In view of the incorrect definition of value adopted by the trial court, the association should have been permitted to continue with the case and present appraisals in conformity with the views expressed herein and, under all the circumstances, the evidence should have been presented by counsel compensated therefor.

We cannot agree with respondent that the attorneys for appellants having proceeded for a period of two years without compensation could have remained for a while longer. There must be an end to everything, even the patience of lawyers contributing time and talent to a lost cause. The legal battle was practically finished when the court adhered to the definitions of value presented to the appraisers. One of the attorneys for appellants frankly admitted that if the court's definition was correct, it would be impossible for them to prove that there was not an impairment of capital. Odell on the witness stand made the following statement: “What we actually feel, your Honor, is this, that you should permit us to put in what we think are the normal values of the properties, the intrinsic value of the properties, the fair market value of the properties, as we understand fair market value, and let your Honor consider all of those elements in determining what you think these properties are worth, and more than that, to determine whether or not this company should be liquidated at this time.”

If it appeared that there was a reasonable possibility that Pacific States could produce evidence of its financial soundness, the motion for attorneys' fees should have been granted. It should be mentioned that the court indicated its willingness to grant fees to witnesses. This seems rather inconsistent with the finding of bad faith. However, the proper presentation of the evidence required the aid and assistance of trained men of the law.

One of the reasons for the denial of the motion was that Pacific States could not produce evidence that its assets were of an amount equal to the “fair market value as defined by the two questions prepared by the court.”

The denial of the motion precluded appellants from presenting evidence in explanation of accounting practices as to the alleged diversion of funds, the acquisition of large holdings, the discounting of certificates, reserve fund accounts, etc. If it be claimed that there is evidence of such matters appearing in the testimony of Odell, then in view of respondent's contention that there is no corroboration, such corroborative testimony should have been permitted. If it be claimed that the court had a right to disbelieve Odell, then Pacific States was materially interested in presenting other evidence which might convince the court that the facts related by him were true. Appellants were denied both the opportunity of presenting evidence in refutation of the charged fraud and the right to present appraisals in accordance with a correct definition of value for the purpose of liquidation. The findings are based upon the evidence presented by respondent plus the evidence given by Odell. Appellants could not proceed with their side of the case. Under the circumstances the findings may not receive the appellate approval usually accorded findings based upon conflicting evidence. We are forced to hold that there was an abuse of discretion. Appellant Pacific States' position on this point should be sustained, and reasonable attorneys' fees, with due regard to the protection of the financial interests of the certificate holders, should be granted.

State Guaranty, intervenor and appellant, also filed an application for attorneys' fees, witnesses' fees and costs. The motion was denied. No authority holding that a parent company is entitled to attorneys' fees, etc., has been submitted, and no convincing argument presented. It has been held that under certain circumstances a holding company may expend its own money to defend a company in which it is vitally interested and holds the controlling stock (Pratt v. Odell, supra), but it may not be awarded fees from funds in the hands of a commissioner, such as the building and loan commissioner under the circumstances of the present case. It is only the company seized that may obtain such assistance. For the reasons stated herein, the orders of denial of attorneys' fees, etc., to State Guaranty should be upheld.

Finally, it may be advisable to state that in reaching the conclusions herein we have eliminated from consideration the allegations in appellants' briefs of corrupt political machinations and purposes, and in the pleadings of the alleged arbitrary method of the commissioner in making the seizure. In the first instance, appellants were not permitted to present evidence in proof thereof, if true, and in the second, were prohibited from offering any evidence to support their allegations. Whatever the basis of these charges on either side, the detriment to the interests of the 40,000 certificate holders in the sale of the company's assets at sacrifice figures are paramount to the determination of a personal or legal feud, if any exists, between Odell and the commissioner. We also may say that the legal rights of 17,000 certificate holders (the number alleged by the commissioner), who sold at a discount, might be jeopardized by an affirmance of the judgment on the main issue.

The orders appealed from in reference to attorneys' fees, etc. by State Guaranty Corporation are affirmed. The orders appealed from by Pacific States Savings and Loan Company in reference to attorneys' fees, etc. are reversed. The judgment is reversed.

I dissent.

I am firmly convinced that the majority opinion is based upon a fundamental misconception of the issue involved in this proceeding, and the law applicable thereto. The majority opinion brushes aside carefully drawn findings of the trial court that are amply supported by evidence and the reasonable inferences therefrom; it adopts a definition of impairment of assets that is contrary to the plain intent of the legislature, which definition results in depriving the commissioner of his main regulatory power, and in rendering the main regulatory provisions of the building and loan act of doubtful if of any value for the protection of investment certificate holders and of the public; it assumes that the main purpose of this proceeding and the main issue decided was whether this company should be continued as a going concern or should be liquidated, when such issue, under the plain provisions of the Act, was not involved, and under the findings, conclusions and judgment was not decided; it confers on the superior court, by inferential interpretation, the power to determine whether a company shall be liquidated or continue in business after a lawful seizure, when the Act places that determination within the discretionary power of the commissioner; it holds that the takeover on March 4, 1939, was proper and in conformance with the statute and then reverses the judgment when that was the main issue involved; it assumes that the appellants are entitled to relief in excess of the issues framed by the pleadings and in excess of the relief permitted by the Act; it holds that if a commissioner has authorized or approved the doing of acts in direct contravention of the statutory law, the public, acting through the commissioner, is forever estopped from challenging those acts even if, forsooth, they have resulted in the company now being in an unsafe condition so as to render its further proceeding hazardous to the public or to the investors; it holds that the commissioner has no power to examine the books of another corporation even though that corporation is the agent and alter ego of a building and loan association; it treats the case as if the burden were on respondent to sustain the findings rather than on appellants to attack them; it makes bald statements of fact as if they were sustained by the record without reference to the record, when such statements are not sustained thereby; it reverses the trial court and sends the case back for a retrial because of what is held to be an erroneous definition of value without defining the term for the benefit of the court on the retrial; and it holds that, as a matter of law, it was an abuse of discretion for the trial court to deny attorneys' fees to the seized company to show its good faith, when that fact, under the cases, must be shown before attorneys' fees may be allowed.

This case took over two years to try. The record shows that all during this period both sides were ably represented by counsel of unquestioned ability and integrity. In spite of charges, express and implied, of appellants to the contrary, the record shows that the trial judge exercised extreme patience in consideration of the issues, and, except where rules of law prohibited, permitted counsel a wide latitude in the introduction of evidence. He demonstrated a thorough and complete knowledge of the issues and the law applicable thereto. He adopted findings that, while clear and concise, are sufficiently detailed to show without ambiguity his theory of the case, and the facts upon which he relied to support that theory. Throughout this long, tedious and exhausting proceeding he was patient and tolerant of counsel and demonstrated time and again his complete impartiality towards, and his lack of prejudice against, either litigant. In my opinion counsel on both sides of this litigation and the trial judge are to be complimented on a difficult job well and ably done.

The fundamental error in the majority opinion is in the assumption, frequently expressed, that the main issue before the trial court was whether this company should be liquidated or returned to its former management. This fundamental misconception of the true issue involved permeates the entire opinion, and is the basic cause of most of the other errors contained in the opinion, some of which have been enumerated above.

The issue as to whether this company should be liquidated or not is not directly or at all involved in this proceeding. In finding No. 96 the trial court expressly found that “a judgment for the Commissioner in this action will not necessarily result in the liquidation of Pacific States. The determination which the Commissioner has made to liquidate Pacific States is subject to his right to make such other disposition of all or any part of its business, affairs and assets as is or may be authorized by law.” In the conclusions of law, after setting forth its conclusions as to the validity of the seizure, the trial court in conclusion No. 10 stated: “The Commissioner lawfully demanded and took possession of the property, business and assets of Pacific States on March 4, 1939, and pursuant to the Building and Loan Association Act, and particularly Section 13.11 thereof.” In conclusion No. 11 it is stated: “The Commissioner is entitled to retain possession of the property, business and assets of Pacific States until it shall with the consent of the Commissioner resume business or until its affairs be liquidated.” It was then provided that neither Pacific States nor State Guaranty was entitled to an injunction and that each of their complaints “should, upon the merits, be dismissed.” Judgment of dismissal was entered in accordance with these findings and conclusions. The findings and conclusions are in exact accord with the issues as framed by the pleadings, and in exact accord with the powers conferred upon the trial court by the building and loan act.

The commissioner took summary possession of the company under § 13.11 of the Act on March 4, 1939. The complaint for an injunction was filed by Pacific States on March 6, 1939. By that petition the validity of the seizure and the retention of the assets were the only issues that were or could be involved. On March 20, 1939, the Commissioner filed his answer in which he alleged the facts which in his opinion justified the seizure and retention of assets, and in which those two questions and those two questions alone were put into issue. The trial of the action was commenced on the same day the answer was filed. From then on, and for over two years thereafter, the case was tried on the theory that the validity of the seizure and the right to retain assets were the issues involved. As already pointed out, the case was decided on that theory.

