KING v. MORTIMER BUILDING AND LOAN COM (1944)

The following statement of the nature and character of this proceeding is quoted from appellant's opening brief:

“This is an appeal from a judgment for the defendant Pacific States Savings & Loan Company, a corporation (hereinafter referred to as Pacific States), entered in the Superior Court of the State of California in and for the City and County of San Francisco, Hon. Maurice T. Dooling presiding.

“The action was filed by Wesley King, as plaintiff, who is the assignee of thirty–two claims set forth in separate causes of action, all similar in character.

“This action is to recover from the Pacific States the amount of their original savings deposits, less what they were sold for to the Pacific States as hereinafter described.

“These claims were assigned by thirty–eight persons, some of whom unite on a single claim and others in a few instances have more than one claim. All of these assignors were holders of investment certificates evidenced by pass books or deposit vouchers issued by the defendant Pacific States for money deposited by them with that corporation.

“The defendant, Pacific States, is a corporation organized and existing under the laws of the State of California relating to building and loan associations and has been engaged in the business of a building and loan association with offices in various cities of this state, since about 1889.”

Defendant filed an answer. An agreed stipulation of facts was presented, and additional evidence produced at the hearing. The trial was not completed until the latter part of 1939. In the meantime, in March of that year, the then Building and Loan Commissioner had seized the property of the defendant corporation. Subsequently Frank C. Mortimer became commissioner and as such defends the action. Building and Loan Association Act, Gen.Laws 1937, Act 986, sec. 13.16; Stats.1931, ch. 269, p. 541, as amended by Stats.1933, ch. 431, p. 1089, ch. 1059, p. 2719, as amended by Stats.1935, ch. 451, p. 1500, ch. 163, p. 798. Some of the contentions on appeal, consisting of criticism directed toward the Attorney General and the Building and Loan Commissioner, are entirely outside the record, and may well be ignored. Condensed, the following questions are presented: Are the transactions involving the purchase of certificates legal, and is there an estoppel which prevents recovery?

The stipulation of facts contains the following:

“That if said assignors were called as witnesses they would testify that at a date or dates after February 1, 1934 and prior to the dates of the execution of the respective alleged assignments, they called at the office of the Pacific States Savings and Loan Company, and were then and there informed by said company that no funds could at that time be withdrawn under their certificates respectively.

“Said assignors sold their certificates because they needed the money and were afraid of losing their investments if they did not sell.

“Said assignors were further informed that if they wished to sell their certificates they could do so, and it was stated that they could only be sold at a discount.”

Upon this stipulation it is contended that appellant's assignors “were the victims of coercion.” No evidence in the record, other than the above quoted stipulation, is called to our attention in the briefs to uphold the contention, though counsel make broad statements that inducements and representations came from the Pacific States or its agents, and they refer to findings in another action as indicating an illegal and deliberate scheme on the part of Robert S. Odell, the president of Pacific States, who is referred to in appellant's brief as “the leader of the gang.”

The trial court did not regard the facts set forth in the quoted portion of the agreed statement of facts as constituting “coercion.” As a stipulation it is assumed that it states the truth, namely, that appellant's assignors “were afraid of losing their investment”; that “they needed money” and sold in order to obtain the needed money notwithstanding that it was necessary to sell “at a discount.” No misrepresentation was made by Pacific States or anyone else. This is demonstrated by appellant's failure to allege that, throughout the transaction, any fraudulent purpose actuated Pacific States or its officers.

The information given by the Pacific States that “no funds could at that time be withdrawn under their certificates respectively” was in conformity with the facts and provisions of the Building and Loan Association Act. The amendments of 1933 and 1935 applied to the emergency period of the depression years and therein the right of certificate holders to withdraw and receive payment was declared secondary to the duty of the association to provide a reasonable reserve for the payment of taxes, insurance, repairs, etc., provided, however, that an association “on notice” should not pay any dividends on its stock. Otherwise it appears that during such period the association was subject to the rules and regulations of the commissioner. There is no evidence that dividends were paid, or distribution of profits made to stockholders by defendants. During this period, also, any transactions involving the purchase of property or the method of transfer of investment certificates to an association required authorization by the commissioner. Furthermore, unless there was compliance with the rules promulgated by the commissioner the statute gave him authority to issue a “cease and desist order.” Stats.1935, ch. 163, p. 798. The legislative declarations constituted a policy. Unless unconstitutional, the provisions should be made effective. “Building and loan associations are creatures of statute, and the authority to regulate and supervise their operations arises under the police power because of the public interest of their business.” Trede v. Superior Court, 21 Cal.2d 630, 633, 134 P.2d 745, 746.

