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MORELLO v. METZENBAUM ET AL.*
This is an appeal from a judgment in an action on a promissory note for $6,000, dated December 15, 1941, and due one day after date.
One Johns was the owner of real property in Fresno County which he had leased to Loren L. Hillman, Inc., for the purpose of drilling for oil. In December, 1941, defendant Metzenbaum negotiated for the purchase of certain of the landowner's royalty from Johns who transferred this royalty to Metzenbaum for $12,000. $6,000 of this purchase price was borrowed from plaintiff on the promissory note involved here. Johns secured a permit from the Commissioner of Corporations of the State of California which authorized the transfer of this royalty to Metzenbaum.
The note to plaintiff was not paid and in February, 1942, he pressed defendants for payment. This resulted in contracts dated March 13, 1942, whereby the parties agreed to an extension of the note in consideration of Metzenbaum conveying to plaintiff one per cent outright and 11 1/2% of the production from the Johns property as security for the payment of the note.
The transfer of the oil interest was to be effected by an instrument called a “Deed and Assignment” which purported to grant, sell, assign and transfer the royalty to plaintiff and an agreement, executed concurrently with the deed, which recited the fact of the unpaid note, the extension of the due date, and that the oil royalty was given as security for the payment of the note and giving plaintiff full power “to at any time, and from time to time sell, assign and transfer the whole of said security property, or any part or parts thereof, at any public or private sale, at the option of Morello, and without advertising the same and without any notice except by registered letter mailed to Metzen baum addressed to Metzenbaum at 625 Safford Avenue, Fresno, California, at least five days before each of such sale or sales, and with the right of Morello to be a purchaser at any such sale or sales, and in the event of any sale or purchase hereunder, no matter by or to whom made, all notice thereof, except as herein provided, and any and all equity or right of redemption, whether before or after the sale hereunder, is hereby expressly waived.” The agreement also contained a provision that Metzenbaum was obligated to secure a permit for the transfer of the mineral rights and that such permit had been obtained and issued.
These documents, with a petition by Metzenbaum and his wife to the Department of Investment, Division of Corporations, praying for a permit authorizing the transfer of the royalties to plaintiff, were placed in escrow with instructions which, among other things, directed the escrow holder to deliver the documents to plaintiff if the note should not be paid.
The promissory note was not paid and the documents were delivered to plaintiff who recorded the deed and assignment on April 9, 1942. He then proceeded to foreclose the lien created by the transaction on the 11 1/2% royalty under the provisions of the power already quoted. No attempt was made to conform to the provisions of section 2924 et seq., of the Civil Code in making the sale. Whether or not this rendered the attempted foreclosure void under the provisions of section 2953 of the Civil Code need not be decided here.
At the sale plaintiff bid in the royalty for $2,000 which was credited on the principal of the note and brought this action to collect the unpaid balance. It is fair to remark that up to this point the parties were represented by counsel other than those now appearing for them.
An amended complaint was filed upon which the case went to trial. In the first cause of action the execution of the promissory note was alleged together with the transaction of March 13, 1942, which was claimed to be void as being in violation of the Corporate Securities Act as was the purported sale of the security under the power. Judgment was sought against defendants in the principal sum of $6,000 and accrued interest, attorneys' fees and costs. The amended complaint contained a second cause of action which was subsequently dismissed.
While the defendants filed separate answers they may be considered identical for the purposes of this appeal. They admitted the due execution of the note, alleged its extension and the transactions of March 13, 1942, the sale of the royalties for $2,000 under the power given in the contract and pleaded the bar of section 580d of the Code of Civil Procedure. It was admitted that no permit had been obtained for the transfer of the oil royalty from Metzenbaum and his wife to plaintiff.
The theory on which the trial court gave judgment for defendants clearly appears in the findings. The due execution of the note was found, as were the transactions which culminated in the documents of March 13, 1942, the non–payment of the note, the delivery of those documents to plaintiff, the recording of the deed and assignment, and the purported sale under the power given in the contract with the sale price credited on the principal of the note. It was particularly found that Metzenbaum was the owner of the oil royalty he obtained from Johns under the permit from the Commissioner of Corporations; that no permit was obtained authorizing the transaction between plaintiff and defendant; that no permit was necessary for that transaction; that the deed and assignment was not a security as defined in the Corporate Securities Act; that it was not a security of the issue of Metzenbaum or his wife; that it transferred the interest therein described to plaintiff, who, through the sale became the lawful owner thereof; that as the security had been sold under the power of sale no judgment could be obtained for any deficiency remaining after crediting the sales price on the note. Sec. 580d, Code Civ.Proc.
