TAYLOR v. SELIG (1945)

Plaintiff appeals from a judgment declaring that he take nothing from defendants; that defendant George A. Selig is the owner of a valid and subsisting one-half interest in certain patents and ‘in and to any and all alterations, modifications, improvements or substitutions thereof’; and that defendant, All Steel Engines, Inc., a Nevada corporation, is the owner of ‘a valid and subsisting exclusive license to manufacture, make, have made, use, sell, deal in and with engines and/or constructions under those certain Letters Patent * * * and in and to any and all alterations, modifidcations, improvements, or substitutions thereof.’ The plaintiff brought a suit for declaratory relief against the above-named defendants Harry G. Selig and All Steel Engine Company, Inc., a California corporation, who are the respondents here, a single brief having been filed in their behalf. Certain other defendants, stockholders in the Nevada corporation and Kinner Motors, Inc., were named in the complaint but the action was dismissed as to them. In view of the contentions by the appellant that the judgment is too broad in some respects, does not fully adjudicate the rights of the parties in other respects, and is not supported by the evidence, it is necessary to detail not only the pleadings to determine what was in issue but also the evidence in the transcript.

The complaint was entitled ‘Amended Complaint for Declaratory Relief’ and was divided into three alleged causes of action. Under the first cause of action the plaintiff alleged that he was an inventor of an internal combustion engine and that a controversy existed between him and the defendants with respect to the rights and duties under certain contracts in relation to the invention; that defendant George A. Selig in December, 1936, represented falsely to plaintiff that he would advance between $5,000 and $6,000 to develop and patent said engine, upon which representation plaintiff relied and thereupon entered into a contract with said George A. Selig whereby he agreed to give a one-half interest ‘in and to said invention and improvements thereof; and in and to any and all Letters Patent that may be granted on said invention and/or improvements thereof’ in exchange for the promise of George A. Selig to finance the protection of said invention by patenting and ‘to continue to use his best efforts and to advance funds and to provide facilities for the further development of said invention and/or improvements thereof’; that in fact George A. Selig advanced only $1,500, of which fact and the need for more financing plaintiff did not learn until September, 1938, and that on January 24, 1941 plaintiff sent a letter to George A. Selig which constituted a notice of rescission and a rescission on plaintiff's part. This letter is attached to the complaint and marked ‘Exhibit C.’ The letter stated that plaintiff would no longer go along with All Steel Engines, Inc., a Nevada corporation, because of its failure adequately to advance his invention; that he planned to organize a new company to finance an entirely new idea; that his decision was influenced by failure to comply with California corporation laws which subjected him to punishments; that the new company would be glad to reimburse the stockholders of the old corporation; and that if the stockholders did not so elect to be reimbursed, the plaintiff asked George A. Selig to reassign his one-half interest in the patent in exchange for the money he had advanced or come in with plaintiff on a new stock deal which had adequate financing.

As a second cause of action the plaintiff incorporated all the foregoing allegations save those concerning the alleged rescission, and further alleged that defendant Harry G. Selig was represented by George A. Selig to be versed and expert in business; that Harry G. Selig advised the formation of a corporation to finance the invention, which corporation, All Steel Engine Company, Inc., was formed March 13, 1940 in California, but that the original plan of issuing 60% of the stock to plaintiff and George A. Selig in exchange for an exclusive license to manufacturer said invention was disapproved by the corporation commissioner who issued a permit whereby only 50% of the stock would be issued to George A. Selig and plaintiff and said stock and the payments for the other 50% were to be held in escrow; that although stock was sold in said corporation, it was not placed in escrow; that after this first incorporation, Harry G. Selig told plaintiff it was necessary to form the Nevada corporation—All Steel Engines, Inc.; that under the plan of incorporation of the Nevada corporation, 51% of the stock was to be issued to plaintiff and George A. Selig, which stock was not to be sold without the consent of the majority of stockholders during the duration of the agreement (which was not specified) in exchange for an exclusive license to manufacture the engine; that although 5,225 shares of stock have been issued in the Nevada corporation, plaintiff has never received any shares or a certificate; that the Nevada corporation sold shares of stock in California without obtaining a permit therefor in California.

