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

R. T. TIEDJE, Plaintiff and Appellant, v. ALUMINUM TAPER MILLING CO., Inc., a corporation, and M. R. Peppard, Jr., Defendants and Respondents.*

Civ. 21204.

Decided: December 29, 1955

William R. Law, Lech T. Niemo, Los Angeles, for appellant. Alan H. Cassman, Los Angeles, for respondent Aluminum Taper Milling Co., Inc. Edmund I. Read, Wilmington, for respondent M. R. Peppard, Jr.

Appeal from judgment after sustaining demurrers to third amended complaint without leave to amend. The demurrers were interposed by defendant corporation and defendant Peppard; they were general and special. Appellant makes no complaint about the court's action upon the special demurrers. Counsel say in their reply brief: ‘The sole question before this Court is whether or not plaintiff's Third Amended Complaint states a cause of action. If it does not, then the demurrer was properly sustained, but the appellant believes that he stated a cause of action in each of the three counts of said complaint.’

Though the complaint contains three causes of action, they show on their face that they involve the same facts and are merely separate attempts to accomplish the recovery of certain corporate stock sold by plaintiff to the issuing corporation, which purchased in violation of Corporations Code, sections 1705–1708. The first count sounds in declaratory relief, the second is quiet title and the third seeks to avoid the stock sale on the ground it was illegal and void. Upon oral argument appellant's attorney stated that all counts are based upon the same facts. They are to be treated as one. Stephan v. Obersmith, 48 Cal.App.2d 199, 202, 119 P.2d 388; Ephraim v. Metropolitan Trust Co., 28 Cal.2d 824, 833, 172 P.2d 501.

Appellant's attorneys plant his case squarely upon a violation of law. The opening brief says: ‘Plaintiff submits that he stated clearly and succinctly the controversy that exists. It is based upon definite statutes prohibitive to the purchase by a corporation of its stock without meeting the requirements as provided by the Corporations Code. (Corp.Code, Secs. 1705, 1706, 1707.)’ ‘The sale of said stock was contrary to Sections 1705 et seq. of the Corporations Code of California, and was not made in accordance with the permissive sections of the Corporations Code of California; all of which as stated above was unknown to the appellant.’ Counsel also assert that plaintiff is entitled to reversal for the purpose of obtaining a declaratory judgment even though it be adverse to plaintiff. Examination of these contentions will dispose of the entire case without the necessity of considering numerous points raised by respondents.

The complaint alleges that defendant Aluminum Taper Milling Co., Inc., is a California corporation and plaintiff was the owner of 2,500 shares of its stock; on September 30, 1953, he agreed with the corporation to sell his shares to it for $25,000, plus an Oldsmobile automobile which they valued at $4,000; there was no other consideration; plaintiff received the money and automobile and delivered the stock on that day, September 30, 1953; the corporation is in possession of same and claims to own it; ‘the said purported contract of purchase by said defendant corporation of the aforesaid shares owned by plaintiff was contrary to Section 1705 et seq. of the Corporation Code of California, and therefore was and is illegal and a nullity, and plaintiff submits that his assignment and delivery of the certificate of said shares was illegal and void, being prohibited by statute.’ It is further alleged that these shares were purchased with capital assets and from stated capital, not out of earned surplus or surplus resulting from reduction of stated capital; that the purchase was not made to collect or compromise a debt, claim or controversy with plaintiff, or to eliminate fractional shares, or to redeem shares subject to redemption, or to purchase at fair market value plaintiff's shares by reason of any dissent from proposed corporate action; nor under any agreement with an employee reserving to the corporation an option to purchase his shares; ‘nor under any permissive act under Sections 1706 and 1707 of the Corporation Code of California; that plaintiff did not know that the said defendant corporation at the time he entered into said purported agreement, was not purchasing the said stock out of earned surplus, but that it was, on the contrary, purchasing the said shares in violation of the express provisions of the Corporation Code as stated hereinabove.’ It is also averred: ‘That plaintiff claims that said agreement is void and a nullity for the reason aforesaid that it is contrary and in violation of Section 1705 of the Corporation Code of California and not coming within the exceptions of Sections 1706 and 1707 of said Code nor of any other permissive legislation.’ The fact of an existing controversy is then set forth: ‘[T]hat plaintiff claims that said purported agreement is a nullity for the reason that it is contrary to the express provisions of the sections of the Corporation Code of California and prohibited as hereinabove enumerated and because of the matters and circumstances set forth hereinabove, all of which defendants dispute.’ The complaint prays for declaratory relief, decree quieting title, and for restoration of possession of the shares upon condition that plaintiff return the sum paid him for the stock with appropriate interest thereon; also for general relief.