A study of the record, especially the findings, shows that the most important question for our consideration is the necessity for a permit authorizing the transfer of the oil royalty from Metzenbaum and his wife to plaintiff.
Section 3 of the Corporate Securities Act, Stats.1917, p. 673, as amended, Stats. 1941, p. 2064, provides in part:
“No company shall sell any security, except upon a sale for a delinquent assessment against such security made in accordance with the laws of this State, or offer for sale, negotiate for the sale of, or take subscriptions for any security of its own issue until it shall have first applied for and secured from the commissioner a permit authorizing it so to do. Such application shall be in writing, shall be verified as provided in the Code of Civil Procedure for the verification of pleadings, and shall be filed in the office of the commissioner.”
Individuals are brought within this prohibition against selling securities without a permit by the provisions of subsections 3 and 6 of section 2(a) of the act, St.1937, p. 1428.
Subsection 7 of section 2(a), as far as material here, provides as follows: “The word ‘security’ shall include any * * * certificate of interest in an oil, gas or mining title or lease * * *.”
Section 16 of the Corporate Securities Act, St.1933, p. 2316, provides in part as follows: “Every security issued by any company, without a permit of the commissioner authorizing the same then in effect, shall be void, * * *.”
Thus the principal question addressed to us on this appeal, on which the decision of the case depends, is this: Is the deed and assignment, whereby Metzenbaum and his wife purported to convey to plaintiff a fraction of the production of the oil produced from the land therein described, a security of their own issue?
The deed and an assignment certainly attempted to convey to plaintiff an interest in an oil or gas lease so on its face it would seem to come within the definition of a “security” as set forth in subsection 7 of section 2(a) of the Corporate Securities Act. The instrument was signed by Mr. and Mrs. Metzenbaum so, if it was a security, it should follow that it was a security of their own issue.
Defendants argue that the transfer of the oil interest from Johns to Metzenbaum was under authority of a permit and was therefore legal; that the transfer from Metzenbaum to plaintiff amounted to an assignment of an interest in the same oil production for which no additional permit was necessary under the following provisions of subdivision (c) of section 2 of the Corporate Securities Act:
“Except as herein expressly provided, the provisions of this act shall not apply to the sale of any security in any of the following transactions: * * *
“The sale of securities when made by or on behalf of a vendor not the issuer or underwriter thereof who, being a bona fide owner of such securities, disposes of his own property for his own account, and such sale is not made, directly or indirectly, for the benefit of the issuer or an underwriter of such security, or for the direct or indirect promotion of any scheme or enterprise with the intent of violating or evading any provision of this act.”
It is not claimed that the transfer of the oil royalty from Metzenbaum and wife to plaintiff was made for the benefit of Johns so that question is eliminated from the case.
The Ninth Circuit Court of Appeals had before it the case of Cecil B. De Mille Productions, Inc., v. Woolery, 61 F.2d 45, which requires our consideration because of the similarity of some of the issues there decided with those presented here.
The Elmer Company had an oil lease on property near Venice, California, upon which it drilled two wells that produced oil. On each of three separate occasions it borrowed $50,000 from Cecil B. De Mille Productions, Inc., and gave three promissory notes in the principal sums of $50,000 evidencing the debts. In each note there was an assignment of a fractional interest in the production from the wells as security for the loans. To this extent the cases are similar as no permits were secured authorizing the giving of the security for the debts. There were other written instruments executed by the Elmer Company recognizing the assignments for which no permits were obtained. The cases differ in this: In the Cecil B. De Mille Productions, Inc., case there was no intermediate assignee from the Elmer Company (assignor to Cecil B. De Mille Productions, Inc.) who took the assignment from the Elmer Company under authority of a permit prior to assignment to Cecil B. De Mille Productions, Inc., while in the case before us the assignment from Johns to Metzenbaum was made under authority of a permit.
The Elmer Company ran into financial difficulties and only one of the notes was fully paid and only partial payments on another. Cecil B. De Mille Productions, Inc., brought action against the receiver for the Elmer Company to compel him to pay the value of the portion of the production of two wells represented by the assignments. The trial court held that each assignment of the oil interest was a security as defined in the Corporate Securities Act; that each was a security of issue of the Elmer Company; that the failure to secure a permit for their issue rendered them void and unenforceable. In a carefully considered opinion this holding was affirmed on appeal, and, on the question of each assignment being a security of the issue of the Elmer Company, has been followed or cited with approval in several California cases. See Domestic and Foreign Pet. Co., Ltd., v. Long, 4 Cal.2d 547, 51 P.2d 73; In re Hatch, 10 Cal.2d 147, 73 P.2d 885; California Western Holding Co. v. Merrill, 7 Cal.App.2d 131, 46 P.2d 175; Julian v. Schwartz, 16 Cal.App.2d 310, 60 P.2d 887.