So much for the pleadings and the trial. Now as to what the statute provides. Section 13.11 provides that if the Commissioner shall find that certain facts exist he may issue a cease or desist order, and if the company does not comply, “or if it shall appear to the commissioner that any association is in an unsafe condition or is conducting its business in an unsafe or injurious manner such as to render its further proceeding hazardous to the public or to any or all of its investors, or if he shall find that its assets are impaired to such an extent that, after deducting all liabilities other than to its investors they do not equal or exceed the sum of the value of its outstanding shares and investment certificates and the par value of its outstanding stock, or if any association shall refuse to submit its books, papers and accounts to the inspection of the commissioner or any of his examiners, deputies or assistants, or if any officer thereof shall refuse to be examined upon oath concerning the affairs of such association, then the commissioner may forthwith demand and take possession of the property, business and assets of such association and retain such possession until such association shall with the consent of the commissioner resume business, or until its affairs be liquidated. Such association may, with the consent of the commissioner, resume business upon such conditions as may be approved by him.” (Italics added.) It is obvious from this section that, contrary to the assumption in the majority opinion, when the commissioner takes possession, liquidation is not inevitable. The section confers power on the commissioner to take summary possession under certain circumstances. Once he has acted, unless he is ordered to return the company under § 13.12, he operates the company. Upon him, and upon him alone, is conferred the power to determine whether it will be in the best interests of the investors and the public to continue to operate the business, and after correcting abuses or building up the impaired assets, if that is necessary, to return the company to its management, or whether the best interests of all concerned will best be served by liquidation. Section 13.12, under the terms of which this proceeding was instituted, does not provide for a court test of this determination. That section provides: “Whenever any association of whose property, business and assets the commissioner has taken possession, as aforesaid, deems itself aggrieved thereby [i.e., by the taking of possession] it may * * * apply to the superior court * * * to enjoin further proceedings * * *.” The provision obviously permits the aggrieved association to test the correctness of the commissioner's findings upon which he took the company over. There is no provision in this or any other section of the Act permitting the association to test the validity of the commissioner's determination, subsequently made, as to whether the company shall continue to operate under his control or shall be liquidated. Once he has validly taken over, the determination of that question is left to his discretion.

This conclusion is fortified, if indeed it needs fortification, by other provisions of the Act. Section 13.13 provides for the powers of the commissioner upon taking possession. It provides that he shall have certain specified powers and unless he “shall be enjoined from further proceedings and directed to surrender such business, property and assets or unless such association shall with the consent of the commissioner resume business, then the commissioner shall proceed to liquidate the affairs of such association as hereinafter provided.” (Italics added.) Section 13.16 provides for the powers of the commissioner once he has determined to liquidate. Among other things that section provides that: “The determination by the commissioner to liquidate any association, evidenced by filing written notice of such determination with the court,” etc. No provision for a court test of that determination is to be found in the Act, and certainly is not found in § 13.12.

It is too plain to require further comment that the Act provides that the commissioner shall have power to take over an association if certain facts exist; that an aggrieved association may, under § 13.12, test the validity of that takeover; that the jurisdiction of the superior court under § 13.12 is limited to determining the validity of that takeover; that if the commissioner validly takes possession for any of the reasons set forth in § 13.11, then he, and he alone, has discretion to determine whether to continue the business of the company after correcting abuses, or whether the best interests of all will be served by liquidation. There is no provision of the Act, and certainly § 13.12 under which this proceeding was instituted does not so provide, that this last determination is subject to court review. The majority opinion in this case from beginning to end is predicated on the erroneous assumption that this court is reviewing the determination of the commissioner to liquidate.

It is true that on October 20, 1939, the commissioner, acting under § 13.16 of the Act, filed a notice of intention to liquidate. It is true that because of conditions found to exist in this proceeding the commissioner may decide on complete liquidation of the company. It is also true that some steps towards liquidation have been taken by the commissioner pending this appeal. But in this proceeding the court did not and could not pass on that question. The result of this proceeding is not to make liquidation inevitable. Even at this date, if the commissioner should decide because of the unprecedented rise of real estate values in recent years, or for other reasons, that it would be to the best interests of all concerned to reorganize and ultimately to return this company to its old or a new management, there is nothing in the decision of this case that would prevent him. Liquidation is an entirely false issue in this case.

The reasons why the legislature failed to provide in § 13.12 for a court test of the determination of the commissioner to liquidate, made after he has taken possession under § 13.11, are obvious. The legislature determined that if a company committed any of the very serious acts that justify a summary takeover under § 13.11, the rights of all concerned would best be protected by the commissioner taking over and operating the company. The legislature then felt the commissioner could decide whether to operate the company so as ultimately to return it to its management or to liquidate. It determined that the aggrieved association could challenge the validity of the seizure and the discretion of the commissioner in retaining the assets, but not that it could challenge, at least under § 13.12, the determination of whether liquidation or continued operation was in the best interests of all concerned. These conclusions are amply supported not only by the language of the statute, but by the cases interpreting this or similar statutes. In North American Building, etc., Ass'n v. Richardson, 6 Cal.2d 90, 56 P.2d 1221, it was contended that at most a mere technical impairment existed and that while that might have justified the commissioner in taking possession, when the facts appeared at the hearing, the trial court had power “to determine whether or not the financial condition of the association was sufficiently sound to warrant a disaffirmance of the action of the commissioner.” Page 97 of 6 Cal.2d, page 1224 of 56 P.2d. The Supreme Court held that the obvious answer to this contention was to be found in the provisions of § 13.11; that if any impairment, technical or otherwise, existed the commissioner “might in his discretion take over the business, property, and assets of the association showing such impairment. * * * The statute plainly sets out the conditions upon which the commissioner was entitled to take over the assets, and we do not believe that the power and authority of the superior court was so enlarged by the use of the words in the statute, ‘upon its merits' that it could determine that the action of the commissioner was not justified when the evidence before it showed the existence of such conditions.” Page 98 of 6 Cal.2d, page 1224 of 56 P.2d. The court then held that § 13.12 protected the association from any arbitrary or unjust seizure. The appellant association ththen contended that the superior court had power in a proceeding under § 13.12 to determine, even if the seizur was proper, that the retention of possession was unjustified. At page 100 of 6 Cal.2d, at page 1225 of 56 P.2d, the court stated: “We find no merit in appellant association's further contention that the retention of the business, property, and assets of the association by the commissioner was not justified. The statute * * * provides that the commissioner shall retain possession ‘until such association shall with the consent of the commissioner, resume business, or until its affairs be liquidated. Such association may, with the consent of the commissioner, resume business upon such conditions as may be approved by him.’ It appears from this language that the commissioner having once rightfully taken possession of the assets of an association, it lies in his sound discretion whether he will retain possession of them or return them upon an approval of some plan of reorganization.”

It is the law that where a question of fact has been committed to a particular officer, his determination will not ordinarily be reviewed by the courts, except as provided by statute, except for gross abuse of power. In Bank of Italy v. Johnson, 200 Cal. 1, 34, 251 P. 784, 797, in referring to prior decisions, the court stated the rule as follows: “* * * this court held that, when subordinate boards or commissioners were by statute invested with discretion with respect to the exercise of their powers, courts would not interfere with such discretion in the absence of grave reasons tending to show that fraud, corruption, improper motives or influences, plain disregard of duty, gross abuse of power, or violation of law had entered into or characterized the determination of such bodies; and that, in the absence of such showing of an abuse of discretion, the determination of such board or commission would not be interfered with or overthrown.” See, also, McGinty v. Gormley, 181 Ga. 644, 183 S.E. 804; Fidelity & Casualty Co. of New York v. Brightman, 8 Cir., 53 F.2d 161; In re Dade County Security Co., 112 Fla. 444, 153 So. 505; Deatsch v. Fairfield, 27 Ariz. 387, 233 P. 887, 38 A.L.R. 651, applying this rule to state commissioners in taking possession of financial institutions; see, also, United States Sav. Bank v. Morgenthau, 66 App. D.C. 234, 85 F.2d 811; North American Building, etc., Ass'n v. Richardson, 6 Cal.2d 90, 56 P.2d 1221; Evans v. Superior Court, 20 Cal.2d 186, 124 P.2d 820.

