Opinion
Rehearing Denied Jan. 16, 1933.
Hearing Granted by Supreme Court Feb. 16, 1933.
Appeals from Superior Court, Los Angeles County; Joseph P. Sproul, Judge.
Two actions by Edward Regan (substituted for John C. Hodge), and by the Golden Eagle Milling Company against Alice T. Albin and others. The cases were consolidated, and, from a judgment in favor of defendants, plaintiffs appeal.
Reversed.
COUNSEL
Hibbard & Kleindienst, of Los Angeles, for appellant Regan.
Patterson, Bailey & Montgomery and Frederick I. Richman, all of Los Angeles, for appellant Golden Eagle Milling Co.
Smith & Breslin, of Los Angeles, for respondent.
OPINION
YORK, J.
These two actions upon stockholders’ liability, brought by creditors of the Pasadena Milling Company, Inc., to recover for goods, wares, and merchandise consisting of grain, feed, and milling products furnished by plaintiffs to said Pasadena Milling Company, Inc., were consolidated and tried upon an agreed statement of facts, and judgment was rendered by the court in favor of the respondents herein.
The trial court found that the Pasadena Milling Company, Inc., prepared and had for use in taking and obtaining subscriptions to its capital stock certain subscription blanks or agreements, which blanks bore the following statement underneath the subscriber’s signature: "(For Copy of Corporation Commissioner’s Permit, See Reverse Side.)" The court also found that on the reverse side of said blanks there was printed and contained a true copy of the permit so issued by the commissioner of corporations of California. Among other things, this permit provided: "This permit is issued upon the condition that a true copy of said permit be exhibited and delivered to each prospective subscriber for, or purchaser of, said securities before his subscription therefor shall be taken or any sale thereof made."
The court further found that neither the Pasadena Milling Company, Inc., nor any one else, whether for or on behalf of said company or otherwise, did at any time either exhibit or deliver to, or in any wise call to the attention of, twelve defendants named in said two actions, as aforesaid, a true copy, or any copy, of the permit so issued to said Pasadena Milling Company, Inc., and that all of the capital stock issued to the twelve defendants named, as stated in and shown by said agreed statement of facts, was at all times and now is invalid and void, and such defendants never at any time became, and are not now, stockholders of said corporation, and never were and are not now debtors of said plaintiffs, or either of them, or of any of the creditors of said Pasadena Milling Company, Inc., mentioned in the complaints of plaintiffs.
Appellants maintain that the point involved in this appeal is whether nonconformity with a provision in a valid permit will render the stock sold and issued thereunder void as regards the claims of creditors of the corporation who have advanced goods, wares, and merchandise to the corporation in reliance upon the paid-in capital of the corporation.
It appears to be the law that, as between the corporation and its stockholders, a sale of corporate stock made contrary to the terms of a permit issued by the commissioner of corporations, in that a true copy of the permit was not exhibited to the purchaser of the stock, is illegal and void, and that such purchasers are entitled to recover the purchase price paid upon tendering the return of the stock. Otten v. Riesener Chocolate Co., 82 Cal.App. 83, 254 P. 942; Brewis v. Toffelmier, 97 Cal.App. 329, 275 P. 819; Castle v. Acme Ice Cream Co., 101 Cal.App. 94, 281 P. 396. However, in the instant case, the defendants, in effect, are seeking to repudiate the consequences of their purchase three years after the same had been made, after they had received dividends from the corporation under the now claimed void contracts, and after innocent third parties had extended credit to the corporation, relying upon the status of the defendants as stockholders. Under the circumstances here presented, we believe the doctrine of estoppel may be invoked in order to protect the rights of the plaintiffs.
"It is well settled in California that, while estoppel is unavailable as a plea in an action between parties to a void stock subscription contract, this rule has an exception that permits innocent creditors to invoke the conduct of the parties to the void contract as an estoppel and barrier against their asserting the invalidity of their contract, so as to defeat just claims of innocent creditors. Reno v. American Ice Machine Co., 72 Cal.App. 409, 237 P. 784; Moore v. Moffatt, 188 Cal. 1, 204 P. 220." In re American Aluminum Metal Products Co. (D. C. S.D. Cal.) 15 F.2d 234, 235. "But it seems that a party to an illegal contract may under some circumstances be estopped to set up the illegality as against third persons who relied thereon." 6 R. C. L., p. 820, § 215. This principle is, we think, illustrated in the present action.