The case of Domestic and Foreign Petroleum Co., Ltd., v. Long, supra, involved the question of the issuance of certificates in private transactions to 10 1/2% of the production from an oil lease. In holding that such certificates were securities and that a permit was required before such certificates could be issued lawfully, the Supreme Court said [4 Cal.2d 547, 51 P.2d 77]:
“Indeed, in the absence of any specific provision in the Corporate Securities Act expressly bringing oil interests within the definition of ‘security,’ the individual owners of an oil lease who, as in the instant case, transfer to others the right to participate in the proceeds from an oil production enterprise to be conducted by the lessees, create an investment contract, or certificate of interest or participation, as those terms are defined and explained in the cases cited in the above paragraph. * * * In 1929 instruments formerly included within the definition of ‘security’ only when they were offered to the public (St.1925, p. 963 * * *) were listed together with other securities in a single paragraph, section 2(a) 7, with no specification in said section as to any of the instruments listed requiring an offer to the public. * * * We are of the view that the elimination of the phrase ‘offered to the public’ as to other securities evinced a legislative intent to define as securities all instruments listed, although disposed of in private transactions. The federal Circuit Court of Appeals thus interpreted the act in Cecil B. De Mille Productions, Inc., v. Woolery, [supra,] which involved fractional interests in gross proceeds from oil produced. * * * the State may control the issuance of securities by corporations under its power to regulate corporations, which exist under charter from the state. Its right to regulate the individual issuer of securities presents a different problem. It is settled by our decisions in People v. Craven, supra, [219 Cal. 522, 27 P.2d 906], and In re Leach, 215 Cal. 536, 12 P.2d 3, that the state may require an individual who issues securities to the public to obtain a permit. See, also, People v. White, [supra,] 124 Cal.App. 548, 12 P.2d 1078; People v. Oliver, [supra,] 102 Cal.App. 29, 36, 40, 282 P. 813. We are of the view that the State may also require a permit although the individual proposes to issue securities in private transactions. Cecil B. De Mille Productions, Inc., v. Woolery, supra. By providing for the investigation of proposed securities before they are issued our legislation aims ‘to regulate and control the class and character of securities and investments that might be offered to the public.’ Hayden Plan Co. v. Friedlander, 97 Cal.App. 12, 275 P. 253. Securities originally issued in bona fide private transactions may subsequently be offered to the public.”
The case of Mary Pickford Co. v. Bayly Bros., Inc., 12 Cal.2d 501, 86 P.2d 102, 107, involved a real estate subdivision trust. In defining a security the court said:
“The declaration of trust issued by California Trust Company named Bayly Brothers, Inc., and Edwards & Wildey Company as beneficiaries and vested in them the entire beneficial interest in the trust. They in turn sold and delivered to the plaintiffs and others certificates executed by them but not by the trust company. That sold to the plaintiffs purported to transfer to Mary Pickford Company an undivided 25/490 of the beneficial interest of Bayly Brothers, Inc., and Edwards & Wildey Company in the trust. This constituted the issuance of a security; it was a new interest created by Bayly Brothers, Inc., and Edwards & Wildey Company in the property owned by them. Unquestionably the certificates executed by Bayly Brothers, Inc., and Edwards & Wildey Company were securities within the meaning of the Corporate Securities Act.”
Under the foregoing authorities we must conclude that the deed and assignment constituted a “certificate of interest in an oil * * * lease,” Subsec. 7, Sec. 2(a) Corporate Securities Act, and was a security under the act. This instrument created a new interest in the oil lease and, as held in Mary Pickford Co. v. Bayly Bros., supra, was a security of the issue of Metzenbaum and his wife. That being the case the attempted issue of the certificate without a permit was void and, on the election of plaintiff, conveyed no interest in the lease to him. Sec. 16, Corporate Securities Act; Mary Pickford Co. v. Bayly Bros., supra.
