Weinstock v. L. A. Carpet, Inc.

• Decision Date: 08 June 1965
• Citation: 234 Cal.App.2d 809,44 Cal.Rptr. 852
• Court: California Court of Appeals Court of Appeals
• Parties: , Blue Sky L. Rep. P 70,676 Henry WEINSTOCK, Plaintiff and Appellant, v. L. A. CARPET, INC., et al., Defendants and Respondents. Civ. 28847.

Page 852

44 Cal.Rptr. 852

234 Cal.App.2d 809, Blue Sky L. Rep. P 70,676

Henry WEINSTOCK, Plaintiff and Appellant, v. L. A. CARPET, INC., et al., Defendants and Respondents.

Civ. 28847.

District Court of Appeal, Second District, Division 1, California.

June 8, 1965.

Hearing Denied Aug. 4, 1965.

Harold Easton and Leo S. Rich, Los Angeles, for appellant.

Oshman & Brownfield, Los Angeles, for respondents.

LILLIE, Justice.

Appellant sued to recover $15,000 he claims he paid on March 12, 1959, for shares of corporate stock issued without a permit from the Corporation Commissioner. Upon completion of plaintiff's case the trial court granted defendants' motion for judgment under section 631.8, Code of Civil Procedure. Findings were made and judgment was entered in favor of defendants; plaintiff appeals therefrom.

In addition to plaintiff's testimony, the record contains the testimony of defendant Barnett under section 2055, Code of Civil Procedure, and various exhibits. The trial court having weighed the evidence in determining the motion (§ 631.8), we treat the court's findings and judgment as though they had been made after a trial in which evidence was produced in support of both sides (Woolliscroft v. Starr, 225 Cal.App.2d 667, 669, 37 Cal.Rptr. 570; In re Estate of Sharff, 219 Cal.App.2d 128, 132, 33 Cal.Rptr. 52); thus, we view the evidence in the light most favorable to respondents.

Between July and October, 1958, plaintiff, a carpet salesman, who had prior experience in the retail carpet business, and defendant Barnett, operator and owner of several carpet establishments, discussed and negotiated a plan between themselves to jointly engage in the retail carpet business; and in January 1959, as co-promoters, they engaged defendant Berris, an attorney, to organize a corporation for the purpose of taking over the operation of Dorn's Carpet Division, an individual proprietorship owned by Barnett. They planned to open branches in several stores which plaintiff was to manage under an employment contract with the corporation. Plaintiff and Barnett each was to receive fifty percent of the stock to be issued in exchange for his investment; plaintiff was to invest $15,000 and the investment of Barnett was to be the inventory and accounts receivable of Dorn's Carpet Division, in an amount equal to $15,000.

On February 16, 1959, defendant corporation was formed. Plaintiff and Barnett were the incorporators; they were to have equal control. Plaintiff became president and a director; Barnett became secretary and a director. On February 29, 1959, plaintiff, as president of defendant corporation, executed and filed a Certificate of Corporation for Transaction of Business under a Fictitious Name; he also executed to himself a contract of employment engaging himself as manager of the branch stores. Plaintiff and defendant then discussed with Berris the necessity of applying for and receiving a permit from the Corporation Commissioner so that defendant corporation could issue stock. Berris advised them that a corporate bank account should be set up so that the corporation could function prior to the issue of stock; he further advised that each lend to the corporation the sum of $15,000 for this purpose. They agreed to lend the corporation the money and opened the corporate bank account on March 12, 1959; as a loan to defendant corporation, each deposited $15,000 in the account. Plaintiff also deposited the $15,000 he had originally agreed to invest. The bank account was controlled by the signature of plaintiff or his son and the co-signature of Barnett. A corporate check was drawn to the order of Barnett for $15,000 in full payment of the individual proprietorship known as Dorn's Carpet Division. Thereafter on March 23, 1959, plaintiff, as president, executed and acknowledged an application for a permit to sell and issue 30,000 shares of stock to plaintiff and defendant for cash; it contained the statement that none of the proposed shares had been issued. It was filed with the Corporation Commissioner on April 2, 1959; the permit was received in June 1959. It authorized the issue of stock in exchange for cash; however, in October 1959 the stock was issued without payment of any money or 'anything like merchandise, or anything of that nature.' The certificates were signed by plaintiff as president of the corporation and Barnett as secretary. They each received fifty percent of the stock. Prior to this, on July 1, 1959, plaintiff began his employment with defendant corporation and worked as manager of the several branch stores until December 24, 1959, when the corporation ceased operations.