Section 1705, Corporations Code, provides: ‘A corporation shall not purchase directly or indirectly any shares issued by it or by any corporation of which it is a subsidiary, except as authorized by Section 1706 or Section 1707. * * *’ Sections 1706 and 1707 are set forth in the margin.1

The complaint allegations above summarized negative the existence of any of the exceptions to the general rule and support the conclusional averment of invalidity. Smith v. Bach, 183 Cal. 259, 262, 191 P. 14; Mindenberg v. Carmel Film Productions, 132 Cal.App.2d 598, 607, 282 P.2d 1024. The transaction was fully executed and plaintiff stands squarely upon its illegality as a basis for recovery, thus bringing himself within the rule of Wise v. Radis, 74 Cal.App. 765, 775, 242 P. 90, 94: ‘No principle of law is better settled than that a party to an illegal contract or an illegal legal transaction cannot come into a court of law and ask it to carry out the illegal contract or to enforce rights arising out of the illegal transaction. He cannot set up a case in which he necessarily must disclose the illegal contract or the illegal transaction as the basis of his claim. In Moore v. Moore, 130 Cal. 110, 62 P. 294, 80 Am.St.Rep. 78, our supreme court quotes Judge Duncan in Swan v. Scott, 11 Serg. & R., Pa., [155] 164, as follows: ‘The test whether a demand connected with an illegal transaction is capable of being enforced is whether the plaintiff requires the aid of the illegal transaction to establish his case. If the plaintiff cannot establish his case without showing that he has broken the law, the court will not assist him, whatever his claim in justice may be upon the defendant.’' This is hornbook law. See Franklin v. Nat C. Goldstone Agency, 33 Cal.2d 628, 632, 204 P.2d 37; Shenson v. Fresno Meat Packing Co., 96 Cal.App.2d 725, 731, 216 P.2d 156; 12 Cal.Jur.2d, sec. 98, p. 298. The principle has been applied to transactions such as the one at bar. Stevens v. Boyes Hot Springs Co., 113 Cal.App. 479, 298 P. 508, 510, dealt with an installment note which was given by a corporation as consideration for the purchase of its own shares. One of the payments was made, then the corporate successor of the maker refused to pay any more, alleging illegality, and it also sought through cross-complaint recovery of the sum previously paid on the purchase price. It prevailed in both respects. The case arose in 1922 under sections 309 and 359, Civil Code; the court held that the transaction was not within any of the exceptions to the prohibition upon dividing, withdrawing or paying to stockholders any part of the capital stock; that the transaction was void and the note unenforceable. ‘Upon this subject we conclude that the defense relied on by defendants, namely, that the contract was void as being prohibited by statute, is sound, and the conclusion of the trial court upon this subject is correct. Contracts of this character being unlawful and against the express law and public policy, cannot be enforced and they are void ab initio. Section 1667, Civ.Code.’ Stevens v. Boyes Hot Springs Co., supra. The court in the Stevens case said also, 113 Cal.App. at page 483, 298 P. at page 510: ‘And finally appellants complaint that the judgment granting to defendants affirmative relief, in effect follows full rescission of the contract after a period of seven years. Whatever effect the judgment may have, the action of the trial court was proper. Appellants were charged with knowledge of the law when they entered into the illegal contract. It was the right and duty of the court to declare the contract illegal and place the parties in statu qou. This is the effect of the judgment.’

The language just quoted destroys plaintiff's contention that he was not in pari delicto because he was ignorant of defendant's violation of the law. He was charged with such knowledge. That language also points to the fact that plaintiff does not occupy the position of one who is held to be not in pari delicto because he belongs to a class for whose protection the statute was enacted. Related sections of the Corporations Code make that a certainty. Section 1715 provides that any shareholder who makes a sale of stock to the corporation in violation of the statute and does so with ‘knowledge of facts indicating the impropriety of the purchase is liable to the corporation or its receiver, liquidator, or trustee in bankruptcy to the extent of the payments received therefor, with interest thereon at 7 percent a year until paid.’ Section 827 provides that any and all directors who have been required to satisfy a claim against a corporation based upon such a wrongful purchase (or certain other infractions of sec. 824, which prohibits purchases specified in secs. 1706 and 1707), shall have a right of reimbursement and contribution against any and all shareholders who have received the purchase price ‘with knowledge of facts indicating that it was not authorized by this division.’ Also that, ‘[s]uch shareholders shall pay or contribute in proportion to the amounts received by them respectively, unless they have returned the amount to the corporation.’ The statute thus imposes an affirmative liability upon a seller who knows that the corporate purchase violates the law, but it places no penalty upon the corporation itself. It is manifest that the statute was enacted for the benefit of the corporation as a whole, its creditors and other stockholders, and that plaintiff's status bears no similarity to that of a member of a class for whose protection the law has been passed, e. g., the purchaser of a security which has been issued without permit from the Commissioner of Corporations or in violation of its terms. Plaintiff's complaint discloses affirmatively that he cannot recover any judgment unless it be one declaring that he is entitled to no relief other than such declaration.

