GILLIS v. PAN AMERICAN WESTERN PETROLEUM CO (1934)

The appeal is from a judgment entered after sustaining a demurrer to the second amended complaint without leave to amend, and an order denying a motion to vacate such order sustaining the demurrer, and denying a motion for leave to file a third amended complaint.

The second amended complaint alleges the following matters:

The corporate existence of one defendant, and the status of the other parties, and alleging the corporation was a Delaware corporation.

That the individual defendants caused the said corporation to be incorporated under the laws of the state of Delaware for the purpose and with the plan that it should take title to certain California property and that it should conduct all of its business affairs within the state of California with its principal place of business at Los Angeles; and that it has done its business in said city and state.

That all of this was done to evade the laws of California, especially the Corporate Securities Act of said state (St. 1917, p. 673, as amended). That the individual directors are and were directors of said corporation until after the issuance of the stocks involved in said action.

That having opened its principal place of business as aforesaid, said corporation at meetings of its board of directors in the state of California, regularly and legally held, ordered issued certain shares of its capital stock, and specified that said shares of stock, as well as other shares of said corporation stock, be sold and the same were sold, in the state of California; and certain shares of said corporation stock were ordered issued and were issued and sold to plaintiffs in the state of California; that the shares of said corporation stock so ordered to be issued and issued and sold to and purchased by the plaintiffs were shares of said “Class B” stock; then followed an itemized statement of the date of sale, the number of shares and the amount paid by plaintiffs. It further alleges: “That the total number of shares so purchased by the plaintiffs from said Pan American Western Petroleum Company, by and through its said directors as aforesaid, was twenty-two hundred shares; that the total amount which the plaintiffs paid in cash for said shares of stock was and is the sum of $63,375.50.”

That at the times of the purchase of said shares of stock by plaintiffs, said corporation had not applied to the commissioner of corporations of California for a permit authorizing it to issue any of its shares of stock and had wholly failed to comply with the provisions of the Corporate Securities Act, and there had not been issued to it any such permit to sell any of its shares of stock.

That the certificates issued to the plaintiffs for said shares of stock purchased by them as aforesaid, as well as said shares of stock, were, at all times herein alleged, and are void and worthless and of no value.

That all of the individual directors, as officers and agents of the corporation and as individuals, knowingly authorized, directed, and aided in the issuance and sale of stock aforesaid, and knew then that the Corporation Commissioner had not issued any permit for the issuance of any of said shares.

That plaintiffs did not become aware of the foregoing facts, as to lack of permit or compliance with the Corporate Securities Act, until in October, 1930, and until then no condition existed to put them on inquiry as to such facts; that on or about October 10, 1930, they became informed of such lack of permit, etc., by reading an article in the newspapers; and then they made inquiry and learned the facts alleged. That up to that time they had relied implicitly upon the genuineness of the stocks and believed that a permit had issued.

That by reason of the void and illegal acts of defendants, plaintiffs were caused to lose their money; that there was no consideration for the money paid by them, and they have been damaged, and ask judgment in the full sum paid, with interest and costs.

The principal question on this appeal is whether or not the demurrer was properly sustained to the second amended complaint. The substance of this pleading is given above at some length. The transcript on appeal sets up all of the prior pleadings in this case, but as to the allegations of the prior complaints we are not concerned. We are confronted by this second amended complaint alone and it must stand or fall as it is written, and its allegations must be taken as true.

It is first claimed that this complaint states no cause of action because the appellants suffered no damage because the stock they purchased was valid and not void. Then it is asserted that the issuance of stock is an internal affair of a corporation and that the state will not interfere in such affairs of a foreign corporation to the extent of declaring stock issued by it void because said corporation had not procured authority from the Corporation Commissioner of California to issue the stock. Ordinarily such would be the rule, but in a case such as this where the whole organization and all the acts are made and done for the purpose of evading the provisions of the Corporate Securities Act, neither state nor court should hesitate to declare stock issued under such circumstances void.

The second point against this complaint urged by respondent is that the pleading states no cause of action because the suit is on contract alone and not on tort, and the individual defendants (respondents) were not parties to the contract, and received no money from appellants. The directors and all persons who participate in the transactions resulting in completed sales without a permit contrary to law, including the corporation, are liable to the purchaser, and the money paid may be recovered. Corporate Securities Act, § 14 (St. 1917, p. 680, § 14, as amended); Minor v. Baldridge, 123 Cal. 187, 55 P. 783.