The third cause of action incorporates all the alelgations of the first cause of action, save those concerning the alleged rescission and those allegations of the second cause of action relating to the representations concerning the financial desirability of incorporation, and the facts of the formation of the two corporations. In addition the plaintiff alleged the assignment by the Nevada corporation of the exclusive right to manufacture the invention to Kinner Motors, but that plaintiff had never given the right to reassign to the Nevada corporation.

Wherefore the plaintiff prayed for declaratory relief in the premises and particularly that the court declare what rights the defendant corporations, George A. Selig and plaintiff had to the invention inter se, and what rights the defendants and plaintiff had in the corporations as stockholders, directors or otherwise. Specifically he asked for damages or that his right to rescind and a rescission be adjudged and that the Kinner Motors' contract be declared invalid. Defendants Harry G. Selig, George A. Selig, the Nevada corporation and the California corporation filed separate answers denying the material allegations of the complaint.

The trial court made the following pertinent findings of fact: That both corporations are valid and existing corporations under the laws of their respective states of incorporation; that a controversy exists between defendants and plaintiff with respect to certain contracts concerning the plaintiff's invention but that it is not true ‘that plaintiff desires a declaration of his rights and duties with respect to defendants * * * [or] in the premises'; that plaintiff brought the action ‘for the purpose of rescinding an assignment to George A. Selig of an interest in the patent * * * and to repudiate and have declared rescinded * * * all proceedings that plaintiff participated in as a stockholder, officer or agent’ of defendant corporation; that George A. Selig had never represented that he had $5,000 to $6,000 or any other sum available for development of said invention but that he had represented ‘that he would, according to his financial ability, assist in the development of said invention, and endeavor to raise funds to the best of his ability from other sources' and that he ‘did advance substantial sums of money from his own funds' n the development of the invention and ‘interested other persons who advanced money’ and ‘that it was in reliance upon these payments and the activities of the said defendant’ that the agreement of March 20, 1937 was entered into giving defendant George A. Selig, one-half interest in the invention and improvements thereof; that plaintiff ‘knew at all times the extent of the funds said defendant * * * had available for the development of said invention, and did not at any time’ prior to the filing of the complaint charge that defendant had misregpresented his financial condition; that plaintiff did not offer, on January 24, 1941 or at any other time, to restore any money received by him from George A. Selig; that plaintiff did not rescind and that the letter of January 24, 1941, was never received by defendant George A. Selig, and was not a notice of rescission or a rescission; that Harry G. Selig never made any representations to plaintiff concerning his excellence in business but that plaintiff actively participated in the formation of the California corporation but that no stock was ever issued in same; that all proceedings were abandoned under the California corporation and that plaintiff actively participated in the formation of the Nevada corporation whereby he and George A. Selig granted the exclusive right to ‘make, have made, use, sell * * * and otherwise deal in and with said engines covere by said invention’ in echange for 51% of the stock, which stock was not to be sold during the term of the agreement; that it is not true that either corporation sought to abdicate its exclusive right to the invention to Kinner Motors; that plaintiff had not been damaged and that ‘it is not true that the plaintiff in this cause of action has established any right to relief, declaratory or otherwise, as to his status as a stockholder or otherwise or as a member of the board of directors of defendant corporations or either of said corporations'; that defendant George A. Selig has a valid and subsisting one-half interest in the invention and patents ‘and in and to any and all additions, substitutionsm, improvements or alterations relating thereto’ and that the Nevada corporation has the ‘exclusive right and license to manufacture, make, have made, use, sell, deal in and with said engine, the subject of said invention, and any and all modifications, improvements, alterations and substitutions relating thereto.’