The statement that the certificates “could only be sold at a discount” was true. No evidence appears to the contrary. The facts concerning this matter appear in the transcript as follows: “Not until April, 1933, did Pacific States Savings furnish any names of its certificate holders to any outside brokers. Yet prior to that time, it was apparent that the names of many of its investors were in the possession of unlisted brokers, and by then the racketeering abuse had become so pronounced that this institution determined that it would be preferable, both for the institution and its investors, to have as an acknowledged and approved dealer in certificates a brokerage firm of unquestioned integrity and responsibility. Accordingly, at that time it furnished to Schwabacher & Company, members of the New York Stock Exchange, the names of only such certificate holders as had frequently been disturbing their accounts or pressing demands for funds, and this association approved a letter which Schwabacher & Company sent to this special list of certificate holders, in which that firm expressly stated that it believed that the Pacific States Savings was a well managed institution and that its certificates were intrinsically worth more than that firm was offering on an immediate cash conversion basis. In February 1934, after the suspension of withdrawals had been announced, the Pacific States Auxiliary Corporation itself applied to the Commissioner of Corporations for a broker's license to deal exclusively in outstanding investment certificates of Pacific States Savings, and in such application, expressly stipulated that it would not take any profit in any of its dealings in such certificates, and has fully and strictly lived up to this agreement. Subsequent to obtaining its broker's license, the Auxiliary Corporation has furnished names of investors to a selected list of brokers pledged to pay investors no less than the current price being paid by the Auxiliary Corporation direct. Moreover, such brokers have further pledged that in case of any certificate trades for other securities they will deliver securities of a comparable market value, and that in no case will they make any misrepresentations or spread any false rumors concerning this institution.”

The complaint in the present action is for money had and received. It was necessary that plaintiff show that the certificates in question had matured; that notice of withdrawal had been given in accordance with the statute; that prior matured claims had been paid and that funds were available for payment. The present record does not show such proof. King v. San Jose Pacific B. & L. Ass'n, 41 Cal.App.2d 705, 107 P.2d 442. In the King case, as in this, claims were assigned to plaintiff. The judgment against King was affirmed. (Petition to the Supreme Court denied.) The question involved is stated on page 706 of 41 Cal.App.2d, on page 443 of 107 P.2d: “Claiming that in refusing to pay withdrawals the defendant breached its contract, the plaintiff asserted that he was entitled to recover, as money had and received, the difference between the amount of the deposit claim of each of his assignors and the amount each of them received from his or her vendee.” As in this case, it was claimed that defendant waived compliance with the requirement of notice, the court saying at pages 707, 708 of 41 Cal.App.2d, at page 443 of 107 P.2d: “And in section 6.01 of the Building and Loan Act * * * it is provided that each association must prescribe by its by–laws or prescribe in its contracts the period of intention to withdraw and that a notice of intention to withdraw must be in writing and served on the association. The record shows that said by–laws were adopted, also that the contract specified in the statute was entered into. However, the record shows no written notice was given by any single one of the assignors. The plaintiff asserts that the defendant waived compliance with the requirement to give notice. Watson v. Stockton Morris Plan Co., 34 Cal.App.2d 393, 407, 93 P.2d 855. That case rested on the facts there involved. Here the trial court by its judgment, in effect held there was no waiver. Plaintiff quotes no part of the record showing that the court's implied finding is not sustained by the record. We find no evidence to the contrary. It follows such assignors never fully performed their contracts and the plaintiff did not prove a case which entitled him to a judgment on a common count as for moneys had and received.”

