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

REED v. NORMAN et al.

Civ. 18142.

Decided: August 14, 1951

Hy Schwartz, Beverly Hills, for appellant. Howard W. Hunter, Los Angeles, for respondent.

Norman Decorating Company, Inc., a California Corporation, issued to defendant, Carl O. Norman, 255 shares of its capital stock. Mr. Norman paid $1,500 cash for 150 shares. The other 105 shares were paid for by cancelling indebtedness of the corporation to him.

The corporation issued to Mr. Hoyt Reed, plaintiff, 245 shares, for which he paid $2,500 cash.

The stock was issued in accordance with a permit of the Corporation Commissioner for the issuance of 500 shares of stock of the corporation to Mr. Norman or Mr. Reed, or either of them, at par, for cash, without any commission or compensation.

Later at a meeting of stockholders Mr. Norman and his nominee, the other defendant, John E. Haskins, were elected directors. There were three directors on the board. Then the directors organized and elected Mr. Norman president and Mr. Haskins secretary of the company.

Mr. Reed thus found himself in the minority as a stockholder and director. He brought this action to declare the issuance of the stock to defendant, and the subsequent elections of directors and officers void. From the judgment of the trial court contrary to his contentions he appeals.

While the briefs contain quotations from the testimony, and arguments as to inferences to be drawn from the evidence, the following questions and answers are sufficient to support the findings of the trial court, so far as the acquirement of the trial man stock, 150 shares for cash, and 105 shares for cancellation of indebtedness, are concerned:

‘The Court: I see. The books then show that Mr. Norman then had put in $1,500 in cash in February and then had furnished materials up to the 31st of August totaling an additional amount of $5,508.81.

‘The Witness: They owed—that is, the corporation owed him for materials to that date.

‘The Court: Yes.

‘The Witness: He had furnished more materials than that.

The Court: I see. Therefore, the $1,050 was charged against that account and then the $1,500 was charged against that account?

‘The Witness: That is correct.

‘The Court: Making a total of $2,550, which would be 255 times 10 or the amount which was the purchase price of the 255 shares of the stock?’ (From testimony of the accountant for the corporation.)

The problem presented is whether the words ‘for cash’ in the corporation Commissioner's permit prohibited the issuance of the 105 shares of stock in exchange for indebtedness of the corporation to Mr. Norman.

At first glance it would seem reasonable to approve the exchange of stock for indebtedness of the company. Section 1109 of the Corporations Code provides that debts cancelled are sufficient consideration for issuance of corporate shares. And in Christy v. Oakland Title Ins. & Guaranty Co., 132 Cal.App. 315, 22 P.2d 737, in construing the application of a commissioner's permit to issue certificates of ownership in a common-law trust for cash for property conveyed to the trust, it was said that the law would not require the idle act of paying cash which would have to be immediately paid back. The thought is stated in a somewhat different way in 18 C.J.S., Corporations, § 240, page 672.

Moreover, it may fairly be argued that when the Corporation Commissioner permitted issuance of the stock in the instant case for cash, he was of the opinion that the corporation was solvent; that being solvent its indebtedness would be paid 100 cents on the dollar; hence no harm was done to anyone.

After careful consideration, however, this Court is of the opinion that it is not the purpose or intent of the corporate securities act of this state to permit any deviation from the literal meaning of the words ‘for cash’ in permits of the Corporation Commissioner. Such deviation would open the door to exchanges of stock for questionable indebtedness; would favor certain creditors against others; would make the administration of the law more difficult; and would afford a means to circumvent the salutary purposes of the legislation. It would require the Corporation Commissioner to add prohibitory clauses in permits in endless detail—all of which will be included in a strict construction of the meaning of the words ‘for cash.’

Permits issued by the Corporation Commissioner for the sale of stock must be strictly complied with. Mannion v. Baldwin, 217 Cal. 600, 20 P.2d 678.

Section 26100 of the Corporations Code provides that every security sold or issued by a company with the authorization of the commissioner, but which has been sold or issued in nonconformity with any provision in the permit authorizing the issuance or sale of the security is void. And see Live Oak Cemetery Ass'n v. Adamson, 106 Cal.App.Supp. 783, 288 P. 29.

No device for the extension of credit is to be permitted in sales of securities. Commercial Building Co. v. Summers, 117 Cal.App. 428, 3 P.2d 1033. Transfers of real property for stock are not for cash, within the meaning of the corporate securities act. Holmquist v. Kent, 219 Cal. 231, 25 P.2d 977. Sales on credit are excluded by this language in permits to sell stock, the word ‘cash’ in its ordinary sense being the antonym of the word ‘credit’. Parrish v. American Ry. Employees' Pub. Corp., 83 Cal.App. 298, 256 P. 590. Sales for which promissory notes are given are void. Gridley v. Tilson, 202 Cal. 748, 262 P. 322. A commissioner's permit specifying that sales of stock shall be for cash expressed exactly his determination upon the facts presented to him; stock issued in exchange for merchandise was not issued in conformity with the permit and was void. Herkner v. Rubin, 126 Cal.App. 677, 14 P.2d 1043.

The judgment is reversed.

DRAPEAU, Justice.

DORAN, Acting P. J., and HANSON, J. pro tempore, concur.

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