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District Court of Appeal, First District, Division 2, California.


Civ. 14836.

Decided: April 18, 1952

Desmond N. Bonnington, Oakland, for appellant. James W. Harvey, San Franscisco, Dorothy E. Handy, San Francisco, of counsel, for respondents.

This appeal was taken from a judgment in favor of defendants for their costs. A new trial was denied.

The action was brought to recover $5,000 contributed in money and services by appellant for a one-third stock interest in a corporation known as M. & H. Kiln & Lumber, Inc. The first count of the complaint pleaded a violation of the Corporate Securities Act in that the plaintiff's money was collected before a permit had been secured for the issuance of his stock; the second was based on fraud, and the third was for money had and received. The findings were adverse to plaintiff on all three counts.

The evidence, which is without substantial dispute, shows that in 1948 respondents Robert G. Marsden and Robert W. Marsden, his son, were partners in the lumber business in Emeryville, operating under the name West Coast Export Materials. Newsom & Bechtel, Inc., had a lumber plant there for which the Marsdens were negotiating. More capital was needed, however, and R. W. Marsden, a close friend of plaintiff, telephoned on November 16, 1948 to him at Seattle proposing his participation in the new enterprise not only financially to the extent of $4,000 or $5,000, but as an active member of the concern.

Plaintiff, who had lived for years in Seattle, said that he did not have very much to invest and that if he became interested it would not be as a partner (for partnerships often led to dissension) but on ‘a corporate basis.’ Marsden replied that that was intended, and that the ownership of the stock would be equal, one-third to each Marsden and one-third to plaintiff. He suggested that plaintiff come down to look over the plant and discuss the whole matter. The telephone conversation was confirmed by a letter written the same night. A few days later plaintiff flew down over the week-end and spent a Sunday with the Marsdens, looking over the plant and discussing the project. He apparently was favorably impressed, and returned to Seattle to wind up his affairs, with an oral commitment to the Marsdens that he would invest $5,000 and join them on January 1 to take an active part in the business, with a one-third stock interest therein.

The Marsdens had articles drawn up for a corporation called Cal Kiln & Lumber, Inc. and mailed them to plaintiff in Seattle, who signed as an incorporator, the other two being the Marsdens. When he returned them, signed and acknowledged, he sent a cashier's check for $3,000 dated November 29, payable to Cal Kiln & Lumber, Inc., which was endorsed in that name by R. G. Marsden and promptly deposited. A payment was then due on a conditional sales contract between Newsom & Bechtel, Inc. and R. G. and R. W. Marsden for the purchase by the latter of a lumber kiln and other equipment. This payment had been delayed, and admittedly plaintiff's $3,000 was needed, and used, to make it, together with money supplied by the Marsdens.

Meanwhile the articles had been sent to the Secretary of State, who returned them because the name conflicted with that of an existing corporation. A new name was chosen, viz., M. & H. Kiln & Lumber, Inc. (the M. & H. meant Marsden & Holmberg). The new articles were filed on December 23, 1948 in that name and a certificate of incorporation issued. Plaintiff did not sign the new articles, but an employee of the Marsdens was used as the third incorporator for convenience.

Plaintiff arrived in Emeryville as agreed on January 1, 1949, and on the 3rd an organization meeting was held which he attended. The Marsdens and plaintiff were then advised by the secretary of Newsom & Bechtel, Inc. (an accountant who had had several years' experience in the Division of Corporations), that it would be futile to apply at that time for a permit to issue stock since the new corporation had insufficient financial standing to warrant it. It was agreed that the application should be deferred until a satisfactory showing could be made.

R. G. Marsden was president and a director of the corporation and had charge of the office; R. W. Marsden was vice-president and a director and had charge of sales, and plaintiff was a director and secretary-treasurer, with authority to sign checks and promissory notes. During the six months from January to June he kept informed of everything going on in the business by daily discussions with the Marsdens. He worked in the yard and had supervision of several men.

Certain contracts which at the time of the Marsden-Holmberg negotiations were thought to be assured and with promise of good profits, either did not materialize or were not profitable as had been anticipated. In short, the business outlook in the spring of 1949 was not bright, to say the least. It had been agreed that the Marsdens and plaintiff, all of whom were working actively in the business, would each have a salary or drawing account of $100 a week. On February 14, 1949 plaintiff made a further payment of $1,500. It had been agreed earlier that the remaining $500 on his $5,000 commitment would be treated as paid off by his foregoing the payment of his $100 a week salary for 5 weeks.

In May the corporation's liabilities exceeded its assets and plaintiff requested the return of the $5,000 which was refused because as both Marsdens testified funds were short. This action was filed soon thereafter.