The primary purpose of building and loan statutes is to protect the investor (Building and Loan Association Act, secs. 2.03, 12.05, 15.03) and conditions may arise that prompt legislatures, particularly during financial depressions, to restrict “withdrawals” in the interest and for the protection of certificate holders. Withdrawals must be paid within a time limit. Secs. 6.01, 6.02, 6.08, 15.13. The time and circumstances of withdrawal as fixed by the legislature may also be changed by that body. Numerous withdrawals within a short period might very well precipitate a panic, resulting in harm to the certificate holders of building and loan associations and investors generally.

Appellant contends that the surrender of the investment certificates by their assignors was a void act and does not deprive them of their rights as depositors; that although there may have been no actual fraud there was constructive fraud. Appellant seeks to support this contention by reference to Ralph A. Badger & Co. v. Fidelity Building & Loan Ass'n, 94 Utah 97, 75 P.2d 669. This case was also relied upon in the King case, supra, 41 Cal.App.2d at pages 708, 709, 107 P.2d at page 444, where the court said: “The briefs recite certain facts which the plaintiff claims tend to show the defendant wrongfully broke down its financial obligations to the plaintiff's assignors for the purpose of benefiting the stockholders of the defendant. Ralph A. Badger & Co. v. Fidelity Building & Loan Ass'n, 94 Utah 97, 75 P.2d 669. It is sufficient to state that the record in the present case does not present such questions. They were not pleaded, there are no findings on them, and they did not enter into the judgment. Nevertheless the plaintiff introduced evidence to establish the theory set forth in the case of Ralph A. Badger & Co. v. Fidelity Building & Loan Ass'n, supra. We have carefully read that evidence. If the trial court had made findings thereon such findings must necessarily have been adverse to the plaintiff.” In addition we may say that, unlike the present case, the plaintiff in the Badger case gave notice of withdrawal; the defendant made false and misleading statements as to the number of claims on file and its ability to pay, and the assignment was not signed. The Badger case was decided upon the theory that there was no accord and satisfaction as applied to the facts of that case which recited fraud.

If fraud on the part of Pacific States induced the certificate holders to part with their investment under certain circumstances as appears in Alexander v. State Capital Co., 9 Cal.2d 304, 70 P.2d 619, and Allen v. California Mutual B. & L. Ass'n, 22 Cal.2d 474, 139 P.2d 321, they would be entitled to share in liquidation, but such facts do not appear herein.

In the present case fraud was not pleaded and not proven. On appeal the position of appellant is that Pacific States was engaged in a deliberate scheme to defraud its certificate holders at a time when it was in fact insolvent. In substantiation of this contention we are referred to the evidence in another proceeding in which appellant contends these elements appear. If upon any theory appellant is justified in predicating the merits of this appeal upon the evidence appearing in another case on appeal relative to insolvency, our attention should have been called to In re Pacific States Savings & Loan Co., D.C., 27 F.Supp. 1009, 1014, which is final and wherein certain creditors sought to have the association declared a bankrupt. It was necessary to determine whether, due to its various activities, Pacific States was still in fact a building and loan association. The Federal court determined that it was and dismissed the proceeding upon the ground that the state of California “is now attempting to liquidate it” and that “it is within the exception provided for in paragraph a of Section 4 of the Bankruptcy Act.” This case is interesting if for no other reason than that it appears to be the forerunner of a criminal proceeding in the District Court of the United States in and for the Southern District of California, Central Division, entitled United States of America v. Odell et al.,¹ wherein certain officers of Pacific States and officials of the California Building and Loan Commissioner's office were charged with a scheme to defraud, based upon the contentions of appellant in the present case. In this criminal proceeding in a “statement by the court” in which the evidence and the law were thoroughly considered, and in which the bankruptcy proceeding played a part, the eminent trial jurist presiding stated: “* * * the facts in the record show conclusively that this corporation has been and is now a building and loan association, for the control of which the State of California has been fighting through courts with the corporation's money to retain jurisdiction over it.” The gist of the criminal charge appears therein as follows: “ ‘That the defendants and each of them would falsely and fraudulently represent and pretend to exchange the assets of said Pacific States Savings and Loan Company for other assets which defendants represented or caused to be represented to be for the benefit and further security of persons intended to be defrauded but would in truth and fact dispose of said assets for cash, and with such cash illegally purchase bonds and real property, with the intent and purpose and with the effect that such bonds and real property so acquired could not be readily converted into cash but would consist of frozen assets, and this [thus] avoid the repayment to the persons intended to be defrauded of their money and property invested as aforesaid, and as required by the laws of the state of California;’ ” A number of cases, federal and state, were considered and the court expressed the following opinion: “There is no evidence that it was merely the alter ego of the other; it is evidence merely that it was satisfied with whatever ownership it derived through the ownership of stock, and did not seek to make a profit out of any transaction in which it entered into which ultimately redounded to the profit of the Pacific States Savings and Loan Company, and was willing that that should go to the certificate holders and to the shareholders of that corporation. * * * there isn't any evidence in the record upon which an inference can be drawn that the acts of the Auxiliary were not the acts of a separate entity; or, to put it positively, that the acts of the Auxiliary were the acts of Pacific States. On the contrary, all the evidence in the record shows that they were separate entities, and I have referred to some of these matters in what I said. * * * In their relationship with the commissioner and their relationship with the individual who dealt with them, there was no element of deception. The public was never deceived. The public never assumed that one corporation was the other corporation.” Finally in reference to the transactions of certificates, cash and property and the method used by Pacific States the learned judge said: “Exchanges they were, exchanges they are, and everyone, including the Government of the United States, is bound finally by them. Not even the State of California could question them now. They are bound by their own record, in the absence of any showing of fraud, and there is no such showing.”

