Hargiss v. Royal Air Properties, Inc.

• Decision Date: 02 August 1962
• Citation: 23 Cal.Rptr. 678,206 Cal.App.2d 406
• Court: California Court of Appeals Court of Appeals
• Parties: Meade HARGISS, Plaintiff and Appellant, v. ROYAL AIR PROPERTIES, INC., Defendant and Respondent. Civ. 6807.

Page 678

23 Cal.Rptr. 678

206 Cal.App.2d 406

Meade HARGISS, Plaintiff and Appellant, v. ROYAL AIR PROPERTIES, INC., Defendant and Respondent.

Civ. 6807.

District Court of Appeal, Fourth District, California.

Aug. 2, 1962.

Hennigan, Ryneal & Nixen by Fred H. Ryenal, Riverside, for appellant.

Best, Best & Krieger by John Babbage, Riverside, for respondent.

SHEPARD, Justice.

This is an appeal by plaintiff from a directed verdict and judgment for defendant in an action to recover $43,396.34 allegedly advanced to defendant.

FACTS

In general, the basic facts are not in serious dispute. Stating the facts as stipulated to or testified to by plaintiff, it appears that on March 11, 1956, plaintiff, Harold L. Heathman and Mrs. Esther Peister agreed to each put in $50,000 for the purchase and development of certain real estate. The purchase price was $235,000. These three parties will hereinafter, when spoken of together, he referred to as the partners. The original plan, according to plaintiff, contemplated six investors, each contributing $50,000. The other three investors were never brought in and no corporate stock was ever sold or issued to anyone other than Heathman, Peister and plaintiff. Plaintiff testified that he had no other understanding 'than if we say 'well, let's put in ten thousand dollars apiece and do this, do that'--that was the only thing that was in my mind,' and that profits and losses would be shared equally.

The partners together agreed to purchase said land and to form a corporation for the purpose of developing said land. On August 2, 1956, Heathman and Peister each repaid to plaintiff one-third of $10,000 theretofore deposited by plaintiff on said land and plaintiff gave to each a receipt the last clause of which reads as follows:

'* * * it being understood and agreed that said Harold Heathman, Esther Peister and the undersigned are equal partners in the purchase of said real estate.'

Corporate formation was completed September 11, 1956 and that corporation is the defendant herein. Prior to said incorporation, each of the partners contributed $23,396.43 toward the purchase price, title documents were placed in escrow and ultimately title was taken in the name of defendant. Thereafter, the partners each contributed to the corporation an additional $15,000. On March 15, 1957, notes in ordinary promissory form were issued to each of the partners for the amount of said advancements, one being dated September 1, 1956 and being for the sum of $23,396.43 and one dated February 1, 1957 for $15,000, each providing for 5% interest per annum and attorney fees on suit, but the printed body of each note being preceded by the typed words, 'To Be Replaced By Stock And Or Notes.' Plaintiff testified that they were prepared at his suggestion and the above quoted words were inserted at his direction. Plaintiff was then the president of the defendant and he signed all the notes as president with Peister signing as secretary. The nores were authorized by the defendant's Board of Directors, who are the partners, except as to Heathman's son; he had no financial interest in the venture or corporation.

Minutes of a meeting purporting to have been held March 31, 1957, recite, inter alia, that it was held to consider the problem of the debt to each partner in the amount of $38,396.34, the value of the notes, the price at which stock should be sold and an application for a permit to sell and issue stock; that the money was loaned to defendant for purchase of land and improvements thereon; that it is proposed to pay the notes by issuance of stock at $100.00 per share or 384 shares to each partner; and that a permit from the Corporation Commissioner be applied for for such purpose. All directors signed a waiver of notice of and consent to such meeting. Plaintiff is recorded as presiding. No dissenting vote is noted plaintiff does not claim there was one. Plaintiff testified that no formal meeting as described in the minutes was in fact held but does not suggest that the minutes do not express the intent of all parties.