The appellant contends that the evidence is insufficient to support the findings of the trial judge as to George A. Selig's representations concerning his financial status, as to plaintiff's profits in this regard including the findings that the letter of January 24, 1941 was not a notice of rescission or a rescission and did not constitute an offer to restore, and as to George A. Selig's subsisting interest in the invention and plaintiff's lack of right to rescind. Further he contends that the court erred in failing to make a finding in respect to the illegal conduct of the corporations according to the California corporation laws. Finaly, he asserts that the conclusions of law were erroneous in the denial of plaintiff's right to rescind, in determining the broad scope of George A. Selig's and the Nevada corporation's interests and in their failure fully to adjudicate the issues raised by his complaint. Upon analysis the appellant's position that the trial court's findings are not supported by the evidence appears to rest upon the contention that the trial court has erroneously construed the original agreements in 1937 between George A. Selig and plaintiff, the assignment to the Nevada corporation, and the plaintiff's letter of January 24, 1941. With reference to the factual issues tendered by this position, there is evidence in the transcript to support the following recital of facts. Both George A. Selig and plaintiff at the time they first became interested in this invention were co-workers, mechanics, at an airport. Neither one had much money. They worked only intermittently prior to the war boom. George A. Selig paid the whole of the costs of patenting and exhausted his funds somewhere toward the of 1938 or beginning of 19398 at which time the other means of financing, by corporate form, were started culminating in the abortive California corporation, and eventually, in the Nevada corporation. The plaintiff took an active part in these ventures until around December of 1940 when a disagreement arose for the signing of a particular contract by the corporation with one Tyson which was advocated by plaintiff and opposed by George A. Selig. In this connection another letter of December 11, 1940 by plaintiff to defendant George A. Selig should be noted in which the plaintiff wrote the following: ‘To begin with you will recall we have a contract stating you agreed to promote and finance the motor for a 50% interest. I have had to sacrifice 50% of my interest to help you try to finance it as well as donating close to $500.00 myself and you still have failed miserably. On those grounds I can sue you for breach of contract and have a cut and dried case against you.’ On the basis of these facts, and the wording of the original agreement the trial court's finding that George A. Selig ‘represented merely that he would, according to his financial ability, assist in the development of said invention, and endeavor to raise funds to the best of his ability from other sources' is a reasonable construction of the promise contained in the agreement of March 20, 1937. It is also clear from the evidence that he carried out this promise to the best of his ability and is still seeking to do so. There is no merit in the plaintiff's contention that the words ‘to continue’ in that agreement modify the whole of the succeeding phrase so that George A. Selig was in default at any time he failed ‘to continue * * * to advance funds' in any amount.

Plaintiff's second contention—that the terms of the judgment are too broad and are not supported by the evidence—is refuted by the terms of the various documents and what was done thereunder. The transcript furnishes ample evidence to justify the scope of judgment in respect to what rights were intended to be granted by the original assignment to George A. Selig and the license to the Nevada corporation. In the original agreement of March 20, 1937, the language is ‘to said invention and improvements thereof; and in and to any and all Letters Patent that may be granted on said invention and/or improvements.’ In the assignment executed by plaintiff to George A. Selig, pursuant to that agreement, dated April 17, 1937, the language used is ‘in and to any and all improvements on said invention, heretofore or hereafter made by said Lloyd M. Taylor; and in and to any and all Letters Patent * * * including each and every Letter Patent granted on any application which is a division, substitution for or continuation of said parent application.’ Plaintiff's counsel stipulated that plaintiff ‘sought to get a release from George Selig of any right he may have in the improvements or substitutios of this particular patent.’ During the period when the California corporation was operating under a license agreement from plaintiff and defendant George A. Selig, plaintiff executed, as vice-president of the California corporation, a sub-licensing agreement with a Vancouver corporation which granted the Canadian corporation ‘the sole and exclusive right and irrevocable license to make, have made, use, and sell in the Dominion of Canada the constructions disclosed in the patent and patent applications set forth hereinabove together with any improvements in such type of construction as may be made by First Party (the California corporation) during the time Second Party (the Canadian corporation) is using such type of constructions; either experimentally or in production.’ This evidence indicates that the parties thought the agreements were as broad as the judgment and findings made them. The words ‘and/or improvements' with respect to a particular invention clearly embrace the terms ‘alterations, modifications, improvements or substitutions' when taken in connection with the reference to patents immediately preceding it. The words ‘alternations, modifications, improvements or substitutions' refer only to the particular patents enumerated in the judgment. In the original assignment, the words ‘substitution for or continuation of’ the particular patent rights are used and it is clear that this is the sense in which the words in the judgment were used.

