Maner v. Mydland

• Decision Date: 28 April 1967
• Citation: 58 Cal.Rptr. 740,250 Cal.App.2d 526
• Court: California Court of Appeals Court of Appeals
• Parties: , Blue Sky L. Rep. P 70,739 Darby MANER, Plaintiff, Appellant, and Cross-Respondent, v. Gerald T. MYDLAND, Defendant, Respondent, and Cross-Appellant. Herbert TEPPER, Plaintiff, Appellant, and Cross-Respondent, v. Gerald T. MYDLAND, Defendant, Respondent, and Cross-Appellant. Arthur C. BENNETT, Jr., Plaintiff and Appellant, v. Gerald T. MYDLAND, Defendant and Respondent. Civ. 30324.

Page 740

58 Cal.Rptr. 740

250 Cal.App.2d 526, Blue Sky L. Rep. P 70,739

Darby MANER, Plaintiff, Appellant, and Cross-Respondent, v. Gerald T. MYDLAND, Defendant, Respondent, and Cross-Appellant.

Herbert TEPPER, Plaintiff, Appellant, and Cross-Respondent, v. Gerald T. MYDLAND, Defendant, Respondent, and Cross-Appellant.

Arthur C. BENNETT, Jr., Plaintiff and Appellant, v. Gerald T. MYDLAND, Defendant and Respondent.

Civ. 30324.

Court of Appeal, Second District, Division 4, California.

April 28, 1967.

Rehearing Denied May 16, 1967.

Samuel P. Norton, Los Angeles, for Darby Maner, plaintiff, appellant, and cross-respondent.

Nathan Goller, Beverly Hills, for Herbert Tepper and Arthur C. Bennett, Jr., plaintiffs and appellants, and Herbert Tepper, cross-respondent.

Dean R. Pic'l, Covina, for Gerald T. Mydland, defendant, respondent, and cross-appellant.

FOX, Associate Justice. ^*

Plaintiffs ¹ seek to recover their investment in a stock promotion. Judgment was rendered in favor of Maner and Tepper, but in favor of defendants and against Bennett. Defendants made a motion for a new trial which was granted as to defendant Mydland but denied as to Jones and Lindsey. Maner and Tepper have appealed from the order granting Mydland a new trial, and Mydland has cross-appealed from the judgment in favor of Maner and Tepper. Bennett has appealed from the judgment in favor of defendant in his case.

In April 1961 defendants organized the AVTA Corporation (known as AVTA Corporation) for the manufacture, sale and distribution of audio-visual teaching aids. It had an authorized capital of $300,000, divided into thirty thousand shares with a par value of $10 each. The three defendants constituted the board of directors and were elected officers of the corporation.

Pursuant to an application to the Department of Investment, Division of Corporations, a permit was issued authorizing the corporation to issue not to exceed 100 of its shares to Jones, Mydland and Ray Heinz at par per share for cash. Pursuant to this permit 80 shares were issued to Jones who was president and 10 shares each to Mydland, who was vice-president and attorney for the corporation, and to Heinz.

We shall now take up these transactions in chronological sequence.

THE BENNETT STOCK PURCHASE

On July 7, 1961, Bennett purchased five shares of stock in AVTA Corporation for $5,000 from Jones who was to contribute said funds to the capital of AVTA, and the court found that Bennett's checks were payable to the corporation. The purchase was made under an agreement prepared by Mydland (Exhibit 3) and dated on the day Bennett purchased the stock. Bennett testified that he never had any experience in corporation affairs where a permit was obtained, nor had he purchased stock in a corporation not publicly owned.

The court found '(T)hat at the time of purchasing said shares of stock in AVTA, plaintiff Arthur C. Bennett, Jr. knew that he was purchasing stock which represented a portion of the personal stock holdings in said corporation of defendant James Jones, Jr. and said plaintiff was informed that no permit was required from the Commissioner of Corporations for the purchase of said shares of stock.'

Mydland testified that at the time of the purchase of said stock by Bennett he advised Bennett that the consent of the Commissioner of Corporations was necessary where an individual sells stock and the proceeds from the sale inure to the benefit of the corporation which was the case in this transaction. Mydland had discussed this matter by telephone with a deputy in the commissioner's office and he was advised that an application was necessary and the procedure was outlined that should be followed in order to get the required consent. This 'included an application and a statement of satisfaction with the transfer by the transferee.' No such application was filed with the commissioner and no such statement was signed by Bennett. ²

On this point the court found that Bennett knowingly participated and aided in the making of the sale of the shares of stock and therefore was In pari delicto.