In the case of Michell v. Grass Valley Gold Mines Co., 206 Cal. 609, page 617, 275 P. 418, 421, which was an action in rescission on the ground of fraud on the part of the corporation, the court said: "But as between the plaintiffs and others whose rights have intervened the plaintiffs may not be heard to say that they were uninformed as to a matter of law when knowledge or the means of knowledge of the true situation was presumptively possessed by them. When the rights of others have intervened, and the circumstances have so far changed that rescission may not be decreed without injury to those parties and their rights, rescission will be denied and the complaining parties left to their action at law."
As to whether or not the printing of the permit on the back of the stock subscription agreement amounted to an exhibition of such permit, see Gridley v. Tilson, 202 Cal. 748, 262 P. 322, in which case defendant testified that he did not have his glasses with him at the time he signed the subscription contract and therefore did not read the contract nor the provision referred to. In that case it was held that (page 752 of 202 Cal., 262 P. 322, 323):
"This cannot afford him an excuse, in the absence of a showing that he was prevented by the agent from reading the limiting clause, or was otherwise tricked into signing the document without reading it. He made no request to have the contract read to him. In addition, it was in evidence that he had previously signed similar contracts with the same company in subscribing for 3,000 shares of its stock.
"The plaintiff contends that the finding of the court that a true copy of the permit was not exhibited and delivered to defendant is without support in the evidence. There was no issue in the pleadings on this point, and, as a copy of the permit was printed on the back of the subscription contract, the finding of the court appears to be unsupported."
We are therefore constrained to hold that the copy of the permit printed on the back of the subscription blanks amounted to an exhibition of said permit, despite the fact that some of the defendants deny they read the same, and also that, said defendants having made no attempt to rescind, and having received benefits in the way of dividends accruing by means of their status as stockholders, they are now estopped to set up the invalidity of their subscription contracts as against innocent third parties, who furnished materials to the corporation, relying upon such contracts.
The judgment is reversed.
CONREY, P. J.
I concur in the judgment of reversal. There is, however one other point which I think should have attention, for the reason that, if decided in favor of the respondents, it would require affirmance of the judgment. The proposition of respondents is stated as follows: "Since the people of California on November 4, 1930, by vote at the general election held on that day, repealed without a saving clause section 3, article 12 of the Constitution of California, which alone created and authorized a stockholder’s liability, appellant’s alleged cause of action based thereon, became thereafter unauthorized, unwarranted and unenforceable." Stated in another way, the proposition is that section 3, article 12, of the Constitution, having been repealed without a saving clause before appellant’s right created thereby was reduced to final judgment, appellant’s remedy provided by section 322 of the Civil Code is destroyed. Said section 3 as in force at the time of its repeal was as follows: "Each stockholder of a corporation, or joint-stock association, shall be individually and personally liable for such proportion of all its debts and liabilities contracted or incurred, during the time he was a stockholder, as the amount of stock or shares owned by him bears to the whole of the subscribed capital stock or shares of the corporation or association. The directors or trustees of corporations and joint-stock associations shall be jointly and severally liable to the creditors and stockholders for all moneys embezzled or misappropriated by the officers of such corporation or joint-stock association, during the term of office of such director or trustee. * * *" The omitted portion contains nothing pertinent to this case. The answer to the question thus presented has been definitely made in Coombes v. Getz, 285 U.S. 434, 52 S.Ct. 435, 76 L.Ed. 866, decided on April 11th of this year. In that decision the Supreme Court of the United States reversed a judgment of the Supreme Court of California dismissing an appeal in an action by creditors of a corporation to enforce a liability of its directors on the ground that the cause of action had abated by reason of the repeal of the constitutional provision imposing such liability. Coombes v. Franklin, 213 Cal. 164, 1 P.2d 992, 4 P.2d 157. The reasoning and authority of the decision of the United States Supreme Court in that case are equally applicable to an action to recover upon a stockholder’s liability. The record in that case, as in the case at bar, showed that the plaintiff’s claim arose upon a liability created prior to the repeal of said section 3, article 12, of the Constitution of California. It was held that the liability was contractual in its nature, and that the right to enforce it, having become vested, stood within the protection both of the contract impairment clause in article 1, § 10, and the due process of law clause in the Fourteenth Amendment of the Federal Constitution.
For the foregoing reason I am satisfied that the repeal of said section 3, article 12, of the Constitution of California, has not deprived appellants of their right of action herein.
HOUSER, J., deeming himself disqualified, takes no part in this decision.