How do these principles apply to the instant case? On pages 6 and 7 of the majority opinion [146 P.2d 432] it is held that the commissioner was legally justified in the seizure because the association refused to permit certain papers to be examined, and in fact, destroyed them after demand. Under § 13.11 it is made a ground of summary seizure “if any association shall refuse to submit its books, papers and accounts to the inspection of the commissioner or any of his examiners, deputies or assistants * * *.” The majority opinion does not disclose the facts surrounding this occurrence. The facts are summarized by the trial court in finding No. 15, which reads as follows: “Shortly prior to February 20, 1939, the Commissioner determined to make an extra examination of and to devote extraordinary attention to the affairs of Pacific States, and he authorized his Chief Examiner, Milton O. Shaw, to make such examination, with such assistants as he might choose. On February 17, 1939, pursuant to such authority, Shaw appeared at the office of Pacific States and demanded that he be permitted to make such examination without any restrictions on his activities by Pacific States in so doing. Pacific States refused to permit him to make such examination but on February 20, 1939, Pacific States stated that it would permit such an examination and thereupon the examination commenced. Shortly thereafter Shaw found on the books and records of Pacific States certain figures which were designated ‘S.T.P.’ and ‘S.C.P.’ He was informed by its employees that these symbols respectively designated ‘sacrifice Term price’ and ‘sacrifice cash price’, that they were related to the assets of Pacific States and that they were supported by appraisals in its files. The figures designated as ‘sacrifice term price’ were in truth and in fact figures representing the fair market value of the assets of Pacific States as determined from time to time by appraisers employed by it. Shaw thereupon, on or about February 21, 1939, asked Pacific States to show him such appraisals. He was informed by employees of Pacific States that they could not be located. Immediately after Shaw's demand, and after Odell had been informed thereof, Odell directed the officers and employees of Pacific States to remove all of such appraisals from its files and destroy the same, and on February 23rd and February 24th, 1939, such officers and employees did secretly remove substantially all of such appraisals from the files of Pacific States, caused them to be taken to the Central Tower Building in San Francisco and to the Hermoyne Apartments in Los Angeles, and there burned them. Odell, prior to the destruction of such records, and prior to ordering their destruction, was advised by one of the attorneys for Pacific States that the Building and Loan Act required it to permit Shaw to inspect such documents. Those documents were destroyed by Pacific States for the purpose of preventing the Commissioner and his examiners and assistants from inspecting them and their destruction constituted a refusal by it to submit them to the inspection of the Commissioner and his examiners and assistants. Those appraisals showed that the fair market value of the assets of Pacific States on March 4, 1939, was many millions of dollars less than the valuations at which such assets were carried on the books of Pacific States. The destruction of these appraisals was a violation, among other things, of the Uniform Classification of Accounts established and prescribed by the Building and Loan Commissioner of California.” The finding is supported by ovewhelming evidence. It should be pointed out that under § 10.02 of the Act it is provided that: “A director, officer, agent or employee of any association shall be guilty of a felony who * * * Having the custody or control of its books, wilfully refuses or neglects * * * to exhibit or allow the same to be inspected and extracts to be taken therefrom by the commissioner, or any of his deputies or examiners.”

These facts, according to the majority opinion, justified the commissioner in the seizure of March 4, 1939. In other words, the majority opinion holds that the seizure on that date was lawful. But, says that opinion (p. 7 [146 P.2d 432]), “There is a great deal of difference between the right of seizure and the subsequent right of liquidation.” The opinion then goes on to hold that because, according to the concept of value adopted by the majority, a certain element was omitted by the trial court in its definition of value, there was no proper evidence of impairment of assets, and therefore the commissioner was not justified in liquidating the company. Thus the majority opinion falls into the fallacy of assuming that there were two separate issues before the trial court––the validity of the seizure, and the validity of the commissioner's determination to liquidate. As already demonstrated, that last issue was not and could not be involved in this proceeding. Once it is determined that the seizure was valid, the only other question involved is whether the commissioner abused his discretion in retaining the assets of the company after the seizure. That is an entirely different question from whether or not he abused his discretion in determining to liquidate. Certainly it is reasonable to believe that where a company or its officers have committed any of the serious offenses warranting a summary seizure under § 13.11, the commissioner, in the exercise of his legislatively conferred discretion, might determine to retain the assets and operate the company even if it were solvent. To hold that after a lawful seizure the only question involved is whether or not the company shall be liquidated or returned to the management is to disregard completely the provisions of the Act conferring the power on the commissioner to operate the business and to reorganize. The majority opinion necessarily stands for the proposition that where there has been a lawful seizure, unless the company must be liquidated, it must be returned to its management, even where that management may have been guilty of very serious acts, including the possibility of being guilty of a felony. That is not what the Act provides.

As already pointed out, once it has been determined that the seizure was valid for any reason, the only other possible issue involved in a proceeding under § 13.12 is whether the commissioner abused his discretion in retaining the assets. Certainly it is not to be seriously contended in the instant case, and certainly the majority opinion does not hold, that there was “fraud, corruption, improper motives or influences, plain disregard of duty, gross abuse of power, or violation of law” (Bank of Italy v. Johnson, 200 Cal. 1, 34, 251 P. 784, 797) on the part of the commissioner in determining to retain control of this company after he had lawfully seized the company.

The majority opinion converts this proceeding under § 13.12 from one to test the validity of the seizure and the retention of assets, into a proceeding to determine whether or not this company should be liquidated. I can find no statutory or other legal authority, and certainly the majority opinion refers to none, that directly or indirectly permits such issue to be tried in a proceeding authorized by § 13.12.

The following conclusions seem to me inevitable. Once it is determined, on competent evidence, that the seizure was valid for any of the reasons set forth in § 13.11, and once it is found, on competent evidence, that the commissioner did not abuse his discretion in retaining control of the company, the jurisdiction of the trial court invoked under § 13.12 is at an end. The trial court must then dismiss the proceeding, as it did in this case. It follows that, if the only facts found related to the refusal to produce the books and the wilful and deliberate and unlawful destruction of the records, this court would have to affirm the judgment dismissing the action brought under § 13.12.

But, of course, these were not the only facts found. The trial court found many other reasons why the commissioner was justified in making the seizure and retaining the assets. The chief theory running through these findings is that, after the association began to get into difficulties at the commencement of the late depression, Odell conceived the idea of converting this building and loan association into a real estate holding and operating company dominated by State Guaranty, which in turn was controlled by Odell, and in which he and his family had a large stock ownership. Pursuant to that general plan a number of corporations were organized by Odell which were, in fact, the alter ego of Pacific States and Odell. Thereafter, many transactions were entered into by which Odell prevented cash from coming to Pacific States, which cash would have been available to the many investment certificate holders who had filed notices of withdrawal, and used to purchase large holdings in the nature of hotels, ranches, office buildings, etc. This necessarily resulted in certificate holders who needed cash being forced to sell their certificates at a discount. Large sums were diverted by Pacific States to the purchase of such certificates at a discount. Campaigns were indulged in and high pressure tactics used to induce certificate holders to sell or exchange their certificates. The main indebtedness of the company was to its investment certificate holders. By this means the outstanding certificate liability which in 1931 was about ninety–one million dollars was reduced so that in 1939 it was forty–six million dollars. The majority opinion says that this was accomplished through “careful management.” p. 4 (146 P.2d 432). According to the findings of the trial court, which findings are amply supported by the evidence, it was accomplished through various unlawful means aimed at freezing out these certificate holders. The majority opinion several times emphasizes that there is no evidence in the record that any certificate holder objected to these tactics. While this may be technically correct, this court may take judicial notice of its own records. There is now pending on appeal in this court the case of King v. Pacific States, Civ.No.12,386, in which some certificate holders who were forced to sell at a discount are challenging very vigorously the validity of the activities above mentioned.

These transactions are far too numerous and complicated to describe in detail in this opinion. They are described in careful detail in the findings. They may be grouped generally as follows:

1. For a number of years prior to the date of the seizure the association engaged in numerous transactions which were called “exchanges” of real property owned by it for large holdings owned by others. In fact such transactions were not exchanges. Many parcels of property owned by the association were sold through Auxiliary or other agencies of the association to third parties for cash, and the cash was used by Auxiliary or the other agencies to buy for plaintiff these large holdings. The same result was accomplished by Auxiliary selling Pacific States holdings for cash and using the funds to purchase bonds long in default for the sole purpose of foreclosing such bonds and acquiring the large properties which were pledged as security for the bonds. These transactions continued right up to March 4, 1939, the evidence showing that on that date many such transactions were pending. These purchases were in direct violation of the Act. § 9.02.

2. Through Auxiliary the Pacific States would sell parcels of its real estate for cash, and then Auxiliary would use this cash to purchase investment certificates at a discount. These certificates were then turned over to Pacific States and canceled. From 1932 down to the time of seizure Pacific States carried on an aggressive and sometimes high pressure campaign through its own employees and through its alter ego Auxiliary to purchase its investment certificates at a discount, and for the exchange of such certificates for a less desirable type. It furnished various brokers lists of its certificate holders for this purpose. These transactions continued until the time of seizure, and resulted in investment certificate holders who owned certificates in the value of in excess of twenty–six million dollars receiving but seventeen million dollars therefor.

