FLYING TIGER LINE v. Fritz Hutcheson, Appellant.*

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District Court of Appeal, Second District, Division 3, California.

The FLYING TIGER LINE, Inc., a corporation, Plaintiff and Respondent, v. U. S. AIRCOACH, a corporation, and Fritz Hutcheson, Defendants, Fritz Hutcheson, Appellant.*

Civ. 22671.

Decided: June 24, 1958

John W. Preston, John W. Preston, Jr., Lawrence L. Light, Los Angeles, for appellant. Hill, Farrer & Burrill, William S. Scully, Los Angeles, for respondent.

U. S. Aircoach (Aircoach) is a chartered air line wholly owned, managed and controlled by defendant Hutcheson. On October 15, 1953, it was indebted to the Flying Tiger Line (Lines) in the sum of $52,000 for plane rental and other credits. On that date a contract was entered into with Hutcheson by which Lines agreed to extend further credit to Aricoach and Hutcheson agreed to pledge all the stock of Aircoach as security for its debts, past and future. The agreement read in part as follows: ‘In the event default in payments shall be made by U. S. Aircoach for a period of thirty days after notice in writing the F. T. L. may take title to all or any part of said shares of stock at a value to be agreed upon at said time by the said Fritz Hutcheson and F. T. L., and such value shall be applied against the then existing indebtedness. It is specifically agreed that the said Fritz Hutcheson is not personally responsible for any indebtedness existing between U. S. Aircoach and F. T. L., other than as created by this instrument.’ (Emphasis added.) Thereafter proper steps were taken to complete the pledge, the stock was reissued to Lines, as pledgee, and at the time of trial was in the hands of an independent escrow holder, pursuant to the agreement.

Lines extended further credit to Aircoach until the debt reached $72,946.48 for which it brought suit against Aircoach and Hutcheson on June 3, 1954. Defendants answered and filed a counterclaim for damages largely in excess of the sum demanded by plaintiff. After a lengthly trial the court by minute order directed judgment for the defendants. Some months later the court reversed its ruling and upon extensive evidentiary findings rendered judgment in favor of plaintiff against both defendants on the complaint and the counterclaim. Hutcheson made a motion under Section 663, Code of Civil Procedure, for entry of another and different judgment which was denied. He appeals from the judgment and the other denying his motion for a different judgment.

The complaint sought judgment against Hutcheson under a theory made up of the following contentions: (1) Aircoach was the alter ego of Hutcheson who, for that reason, was liable for its debts; (2) After October 15, 1953, Hutcheson misappropriated the funds of Aircoach so as to render the corporation insolvent; (3) These facts were unknown to plaintiff until long after it had extended the additional credit to Aircoach and therefore the agreement was not a release of Hutcheson's liability. The same contentions are urged in support of the judgment against Hutcheson.

The answers of defendants denied the allegations of the alter ego relationship and the allegations of fraud. There was a separate defense pleaded by Hutcheson based upon the above quoted nonliability provision of the October agreement.

The court found that the corporation was the alter ego of Hutcheson and that the later had misappropriated moneys of the corporation until it was rendered insolvent. It was also found that plaintiff was without knowledge and was not chargeable with knowledge of these facts prior to the institution of the action.

Hutcheson assails these findings, and findings adverse to the counterclaim, as being without support in the evidence. His contentions are not deserving of consideration. The oral proceedings fill 1,100 pages of the reporter's transcript; 52 exhibits were introduced in evidence. A vast amount of this evidence related to the findings that are criticized by appellant. His briefs state the evidence he considers favorable to him, ignores that of the plaintiff and makes no pretense of giving this court a fair statement of the evidence relevant to the findings which he assails. The findings will be deemed supported by the evidence. Hickson v. Thielman, 147 Cal.App.2d 11, 304 P.2d 122. This, however, is of no moment. Those findings afford no support for the judgment.

Plaintiff contends that the October 1953 agreement was not a release because it did not know at the time of the alter ego relationship or of Hutcheson's manipulation of the corporation's finances. Cases are cited which state the rule that a release does not extend to liabilities which at the time are unknown to the creditor, and hence not within the contemplation of the parties. The rule is a familiar one but it is inapposite since it is of no consequence whether the agreement, under the circumstances, and the situation of the parties, met the requisites of a valid release. If it was an agreement which, for a consideration, absolved Hutcheson of liability for the debts of Aircoach it was binding upon plaintiff as long as it remained in effect.

