Walton v. Anderson

• Citation: 86 Cal.Rptr. 345,6 Cal.App.3d 1003
• Court: California Court of Appeals
• Decision Date: 27 April 1970
• Parties: , Blue Sky L. Rep. P 70,860 A. Bruce WALTON, Jr., sole general partner of Georgetown Lumber Company, Plaintiff and Respondent, v. Keith ANDERSON, Robert Badger, and R. E. Wood, Defendants and Appellants. Civ. 12048.

Page 345

86 Cal.Rptr. 345

6 Cal.App.3d 1003, Blue Sky L. Rep. P 70,860

A. Bruce WALTON, Jr., sole general partner of Georgetown Lumber Company, Plaintiff and Respondent, v. Keith ANDERSON, Robert Badger, and R. E. Wood, Defendants and Appellants.

Civ. 12048.

Court of Appeal, Third District, California.

April 27, 1970.

Hearing Denied June 24, 1970.

Young & Nareau, by John A. Young, Woodland, Downey, Brand, Seymour & Rohwer, by Ronald N. Paul, Sacramento, for defendants and appellants.

Dwyer, King & Mering, by Harold T. King, Sacramento, for plaintiff and respondent.

PIERCE, Presiding Justice.

Defendants, participants in an unauthorized sale of corporation stock to plaintiff, appeal from the judgment entered against them in a court tried case awarding plaintiff compensatory damages ($40,500), as well as assessing punitive damages ($5,000, $1,000 respectively) against defendants Anderson and Wood. ¹

Defendants Anderson and Wood submit two contentions on appeal: (1) That the evidence was insufficient to support the award of compensatory damages in that it showed without conflict that defendants acted in good faith and upon reasonable investigation when they accepted money from plaintiff for the purchase of shares to be issued; and (2) that the award of punitive damages was contrary to law under the circumstances disclosed by the evidence in the case.

The evidence in the record, including inferences properly drawn by the trial court, justifies the allowance of both compensatory and punitive damages as awarded, and we will affirm the judgment.

H. & A. Distributing Co., Inc. (H. & A.) was a Fresno-based California corporation. It had been organized originally by appellant Keith Anderson and one Hastings in 1962. The latter was still its manager when the events out of which this litigation arose took place. In January 1967 Hastings was president, Anderson was vice president and Badger was secretary. Appellant, R. E. Wood, was the treasurer. He was, and had been for 11 years a registered public accountant, and was the accountant for Anderson in another corporation, Handy Andy TV & Appliances, Inc., with a net worth of $700,000. Anderson--except for a few shares owned by Wood--was the sole owner of that corporation. ² Wood was also active in the affairs of H. & A. It may be assumed that some of his duties were connected with accounting. In Anderson's testimony are several references to directions given by him to Wood to perform various duties relating to the affairs of H. & A. Hastings, Anderson, Badger and Wood were the directors of the corporation. That corporation had applied to, and received a permit from, the Corporations Commissioner of California to sell two separate issues of capital stock, each being for 250 shares, authorized to be sold at $100 per share for cash. As a result of these sales, at the time of the negotiations with Walton to be related below, Anderson owned (in dollars at par value) $25,000, Hastings $15,000 and Badger $12,000.

The corporation was a wholesaler for Sylvania products, principally television sets. That company wanted H. & A. to increase its working capital. Badger and plaintiff, Bruce Walton, were friends who met frequently at a Sacramento country club. Badger was the golf professional at that club. Walton had money to invest. Walton knew of Badger's interest in H. & A., and through Badger he had learned of Anderson's interest therein. He also knew of Anderson ('Handy Andy') as a business man with many years' experience in TV enterprises.

As the result of an original contact by Badger several meetings were held between Walton, Anderson and Badger. Before those meetings, however, on January 3, 1967, a meeting of the directors was held in Fresno. At that meeting three of the four directors were present, Anderson, Hastings and Badger. Badger told the others about his meeting with Walton. The minutes of the corporation (in evidence) reflect that the directors discussed the corporation's need for $180,000. Not all of that money was needed for the expansion capital asked for by Sylvania. As of November 30, 1966, H. & A. had a deficit of $31,153. It was decided to solicit a stock purchase from Walton of $40,500.

