Intermountain Title Guaranty Company v. Egbert

• Decision Date: 19 November 1932
• Docket Number: 5944
• Citation: 16 P.2d 390,52 Idaho 402
• Parties: INTERMOUNTAIN TITLE GUARANTY COMPANY, a Corporation, Appellant, v. GEORGE L. EGBERT and GWEN EGBERT, His Wife, H. CARL NIELSON, as Administrator of the Estate of HYRUM NIELSON, Deceased, and E. L. CHESNEY, Respondents
• Court: Idaho Supreme Court

16 P.2d 390

52 Idaho 402

INTERMOUNTAIN TITLE GUARANTY COMPANY, a Corporation, Appellant, v. GEORGE L. EGBERT and GWEN EGBERT, His Wife, H. CARL NIELSON, as Administrator of the Estate of HYRUM NIELSON, Deceased, and E. L. CHESNEY, Respondents

No. 5944

Supreme Court of Idaho

November 19, 1932

BLUE SKY LAW-NONCOMPLIANCE-NEGOTIATION OF SALE-EFFECT ON NOTE GIVEN FOR STOCK-RECOVERY OF MONEY.

1. Blue Sky Law held applicable to Utah title guaranty company and its predecessor promoters who negotiated for sale of stock later issued without compliance with such law, where company ratified activities of promoters (C. S., sec. 5305).

2. Court should give statute interpretation which will not nullify it, if reasonable.

3. Promoters' talking to prospect to interest him in stock held "negotiation for sale" within Blue Sky Law (C S., sec. 5305 et seq.).

4. Where note given for stock sold, in violation of Blue Sky Law, was void, note, mortgage and assignment thereof given as security for original note were also void as between corporation not an innocent purchaser and parties to assignment, mortgage and note (C. S., sec. 5305 et seq.).

5. Money paid on stock in violation of Blue Sky Law held recoverable (C. S., sec. 5305 et seq.).

APPEAL from the District Court of the Fifth Judicial District, for Franklin County. Hon. J. L. Downing, Judge.

Action to foreclose mortgage. Judgment for defendants. Affirmed.

Judgment affirmed; costs to respondents.

Stewart Alexander & Budge and Merrill & Merrill, for Appellant.

The act of interesting a person in a subscription contract is not a negotiation for the sale of stocks, bonds or other securities, the term "negotiation" contemplating that both parties shall participate in the discussion of terms and bargain with one another for an agreement. (Standard Dictionary; Webster's New International Dictionary; First Nat. Bank v. Sherburne, 14 Ill.App. 566; Northrup v. Diggs, 128 Mo.App. 217, 106 S.W. 1123; Brown v. City of Newburyport, 209 Mass. 259, Ann. Cas. 1912B, 495, 95 N.E. 504; Everson v. General Acc. Fire & Life Assur. Corp., 202 Mass. 169, 88 N.E. 658.)

Nielson should not be permitted to defend on the ground of a violation of the Blue Sky Law when, with opportunity to know as to whether or not there had been a compliance, he nevertheless paid off the notes given with his subscription contract, by transferring to the plaintiff the note and mortgage sued on, and entered into an indorser's contract with the plaintiff on the note so transferred. The defense of the Blue Sky Law should be unavailable to him upon the same principle that where a note is subject to the defense of partial or total lack of consideration, or of fraudulent representations in its procurement, or to the defense of usury, or that the note had been forged, such defense is not available, as against a note given in renewal or against a note or obligation given in payment which is signed by a changer. (Smith v. Smith, 4 Idaho 1, 35 P. 697; Pioneer Bank & Trust Co. v. MacNab, 41 Idaho 146, 238 P. 295; Drake's Exr. v. Chandler, 18 Gratt. (Va.) 909, 98 Am. Dec. 762; King v. Smith, 173 Minn. 524, 218 N.W. 102; Dewey v. Bell, 5 Allen (Mass.), 165; Hatten Realty Co. v. Baylies, 42 Wyo. 69, 72 A. L. R. 587, 290 P. 561.)

Peterson & Clark and L. R. Morgan, for Respondents.

An investment company "negotiates for the sale of stocks" within the meaning of C. S., sec. 5305, when it enters into conversations with a prospective purchaser designed and intended to induce the latter to buy such stocks. (People v. Augustine, 232 Mich. 29, 204 N.W. 747; Link, Petter & Co. v. Pollie, 241 Mich. 356, 217 N.W. 60; Rhines v. Skinner Packing Co., 108 Neb. 105, 187 N.W. 674.)

Illegality of consideration vitiates not only the original note, but all substitutions therefor and renewals thereof. (Union Collection Co. v. Buckman, 150 Cal. 159, 119 Am. St. 164, 11 Ann. Cas. 609, 88 P. 708, 9 L. R. A., N. S., 568; City National Bank v. DeBaum, 166 Ark. 18, 265 S.W. 648; Kuhl v. M. Gally Universal Press Co., 123 Ala. 452, 82 Am. St. 135, 26 So. 535; Campbell County Bank v. Schmitt, 143 Ky. 421, 136 S.W. 625.)

