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

A. R. BELLERUE, Plaintiff and Appellant, v. BUSINESS FILES INSTITUTE, INC., Creative Management Corporation, George A. Hedden, Jr., Wayne Marsh, and John W. Hilliard, Defendants and Respondents.

Civ. 26803.

Decided: March 06, 1964

Leonard B. Hankins and James L. Hay, Long Beach, for plaintiff and appellant. James A. Poore, Los Angeles, for defendants and respondents.

This action was brought to recover money upon the ground thate transaction was a violation of the Corporate Securities Law1 and upon the additional ground that the transaction had been induced by misrepresentations. After a court trial there was a judgment in favor of defendants, from which plaintiff appeals.

The defendants Business Files Institute, Inc., (hereinafter called B.F.I.) and Creative Management Corporation (hereinafter called C.M.C.) were California corporations, both organized in 1957. All of the stock of B.F.I., consisting of 100 shares, was issued to C.M.C. in consideration of the cancellation of indebtedness as the rate of $10 per share. The individual defendants, Hedden, Hilliard and Marsh, were active in the management of both corporations as officers or directors. C.M.C. was owned principally by defendants Hedden and Hilliard, each of whom held 49 per cent of its stock. Prior to the transaction which is the subject of this action, the activities of B.F.I. had been financed mainly by money loaned to it by C.M.C. and by Hilliard. Defendant Hilliard had loaned to the two corporations approximately $24,000 which was devoted to promoting the business of B.F.I.

The complaint alleges and the answer admits that ‘On or about April 1, 1958, plaintiff and defendants entered into an oral agreement which or on about May 1, 1958 was reduced to a written memorandum agreement whereby plaintiff was to loan to Business Files Institute, Inc., for a period of two years, the sum of $10,000.00 and to pay to Creative Management Corporation $10.00 each for seven and one-half shares of stock of Business Files Institute, Inc. That pursuant to said agreement between the date of April 1, 1958 and July 2, 1958, plaintiff paid to defendants the total sum of $7,565.00.’

The complaint also sets forth a variety of misrepresentations of fact which defendants are alleged to have made to induce plaintiff to enter into this transaction.

The trial court found, in substance, that pursuant to the agreement between the parties, plaintiff paid the sum of $7,565, of which $7,500 was a loan to B.F.I. and $65 was payment to C.M.C. for shares of B.F.I.; that the transaction whereby plaintiff agreed to loan $10,000 to B.F.I. did not constitute the sale of stock of either corporation; that B.F.I. had obtained a permit to issue stock, that plaintiff was at all times fully advised as to the nature and condition fo B.F.I.'s business, there was no intent on the part of any defendant to mislead plaintiff, and plaintiff did not rely upon any representation made by defendants.

Plaintiff's attack on the judgment here is entirely a challenge to the sufficiency of the evidence to support these findings. In submitting this issue, plaintiff is bound by the rule so familiar to all but so often disregarded by disappointed litigants: that an appellate court does not reweigh the evidence, and that conflicts which the trial court resolved against the appellant may not be reopened here. The judgment may not be overturned here for insufficiency of the evidence if there is any substantial evidence to support it, including any inferences which may reasonably be drawn from the evidence. (Bancroft-Whitney Co. v. McHugh, 166 Cal. 140, 142, 134 P. 1157.)

To avoid confusion it is necessary to note the relationship, or lack of it, between this case and another between the same parties arising out of the same transaction. Plaintiff brought this action by filing his complaint on January 7, 1959. The trial ended on September 22, 1960, when the judge announced from the bench that he found no violation of the Corporate Securities Law and no fraud, and that judgment would be for the defendants. The judgment is dated March 21, 1962, and was entered March 27, 1962.

Meanwhile, on October 25, 1960, plaintiff commenced an action upon the notes which had been given in return for his $7,500. The action on the notes proceeded to trial before any judgment had been entered in the fraud action. In the note action the court gave judgment on the notes against B.F.I. as the maker, and against C.M.C., Hilliard and Hedden on an alter ego theory. This judgment was appealed by the defendants, with the result that the judgment on the notes was affirmed as to B.F.I. and reversed as to the other defendants. (Bellerue v. Business Files Institute, Inc., 215 A.C.A. 440, 30 Cal.Rptr. 232 decided April 23, 1963.)

Neither party makes any contention here that the decision in the note case should have any bearing on the outcome of the present action, and it is therefore unnecessary to refer to it further.

In the present case the defendants testified that before plaintiff made his agreement to invest, they had fully and truthfully explained to plaintiff the nature of the business and had showed him the books of account. Defendant Marsh testified that he told plaintiff specifically that B.F.I. would give him its notes for the money which was to be loaned, and that C.M.C. would sell him some of its stock in B.F.I. at the price of $10 per share, and that plaintiff was not to receive any stock except that which C.M.C. was selling to him.