The fact that there was a permit authorizing the transfer of the royalty interest from Johns to Metzenbaum cannot and defendants. Metzenbaum and his wife did not attempt to assign to plaintiff the oil interests acquired from Johns under authority of the permit. The deed and assignment to plaintiff created a new and independent interest in the oil lease and a permit for its issuance was necessary.
Defendants argue that it was as much the duty of plaintiff, as it was of Metzenbaum, to secure the permit; that an application for a permit, duly executed by Metzenbaum and his wife, was included in the papers deposited in escrow on March 13, 1942, to enable plaintiff to secure the permit and validate the transfer; that this must have been sufficient notice that no permit had been issued. In this connection it should be observed that another of those papers placed in escrow contained the declaration that a permit authorizing the transfer had been issued.
This argument is answered in Randall v. California L. B. Syndicate, 217 Cal. 594, 20 P.2d 331, 332, as follows:
“Although the parties seeking affirmative relief, i. e., the buyers of such stock, may be in some degree guilty with the parties against whom the relief is sought, they will be denied relief only where the record shows that they are equally culpable (Campbell v. Julian Merger Mines, 111 Cal.App. 649, 295 P. 1040); and, considering the object and purpose of the Corporate Securities Act, mere knowledge of the terms of the permit, or of the fact that no permit has been issued, may not alone be sufficient to raise the guilt of the purchaser or subscriber to that degree.”
A further answer to this argument is set forth in Mary Pickford Co. v. Bayly Bros., Inc., supra, where it is said:
“Although by these decisions the common–law warranty applicable to a sale of securities was limited in this state, nevertheless because of the provisions of the Corporate Securities Act, supra, in effect at the time of the transaction here in controversy, a seller of securities necessarily warranted that the duties therein imposed upon him had been performed. Such a warranty is based upon the obligation to secure a permit which the law enjoined upon the seller. * * * Whenever, therefore, an issuer or underwriter of securities offers them for sale to the public, he impliedly represents that the applicable provisions of law have been complied with. The falsity of that representation may give rise to an action either for breach of warranty or for fraud depending upon the culpability of the seller in the particular transaction. ‘The representation of fact which induces a bargain is a warranty. In truth, the obligation imposed upon the seller in such a case is imposed upon him not by virtue of his agreement to assume it, but because of a rule of law applied irrespective of agreement. The obligation in such a case is quasi contractual, and at least if the seller knows the falsity of his representation there is also a tort.’ Williston on Contracts, Revised Ed., vol. 5, sec. 1505, p. 4198.”
Nor can it be argued that the acts of plaintiff in attempting to foreclose his purported lien on the oil interest amounted to a ratification of the transaction. In Mary Pickford Co. v. Bayly Bros., supra, it was said:
“It is likewise clear that a fraudulent transaction can be ratified by acquiescence of the party defrauded with full knowledge of the facts, but a purchaser of void securities is given relief against the seller notwithstanding acquiescence with full knowledge. The seller cannot assert that the purchaser has ratified the void transaction.”
Defendants urge that the action cannot be maintained because plaintiff still retains the fruits of the transaction, gave no notice of cancellation and did not offer to restore that which he received.
The issuance of the security without a permit was made void by the provisions of the Corporate Securities Act so plaintiff received nothing under the purported deed and assignment. The authorities cited support this conclusion. The amended complaint alleged the transaction was void, which, in effect, was an allegation that plaintiff received nothing of value from Metzenbaum and his wife. Where a plaintiff receives nothing in a transaction, a notice of cancellation and an offer to restore is unnecessary. Watson v. Poore, 18 Cal.2d 302, 115 P.2d 478; Rosemead Co. v. Shipley Co., 207 Cal. 414, 278 P. 1038; Browne v. T. J. Lawrence Co., 204 Cal. 424, 268 P. 631.
If the plaintiff should recover judgment on a retrial of the case, the trial judge might, if he deems it advisable, require plaintiff to clear the record title to the oil royalty by a quitclaim deed to Metzenbaum upon satisfaction of his judgment. This was done in Moore v. Stella, 52 Cal.App.2d 766, 127 P.2d 300, and the Supreme Court denied a petition for hearing.
As plaintiff received nothing under the deed and assignment, he had nothing to sell in the purported foreclosure of the security. As the note was unsecured, and as nothing was sold, section 580d of the Code of Civil Procedure was no bar to this action.
The judgment is reversed.
MARKS, Justice.
BARNARD, P. J., and GRIFFIN, J., concur.
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Docket No: Civ. No. 3326.
Decided: April 13, 1944
Court: District Court of Appeal, Fourth District, California.
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