On April 5, 1957, pursuant to the said authority of March 31, 1957, plaintiff as president and Peister as secretary, acting for 'That Applicant proposes to sell and issue to Meade Hargiss 384 shares in payment of the principal indebtedness of the corporation to Meade Hargiss, amounting to $38,396.34;'

defendant, applied to the Commissioner of Corporations for a permit to issue one class, no par value, common stock to each of the partners. In said application it is recited, that,

and the same number of shares for the same monetary contribution, to Heathman and Peister each. As above noted, on April 5, 1957, each of the partners advanced to defendant an additional $5,000. Plaintiff was asked,

'Was that $5,000 contributed to the corporation in accordance with your preexisting arrangement that you all would contribute equal sums?' Plaintiff answered, 'Yes, I think we could say that, Mr. Babbage.'

This $5,000 was not mentioned in the minutes of the meeting of March 31, 1957. No written agreement respecting said $5,000 was signed at or after the date of its contribution.

Some differences arose between plaintiff and the other partners over construction expense and about April 12, 1957, the directors, by majority vote, replaced plaintiff as president by Heathman. Plaintiff claims that the others had orally agreed that he would remain president for two years. In any event, plaintiff promptly notified defendant and the Corporations Commissioner that he refused to accept stock for his notes. The other two partners accepted the stock allotted to them. There is some confusion in the testimony as to whether or not a formal tender of the stock was ever made to plaintiff. No other stock was sold. Heathman's son was one of the named incorporators but had no actual financial interest. The record at various places shows an un-explained difference of nine cents in the total debt. De minimis non curat lex applies.

Thereafter, defendant's complaint in action No. 1730 was filed, seeking in three causes of action, based on the $23,396.43 note, the $15,000 and the $5,000 advance of April 5, 1957, respectively, judgment against defendant for $43,396.43, interest, costs and counsel fees. A cross-complaint for declaratory relief was filed by defendant. After trial by jury the court directed a verdict that plaintiff recover nothing. The cross-complaint was dismissed on motion of cross-complainant. Judgment was entered for defendant pursuant to the directed verdict and plaintiff appeals.

PLAINTIFF CANNOT RECOVER

Plaintiff first contends that a corporation which issues a note for money received prior to obtaining a permit to issue stock, containing the language, 'To Be Replaced By Stock And Or Notes,' has violated the Corporate Securities Act.

It is true, of course, that such a purported agreement might well be a violation of sec. 25500 of the Corporations Code if the proposed purchaser was not one of the original organizers of a closed corporation under the particular circumstances here present. (Miller v. California Roofing Co., 55 Cal.App.2d 136, 130 P.2d 740; Stonehocker v. Cassano, 154 Cal.App.2d 732, 316 P.2d 717.)

However, Section 25102(c) provides exemption for

'Promissory notes, whether secured or unsecured, where the notes are not offered to the public, or are not sold to an underwriter for the purpose of resale.'

As was said in Holmberg v. Marsden, 39 Cal.2d 592, 597, 248 P.2d 417, 419,

'Whether the three men, as among themselves, be termed partners, joint venturers, or co-promoters of a corporation [Cita.], it is obvious that the trial court was justified in concluding that they stood on an equal footing as entrepreneurs. It is significant that it was only after the financial outlook began to worsen that plaintiff sought to recover his contribution. There appears no more reason for defendants to reimburse plaintiff for his contribution to the venture than for plaintiff to reimburse defendants for theirs. At the time of trial defendants were still devoting their time and energies to operating the business for the benefit of all three owners, which included plaintiff.'

If therefore the trial court took the position, as it was fully entitled to do under the undisputed facts, that this enterprise was, as to the three partners, a joint venture, partnership or copromotion of a corporation, it was exempt from the provisions of the Corporate Securities Act respecting the point made by plaintiff. The three were equal owners; there was no stock offered to nor sold to the general public; the notes were not offered to the public nor to an underwriter. The corporation was formed within 90 days after the meeting of August 2, 1956. There appears to have been no contention made to the trial court that the application for permission to issue stock was not made within a reasonable time after incorporation.

Thus the corporation was simply the alter ego of the three partners as the vehicle by which their enterprise was finally put into legal form for organization purposes. Of course, had outsiders actually been brought in and stock subscribed to or sold to them the legal picture, as to such outsiders, would have been entirely different. But that did not happen.

On the other hand, if...