Two of the assignors herein, Gilbert G. Davis and Mary F. Davis, held Fidelity Participating Certificates. It was held in Eggert v. Pacific States S. & L. Co., 57 Cal.App.2d 239, 136 P.2d 822, that such certificates arose out of a trust agreement whereby Pacific States was to liquidate the assets of Fidelity for the benefit of those beneficially interested in the Fidelity company; that is, those who retained their interest in Fidelity. “These too [[[[certificates] were sold 1934,” as appellant admits. The evidence shows an absolute sale. The Davis sale was identical with sales by other assignors and is in the same legal position as all others in this proceeding.

In the present case the trial court found “that said certificate (or certificates) was, prior to the commencement of this action, for valuable consideration, duly transferred to, and acquired by, Pacific States Auxiliary Corporation (a corporation) which corporation thereafter, pursuant to Section 6.07 of the California Building and Loan Association Act, exchanged said certificate (or certificates), with the approval of the Building and Loan Commissioner of the State of California, for property owned by defendant; that defendant thereafter duly cancelled said certificate (or certificates), and that said certificate (or certificates) was thereby extinguished and all right and liability thereunder released and terminated.

“It is also true that defendant on the faith of, and relying upon such assignment of said certificate (or certificates) by plaintiff's predecessor, or predecessors, in interest, named in said respective counts of said complaint, and of similar assignments made by other holders of investment certificates issued by defendant, thereafter made transfers of certain of its properties and assets, entered into obligations and otherwise changed its financial position, and that defendant would not have made such transfers, or entered into such obligations or so changed its said position, except for the fact that said transfer and assignment had been executed by plaintiff's assignor, or assignors, as aforesaid, and by other holders of said investment certificates of defendant, and that plaintiff is estopped by the facts hereinabove mentioned from asserting the claims herein sought in said counts respectively to be asserted, and that it would be unjust and inequitable if plaintiff were now permitted to make or assert such claim.”

The foregoing narrative of the facts and the law compel us to reject the contentions of appellant.

Appellant further contends that there is no evidence showing approval by the Building and Loan Commissioner of the transactions. Such evidence appears throughout the transcript. For example, a witness testified: “The way that was handled was that the Pacific States Savings and Loan Company, through a broker, would sell a piece of property to a purchaser for a certain amount of money, and then that purchaser would put in escrow that amount of cash with the instruction to buy so many certificates, and those certificates were then acquired, and with the approval of the Building and Loan Commissioner the exchange would be made.”

The judgment is affirmed.

I dissent.