His counsel argue that he is nevertheless entitled to a reversal so that he may obtain such a judgment in the superior court. To that end they rely upon Maguire v. Hibernia S. & L. Soc., 23 Cal.2d 719, 728, 146 P.2d 673, 151 A.L.R. 1062, and Columbia Pictures Corp. v. De Toth, 26 Cal.2d 753, 760, 161 P.2d 217, 162 A.L.R. 747. In those cases reversals were had because the court had denied declaratory relief through sustaining of a demurrer. But those opinions do not command reversal in all instances regardless of the fact picture drawn by the complaint. An exception to the general rule appears to be a case in which a plaintiff relies upon a void contract—it being plainly apparent that he cannot recover thereon. Moss v. Moss, 20 Cal.2d 640, 128 P.2d 526, 141 A.L.R. 1422, is an example. It was an action for declaratory relief to enforce the obligations of a property settlement agreement which was void because contrary to public policy. The lower court sustained a demurrer without leave to amend and the Supreme Court affirmed. At page 643 of 20 Cal.2d, at page 528 of 128 P.2d, it said: ‘The fact that plaintiff was a party to the unlawful bargain of equal fault with defendant and is therefore in pari delicto, is a consideration which could properly have been considered by the trial court as a sufficient reason for declining to grant declaratory relief.’ And at page 644 of 20 Cal.2d, at page 528 of 128 P.2d: ‘Assuming, however, as contended by plaintiff, that the doctrine of in pari delicto should not be treated as an absolute bar to this action, it is nevertheless an element which the trial court in its discretion could consider in deciding whether or not to grant declaratory relief under the circumstances presented here. Cf. Borchard, supra, pp. 239–240, 304–305. It cannot be said, therefore, that the trial court abused its discretion, and we find no error in its conclusion that declaratory relief was not proper under the facts of this case.’ This case has never been overruled, although it has been factually distinguished. The Chief Justice, who was the author of the Moss opinion, said in the Maguire case, supra, 23 Cal.2d 719, at page 730, 146 P.2d 673, at page 679: ‘The Moss case holds that a trial court does not commit reversible error when in ruling on demurrer it exercises its discretion and refuses declaratory relief to a party of equal fault to an illegal transaction. * * * That a party seeking judicial aid has ‘unclean hands' may well justify a trial court in concluding that its adjudication would not be proper.’

Davis v. City of Santa Ana, 108 Cal.App.2d 669, 239 P.2d 656, was an action to prevent the performance of a contract for collection of city garbage and for declaratory relief. The attack upon the contract was that it was made without notice inviting bids and that it was not let to the lowest responsible bidder after notice, and hence it was illegal and void. Having determined that the court properly denied an injunction, the opinion in 108 Cal.App.2d at page 684, 239 P.2d at page 665, says: ‘It is true that a complaint for declaratory relief is legally sufficient if it sets forth facts showing the existence of an actual controversy relating to the legal rights and duties of the respective parties under a written instrument and requests that these rights and duties be adjudged by the court. Maguire v. Hibernia Sav. & Loan Society, supra. However, the pleadings must set forth facts which show an actual controversy. Under the statement of facts here presented the only controversy claimed is whether the contract for the handling of garbage was void because bids were not called for, and whether the conditional agreement to sell the equipment was void because such sale was not made at public auction. These questions were fully presented by the pleadings and plaintiff has suffered an adverse ruling on these subjects. He is not prejudiced by the ruling of the trial court which, in effect, denies declaratory relief. No abuse of discretion appears in the action of the court in refusing to entertain such complaint. [Citating cases.]’

In Essick v. City of Los Angeles, 34 Cal.2d 614, at page 624, 213 P.2d 492, the court held that the trial judge had erred in dismissing a declaratory relief complaint and, instead of reversing, it modified the judgment so as to declare that plaintiff was entitled to no relief.