The evidence includes the permit issued by the Commissioner of Corporations on August 9, 1957, authorizing B.F.I. to issue stock to C.M.C., and placing no restrictions on the transfer of this stock by C.M.C. The permit was, by its terms, valid through November 8, 1957. In the absence of evidence to the contrary, it must be assumed that the issuance of the shares to C.M.C. took place during that period. The record adequately supports the trial court's findings and conclusions that the $7,500 was paid to B.F.I. as a bona fide loan, and not for the purchase of stock. No permit from the Commissioner of Corporations was required for this transaction. The issuance of promissory notes was exempt under the express provision of Corporations Code, section 25102, subdivision (c).2 The agreement to sell stock was not within the prohibition of Corporations Code, section 25500, because the seller was not the issuer.

Plaintiff argues that a permit was required because the agreement to lend and the agreement to sell stock were a part of the same transaction. The decisions upon which he relies may be summarized as follows:

In People v. Sidwell, 27 Cal.2d 121, 162 P.2d 913, the investor gave $5,000, for which he received a $5,000 note and a promise that 5 per cent of the oil and gas of a particular well would be set aside for him. No permit had been issued for the sale of interests in the oil well. The trial court found the transaction to be a security and its judgment was affirmed.

In Voss v. Friedgen, 141 Cal.App.2d 135, 296 P.2d 424, the investors advanced cash in an ambiguous oral transaction in which they were told they would receive one per cent of a producer's share in a motion picture. After the legality of the transaction was challenged, the defendants gave the investors a note. No permit for the sale of any share in the enterprise was ever issued. The trial court found that the transaction was the sale of a security, and the judgment was affirmed.

In Strangman v. Arc-Saws, Inc., 123 Cal.App.2d 620, 267 P.2d 395, the investor advanced $10,000, which a corporation was to repay out of profits. He was also told that he would receive 10 per cent of certain stock. No permit had been issued. The trial court found that this transaction was the sale of a security, and the judgment was affirmed.

In People v. Woodson, 78 Cal.App.2d 132, 177 P.2d 586, the investor paid in money, for which he received a note and a share certificate in a limited partnership. There was no permit. The trial court found the transaction to be the sale of a security, and the judgment was affirmed.

These cases are readily distinguished from the present case. In each of the four there was a promise of a share of the profits of the business, there was no permit of any kind, and the trial court found as a fact that the transaction was the sale of a security. The opinions recognize that when the trier of the facts looks through form to substance it may find that a transaction which purports to be merely a loan may actually be something else. In the present case the loan and the sale of stock were clearly spelled out as distinct events, each supported by a separately stated consideration. The borrower and the seller were separate entitles. The stock had been issued under a valid permit, and the trial court made a finding of fact that $7,500 was in truth loaned to B.F.I.

Plaintiff makes the further contention that the sale of B.F.I. stock by C.M.C. required a permit because the sale was ‘directly or indirectly, for the benefit of the issuer,’ citing Corporations Code, section 25152. The benefit, he argues, is that the sale of the shares by C.M.C. induced plaintiff to lend money to B.F.I.

Although the trial court made no finding to this effect, the circumstances shown in the record leave no doubt that C.M.C. would have been unwilling to sell stock unless plaintiff agreed to loan money to B.F.I., and plaintiff would have been unwilling to lend $7,500 or more to B.F.I. but for the opportunity to become a shareholder. The question then is whether such a motivation on the part of the selling shareholder and the lender makes the transaction subjection to the requirement of a new permit.

It is sometimes said that a sale by the owner of personally owned stock is not exempted from the requirement of a permit if the stock is sold for the benefit of the issuer. (See 15 Ops.Cal.Atty.Gen. 317 (1950); 2 Ballantine & Sterling, California Corporation Laws (4th ed) § 459.01, p. 909.) This calls for an analysis of what kind of ‘benefit’ is meant. The cited opinion of the Attorney General holds that the issuer is benefited and a permit is required when the privately owned stock is pledged to secure a loan to the corporation.

The phrase ‘benefit of the issuer’ appears in Corporations Code, section 25152, which states:

‘Except as expressly provided in this division, the Corporate Securities Law does not apply to the sale of securities when (a) made by or on behalf of a vendor not the issuer or underwriter thereof who, being a bona fide owner of the securities, disposes of his own property for his own account, and (b) the sale is not made, directly or indirectly, for the benefit of the issuer or an underwriter of the security, or for the direct or indirect promotion of any scheme or enterprise with the intent of violating or evading any provision of the Corporate Securities Law.’

It must be noted that section 25152 does not by its terms prohibit anything. It cannot properly be cited as authority for the proposition that a sale for the benefit of the issuer requires a permit. The Legislature does not make a particular act criminal by declaring that some other act is innocent. Section 25152 clarifies section 25500 by specifying some transactions which do not fall within the broad proscription of the latter section. If it is a violation of the law to sell a security ‘for the benefit of the issuer,’ the section violated is section 25500, which says, ‘No company shall sell any security of its own issue * * * until it has first applied for and secured from the commissioner a permit authorizing it so to do.’