We come now to the special defense of Hutcheson based upon the nonliability provision of the agreement. The defense is that this provision was an integral part of the agreement of pledge, that plaintiff holds the stock in pledge, has not rescinded or offered to surrender the stock, and is estopped to sue him on the debt. Appellant also argues that long after plaintiff had knowledge of his ownership and control of the affairs of Aircoach, and his transactions with the corporation, it insisted upon performance of the pledge agreement and still stands upon it. It is true that Lines demanded performance and the stock was issued to it as pledgee after the suit was brought, but the question of ratification is not a material one.

Hutcheson's contention that Lines cannot be permitted to retain the security of the stock and at the same time hold him liable for the debt is unquestionably sound. Plaintiff attempts to answer it by pointing to the findings of Hutcheson's fraud.

It argues that it was not required to rescind or to restore the certificates. It asks in its brief: ‘Why should The Flying Tiger Line, Inc. rescind the Agreement when, as seen above, it [the agreement] has nothing whatever to do with the basis and reasons for holding Appellant personally for the contract debt of his corporation in consequence of his fraudulently tortious acts?’ A sufficient answer to this contention is that the circumstance that the value to plaintiff of the pledged security was materially impaired by appellant's subsequent acts would furnish grounds for a rescission but not an excuse for a failure to rescind.

All that plaintiff can claim as the effect of the finding of the loss of value of the security is that it might have had a right to rescind the agreement and disaffirm its implied promise not to look to Hutcheson for payment of the debt, or to stand upon the agreement and sue for damages.

The agreement as to Hutcheson's non-liability was inseparable from his pledge of the stock. As long as the agreement remained in effect plaintiff was bound by it; not only by those parts which were advantageous to it, but by those which operated to its disadvantage.

A party to a contract may rescind if, through the fault of the party as to whom he rescinds, the consideration for his obligation has failed, either in whole or in material part. Civ.Code § 1689, subd. 2; McCreary v. Mercury Lumber Distributors, 124 Cal.App.2d 477, 486, 268 P.2d 762. But a contract which is subject to rescission upon that ground is not a nullity; once in effect it remains in effect until it is rescinded. Scheel v. Harr, 27 Cal.App.2d 345, 352, 80 P.2d 1035. One who rescinds a contract must restore, or offer to restore, everything of value received thereunder. Civ.Code § 1691, subd. 2. There are several exceptions to the rule. One exception is that a worthless consideration need not be restored as a condition precedent to rescission. McElligott v. Freeland, 139 Cal.App. 143, 33 P.2d 430; Newark Trust Co. v. Kriebel, 49 Cal.App. 614, 193 P. 962. Another is that the rescinding party need not restore the consideration where he would have been entitled to retain it in any event. Richards v. Fraser, 122 Cal. 456, 55 P. 246; Kales v. Houghton, 190 Cal. 294, 212 P. 21; Morris v. Cole, 218 Cal. 676, 24 P.2d 785. Neither exception is applicable here. In the first place, the court did not find that the stock had become worthless and there was no evidence that it was worthless. There were widely different estimates as to the value of Aircoach's certificate under which it could operate. Some estimates were far above the amount of its debt to plaintiff. In the second place, plaintiff would not have been justified in retaining the stock upon rescinding for the reason that it claims the right to possession of the security by virtue of the very agreement whose validity would be denied by a rescission. Proof that the corporation was the alter ego of Hutcheson would not entitle plaintiff to retain the stock which it claims only under its agreement that he was not liable.

In our opinion, plaintiff was precluded from maintaining an action against appellant on the debt. The judgment against Hutcheson on the complaint was erroneous. No error appears with respect to the denial of plaintiff's liability on the counterclaim.

The order denying a new trial not being appealable, the purported appeal from that order is dismissed.

The judgment and the order denying, Hutcheson's motion to vacate the judgment and enter a different judgment are reversed, and the court is directed to enter judgment that plaintiff recover nothing as against Hutcheson on its complaint, and that Hutcheson recover nothing from plaintiff upon his counterclaim.

SHINN, Presiding Justice.

PARKER WOOD and VALLEÉ, JJ., concur.