During the subsequent meeting between Walton, Anderson and Wood (at one or more of which Badger was present), it was represented to Walton that Hastings had been doing a good job which would be reflected in the company's balance sheet. They told Walton the company was in good financial shape, that when it had On February 2, 1967, Walton delivered his check to H. & A. in the sum of $40,500 and was given a receipt showing that he was to receive 270 shares of H. & A. capital stock (at $150 per share). There was nothing in the receipt informing Walton that an application for a permit would be required before the shares could be issued. Anderson's testimony is equivocal as to whether Walton was so advised. (Anderson testified: 'Q Was the permit mentioned? Do you recall? A. I do not recall. No.') Walton testified he believed when he bought and paid for the shares that he would receive them forthwith. Appellants admitted they knew an application would have to be made before shares could be issued.

started it was 'in the red' but that the manager (Hastings) had pulled it out. They showed Walton a pencil-written balance sheet indicating the company had made money in 1966. The trial court, however, was also justified in drawing the inference--and it was a fair one--that Hastings had not been doing a good job, that the company was not in good financial condition. It was losing money at the time of the sale to Walton and, due to the mismanagement of Hastings, seven months [6 Cal.App.3d 1007] thereafter it was in bankruptcy. Although appellants testified they were not aware of that mismanagement until early in June, the documentary evidence--consisting of the entire file of the Corporation Commissioner is in evidence, and from it the court was reasonable in its belief that Anderson and Wood were aware of the mismanagement and the plight of the corporation much earlier.

Notwithstanding, the $40,500 obtained from Walton was immediately deposited in H. & A.'s bank account and apparently used by the corporation in its short-lived remaining period of business existence. Anderson stated that he told Wood to instruct the corporation's attorney to apply for a permit, and Wood testified that he did so and remonstrated with the attorney over the delay. Nevertheless, no permit was applied for until May 22, 1967. In that application an issue of shares to Walton, Anderson, Hastings and Badger was proposed. Yet the testimony of Anderson was they did not then plan to purchase shares. The financial statement of the corporation, then six months old and showing a large deficit, accompanied the application. The permit was never granted. No shares were ever issued to Walton. It is obvious from a reading of the Corporation Commission's file that no permit could possibly have been issued on the application submitted. It is inferable that the entire proceedings for a permit were taken with a realization that they were foredoomed.

The complaint was in two counts. It included the allegations: 'That by offering to sell and by selling said stock to plaintiff, defendants represented to plaintiff that a permit for the sale of said stock had been obtained from the Commissioner of Corporations of the State of California, but said representation was false and fraudulent and was made with the intention to deceive plaintiff and in truth and in fact no such permit has at any time been obtained by the defendants or any of them.

'That plaintiff would not have paid the purchase price for said stock had he known no permit for the sale thereof had been obtained from the Commissioner of Corporations of the State of California.'

The trial court found that defendants Anderson and Wood knowingly, deliberately and wilfully sold unissued shares to Walton for $40,500, representing that a permit had been obtained for the sale of said shares, when in fact no permit had then, or was thereafter, issued, and that those defendants knew they had no legal right to sell the shares and that the representation was false. The court further found that these representations induced plaintiff to purchase the shares and was thereby damaged (a) in the sum of $40,500 plus interest in compensatory damages, and (b) punitive damages as stated above.

COMPENSATORY DAMAGES

The record presents no difficulty to this court on the issue of compensatory damages. Even good faith, had it been shown, would not be a defense in an action to recover the purchase price paid for shares sold without, or in advance of, authorization in the form of a permit issued by the Commissioner of Corporations to sell securities, but is only relevant to a determination of the applicable statute of limitations since the action may be based on any one of three theories: fraud, warranty or money had and received. (Code Civ.Proc. §§ 338, subd. 4, 339, subd. 1; Corp.Code, § 25000 et seq.; Mary Pickford Co. v. Bayly Bros., Inc. (1939) 12 Cal.2d 501, 525--526, 86 P.2d 102; Maner v. Mydland (1967) 250 Cal.App.2d 526, 532--537, 58 Cal.Rptr. 740; N. C. Roberts Co. v. Topaz Transformer Products,...