Durham v. Firestone Tire & Rubber Company of California, a Corp.

• Decision Date: 16 March 1936
• Docket Number: Civil 3535
• Citation: 55 P.2d 648,47 Ariz. 280
• Parties: M. H. DURHAM, Appellant, v. FIRESTONE TIRE & RUBBER COMPANY OF CALIFORNIA, a Corporation, and FIRESTONE SERVICE STORES, INC., OF PHOENIX, a Corporation, Appellees
• Court: Arizona Supreme Court

55 P.2d 648

47 Ariz. 280

M. H. DURHAM, Appellant, v. FIRESTONE TIRE & RUBBER COMPANY OF CALIFORNIA, a Corporation, and FIRESTONE SERVICE STORES, INC., OF PHOENIX, a Corporation, Appellees

Civil No. 3535

Supreme Court of Arizona

March 16, 1936

APPEAL from a judgment of the Superior Court of the County of Pima. Fred W. Fickett, Judge. Judgment reversed and cause remanded with instructions.

Messrs Mathews & Bilby, Mr. Odin B. Dodd and Mr. J. Bolivar Sumter for Appellant.

Messrs Conner & Jones, for Appellees.

OPINION

LOCKWOOD, C.J.

This is an appeal from a judgment in favor of Firestone Tire & Rubber Company of California, a corporation, hereinafter called the California company, and Firestone Service Stores, Inc., of Phoenix, an Arizona corporation, hereinafter called the Phoenix company, against M. H. Durham, defendant, rendered upon certain directed verdicts. From the order overruling the motion for new trial and the judgment, this appeal is taken.

The suit was brought by the California company, and the pleadings are very lengthy. We therefore summarize only so much of them as is necessary to explain the issues on this appeal. The complaint contains two causes of action; the first being upon a promissory note which is alleged to have been made, executed and delivered by defendant to the California company, for a valuable consideration. The second is based upon a written guaranty of certain accounts receivable assigned by defendant to the same company. The defendant moved that the Phoenix company be made a cross-defendant, which motion was granted, and then answered, admitting the execution and delivery of the note and guaranty set up in the complaint, but denying that there was any consideration therefor. He alleged that about the 14th of December, 1929, he entered into a contract, in writing, with the California company and the Phoenix company, whereby they agreed to see to defendant, and he agreed to purchase, certain shares of the capital stock of the Phoenix company, of the par value of $20,000; that in payment for said stock he gave to the California company the promissory note, the guaranty of certain accounts receivable, and various other things of value. He claimed, in substance, that the Phoenix company, which was incorporated under the law of Arizona, as of August 10, 1929, was a corporation of the class described in section 1887, Revised Code of 1928, as a domestic investment company which, under the law, is required before selling any of its stock to make certain reports to the Corporation Commission and to comply with the proper orders of the commission; that he was not one of the persons who associated themselves together to form said Phoenix company, and that the said company had never complied with the provisions of section 1888, Revised Code of 1928, nor with a certain order of the Corporation Commission known as No. 117-B, and that by reason of the premises the contract of sale and purchase of the stock was void. He further alleged that plaintiff had not exercised due diligence in attempting to collect the guaranteed accounts, nor notified the defendant that the debtors were insolvent, nor reassigned the accounts to defendant. He then filed a cross-complaint, in which he set up the same facts as alleged in his affirmative defense, and asked that he recover from the California and Phoenix companies the amount which he had paid them for purchase of the stock aforesaid through cash, merchandise, and accounts receivable, and that the note and guaranty be surrendered.

The plaintiff and the cross-defendant replied to defendant's cross-complaint, denying that the cross-defendant was an investment company as defined under section 1887, supra, or had sold, or offered to sell, any stock, except to the associates who caused it to be organized, and denying that plaintiff had not used due diligence in attempting to collect the guaranteed accounts, or that it was required to notify defendant that it had been unable to collect them, or to reassign the accounts in question unless and until the guaranty had been performed.