3. Rather than accept cash from its tenants in many of its properties, the association through Auxiliary offered such tenants a discount if they would pay the rent in investment certificates which were sold to such tenants by Auxiliary. This clear violation of the law continued until February 16, 1939, when the commissioner discovered what was being done. On that date the commissioner issued a cease and desist order. The association thereafter discontinued this practice, except for a few transactions. The trial court found, however, that (finding No. 36): “On or about February 17, 1939, however, Pacific States, with the intention of continuing its plan, policy and practice of purchasing and acquiring its investment certificates at a discount, devised a new method of doing so, by which Auxiliary would borrow money from Pacific States on investment certificates and use such money to purchase additional certificates, and by which it was contemplated that Auxiliary would never pay off the loans so made by Pacific States, but that Pacific States, in settlement of such loans, would take over its investment certificates held as collateral therefor, and would thus acquire its own certificates at a discount. Pacific States intended to put that new method into practice and if defendant Commissioner had not taken possession of Pacific States on March 4, 1939, would have done so.”

4. Through various accounting practices, described in detail in the findings, these practices were hidden from the commissioner and from the investment certificate holders. These accounting practices not only were in violation of the accounting practices ordered by the commissioner, but resulted in the books of the company failing to disclose that the liabilities of the company exceeded its assets by more than ten million dollars.

These findings describing the methods used by the company, are admittedly supported by the evidence. There is a dispute as to whether such methods were legal.

The court found, and the finding is amply supported, that the effect of these transactions was to convert this building and loan company into a huge real estate holding and operating company––that in truth and in fact it was no longer a building and loan association as contemplated by the Act. The court concluded that this justified the commissioner in seizing the company because these transactions demonstrated that the company was “conducting its business in an unsafe or injurious manner * * * such as to render its further proceeding hazardous to the public or to any or all of its investors.” § 13.11 of the Act.

Evidence relating to these transactions was clearly admissible. If these transactions demonstrated, as the trial court found, that the management of Pacific States had so distorted the corporate functions and purposes of the company that it was no longer a building and loan association in fact, and such change in purpose was injurious to the investors, and if in fact, on March 4, 1939, the company was then in an unsafe condition, evidence of how that company arrived in that condition was clearly admissible. The evidence was admissible not to charge the company with derelictions occurring prior to 1937, but to explain its condition on March 4, 1939. The evidence was also admissible to show that the various corporations involved were, in fact, controlled by Odell and were the alter ego of Pacific States.

The majority opinion condones these practices on several grounds. It suggests, without argument, that many of these practices were expressly permitted by the emergency legislation of 1933–1937. The suggestion is unwarranted. While the main provisions of the Act still in effect permit an association to “exchange” its properties for other properties, and while the emergency provisions of the Act permitted the exchange of properties for certificates, there was no provision of the Act that ever permitted an association to sell its properties for cash, and to use that cash, directly or indirectly for the purchase of other properties, except for office purposes. There was no provision of the Act that ever permitted an association to use its cash for the purchase of its own certificates at a discount, cash that otherwise would be available to pay certificate holders who had withdrawal notices on file. While the emergency legislation permitted debtors of the association to pay off loans in certificates, that legislation did not permit the associations to refuse cash for such loans, and did not authorize an association to offer inducements to borrowers not to pay in cash but to pay in certificates which were sold to such borrowers by the association through a dummy corporation. Such transactions were direct violations of the duties owed the investment certificate owners, particularly those who had withdrawal notices on file.

In apparent recognition that its argument that these transactions were authorized by law is questionable, the majority opinion offers three arguments which it contends make these transactions unavailable as grounds of seizure. These arguments are: (1) That in fact such transactions benefited the association, and benefited the certificate holders still remaining in the company; (2) that Odell did not personally profit therefrom; (3) that former commissioners approved all such transactions, and the commissioner in office on March 4, 1939, and the state, are estopped from now challenging such transactions.

The first two arguments have no relevancy to the problem involved. If the transactions were unlawful, as they were, the facts that they benefited the association, or that Odell and his associates did not make a personal profit therefrom are totally irrelevant. The argument that the end justifies the means is a strange argument for a court to advance in support of illegal transactions. It is true that by the illegal means used the certificate liability of the company was materially reduced. It is true that as to the certificate holders remaining in the company, owning some forty–six million dollars of certificates, their position was benefited by such transactions. But what about those certificate holders who owned some twenty–six million dollars of certificates who were forced to sell their certificates at a discount? The management of the association was trustee for those certificate holders. It violated that trust. Some of the certificate holders, as the case of King v. Pacific States, Civ. No. 12,386, referred to above, illustrates, are vigorously protesting this violation of trust. The fact that Odell and his associates made no personal gains from these transactions is a false issue. It should be mentioned, however, that Odell and his family have a large stock holding in State Guaranty. State Guaranty owns all the guarantee capital stock of Pacific States. Every reduction in value of the certificate indebtedness of Pacific States added just that much to the possibility of value attaching to the State Guaranty stock, both common and preferred. If the entire certificate indebtedness of Pacific States could have been paid, the assets of that company would then belong to State Guaranty.

The argument that former commissioners approved all of these transactions states only a half truth. It is true that former commissioners approved most of the so–called “exchanges.” But the record shows that these approvals were not based on full knowledge of the facts. There is no evidence that the commissioners knew that Auxiliary and State Guaranty, and Guaranty Auxiliary were agents and the alter ego of Pacific States. Findings Nos. 1 to 3 of the trial court disclose the factual situation upon which the conclusion that they were all the alter ego of Pacific States is based. The facts as to the stock ownership and the interrelations of these companies are not disputed. Part of finding No. 2 reads as follows:

“Ever since 1929 Pacific States, State Guaranty, Auxiliary and Guaranty Auxiliary, and their respective officers and directors, have been and they were on March 4, 1939, dominated and controlled by and on behalf of Odell, and at all of those times Pacific States, Auxiliary and State Guaranty have been practically one organization, and for business purposes and in the transactions of business of Pacific States Auxiliary and State Guaranty have at all times been so closely identified as to be one legal entity.

“At least a majority of the directors of these three corporations has been dominated and controlled by and subordinate to and the instrumentality of Odell. Pacific States, Auxiliary and State Guaranty have at all times since about the year 1929 been the alter ego of each of the other two of such three corporations. At all of these times Pacific States, Auxiliary and State Guaranty have maintained their offices at the same place except that Auxiliary and State Guaranty moved their offices from the offices of Pacific States on or about February 25, 1939, and each of them has used the same equipment, paraphernalia and other properties in the conduct of its business which has been used by each of the other two. Each has been carrying on and conducting portions of the same business conducted by each of the other two. State Guaranty and Auxiliary have, during the times mentioned, operated with Pacific States as part of a plan and program and have followed that plan and program. There is such a unity of interest and ownership between and among Pacific States, Auxiliary and State Guaranty that the separate identities of such corporations have ceased and adherence to the fiction of separate corporate existence of such corporations would, in the circumstances, sanction a fraud and promote injustice and place a premium upon the improper and unlawful conduct of these corporations which is more fully described elsewhere in these findings. The directing personnel and operations of the three corporations are and have been inextricably interwoven and they were never considered by Odell, who continuously dominated and controlled them, as being separate and distinct but were at all times viewed by him as incident to and instruments for the furthering of such improper and unlawful conduct.”

There is no evidence that the commissioners knew all these facts. Moreover, no commissioner ever sanctioned the diversion of cash that would otherwise be available for investment certificate holders for the purchase of certificates at a discount. The commissioners did not know, when they approved the exchange transactions, that many of the parcels “exchanged” by Pacific States were or could be sold for cash. In finding No. 89 the trial court found that: “On June 3, 1936, the Building and Loan Commissioner of California ordered that every purported exchange transaction whereby Pacific States disposed of real estate and acquired other real estate, must be a bona fide exchange of properties and that properties disposed of must be properties for which there was no ready or immediate sale either for cash or upon terms advantageous to Pacific States. He further ordered that Pacific States must not, directly or indirectly, divert the sale of any of its property to the party with whom it was purporting to make an exchange. Thereafter and continuously down to March, 1939, Pacific States engaged in transactions which purported to be, but which in fact were not, bona fide exchanges of properties, and disposed of hundreds of properties in such transactions for which there were ready and immediate sales, but for cash and upon terms advantageous to Pacific States, and Pacific States, frequently, both directly and indirectly, diverted the cash which it was to receive from any sales of property, which could be sold for cash or upon good terms, to purchase properties acquired by it from the parties with whom it purported to be making exchanges. Since June 3, 1936, Pacific States has consummated at least 83 such purported exchanges in violation of the order of the Building and Loan Commissioner.”