There is no merit in plaintiff's further argument that the judgment mortgages the inventor's brain for life and compels involuntary servitude. Only one subject matter is here involved. It is of course the law that generally a contract for personal services will not be specifically enforced. 23 Cal.Jur. 479; Civil Code, sec. 3390(1). But what the trial court has done here does not compel plaintiff to work against his will, but mrely says that if he does work on a particular invention or subsidiary thereof, the product of his efforts will belong one-half to defendant George A. Selig pursuant to agreements made by plaintiff to that effect. This result is in accordance with the rule that ‘equity, in certain cases, accomplishes indirectly what it may not accomplish directly.’ 23 Cal.Jur. 480. The judgment does no more than reiterate the terms of the plaintiff's promises.

There being ample evidence to sustain the trial court in these respects, it is unnecessary to determine what effect the letter of January 24, 1941, would have in the event the trial court had found that there had been a breach of George A. Selig's obligations under the 1937 agreement. The letter's effectiveness as a notice of rescission or a rescission becomes an issue only in the event the contract has been breached.

The only other contention of appellant which requires discussion concerns the alleged refusal of the trial court fully to adjudicate all the issues raised by the complaint. The transcript sustains the trial court's finding that this suit for declaratory relief was in reality merely a suit to rescind and get out from the agreement of March 20, 1937, and all that had been done thereunder. The delay in bringing the suit, the active participation of plaintiff in the two corporations, the testimony concerning the new business contracts of plaintiff in and around December, 1940, the lack of any evidence in the transcript concerning the precise stockholdings in the Nevada corporation, the dismissal of the suit against the alleged stockholders in the Nevada corporation, and the dismissal of the suit as to Kinner Motors, with whom no contract was ever completed by the Nevada corporation, all support this finding. Section 1061 of the Code of Civil Procedure provides that the court may refuse to grant declaratory relief in any case ‘where its declaration or determination is not necessary or proper at the time under all the circumstances.’ In Moss v. Moss, 20 Cal.2d 640, 643, 644, 128 P.2d 526, 528, 141 A.L.R. 1422, the Supreme Court stated: ‘Since we have held that this complaint was sufficient to authorize a declaration of plaintiff's obligations under the contract, we must now consider whether the trial court abused its discretion in denying declaratory relief under the circumstances here presented. Plaintiff urges that the trial court abused its discretion and that there is no basis upon which its determination can be sustained. It is not necessary for us to consider each of the various grounds advanced by defendant in support of the trial court's conclusion. * * * It is contended by plaintiff that such an action is not strictly an action in equity and, therefore, that the doctrine of in pari delicto should not be applied. * * * It is true that declaratory relief is not strictly legal or equitable, but is suis generis in nature (Gore v. Bingaman, 20 Cal.2d 118, 120, 124 P.2d 17; see Borchard, Declaratory Judgments (2d Ed. 1941), pp. 238, 248, 399, 439) and that in pari delicto is not ordinarily applied to the executory portions of an illegal agreement. Cases supra, and see 3 Pomeroy, Equity Jurisprudence, 5th Ed. 1941, § 940, pp. 728–733. Assuming, however, as contended by plaintiff, that the doctrine of in pari delicto should not be treated as an absolute bar to this action, it is nevertheless an element which the trial court in its discretion could consider in deciding whether or not to grant declaratory relief under the circumstances presented here. Cf. Borchard, supra, pp. 239–240, 304–305. It cannot be said, therefore, that the trial court abused its discretion, and we find no error in its conclusion that declaratory relief was not proper under the facts of this case.’ This reasoning is applicable here once the trial court has determined that plaintiff is acting in what amounts to bad faith in bringing an action for declaratory relief. The court's discretion under sec. 1061 has consistently been held to be very broad. The trial court's action should not be reversed unless it is clearly shown to be arbitrary and capricious. See City of Alturas v. Gloster, 16 Cal.2d 46, 104 P.2d 810; Cutting v. Bryan, 206 Cal. 254, 274 P. 326; Gunn v. Giraudo, 48 Cal.App.2d 622, 120 P.2d 177; Caldwell v. Gem Packing Co., 52 Cal.App.2d 80, 125 P.2d 901. In this connection it should be noted that no evidence was introduced as to any controversy as to plaintiff's rights as a stockholder or director of either of the corporations and that as to any illegality in the conduct of the corporations, plaintiff was a participant therein, and a finding thereon was immaterial insofar as any relief which plaintiff asked was concerned.

For the foregoing reasons the judgment is affirmed.

WARD, Justice.

PETERS, P. J., and OGDEN, J. pro tem, concur.