The third point is made that this complaint states no cause of action because no actionable fraud is pleaded.

The allegations charging violations of the Corporate Securities Act, sales without a permit, or even application for one, within the state of California, sufficiently allege fraud.

It is also contended that the second amended complaint does not state facts sufficient to state a cause of action in that it does not allege that appellants were entitled to relief as of the time of filing of said complaint. This point rests chiefly upon a statement contained in a former pleading of this cause. That statement is no part of the present pleading, and there is nothing to indicate on the face of the second amended complaint that the plaintiffs were not entitled to relief as of the time it was filed, and in the absence of direct showing on the face of the complaint to the contrary, no presumption that plaintiffs had disposed of or did not own the stock they bought at the time of filing can be invoked.

It is next urged that the statute of limitations has run and the cause of action is barred. That not only must the pleader state when the discovery of fraud is made, but why it was not or could not have been made within the 3-year period. Code Civ. Proc. § 338, subd. 4; Lady Washington C. Co. v. Wood, 113 Cal. 482, 45 P. 809; Victor Oil Co. v. Drum, 184 Cal. 226, 193 P. 243; Montgomery v. Peterson, 27 Cal. App. 671, 151 P. 23; Security Commercial, etc., Bank v. Seitz, 43 Cal. App. 353, 185 P. 188.

There was no obligation upon appellants to make inquiry under the law, and a prudent person would not have been put upon inquiry, because the means of knowledge existed or were open to them. Nothing had occurred before to excite their suspicion or put them on inquiry. The matters of special demurrer for uncertainty are not sufficient to warrant the order sustaining the demurrer, and the demurrer should have been overruled. MacDonald v. Reich & Lievre, Inc., 100 Cal. App. 736, 281 P. 106; Boss v. Silent Drama Syn., 82 Cal. App. 109, 255 P. 225; 26 Cor. Jur. 1120.

The next point made against the pleading is that no violation of the Corporate Securities Act is shown, and hence appellants suffered no damage. Stated otherwise, the claim is that this complaint does not allege directly that the appellants purchased any stock from the defendants in violation of the Corporate Securities Act.

It may well be claimed that this complaint does state its facts in a devious and indirect way that gives rise to speculation as to why a direct and clear allegation as to the sale and purchase is not made. Examining the complaint, however, the following statements appear therein:

“That the corporation ordered issued certain shares of stock including those enumerated as purchased by the appellants; that said shares were ordered issued and sold and were sold within the state of California, and were ordered issued and were issued to the plaintiffs in the state of California; that said shares so ordered issued and sold to and purchased by appellants were class ‘B’ stocks, and purchased by appellants in lots as is alleged on different dates and in different amounts; that the total number of shares so purchased by plaintiffs from the corporation by and through its directors was 2200 shares.

“Paragraph IX alleges that the individual defendants as agents and officers of the corporation and as individuals knowingly authorized, directed and aided in the issuance and sale of all of said shares purchased by appellants.”

This language, though devious, seems sufficiently to state that the stocks were issued and sold within the state of California by the defendant corporation aided by and through its directors, the individual defendants, to the plaintiffs, appellants herein. If so, there was violation of the Corporate Securities Act.

There is really no occasion to make comment upon the remaining points of appeal, namely, from the order denying appellants the right to file a third amended complaint. But disregarding the fact that this is rather a moot question now, it may be said that the right to allow further amendments is discretionary with the trial judge, and, having granted two permissions to amend, it cannot be said this discretion was abused, but, further, and still stronger, is the fact that the proposed third amended complaint was never properly before the court at the time said order was made. This disposes of the claim of abuse of discretion. The court cannot be held to have abused its discretion when it had no means of knowing what the proposed pleading would contain, or whether it could or could not state a cause of action.

The judgment appealed from is reversed, and the cause remanded, and the trial court is hereby directed to overrule the demurrer to the plaintiffs' second amended complaint with leave to defendants to answer within such reasonable time as may be fixed if so advised.

GANS, Justice pro tem., delivered the opinion of the court.

We concur: PULLEN, P. J.; PLUMMER, J.