The 'Jones stock' was sold to Bennett for the 'benefit' of the corporation. A permit or consent for such sale from the Corporations Commissioner was therefore required under section 25152, Corporations Code. And a sale without such permit or consent violated the section. (Bellerue v. Business Files Institute, Inc., 61 Cal.2d 488, 39 Cal.Rptr. 201, 393 P.2d 401.) In Bellerue the court stated (p. 489, 39 Cal.Rptr. p. 202, 393 P.2d p. 402):

'Section 25152 of the Corporation Code exempts from the Corporate Securities Law '* * * the sale of securities when (a) made by or on behalf of a vendor not the issuer or underwriter thereof who, being a bona fide owner of the securities, disposes of his own property for his own account, and (b) the sale is not made, directly or indirectly, for the benefit of the issuer or an underwriter of the security * * *.' A permit for the sale of stock by a vendor who was not the issuer is therefore required when the sale is made for the benefit of the issuer.'

We come now to the question: Was Bennett In pari delicto with defendants? We have concluded that he was not.

It must be borne in mind that the purpose of the Corporate Securities Law is to protect the investing public. And the penalties therein provided are leveled against the seller and not the buyer. (Robbins v. Pac. Eastern Corp., 8 Cal.2d 241, 278, 65 P.2d 4i.) Therefore a purchaser of stock is not In pari delicto with the corporation and its directors unless he is equally culpable with them. If such purchaser is not In pari delicto, the law accords him relief against the corporation and against any person who aided the corporation in making the sale or participated in the scheme to sell the securities without the requisite permit or consent. (Randall v. Beber, 107 Cal.App.2d 692, 701, 237 P.2d 994.) Mere knowledge that no permit or consent had been issued does not place a purchaser In pari delicto. (Randall v. Calif. L. B. Syndicate, 217 Cal. 594, 598, 20 P.2d 331; Taormina v. Antelope Mining Corp., 110 Cal.App.2d 314, 320--321, 242 P.2d 665.) In Gormly v. Dickinson, 178 Cal.App.2d 92, 103--104, 2 Cal.Rptr. 650, 657, the court stated: 'Even had the plaintiffs known that the consent of the Commissioner of Corporations would have to be secured before they could receive their stock, they could not be held to be equally culpable with the sellers.' In holding in Bellerue v. Business Files Institute, Inc., supra, that plaintiff, a purchaser of stock, was not In pari delicto with defendants the court pointed out (61 Cal.2d pp. 490--491, 39 Cal.Rptr. p. 202, 393 P.2d p. 402): 'Although plaintiff subsequently became a director of B.F.I., he was not a director at the time he and defendants made the agreement under which he was to lend B.F.I. the sum of $10,000 and pay C.M.C. $10 each for 7 1/2 shares of stock of B.F.I. Therefore, he was not In pari delicto with defendants. * * *' In a footnote the court observed: 'The agreement was made on April 1, 1958, and plaintiff became a director of B.F.I. on May 1, 1958.' The statement of the court is particularly apposite to the case at bench. Here defendant made his stock purchase and paid for it on July 7, 1961, and then became a director on September 1, 1961, according to the minutes of that date.

In Tri-Q, Inc. v. Sta-Hi Corp., 63 Cal.2d 199, at pages 218--219, 45 Cal.Rptr. 878, at page 889, 404 P.2d 486, at page 497, the court elaborated on the applicability of the principle expressed in the phrase In pari delicto. The court stated:

'There is no doubt that the general rule requires the courts to withhold relief under the terms of an illegal contract or agreement which is violative of public policy. (Citations.) It is also true that whatever the state of the pleadings, 'when the evidence shows that * * * (a party) in substance seeks to enforce an illegal contract or recover compensation for an illegal act, the court has both the power and duty to ascertain the true facts in order that it may not unwittingly lend its assistance to the consummation or encouragement of what public policy forbids.' (Lewis & Queen v. N. M. Ball Sons, 48 Cal.2d 141, 147--148, 308 P.2d 713, 717.) These rules are intended to prevent the guilty party from reaping the benefit of his wrongful conduct, or to protect the public from the future consequences of an illegal contract. They do not necessarily apply to both parties to the agreement unless Both are truly (emphasis added) In pari delicto. In Norwood v. Judd, 93 Cal.App.2d 276, at pp. 288--289, 209 P.2d 24, at p. 31, it was said: 'The rule that the courts will not lend their aid to the enforcement of an illegal agreement or one against public policy is fundamentally sound. The rule was conceived for the purposes of protecting the public and the courts from imposition. It is a rule predicated upon sound public policy. But the courts should not be so enamored with the Latin phrase 'in pari delicto' that they blindly extend the rule to every case where illegality appears somewhere in the transaction. The fundamental purpose of the rule must always be kept in mind, and the realities of the situation must be considered. * * * where the defendant is the one guilty of the greatest moral fault, and where to apply the rule will be to permit the defendant to be unjustly enriched at the expense of the plaintiff, the rule should not be applied."

It is quite apparent that plaintiffs and defendants were not 'equally culpable' in this transaction. Bearing in mind that the Corporate Securities Law is for the protection of the public and that the penalties run against the sellers of securities, it would appear clear that it was the duty of defendants to take the steps necessary to make the sale in conformity with the law. This they did not do. It is thus apparent that the defendants are 'guilty of the greatest moral fault' and that the...