Anderson v. Stansbury, 38 Cal.2d 707, 242 P.2d 305, was an action for accounting, declaration of trust and declaratory relief, in which the court had granted a nonsuit. At page 717 of 38 Cal.2d, at page 310 of 242 P.2d it was held that this did not result in a miscarriage of justice within the constitutional provision. ‘From what has been said, it appears that the trial court properly granted the nonsuit as to plaintiffs' alleged causes of action for an accounting and for a declaration of trust. However, plaintiffs' complaint also included a count for declaratory relief, and the disposition of such count would ordinarily require an express declaration of the rights of the parties. Essick v. City of Los Angeles, 34 Cal.2d 614, 624, 213 P.2d 492; Kessloff v. Pearson, 37 Cal.2d 609, 613, 233 P.2d 899. While the trial court therefore erred in entering a nonsuit rather than a declaratory judgment in disposition of the count for declaratory relief, such error cannot be deemed prejudicial here. Any declaration of the rights of the parties would necessarily have been unfavorable to plaintiffs in conformity with the disposition of the other two counts, which latter disposition constituted the equivalent of an express declaration that plaintiffs had failed to establish any rights. Under such circumstances, the procedural error of the trial court does not constitute ground for reversal of the judgment. Const., art. VI, sec. 4 1/2.’

15 Cal.Jur.2d, sec. 25, p. 145, makes this observation: ‘It is of interest to note that, in affirming the denial of declaratory relief by the trial court, the opinion of the reviewing court sometimes discusses matters of substance with respect to which the declaration was sought, and in effect affords the plaintiff-appellant a declaration as to the law measuring his rights or duties.’ This must be true. Our holding that plaintiff cannot recover because of illegality of the transaction upon which he stands becomes the law of the case. If the cause were reversed, plaintiff could not amend to eliminate the present allegations which show he has no cause of action at law or in equity. Wennerholm v. Stanford Univ. Sch. of Med., 20 Cal.2d 713, 128 P.2d 522, 141 A.L.R. 1358; Zakaessian v. Zakaessian, 70 Cal.App.2d 721, 161 P.2d 677. The superior court could do no more than enter judgment to that effect; in fact, this court, in the event of reversal, should so direct. It appears then that reversal would be an idle and fruitless act. The object of declaratory relief has been attained by the ruling herein. ‘The purpose of declaratory relief is to liquidate uncertainties and controversies which might result in future litigation.’ Hannula v. Hacienda Homes, 34 Cal.2d 442, 448, 211 P.2d 302, 306, 19 A.L.R.2d 1268. Under such circumstances, section 4 1/2 of article VI, commands an affirmance. Anderson v. Stansbury, supra, 38 Cal.2d 707, 717, 242 P.2d 305; Bisinger v. Sacramento Lodge No. 6, 187 Cal. 578, 582–584, 203 P. 768. ‘Nor will a judgment be reversed where such reversal would be of no benefit to the appellant because the same judgment would have to be entered on retrial.’ 3 Am.Jur., sec. 1184, p. 691.

The judgment is affirmed.


1.  Sec. 1706. ‘A corporation may purchase, out of stated capital or out of any surplus, shares issued by it, or by a corporation of which it is subsidiary, in any of the following cases: ‘(a) To collect or compromise in good faith a debt, claim, or controversy with any shareholder. ‘(b) To eliminate fractional shares. ‘(c) To redeem or purchase shares subject to redemption at prices not exceeding the redemption price thereof. ‘(d) From any shareholder who by reason of dissent from any proposed corporate action is entitled under Article 2 of Chapter 3 of Part 8 of this division to be paid the fair market value of his shares. ‘(e) From one who as an employee other than as an officer or director has purchased the shares from the corporation under an agreement reserving to the corporation the option to repurchase or obligating it to repurchase the shares.’ Sec. 1707. ‘A corporation may also purchase shares issued by it, or by a corporation of which it is subsidiary, in any of the following cases: ‘(a) Upon the exchange or surrender of such shares for other shares, in order to carry out provisions of its articles authorizing conversion of its shares. ‘(b) From surplus resulting from reduction of stated capital, subject to the provisions of Chapter 5 of this part. ‘(c) Subject to any limitations contained in its articles, out of earned surplus. Purchases under this subdivision are not limited to cases authorized under other subdivisions of this section or of Section 1706.’

ASHBURN, Justice pro tem.

MOORE, P. J., and FOX, J., concur. Hearing granted; McCOMB, J., not participating.

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