In many cases a sale by a shareholder is in reality a sale by the issuer, particularly in view of the very broad definition of ‘sale’ contained in Corporations Code, section 25009.3 It is frequently a question of fact whether a sale purportedly made by a person not the issuer is actually a disguised sale by or on behalf of the issuer. The benefit accruing to the issuer may betray the true nature of the transaction.

A number of cases have upheld findings that the issuer corporation was in fact the seller where it appeared that the issuer was a foreign corporation, issuing its stock outside California to an individual who actually held the stock as the issuer's agent for sale in California to the intended investors. (People v. Mason, 184 Cal.App.2d 317, 7 Cal.Rptr. 627; People v. Mills, 148 Cal.App.2d 392, 306 P.2d 1005; People v. Mason, 86 Cal.App.2d 445, 195 P.2d 60; Smith v. Randall, 51 Cal.App.2d 195, 124 P.2d 334; People v. Allen, 47 Cal.App.2d 735, 118 P.2d 927; Auslen v. Thompson, 38 Cal.App.2d 204, 101 P.2d 136; People v. Murphy, 17 Cal.App.2d 575, 62 P.2d 592; People v. Smith, 111 Cal.App. 177, 295 P. 105.) In other cases it has been inferred that the issuer was the real seller when the promoter offered to sell his personal shares before any shares had been issued. (Conrad v. Superior Court, 209 Cal.App.2d 143, 25 Cal.Rptr. 670; Sampson v. Sapoznik, 124 Cal.App.2d 704, 269 P.2d 205; People v. Weibert, 18 Cal.App.2d 457, 64 P.2d 169.) In each of those cases the nominal vendor of the shares was the mere conduit through which the issuer transmitted its shares to someone else. On the other hand, in Davies v. Acware Plastics, 116 Cal.App.2d 798, 254 P.2d 663, where a shareholder sold his personally owned shares to the plaintiff and then loaned the proceeds to the corporation, the trial court's finding that this was not a sale by or for the benefit of the issuer was upheld. The fact that the issuer received the cash in the form of a loan from the shareholder was held not to be such a benefit to the issuer as to compel a finding that the issuer was the seller, in violation of the Corporate Securities Law.

In the present case there is evidence that the shares had been issued lawfully to C.M.C. long before the transaction with plaintiff had been contemplated; that the resale to plaintiff and plaintiff's agreement to lend, though negotiated as one bargain between plaintiff and C.M.C., were set up as distinct transactions, each supported by its own stated consideration; and the acts of the vendor-shareholder were clearly differentiated from the acts of the issuer-borrower. This record does not compel a finding that there was a sale, within the meaning of the Corporate Securities Law, by or on behalf of the issuer.

The findings of fact were not carefully drawn, and plaintiff has found some points to criticize. For example, the court found that ‘there was never any sale of stock * * * but plaintiff did pay the sum of $65.00 to Creative Management, Inc. [sic] included in the $7565.00 referred to in par. II for seven and one-half (7 1/2) shares of Business Files Institute, Inc. stock, which sale was never consummated, but was conditioned upon further approval by the Corporations Commissioner of the State of California.’

An agreement to sell is a sale within the meaning of the Corporate Securities Law. (Corp.Code, § 25009.) The finding quite clearly was intended to state that there was an agreement to sell, but that the shares were never transferred. There is nothing in the record or in the law to explain the court's finding that the consummation of the sale was conditioned upon further approval by the Corporations Commissioner. There is no evidence that the sale was so conditioned, and no such approval was required for the reasons stated above. These inaccuracies in the findings do not detract from the basic facts upon which the judgment rests.

The judgment is affirmed.


1.  Corporations Code, section 25500, provides in part: ‘No company shall sell any security of its own issue, except upon a sale for a delinquent assessment against the security made in accordance with the laws of this State, or offer for sale, negotiate for the sale of, or take subscriptions for any such security, until it has first applied for and secured from the commissioner a permit authorizing it so to do.’

2.  Corporations Code, section 25102, provides in part: ‘Except as otherwise expressly provided in this division, the Corporate Securities Law does not apply to any of the following classes of securities: * * * ‘(c) Promissory notes, whether secured or unsecured, and any guarantee thereof, where the notes are not offered to the public, or are not sold to an underwriter for the purpose of resale.’

3.  Corporations Code, section 25009, subdivision (a), reads: “Sale' or ‘sell’ includes every disposition, or attempt to dispose, of a security or interest in a security for value. “Sale' or ‘sell’ includes all of the following, whether done directly or by an agent, circular letter, advertisement, or otherwise: An offer to sell; an attempt to sell; a solicitation of a sale; an option of sale; a contract of sale; a taking of a subscription; an exchange; any change in the rights, preferences, privileges, or restrictions on outstanding securities.'

FILES, Justice.

SHINN, P. J., and FORD, J., concur.

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