This finding is amply supported. Defendant's Exhibit 181 is a letter from commissioner Drapeau to Odell dated June 3, 1936, containing the purported approval of the Taylor Ranch transaction. The letter states that the commissioner does not oppose the principle of exchanging many small parcels which are “difficult properties to service and handle, for one large parcel of property.” The letter continues: “As I understand the principle of these exchanges, your association finds it difficult to handle a dwelling house or small apartment house in a town or city more or less remote from San Francisco or Los Angeles. In addition to this type of property, you have a large number of urban properties consisting of dwelling houses, small apartments, and duplex apartments, which do not (and probably never will) pay to hold for sale, in the normal course of servicing and disposing of real estate * * *

“However, there is one matter in connection with this exchange which I want to have very definitely understood at all times. It is to be, and must be, a bona fide exchange of properties, and the properties which you trade must be properties for which there is no ready or immediate sale, either for cash or upon terms advantageous to the association. In other words, if any of the properties of the Pacific States Savings and Loan Company on the market are capable of being sold for cash or upon good terms, and if in fact such a sale can or would be made, and if in fact the Pacific States Savings and Loan Company directly or indirectly holds up such a sale or knowingly diverts the sale to the party with whom the main exchange is made, then I feel that the whole principle upon which the main transaction is based must fail. In our conference of a month or two ago * * * I quite definitely expressed this thought to you. I am committing it in writing so that there may be no misunderstanding of my position.” (Italics, except as to the word “bona fide”, added.) Yet in this very transaction many parcels were “exchanged” by selling them, in the escrow, for cash, and as to many of the parcels cash offers had been received and refused. This is the type of approval relied upon.

The majority opinion then argues that the assumed prior approval of the commissioners constituted a ratification of such acts, and that the state is now estopped to challenge such acts. As already pointed out, there was no real approval by the prior commissioners because the true facts were hidden from them just as they were hidden from the investors. But even if there had been approval of these acts by prior commissioners such approval could not constitute a “ratification,” nor create an “estoppel.” The majority opinion cites Farrell v. County of Placer, Cal.Sup., 145 P.2d 570, in support of this startling doctrine. These transactions were illegal. It needs no citation of authority to support the rule that ratification and estoppel have no application to such illegal acts. As I read this portion of the opinion, the majority of this court is holding that if a commissioner once approves an illegal transaction, subsequent commissioners are forever estopped from challenging such transaction, even though it has resulted in the company being placed in an unsafe and unsound condition so far as its investment certificate holders are concerned. This is an astounding use of the doctrine of estoppel. Neither the Farrell case, nor any authority cited therein, supports such a conclusion. It is one thing to hold that the state or its agencies are estopped in dealing with an individual, but an entirely different thing to hold that a commissioner, representing the state, is estopped in dealing with an association, which in turn owes a fiduciary duty to its investment certificate holders. It is not a question of “right” or “justice” between the commissioner and the corporation, but a question of the “right” or “justice” to the investment certificate holders. If this company, on March 4, 1939, was in an unsafe condition so far as investment certificate holders are concerned, as found by the trial court, no approval of a prior commissioner could estop the then commissioner from doing his duty as imposed upon him by the Act. If authorities are necessary for such a fundamental concept they may be found in Magruder v. City of Redwood, 203 Cal. 665, 265 P. 806; Wood v. Imperial Irrigation District, 216 Cal. 748, 17 P.2d 128; Lukens v. Nye, 156 Cal. 498, 105 P. 593, 36 L.R.A.,N.S., 244, 20 Ann.Cas. 158; Connally v. Continental–Southland Savings & Loan Ass'n, 121 Tex. 565, 51 S.W.2d 293; State v. Northwestern Inv. Co., 70 Wash. 381, 126 P. 895; Southwestern Distilled Products v. State, 199 Ark. 761, 136 S.W.2d 166; City of Hutchinson v. White, 117 Kan. 622, 233 P. 508; Federation Bank & Trust Co. v. Hammons, 176 Misc. 447, 26 N.Y.S.2d 56; McKay v. Public Utilities Commission, 104 Colo. 402, 91 P.2d 965; Department of Insurance v. Church Members R. Ass'n, 217 Ind. 58, 26 N.E.2d 51, 128 A.L.R. 635.

From what has been said it is clear that the trial court was justified in approving the seizure either because of the refusal to produce and the destruction of the records, or, because of a series of illegal transactions starting in 1932 and some of them continuing right up to March 4, 1939, the corporate purposes and functions of this association had been so distorted and changed that it was no longer a building and loan association, and such association was “in an unsafe condition” or was “conducting its business in an unsafe or injurious manner * * * such as to render its further proceeding hazardous to the public or to any or all of its investors” within the meaning of § 13.11. For either of these reasons the judgment should be affirmed.

The trial court also found that the assets of the company were impaired, in an amount exceeding ten millions of dollars. This finding is predicated on two different sets of facts.

In the first place, the books of this company were submitted to competent and experienced accountants. Using those books, but applying to them the uniform classification of accounting system established and prescribed by the commissioner for all associations, and applying to them proper accounting practices as defined by the experts, it was discovered that if the books had been kept properly they would show an impairment of assets of over ten millions of dollars.

The trial court also undertook to appraise the assets of this company, to ascertain whether or not its assets were impaired within the meaning of § 13.11. To this end it appointed certain experts and gave them certain definitions of “value” to be used by them in appraising these assets. These experts, using those standards of value, found that the assets were impaired in excess of ten millions of dollars. The majority opinion holds that these definitions unduly restricted the experts because they did not include what the opinion refers to as a “going concern” value, and that for that reason such evidence does not support the findings relating to impairment. With these conclusions I must respectfully but vigorously disagree. In my opinion, the trial court's definitions included every element that should be included for the purposes of ascertaining whether the assets of this company were impaired sufficiently to permit the commissioner to seize and operate the company.

In its discussion of impairment of assets the majority opinion carries to a logical conclusion the basic error upon which the entire opinion is predicated––namely, that the issue before the trial court was whether the assets of this company were so impaired that the company should be liquidated. The whole discussion of impairment of assets in the majority opinion is colored by the thought that the trial court decided, or that the effect of its decision was, that the assets of this company were so impaired that it should be liquidated––that the purpose of determining whether assets are impaired within the meaning of § 13.11 of the Act is to ascertain whether the company should be liquidated. The fallacy of this conclusion has been fully discussed in the first part of this dissent. Section 13.11 provides that if the commissioner shall find that an association's “assets are impaired to such an extent that, after deducting all liabilities other than to its investors they do not equal or exceed the sum of the value of its outstanding shares and investment certificates and the par value of its outstanding stock * * * then the commissioner may forthwith demand and take possession of the property, business and assets of such association and retain such possession until such association shall with the consent of the commissioner resume business, or until its affairs be liquidated.” The purpose of determining whether assets are impaired within the meaning of this section is not to determine whether the company shall be liquidated, but to determine whether the commissioner shall take over. Once he takes over he may operate, rehabilitate, or liquidate. The factors that will be considered by the commissioner in determining whether to liquidate may be entirely different from those that control his action in determining to take over a company. Conceivably, in determining whether to liquidate or to continue to operate, he will consider whether the company has a reasonable chance to pay off all its debts––the so–called “going concern” value that is discussed in the majority opinion. But that question is an entirely false issue when it comes to the question as to whether he shall take over the company and operate it. The legislature determined that when a company's assets are impaired, the commissioner could take over for the protection of the investment certificate holders and the public. The legislature determined that it was in the best interests of all concerned that when the assets were impaired the commissioner and not the management that had brought the company to that condition should have the right to attempt to work such a company out of its financial difficulties. Then after the commissioner has taken over, the commissioner determines whether to operate the company or to liquidate. The propriety of this determination is not involved in this proceeding. As already pointed out, while it is true that the commissioner has filed a notice of intention to liquidate, that determination is even not yet final. In spite of the fact that the assets may have been impaired on March 4, 1939, to the extent of ten millions of dollars, it might be that because of the present abnormally high real estate values, this company might, as of today, have some reasonable prospect of working out its troubles. If the commissioner should so decide, he could, as of the present, stop liquidation, and operate this company until its financial condition was such that it could safely resume business. Any discussion of the meaning of impairment of assets within the meaning of § 13.11 must start with the fundamental concept that the purpose of ascertaining that fact is to determine whether the company should be taken over and operated by the commissioner or whether the old management should continue to operate it. The question as to whether the company is so insolvent as to require liquidation is not involved under that section, or under § 13.12.

If the purpose of determining whether assets are impaired within the meaning of § 13.11 be kept in mind, the determination of what the legislature intended by the use of that phrase is a reasonably simple task. It seems clear to me that any time the assets of a company, if sold at other than a forced sale, would not equal the liabilities, so that the creditors, and particularly the investment certificate holders would not be paid in full, the legislature intended that the company, could, in the discretion of the commissioner, be seized and operated by him. The majority opinion, however, is based on the theory that even where a company has reached that dangerous condition, the commissioner must stay his hand––he cannot lawfully take over, even where the company is insolvent according to this test, until he also determines whether or not as a “going concern,” the company may have a reasonable possibility of paying off its debts. In other words, he must stay his hand until the company is so hopelessly insolvent that it has no reasonable possibility at all of paying off its debts. If this had been the intent of the legislature it would mean, in every case, that the commissioner could not lawfully take over because of impairment of assets, until the company was hopelessly insolvent. Every association, when seized, under such a test, would be in such a condition that it would have to be liquidated. Then what becomes of the legislatively conferred power to operate the company, and if rehabilitated, to permit it to resume business? Why would the legislature confer such a power, and then render it totally ineffectual by such a definition of impairment of assets? The answer is clear. The legislature intended, and in my opinion has provided, that when a company was in such a financial condition that it could not, if liquidated, pay off its debts, the commissioner and not the management should be entrusted with its operation.