The plaintiff, as assignee of a number of investment certificates in Pacific States Savings and Loan Company, seeks by this action to have it determined that certain assignments made by his assignors of their investment certificates to Pacific States were void. The majority opinion correctly states that the basic question involved is whether the transactions by which Pacific States purchased the certificates were legal. The trial court, and the majority opinion, have answered this question in the affirmative. In so holding, the majority reaffirm the position they took on the same issue in Pacific States S. & L. Co. v. Hise, 63 Cal.App.2d –––, 146 P.2d 427, which opinion is not yet final. In my dissent in that case I described in detail the means used by Pacific States to force certificate holders to sell their certificates at a discount. See 63 Cal.App.2d –––, et seq., 146 P.2d 455. No useful purpose would be served by repeating what was there said. The record in that case, as does the record in this case, demonstrates, in my opinion, that the means used to compel certificate holders to sell their certificates at a discount were illegal, and in direct violation of the trust owed such certificate holders by the management of Pacific States. As is pointed out in my dissent in the prior case, many of the means used by Pacific States in stripping itself of cash, and in preventing the company from receiving cash––cash that otherwise would have been available for the protection of all investment certificate holders––were illegal, were not approved by the then commissioners with full knowledge of all the facts, and were not known to the certificate holders.

The case of King v. San Jose Pacific B. & L. Co., 41 Cal.App.2d 705, 107 P.2d 442, so heavily relied upon in the majority opinion, is not in point. It involved a different defendant, and entirely different transactions from those here involved. The majority opinion attempts to bolster what I consider its faulty reasoning by a long quotation from a federal trial judge's opinion in a criminal case involving some of the managing officers of the Pacific States. Of course, we have no way of knowing what the record there showed. That record is not before us. The rules of evidence, particularly as to the burden of proof, are so different in a criminal case than in a civil case, that rulings made in that criminal case can hardly be considered even as an argumentative authority in this civil case.

This court knows what the record was in the main Pacific States case, and, of course, the record in the instant case is before us. It is true that the record in this case is not identical with, nor as complete as, the record in the main Pacific States case. But it is also true that in the instant case the background of these transactions was developed in evidence, much of it being record evidence produced from the files of Pacific States. Many of the exhibits in this case were also used as exhibits in the main Pacific States case. Sufficient appears in the present record to show the means adopted by the management of Pacific States to accomplish its ends. If I am right in the position I took in my dissent in the main Pacific States case, the present judgment cannot stand. The problem is not one where the proved facts in the two cases are capable of different interpretations. The case is one where, on the facts contained in the record, the challenged transactions are, as a matter of law, either legal or illegal. The judgment rendered by the trial court in this case is totally irreconcilable with that rendered by the trial court in the main Pacific States case. Under such circumstances, the rule announced in Southern Pacific Co. v. City of Los Angeles, 5 Cal.2d 545, 55 P.2d 847, is applicable. In that case two trial judges, in actions involving different plaintiffs, but the same defendant, on different records, but involving the same events, had reached different results. In holding that both judgments should not stand, the court stated (5 Cal.2d at page 548, 55 P.2d at page 849): “It would be most anomalous for such decisions to stand, reaching diametrically opposite conclusions as to the legal effect of the same occurrence, where the essential facts are similarly presented, and are in most particulars undisputed. The rule that a reviewing court is bound by the findings of the trial court on conflicting evidence cannot apply to a situation such as this, where two lower courts, dealing with substantially the same evidence, have reached different conclusions of law, on the legal issue of whether from this evidence legal responsibility is imposed by the law upon the defendant. It is within the proper function of this court, upon petition for hearing, to eliminate this confusion, and to determine the legal effect of the evidence in both cases.” See, also, Colburn Biological Institute v. Shaffer, 12 Cal.2d 168, 82 P.2d 938; Ferroni v. Pacific Finance Corp., 21 Cal.2d 773, 780, 135 P.2d 569; Morris v. Fortier, 59 Cal.App.2d 132, 136, 138 P.2d 368; see, also, 24 Cal.L.Rev. 733.

For this reason I believe the disposition of this case must follow the final disposition of the main Pacific States case. For reasons stated at length in my dissent in that case I believe the transactions there described were illegal. For the same reasons I believe the transactions here involved––the same transactions involved on the prior appeal––were also illegal. For that reason it is my opinion that the judgment in the present case should be reversed.

FOOTNOTES

1.  No opinion for publication.

WARD, Justice.

KNIGHT, J., concurs.