The trial court concluded that there was no violation of the Corporate Securities Law. It found that the transaction of March 12, 1959, constituted a loan to defendant corporation (Findings of Fact, par. 1); that plaintiff at the time knew that no application for permit for defendant corporation to issue stock had been made and no permit had been issued (par. 2); that plaintiff was at all times promoter, organizer, president, and director of defendant corporation, and as president signed the application for permit to issue stock on March 23, 1959, and was co-signer of the corporate bank account (par. 8); and that plaintiff was in pari delicto with defendants 'if there was a technical violation of the Corporate Securities Act' (par. 15).

At all times the main issue was '[w]hether the transaction involved herein constituted a violation of the Corporate Securities Act * * *' (Joint Pretrial Statement; A.O.B. p. 2) inherent in which was the basic question whether the stock issued by defendant corporation was a security within the provisions of the Corporate Securities Law. At the outset, before he could establish a violation, plaintiff had to sustain his burden of proving that the issue of corporate securities was embraced by the statute. Whether a security is to be considered one within the meaning of the Corporate Securities Law is a question to be determined in each case; and 'In arriving at a determination the courts have been mindful that the general purpose of the law is to protect the public against the imposition of unsubstantial, unlawful and fraudulent stock and investment schemes and securities based thereon. In re Hatch, 10 Cal.2d 147, 151-152, 73 P.2d 885 * * *.' (People v. Syde, 37 Cal.2d 765, 768, 235 P.2d 601, 603.) Accordingly, an exemption from the operation of the Corporate Securities Law is '(m) Any bona fide joint adventure interest, except such interests when offered to the public.' (§ 25100, Corp.Code.) This has been interpreted to mean corporate securities as between joint venturers, partners, or co-promoters of a corporation, where the parties are equal owners and stand on equal footing as entrepreneurs, where no stock is offered to or sold to the general public, where the corporate function is but a mere convenient instrumentality through which they, who own all of the corporate stock and control the conduct of its affairs, transact their business, and where the interests of third parties are not affected. (Holmberg v. Marsden, 39 Cal.2d 592, 597, 248 P.2d 417; Hillman v. Hillman Land Co., 81 Cal.App.2d 174, 183-184, 183 P.2d 730; Hargiss v. Royal Air Properties, Inc., 206 Cal.App.2d 406, 412, 23 Cal.Rptr. 678.)

A joint venture requires little formality in its creation (Gross v. Raeburn, 219 Cal.App.2d 792, 801, 33 Cal.Rptr. 432); it may be the result of a parol agreement or it may be assumed as a reasonable deduction from the acts and declarations of the parties. (Nelson v. Abraham, 29 Cal.2d 745, 749-750, 177 P.2d 931.) Here the evidence shows that plaintiff and defendant Barnett were joint venturers standing on equal footing as entrepreneurs; that the purpose of the enterprise was to engage in the business of selling carperts that both parties had prior extensive experience in the retail carpet business; that there was a community of interest in a mutual endeavor over which they exercised joint control for the purpose of making a profit; and that they were to share in profits and losses equally. (Lasry v. Lederman, 147 Cal.App.2d 480, 485-486, 305 P.2d 663; People v. Woolson, 181 Cal.App.2d 657, 669, 5 Cal.Rptr. 766; Ragghianti v. Sherwin, 196 Cal.App.2d 345, 351, 16 Cal.Rptr. 583.)

It was not contemplated by the parties, especially plaintiff, that he would play the passive roll of investor. (Goldberg v. Paramount Oil Co., 143 Cal.App.2d 215, 300 P.2d 329; Rivlin v. Levine, 195 Cal.App.2d 13, 25, 15 Cal.Rptr. 587.) From the beginning of their negotiations plaintiff, at the very least, was co-promoter and co-organizer; thereafter he actively participated in the conduct of the enterprise from which he expected to reap a profit. (People v. Syde, 37 Cal.2d 765, 235 P.2d 601.) He managed the business under an employment contract which he negotiated with the corporation, became corporation president and director and signed all of its official documents. The fact that a corporation was formed as the vehicle by which the enterprise could accomplish the partners' business venture does not preclude a finding of a joint venture (People v. Clark, 215 Cal.App.2d 734, 749, 30 Cal.Rptr. 487), and under the circumstances is considered 'simply the alter ego' of the joint venturers. (Hargiss v. Royal Air Properties, Inc., 206 Cal.App.2d 406, 410, 23 Cal.Rptr. 678.) No corporate stock was issued to anyone other than plaintiff and defendant Barnett--they shared equally, each taking fifty percent of the stock. 'Where a corporation is the...