Any other rule would be extremely dangerous for the investment certificate holders. If the commissioner has the power to take over and operate whenever an association is insolvent as measured by a liquidation test, it means that he can then decide whether the investment certificate holders will best benefit by immediate liquidation, in which event the losses will be relatively small, or whether he should attempt to rehabilitate. But if he is prohibited from seizing the company until it is not only insolvent according to a liquidation test, but until all reasonable possibility of rehabilitation is gone––until the company is so hopelessly insolvent that there is no possibility of rehabilitation––then the investment certificate holders, in all cases, will suffer very serious losses.

That the legislature intended that no such element as “going concern” value, as defined in the majority opinion, should be required to be considered by the commissioner in determining whether to seize a company, and that no such element should be required to be considered by the trial court in passing on the validity of the seizure, is made clear by other provisions of the Act. In 1935 the legislature adopted an article of the building and loan act, as part of the emergency legislation, providing for the rehabilitation and reorganization of building and loan associations under certain circumstances. Art. XVI, Stats. of 1935, at p. 814. That plan required the consent of certain designated types of creditors, including the investment certificate holders, but provided that shareholders' consents were not required “if the value of the assets of such association shall be less than the liabilities of such association, including the value of its investment certificates but not including the value of its shares, or if the business, properties and assets of such association be then in the possession of the commissioner. For the purpose of this article, real property, contracts for the sale of real property, loans, and all other assets (whether like or unlike the foregoing) shall be valued at what may reasonably be expected to be realized therefrom in the orderly and proper conduct of a going business.” § 16.04. (Italics added.)

Thus, when the legislature wanted to include a “going concern” value in determining whether certain action should be taken, it knew how to use appropriate language. But in so doing, it was careful to limit that definition to the “purpose of this article.” Why this careful limitation and careful and appropriate use of language if that definition was the one intended for impairment of assets under § 13.11? Yet the majority opinion quotes this emergency section (opinion p. 30 [146 P.2d 444]) as an indication that “going concern” values must be included in § 13.11. There is no basis for such a conclusion. The legislature knew what it was doing. When it wanted to include a “going concern” value it so provided. When it did not so intend it omitted such provision.

The majority opinion falls into the same fallacy in applying the rule of the cases decided under § 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, to § 13.11. It will be noted that nearly every case cited in the majority opinion that requires a “going concern” value, in the sense of debt paying ability, to be included in a definition of value has to do with reorganizations under the Bankruptcy Act. Of course, in determining whether a company shall be reorganized, which usually requires a scaling down of its debts, the determinative question is whether, if the debts be so scaled down, the company will have a reasonable possibility of working out its financial problems. For that reason the legislature provided in § 16.04 of the State Act, and the federal Congress provided by necessary implication in § 77B of the Bankruptcy Act, that one of the factors to be considered was the “going concern” value––the prospects of it paying its debts––of the company that was proposed to be reorganized. But that is an entirely different proposition from the test to be applied in determining whether the commissioner may lawfully seize and operate the company, before he has determined whether to reorganize, rehabilitate or liquidate.

The phrase “going concern value” is a chameleon–like phrase that changes its meaning dependent upon the purpose for which it is being used. It has various meanings, dependent upon whether the problem involves rate fixing for utilities, reorganizations, or insolvency. The majority opinion is careful to define the meaning with which it uses the term. It holds that in addition to the liquidation value of the assets, the trial court should have permitted evidence of the debt paying ability of this company as a “going concern.” In other words, before a commissioner may lawfully seize a company he must not only determine whether the company is insolvent in the sense that, if liquidated, it could not pay its debts, but also must engage in guess, surmise and conjecture by adding to the value of the assets so ascertained some vague, uncertain, cryptic and ambiguous value known as “going concern” value. If this be so, as already pointed out, no commissioner could lawfully seize a company until it was hopelessly insolvent. The protection to the investment certificate holders, and other creditors, intended by the Act would not exist, and the legislative intent would be thus thwarted. It is of some significance that the majority opinion does not attempt to define market value for the benefit of the trial court in the event of a reversal. All that is said is that this vague and uncertain thing known as “going concern” value must be included. How could a trial judge instruct experts, or pass on admissibility of evidence on the issue by what is said in the majority opinion?

Just what is it that the trial court did in this case? It told the experts, in the three directions quoted in the majority opinion, that in valuing the assets of this company they should determine the “market value” of those assets. The liabilities of the company, at least so far as its liabilities based on investment certificates are concerned, were admitted. Thus the trial court determined that if all the assets of this company were valued at their market values, and if such values were less than its indebtedness, that then the company's assets were impaired within the meaning of § 13.11 so as to warrant the seizure. That is the traditional way of ascertaining whether a company is insolvent. The definition of value given is correct, unless “going concern” value must be added thereto. Appellants make some attacks on this definition, but the majority opinion relies upon only one objection––it fails to include the possibility of the company paying out independently of the fact that its assets could not be sold for enough to meet liabilities.

It is also of some significance that appellants do not seriously urge that “going concern” value, in the sense of debt paying possibilities, should have been included. When they refer to “going concern” value they are apparently using the phrase to mean the amount by which the value of the assets as a whole, assembled together for the conduct of a business, exceeds the aggregate of the value of the separate items of property. That concept has received frequent discussion in cases involving the valuation of franchises and public utility properties for rate making. Obviously a dozen separate franchises, making an integrated unit, may be more valuable than the totals of the values of each separate franchise. But such a concept could have application to a situation such as the one here involved only if there had been a possibility of selling all the assets of this association to a single purchaser. No one has ever hinted or claimed that such a prospect ever existed. The majority opinion carefully, and properly, excludes this concept of “going concern” value, and bases its conclusion on a concept that is only incidentally if at all urged by appellants.

The appellants stated their main objections to the definitions given by the trial court during the trial as follows:

“1. It excludes the element relation to the value at which a prudent owner willing, but not forced to sell, would accept, and ignores the rule that market value includes the amount for which a willing seller would sell to a willing buyer with full knowledge of all the facts.

“2. It excludes the element of sales from consideration where made for part cash and mortgage or deed of trust for the balance of the purchase price.

“3. It excludes the element of exchange value, that is, where one property might be exchanged for another as authorized by the Building and Loan Association Act.

“4. It excludes the element of sales under contract, where a party enters into possession of the property and pays for it in installments over a period, then obtaining title after full payment.

“5. It excludes the necessary element of a fair market or normal market existing at or near the time of appraisement. Thus it is made to apply to the value of properties for which no market existed as of the date of the appraisement.” Rep.Tr. p. 18367; quoted Op.Br. p. 220.

If the test is to be liquidation value, cash prices control. Liquidation implies a winding up, a closing out of a business, within a reasonable time. Sales allowing time to pay the purchase price, whether by means of a mortgage or installment contract of sale, of such length as substantially to raise the price are not customary where a business is being wound up. For the same reason exchange values are not the test. Where property of a business is being disposed of in liquidation it will rarely be exchanged for other property. Where the matter has been the subject of express reference the statements in the cases are to the effect that it is the amount for which the property can be sold for cash which is to be estimated. People ex rel. Nelson v. First State Bank, 274 Ill.App. 46; Johnson v. Land Title Bank & Trust Co., 329 Pa. 241, 198 A. 23; Mitchell v. Investment Securities Corp., 5 Cir., 67 F.2d 669. For that matter the majority of sales, whether or not made in liquidation, are for cash to the owner. The purchaser customarily borrows from a bank or other financial institution in order to pay cash to the owner.

Appellants also object that the definition as given by the court assumes a willing buyer, but fails to make clear to the experts that they should also assume a willing seller. Statements to the general effect that market value is the amount for which the property could be sold by a willing seller to a willing buyer have acquired wide judicial currency. The instructions herein given to the experts do not employ these words. There are two types of “unwilling” seller, the one who is forced to sell at a low figure because of necessitous circumstances, and the seller in prosperous circumstances who is without special reason for selling and not interested except at a high figure. In the second of the instructions given by the trial court to the experts, they were told expressly that they were not to consider what the property would bring at a forced sale. Any omission to exclude expressly the unwilling non–necessitous seller is favorable to appellants, since such a seller tends to sell at a high figure.