Money paid for stock sold or negotiated for sale in violation of the blue sky laws may be recovered. (Reilly v. Clyne, 27 Ariz. 432, 40 A. L. R. 1005, 234 P. 35; Barrett v. Gore, 88 Cal.App. 372, 263 P. 564; Pennicard v. Coe, 124 Ore. 423, 263 P. 920; Karamanou v. H. V. Green Co., 80 N.H. 420, 124 A. 373, 374; Thompson v. Gain, 226 Mich. 609, 198 N.W. 249.)

GIVENS, J. Lee, C. J., Varian and Leeper, JJ., and Babcock, D. J., concur.

OPINION

GIVENS, J.

Hyrum Nielson, of Preston, subscribed for fifty shares of common stock of the Intermountain Title Guaranty Company prior to incorporation, paying $ 125 cash and giving his note for $ 375. Thereafter he subscribed for twenty shares of common at $ 10 per share, and twenty shares of preferred at $ 115 per share, paying $ 625 in Liberty bonds, and giving his note for $ 1,875 for the balance. One Keller, who handled both subscriptions, indorsed on the back of the contract that Nielson might "drop one or five shares of his preferred stock which carries with it one share of common stock," and on the back of the $ 1,875 note:

"This note is payable on demand to Nephi L. Morris, Trustee, by mortgage acceptable to Nephi L. Morris, Trustee.

"(Signed) FRANK KELLER."

Such notes and contract were delivered to Morris, trustee for the prospective corporation, which was incorporated on February 24, 1928.

February 29, 1928, Nielson delivered to Morris, as security for his obligation, a promissory note, mortgage and assignment of mortgage, given him by respondents Egbert, and Morris marked the $ 1,875 note paid, and indorsed a credit of $ 125 on the $ 375 note, leaving a balance due of $ 250, which amount Nielson paid August 4, 1928, and the stock for which he had subscribed was delivered to him in Preston.

Nielson made interest payments of about $ 200, and later asked to be allowed to drop the stock as provided in the subscription agreement, stating that if allowed to do this, he would pay the interest due. This request was refused as coming too late.

April 22, 1931, Nielson entered a release of the Egbert mortgage at the recorder's office in Preston, such release coming to plaintiff's attention about June 2, 1931. Plaintiff immediately brought action to have the release vacated and for foreclosure of the mortgage. The defense was failure of the company to comply with C. S., chap. 206, the Blue Sky Law; the agreement to cancel the stock was set up; Egberts alleged that the Nielson note and mortgage were given without consideration, and were void.

Nielson cross-complained, asking for judgment for $ 625 paid in Liberty bonds, and $ 200 paid in interest, and further asked that he be allowed a credit of $ 525 for five shares of stock he claimed he had elected to drop, in the event judgment was for plaintiff.

Judgment was awarded for defendants for the return of the mortgage and note and for $ 1,200, the total cash paid by Nielson. Plaintiff appeals from such judgment.

Four major issues are presented in this case: First, does the Blue Sky Law apply to plaintiff and its predecessor promoters; second, were the negotiations in Idaho such as to come under the ban of the Blue Sky Law; third, was the substituted note and mortgage on which this suit is based tainted with the irregularity of the preceding notes and transactions; and last, may respondent recover the money paid in connection therewith.

Appellant asserts that at the time of the alleged "negotiations for sale" of the stock in question it was not an investment company as defined by C. S., sec. 5305. This statute provides:

"Definition of Investment Companies. Every corporation, every copartnership or company, and every association (other than state and national banks, trust companies, real estate mortgage companies dealing exclusively in real estate mortgage notes, and corporations not organized for profit), organized or which shall be organized in this state, whether incorporated or unincorporated, which shall sell or negotiate for the sale of any stocks, bonds or other securities of any kind or character other than bonds of the United States, the State of Idaho, or of some municipality of the State of Idaho, and notes secured by mortgages on real estate located in the State of Idaho, to any person or persons in the State of Idaho, other than those specifically exempted herein, shall be known for the purpose of this chapter as a domestic investment company. Every such investment company organized in any other state, territory or government, or organized under the laws of any other state, territory or government, shall be known for the purpose of this chapter as a foreign investment company."

It is conceded that appellant was not organized as a corporation at the time of the conversations had with Nielson by Watson and Barnett in Preston, and appellant urges that at that time it was not a copartnership, company or association, so as to come within the meaning of the act.

Nephi L. Morris was trustee and custodian of the funds, notes, etc., for the corporation prior to its incorporation, and was associated with the other promoters (Keller, Watson and Barnett), in obtaining the subscription contracts. Keller apparently had charge of the contracts and sale of stock, and Watson and Barnett were his agents who contacted the public and solicited the contracts. The subscription contract showed the purpose and intent of the promoters of the corporation, thus:

" . . . . WHEREAS it is proposed to organize under the laws of the State of Utah a corporation to be known as INTERMOUNTAIN TITLE GUARANTY COMPANY, or by such other name as the parties in...