Defendant demurred to the answers to the cross-complaint, but this demurrer was by the court overruled. The case was then tried before a jury upon the complaint, defendant's amended answer and cross-complaint, and the answer of the companies to the latter. Various witnesses were introduced and documentary evidence submitted, and the parties rested. Thereupon plaintiff moved the court for instructed verdicts in favor of plaintiff on its first and second causes of action and for plaintiff and cross-defendant on defendant's cross-complaint, which motion was granted, and upon such verdicts the judgment appealed from was rendered.

There are eleven assignments of error properly grouped under seven propositions of law, which we shall consider as seems advisable. The first is based on the theory that the Phoenix company was a domestic investment company, within the definition of section 1887, supra, which had not complied with the provisions of section 1888, supra; that defendant was not one of the persons who had associated themselves together to form the Phoenix company, and that therefore the sale of stock therein to him, which was admittedly the sole consideration for the note, guaranty, and other considerations paid by him to the California company, was void. Under section 1887, supra, every corporation which sells its stock to any other person except "those who associated themselves together to form such company and other than those specifically exempted herein..." is a domestic investment company, and therefore subject to the provisions of chapter 38, Revised Code of 1928, regulating the sale of securities by such companies and commonly known as the "Blue Sky" Law. The Phoenix company was admittedly incorporated under the laws of Arizona by H. M. Fennemore, T. C. Nairn and R. M. Fennemore as of August 10, 1929; defendant not signing the articles nor being named therein as an incorporator. It is the contention of defendant that the persons "who associated themselves together to form such company," under section 1887, supra, mean only those whose names are subscribed to the articles of incorporation, and, since defendant was not one of them, a sale of stock to him by the Phoenix company automatically made it a domestic investment company. It is the contention of plaintiff that these words are not to be used in the limited sense claimed by defendant, but that it includes, not merely the actual incorporators, but all those at whose instance the company has been organized.

In determining this question, we think we should consider the intention and the purpose of the legislature in enacting the Blue Sky Law. We have stated this in Reilly v. Clyne, 27 Ariz. 432, 234 P. 35, 38, 40 A.L.R. 1005, as follows:

"The aim of the courts has been to carry out the manifest intention of the statutes, of preventing the public from being imposed upon by questionable and unsound financial schemes of fortune dreamers and dishonest promoters, and to reach all get-rich-quick schemes offering to the general public their stocks and securities, under whatever name they may choose to act."

The Blue Sky Law as originally adopted, construed literally covered every corporation which sold stock, bonds or other securities to any persons whatsoever. Under its terms, even the so-called "close" corporation, organized at the behest of a limited number of persons for convenience in carrying on their own business, and with no intention of any securities ever being sold to any person except those who had arranged for its organization, was subject to all the rigid provisions of the law. It soon became obvious that it was unnecessary and absurd to attempt to protect the public from a corporation which had a fixed and definite intention not to sell any of its stock or securities to the public, but to retain them for its organizers. The legislature, therefore, not wishing to impose an unnecessary burden upon such corporations, modified the statute by adding the words "other than to those who associated themselves together to form such company," thus obviously exempting them from the Blue Sky Law. There can be no dispute that this was the purpose of the addition to the statute, and, this being true, we think it is erroneous to say that the persons excepted are limited to those who actually sign the articles of incorporation. It is notorious that a very large percentage of the articles of incorporation adopted in almost every state are not signed by all, or even a large part, or, at times, any, of the real parties in interest who are associated for the purpose of organizing it. They are frequently, if not generally, signed only by the attorneys who perform the legal services necessary for the organization, or some members of their staff, and at the first meeting, after the formal steps necessary to make it a legal entity have been completed, the control is turned over to the real associates or such of them as are chosen by their coassociates to manage the affairs of the corporation. We are of the opinion that, as a matter of common sense and correct practice, the words "those who associate themselves together to form such company" were meant by the legislature to mean, and should be construed to mean, "all persons who before the formal organization of the corporation, had aided and assisted in or advised and encouraged its organization, with the definite intention and expectation that they should become stockholders or bondholders therein." We hold, therefore, that the fact that defendant did not actually sign the articles of incorporation does not of itself exclude him from the class set forth in the exception to section...