Insofar as the willing–buyer, willing–seller phraseology is interpreted as having greater meaning than to exclude forced sales and sales at hold–up prices, it has been severely criticized by judges and writers. Whether a seller is willing to sell, or the buyer to buy, depends on the price at which the property can be sold or bought.

In M'Gill v. Commercial Credit Co., D. C., 243 F. 637, 647, the court said of the willing–seller, willing–buyer test:

“The effort is to find out not what a real buyer and a real seller, under the conditions actually surrounding them, do, but what a purely imaginary buyer will pay a make–believe seller, under circumstances which do not exist. You are forced to wonder what would have happened if everything had been different from what it was. It is not easy to guess what will take place in Wonderland, as other people than Lewis Carroll's heroine have found out.”

Judge Learned Hand's comment is: “ ‘Willing’ adds nothing, for, if the trade goes through at all, both must be willing, and the degree of their reluctance is not a serviceable measure.” Helvering v. Walbridge, 2 Cir., 70 F.2d 683, 684.

Bonbright says: “In short, we are convinced that the willing–buyer, willing–seller incantation is a great bar to clear thinking in the law, and that it has no more place in legal opinions than it has in the literature of economic theory.” 1 Bonbright, Valuation of Property, p. 61. The author gives point to his remarks by quoting the willing–buyer, willing–seller test as given in Parish & Co. v. Yazoo, etc., R. Co., 103 Miss. 288, 60 So. 322, 323: “The ‘market value’ of a commodity, in its last analysis, means the price which it will bring in cash from a buyer who is willing to pay its value.” The author says of this statement: “But this attempt to give precision to the phrase simply impales the court on the other horn of the dilemma, for it runs into a vicious circle. It makes market value depend on a hypothetical sale, and it makes the price at this sale depend on an assumption of the very figure which is to be found, namely, the value of the property.” P. 60.

It seems quite clear that the failure of the court herein to employ this phraseology in its directions to the experts is not erroneous, but, rather, is to be commended.

Appellants also object that the definition submitted to the experts omitted the element of “a fair market or normal market existing at or near the time of appraisement.” This seems to be the main objection urged by Odell. It is appellants' contention that if the market is in a depressed state at the time of seizure, as of which date assets must be valued under § 13.11 of the Act to determine whether there is an impairment, it is not the amounts for which they actually could be sold on the market which govern, but, rather, the amounts which could be realized in a more normal market. This is a plea that the realities of the situation be disregarded. Since the purpose of a valuation, made to determine whether assets are impaired, is to determine whether the commissioner was justified in seizing a company as of a particular date, regard must be had for the actualities of the situation. If liquidation values are to be the test, then the question is not whether the liquidation assumed to determine value will result in a “fair” or “normal” price to the debtor, but whether the property could in fact be sold for enough to pay creditors in full, allowing a reasonable time to complete the sale, but not awaiting the return of a market which is fair or normal to the debtor.

In Johnson v. Land Title Bank & Trust Co., 329 Pa. 241, 198 A. 23, 25, the court said: “The test of insolvency under subdivision (15) of section 1 of the Bankruptcy Act of July 1, 1898, 11 U.S.C.A. § 1 (15), is not what appellant's properties might have brought in a favorable real estate market under business conditions of a departed era. The test is the amount of cash which these assets would have brought on a fair sale at the time when the alleged act of bankruptcy, namely, the purchase of the annuity, was committed. As the court said in Mitchell v. Investment Securities Corp., 5 Cir., 67 F.2d 669, 671: ‘Statutory as well as commercial insolvency arises out of, and consists in, inability to pay debts. One is insolvent under the statute when his assets, if converted into cash, at a fair not forced sale will not pay them. In both cases solvency is tested by ability to pay debts, in the one case promptly, in the other, in time. In testing both kinds of insolvency, the realities of the situation control. In both kinds it is the actual, rather than the theoretical, condition of the debtor which determines it.’ See, also, Grandison v. Natl. Bank [of Commerce] of Rochester, 2 Cir., 231 F. 800. It is clear that the financial statements submitted to appellees were of no controlling force on their judgment and they were entirely at liberty to reject them as unreliable. Such statements are fundamentally too unsound, being predicated on the existence of the nonexistent, to wit, a ‘normal real estate market,’ to support an inference that appellees, in filing this petition complained of, acted without probable cause.”

That the amount for which the property could be sold on the existing market, rather than in a theoretical “normal” market, controls is implicit in the following statement in Re Studebaker Corporation, D.C., 9 F.Supp. 426, 427: “A person or corporation is therefore insolvent when he or it is unable to pay debts, and this inability to pay debts is not temporary, through lack of ready funds, but permanent through lack of assets convertible in a reasonable time, not necessarily at forced sale, but nevertheless within a reasonable period. Insolvency under the statute and from a commercial standpoint results from inability to pay. If the assets will not sell on the market within a reasonable time for enough to liquidate the debts, insolvency exists.”

It is to be noted that, although the majority opinion refers to appellants' objections to the court's definitions (opinion p. 26 [146 P.2d 442]), it bases the reversal, so far as the questions involved in the consideration of impairment of assets are concerned, on the sole ground that the trial court's definitions were too limited in that they failed to consider “going concern” value in the sense of debt paying possibilities. From this failure to uphold any of the other contentions of appellants on this question it may be reasonably assumed that it is the view of the majority that the definitions given were correct except for that one element.

Just what were the definitions given by the trial court? It gave the definition of market value that has been approved time and time again by the courts of this state. It is the traditional and well settled definition of that term. It is true that the three directions were more or less based upon the instructions approved in Sacramento, etc., R. R. Co. v. Heilbron, 156 Cal. 408, 104 P. 979. That case and the definition there given has been approved in many cases. City of Napa v. Navoni, 56 Cal.App.2d 289, 299, 132 P.2d 566; City of Redding v. Diestelhorst, 15 Cal.App.2d 184, 192, 59 P.2d 177; Oakland v. Pacific Coast Lumber, etc., Co., 171 Cal. 392, 399, 153 P. 705; City of Stockton v. Vote, 76 Cal.App. 369, 401, 244 P. 609; People v. Olsen, 109 Cal.App. 523, 532, 293 P. 645; City of Los Angeles v. Deacon, 119 Cal.App. 491, 493, 7 P.2d 378; Temescal Water Co. v. Marvin, 121 Cal.App. 512, 518, 9 P.2d 335; Joint Highway Dist. No. 9 v. Ocean Shore Railroad Co., 128 Cal.App. 743, 752, 754, 18 P.2d 413; Estate of Felton, 176 Cal. 663, 668, 169 P. 392; Wild Goose C. Club v. County of Butte, 60 Cal.App. 339, 341, 212 P. 711. It is true that all but the last two of the cases above cited are condemnation cases, the last two being tax cases. But that does not detract from the definition if it is the correct one. The majority opinion, as I read it, concedes that it is the correct definition if the question to be determined is whether the assets, if sold, would or would not pay off the indebtedness––in other words, if the liquidation test is the proper test.

Under the three directions given the experts they were told to ascertain the “fair market value” of the assets. The first direction told the experts that: “Market value is the amount this property would sell for if put upon the open market, and sold in the manner in which property is ordinarily sold for cash in the community in which it is situated, with a reasonable time being given to find a purchaser buying with knowledge of all the uses and purposes to which it is best adapted and for which it is capable of being used and make the sale.”

The second direction told the experts not to consider speculative or mere possible uses of the property, and not to consider what it “would bring at a forced sale”, but to consider “only the highest and best use for which this property was adapted and its fair market value, if offered in the market under ordinary circumstances for cash, a reasonable time being given to make the sale * * *.”

Later the court eliminated the “cash” feature and gave the following definition of market value: “The highest price, estimated in terms of money, which the property would bring if exposed for sale in the open market with reasonable time allowed in which to find a purchaser buying with full knowledge of all the uses and purposes to which the property was adapted and for which it was capable.”

It will be noted that the trial court carefully eliminated any thought of a forced sale. It included a value based upon the highest and best use of the property. The experts were told to ascertain what a seller could get and what a purchaser would pay for each parcel in the open market at a sale other than a forced sale. Thus, every factor that would motivate a purchaser in considering the purchase of the property was properly admissible under these definitions. The evidence shows that the various experts, those called by respondent and those appointed by the court, gave consideration to all such factors. Physical values of the properties, both land and buildings, the income of the properties, assessed valuations, etc., etc., were all considered. In many cases the income of the properties was ascertained and a value reached by capitalizing the income. In many cases the physical values were materially less than values based upon capitalizing the income, and in most such cases the experts adopted the higher figure.