Plaintiff cites § 25153, Corporations Code, enacted in 1949, which was formerly § 33 of the Corporate Securities Act, Act 3814, 2 Deerings Gen.Laws 1944, p. 1418, at pp. 1438–9. At the time of this transaction § 33 was still in effect, but there is no substantial difference between it and the present § 25153. The former section read: ‘Neither this act nor any provision hereof shall be deemed to prohibit subscriptions for shares of a domestic or foreign corporation made prior to the incorporation thereof; but such subscription shall be deemed to have been made and accepted upon the condition that such corporation shall be incorporated within ninety days thereafter, and, when incorporated, shall with reasonable diligence apply for and secure from the commission a permit authorizing the issue of the shares so subscribed for, in accordance with such subscriptions; provided, however, that * * * nothing herein contained shall be construed as permitting the collection of any portion of the consideration to be paid on account of such subscriptions, unless and until a permit shall have been issued by the commissioner authorizing such collection; * * *.’ (Emphasis added.)

There was prompt compliance with the 90-day condition but none with the permit requirement, and appellant contends that respondents violated the law when they collected the $5,000.

Respondents' position is that they did not offer to sell a ‘security’ to appellant; that the evidence does not show a debtor-creditor or buyer-seller relationship between the parties, but that, instead, it shows their relationship ‘was that of co-promoters, joint venturers, or partners, who in good faith associated themselves together for the purpose of acquiring property and organizing and operating a corporation.’

The uncontradicted testimony of appellant and the documentary evidence establish a pre-incorporation subscription (see 6A Cal.Jur. pp. 433–441, §§ 249–252) and that evidence at the same time negatives a partnership relation. Take the $3,000 check for instance, which was made payable to Cal Kiln & Lumber, Inc. Had it been made payable to the Marsdens there might be some room for the claim that it was intended either as a personal loan to them pending incorporation, or a partnership contribution.

That the Marsdens were promoters is beyond question since the son, acting for both of them, solicited appellant's subscription of $4,000 or $5,000 for a one-third stock interest in the corporation. Their project at that time urgently needed further capital and appellant supplied it. It was his $3,000 that held together the nucleus of the corporation's operating property for which the Marsdens had already negotiated. Appellant did nothing to indicate that he was a promoter, or otherwise than a subscriber, between the time he sent his $3,000 check on November 29 and the organization meeting on January 3. There was no further promotion activity, and no need for any, since it was to be nothing but a three-man corporation.

It may be conceded that all three men acted in good faith. R. W. Marsden from the outset urged appellant to make an independent investigation, and he made it. The court definitely negatived the fraud charges, and properly so. The problem presented is not one of good or bad faith but simply one arising from the violation of a clear and positive statutory prohibition.

In California Western Holding Co. v. Merrill, 7 Cal.App.2d 131, 153, 46 P.2d 175, 186, the court said that ‘under the law actual good faith is of no import, if the law has not been complied with. Boss v. Silent Drama Syndicate, 82 Cal.App. 109, 115, 255 P. 225; Commercial Bldg. Co. v. Levy, 108 Cal.App. 54, 56, 290 P. 1048. As said in Herkner v. Rubin, 126 Cal.App. 677, 682, 14 P.2d 1043, 1045: ‘Irrespective of the integrity of the organizers or directors of a corporation, the law must be obeyed.’'

There is too much undisputed evidence of a subscription herein to justify a finding or conclusion that the parties were merely joint venturers or partners. Indeed, there was no such finding.

The $3,000, followed by the $1,500, went directly into the working capital of the corporation, and appellant's 5 weeks of labor without compensation was the same as if he had paid in the $500 and received it back as salary.

The only remaining question is whether the parties were in pari delicto. The case of Randall v. California L. B. Syndicate, 217 Cal. 594, 20 P.2d 331 and the numerous authorities cited therein make it clear that that rule does not apply in cases such as this. The same cases hold that, the transaction being void, the subscriber may recover the consideration collected by the corporation.

The instant case is not similar to that of Morris v. Whittier Amusement Co., 123 Cal.App. 121, 10 P.2d 1017, cited by respondents, where the parties associated themselves for the purpose of acquiring the property, and afterward forming a corporation. It is true that the two Marsdens were already partners, but from their very first contact with appellant nothing was ever contemplated between the trio but a corporation. There was no twilight zone after appellant's participation was solicited.

Respondents cite Domenigoni v. Imperial L. S. & M. Co., 189 Cal. 467, 209 P. 36, but there is no similarity at all between the facts of that case and this. The same may be said with respect to Menke v. Rand Mining Co., 81 Cal.App.2d 169, 183 P.2d 755, also cited by respondents.

The judgment is reversed.

GOODELL, Justice.

NOURSE, P. J., and JONES, Justice pro tem., concur.