Another factor must be considered. It must be remembered that this association on March 4, 1939, was not doing a building and loan business, as such business is ordinarily carried on. The normal functions of a building and loan association are to accept money for investment, and to make loans on the security of real property. Where foreclosures are necessary, normally a building and loan company expects and tries to sell such properties as soon as possible. Such functions had entirely ceased, so far as this association is concerned, long prior to 1939. Through the methods already described it had become the owner of a group of large properties, each constituting an individual business. Its main function was the operation of these businesses. Thus it owned and operated several large hotels, several large ranches, many large and medium–sized office buildings, apartments, etc. Each one of these businesses was a separate going concern. Each property was valued by the experts as a going concern. In each case the question was what would a purchaser pay for that property in operation. That is the reason that many of the properties were valued by the experts according to a capitalization of the income, the rate of capitalization being dependent upon the age of the buildings, the nature of the business, etc. In this respect the problem of valuation was different from that in an ordinary bankruptcy proceeding. Normally, if a business goes bankrupt that business has ceased as a going concern. Bonbright, and the other authorities relied upon in the majority opinion, object to valuing the assets of that business according to the value of its physical assets––they believe that in determining whether a company is insolvent its debt paying possibilities as a “going concern” should be considered. But in the instant case the main business of this association was the operation of many businesses. Each of the individual businesses was in operation, and none of those individual businesses was bankrupt. Each of the individual businesses was valued accordingly. Stated another way, each of the individual properties was valued by taking into consideration that on such properties there was being operated a going and solvent business. In this sense a “going concern” value was included in the estimates given by each expert.

From what has been said, it is my conclusion that the definitions as given by the trial court were correct, and that the findings, based on these definitions, that the assets of this company were impaired on March 4, 1939, in excess of ten millions of dollars, are amply supported.

The only other points necessary to be discussed are those arising from the appeals from orders denying applications for attorneys' fees. State Guaranty had been permitted to intervene on the representation of its then counsel that the company does not “expect to come here asking for leave of the court to pay its expenses in defending its rights as a stockholder.” At the inception of this proceeding Pacific States made no application for attorneys' fees. Nor has it made any application for attorneys' fees for services rendered prior to the date of the application. For more than two years Pacific States was represented by competent and able counsel. No application for their compensation has ever been made. The application that was denied was for attorneys' fees for services to be rendered after the date of the application. This application was made after the commissioner had rested his case and was for the purpose of compensating counsel during the production of evidence by Pacific States. On the application by Pacific States Odell was called as a witness and was examined and cross examined for many weeks. Odell admitted that the company operated at a loss in 1937 and 1938; that in 1937 the loss shown by the books was $366,995.44, including the profit of $250,044.45 made on certificate deals, and that in 1938 the loss was $184,319.40, in which year $150,912.72 was made on certificate deals. (Tr. 22,863.)

During the examination of Odell a discussion arose as to whether Pacific States could or intended to produce evidence of fair market value. Then counsel for Pacific States fairly and properly admitted that under the definition of value adopted by the trial court they could not produce evidence that there was not an impairment. (Tr. 22,848.) Odell stated that the evidence he expected to produce was values predicated upon “normal” markets––a factor already considered in this dissent. Odell admitted that he could not tell when that “normal market” would occur again. He was then asked directly whether he was in a position to produce testimony of fair market value under the first two definitions given to Forbes and Smith. Odell frankly admitted that under those definitions he could not produce any such evidence and was extremely doubtful if he could produce any evidence under the third definition. (Tr. 23,001.)

Thus, considering the case only from the standpoint of the impairment of assets, it is apparent that the company was unable to produce evidence if the trial court definitions were correct, to show the assets were not impaired. From that standpoint alone, if the trial court's definitions were correct, and I believe they were, it would have been a useless waste of the assets of the association to have permitted the expenditure of company funds for the purpose of continuing a case when the parties involved admitted they had no evidence.

The trial court prepared a lengthy opinion in support of its order denying attorneys' fees. That opinion appears in the Clerk's Transcript starting at page 164. That opinion shows a full and complete understanding on the part of the trial court of the problems presented on an application for attorneys' fees in such an action. According to the many authorities cited therein, an association seized by a state officer, just as is true in cases of receiverships, is not entitled as of right to attorneys' fees and costs in resisting a seizure. Such application is addressed to the sound discretion of the trial court, and is to be granted only upon a showing that the resistance to the seizure is made in good faith based upon reasonable grounds. The burden is upon the applicant to show these facts. Anderson v. Great Republic L. Ins. Co., 41 Cal.App.2d 181, 106 P.2d 75; Barker v. Southern Building & Loan Ass'n, C.C., 181 F. 636; Barnes v. Newcomb, 89 N.Y. 108; Witherspoon v. Hornbein, 70 Colo. 1, 196 P. 865; Commonwealth Finance Corp. v. Missouri Motor Bus Co. et al., Mo.App., 251 S.W. 756; Esarey v. Pierson, 84 Ind.App. 109, 141 N.E. 87; Assets Realization Co. v. DeFrees, Brace & Ritter, 225 Ill. 508, 80 N.E. 263; Watson v. Johnson, 174 Wash. 12, 24 P.2d 592, 89 A.L.R. 1527; O'Malley v. Continental Life Ins. Co., 343 Mo. 382, 121 S.W.2d 834; see annotation 89 A.L.R. 1531.

Pacific States saw fit to make no application for attorneys' fees until the commissioner had rested its case. The application was not for attorneys' fees already incurred, but for attorneys' fees to be incurred in presenting the defense of Pacific States. Neither Odell nor any other officer of the company could object to the refusal insofar as they personally were concerned. The privilege of securing attorneys' fees to resist the seizure is a privilege of the company. When the trial court was asked to allow such attorneys' fees, it had before it the vast mass of evidence, briefly referred to in this dissent, which, according to the findings ultimately made, amply justified the seizure. It had before it the several thousands of pages of Odell's testimony produced on the application for attorneys' fees. The testimony is clear that Odell knew of the many facts testified to by respondent's witnesses. Those facts made out a prima facie case of the propriety of the seizure. The trial court was fully justified in holding that, if Odell knew these facts, including the facts relating to impairment, he, and therefore the company, knew, on March 4, 1939, that it was subject to lawful seizure. The court expressly held that if Pacific States wanted to continue its defense that the matter of attorneys' fees would again be considered in light of any evidence produced. But it held that the evidence produced on the application was insufficient to show applicant's good faith, and was insufficient to overcome the commissioner's evidence of bad faith.

The majority opinion holds that the trial court “abused its discretion” in refusing attorneys' fees. A reading of the discussion in that opinion, however, discloses that it is based on the thought that an absolute right to such attorneys' fees exists. That, of course, as the cases above cited indicate, is not the law. Under the theory of the majority opinion no case can be conceived in which the trial court would be justified in denying attorneys' fees. No matter what evidence is produced by the commissioner, no matter how strong that evidence may be, the trial court cannot know what the rebutting testimony may be until it is produced. Therefore, according to the majority, attorneys' fees must be allowed, and the assets of the association must be dissipated, to allow this assumed rebutting testimony to be introduced. It is for this very reason that practically every court that has ever considered the problem has held that there is no right to attorneys' fees, and that whether such fees shall be allowed rests in the sound discretion of the trial judge, who can grant such fees only upon a showing of good faith.

The majority opinion in several places states that Pacific States was “precluded” from presenting its side of the case, or was not “permitted” to produce evidence on its behalf. These statements are neither factually nor legally correct. In the first place, former commissioner Richardson testified on behalf of Pacific States, and by stipulation the several thousands of pages of Odell's testimony given on the application for attorneys' fees was admitted in the main case. In the second place, most of the witnesses called by the commissioner, except the experts, and upon whose testimony the findings are largely based, were officers or employees of Pacific States and were thoroughly cross–examined by counsel for Pacific States. In the third place, the trial court did not “prohibit” or “preclude” Pacific States from presenting its side of the case. There was no evidence that without the allowance of attorneys' fees attorneys could not be secured. The trial court found (finding No. 98), and the finding is supported, that: “There is no evidence that Pacific States has been unable to secure attorneys of its own selection to act for it.” The trial court gave Pacific States every opportunity to present any available testimony, except that it refused to allow attorneys' fees for that purpose until convinced that Pacific States was acting in good faith. Pacific States has had no difficulty in financing this expensive appeal. Were evidence available to rebut the convincing and well nigh conclusive evidence produced by the commissioner, it is inconceivable that Pacific States could not have financed the production of such evidence.

Under all these circumstances it is apparent that under the rule of all the cases on this subject the trial court acted well within its discretion in denying the applications.

In my opinion every material finding is amply supported by competent and convincing evidence. The record demonstrates that the commissioner would have been remiss in his duties owed to the investment certificate holders and the public had he not taken possession of this company on March 4, 1939. The record discloses that, according to the proper tests contemplated by the Act, this company was insolvent on that date. It is my view that the reversal ordered by the majority of this court is based on a fundamental misconception of the true issues involved in this proceeding. I believe that this case was carefully and properly tried, and that no errors were committed. For these reasons I am of the opinion that the judgments and orders appealed from should be affirmed.

WARD, Justice.

KNIGHT, J., concurs.

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