Wells v. Comstock

• Decision Date: 22 May 1956
• Citation: 46 Cal.2d 528,297 P.2d 961
• Court: California Supreme Court
• Parties: , Blue Sky L. Rep. P 70,312 E. E. WELLS and John M. Reynolds, Plaintiffs and Respondents, v. H. Thomas COMSTOCK and Grace E. Mendizza, also known as Grace Ellen Comstock Harris, Defendants and Appellants. L. A. 23929.

Page 961

297 P.2d 961

46 Cal.2d 528, Blue Sky L. Rep. P 70,312

E. E. WELLS and John M. Reynolds, Plaintiffs and Respondents, v. H. Thomas COMSTOCK and Grace E. Mendizza, also known as Grace Ellen Comstock Harris, Defendants and Appellants.

L. A. 23929.

Supreme Court of California, In Bank.

May 22, 1956.

William J. Currer, Jr., Los Angeles, for appellants.

Trihey & Mirich and Joseph M. Trihey, San Pedro, for respondents.

SCHAUER, Justice.

By written contract plaintiffs Reynolds and Wells agreed to sell and defendant Comstock agreed to buy 440 shares of corporate stock evidenced by described certificates and defendant Mendizza guaranteed Comstock's performance. In this action for breach of contract plaintiffs recovered a money judgment against Comstock based on his refusal to pay the agreed price and against defendant Mendizza based on her guaranty.

The principal defense at the trial, and defendants' principal contention on this appeal, is that the contract is unenforceable because 380 of the shares were illegally issued. The trial court found that plaintiffs, officers of the issuing corporation, had caused 380 of the shares to be issued to plaintiff Reynolds in violation of the permit of the commissioner of corporations; that defendant Comstock 'participated in and induced the issuance' of the 380 shares with knowledge that the permit was violated, and that Comstock is therefore 'estopped' to assert that the shares were illegally issued. We have determined that the court's socalled 'finding' of estoppel in an erroneous conclusion of law; that the contract is unenforceable not only because of the original illegality in the issuance of the 380 shares (Corp.Code, § 26100) but also because the contract itself violates penal sanctions of the Corporate Securities Act (Corp.Code, § 26104); and that the guaranty is also unenforceable because of the illegality of the principal obligation.

As will appear from the following summary, the evidence supports the findings of fact (although not the so-called 'finding' that defendant is estopped to assert illegality) and refutes the assertions of both defendant Comstock and plaintiffs in their respective briefs that their respective conduct which resulted in the contract was in good faith:

Plaintiff Reynolds was president, plaintiff Wells was treasurer, and both were directors of Finance Control, a California corporation which was organized about July, 1952. Defendant Comstock, although he was not an officer or director of the corporation, was its active general manager and attended all meeting of the directors.

As defendant Comstock knew, the corporation applied to the commissioner of corporations for a permit to issue its stock for $10 cash a share. By permit of October 1, 1952, the corporation was authorized to issue to Reynolds or Wells 500 shares for $10 cash a share. The directors and officers of the corporation, however, agreed that stock would be issued to Reynolds not for cash but for services. At Comstock's request, Reynolds agreed that the stock issued to Reynolds would be held by Reynolds for Comstock.

Comstock arranged for his father-in-law to loan the corporation $3,800. The corporation gave the father-in-law a note for $3,800, which was subsequently paid. The corporation used the $3,800 to buy real estate. The records of the corporation falsely show that the $3,800 was paid by Reynolds for 380 shares of stock which were issued to him in December, 1952, and March, 1953. In fact Reynolds paid no cach for the issuance of these 380 shares. For 25 additional shares which were issued to Reynolds he paid $10 cash a share which was furnished by Comstock.

On June 19, 1953, plaintiffs Reynolds and Wells and defendant Comstock entered into the written contract here sued on, with defendant mendizza guaranteeing Comstock's performance. Reynolds agreed to sell Comstock 405 designated shares and Wells agreed to sell Comstock 35 designated shares of the stock of Finance Control for $11,998.80, payable $2,000 upon execution of the agreement and $9,998.80 within 15 days. Of the 405 shares which Reynolds agreed to sell, 380 were the shares above described which were issued in violation of the permit of the commissioner of corporations, and 25 were the shares above described for which Comstock had furnished the cash. Plaintiffs transferred the 440 shares to Comstock. Comstock paid the $2,000 and refused to pay the balance.

Manifestly, as Comstock points out, the issuance of the 380 shares was in violation of the implied prohibition of the Corporate Securities Act found in section 26100 of the Corporations Code: 'Every security of its own issue sold or issued by a company with the authorization of the commissioner but which has been sold or issued in nonconformity with any provision in the permit authorizing the issuance or sale of the security is void.'

Furthermore, although the parties neglect to mention this fact, both plaintiff and Comstock appear to have violated penal sanctions of the Corporate Securities Act, the provisions of section 26104 of the Corporations Code that 'Every officer, agent or employee of any company and every other person, who does any of the following acts is guilty of a public offense * * * (a) Knowingly authorizes, directs, or aids in the issue or sale of * * * any security, in nonconformity with a permit of the commissioner then in effect authorizing such issue * * * (d) With knowledge that any security has been issued or executed in violation of any provision of this division (which includes Corp.Code, § 26100, supra), sells or offers the security for sale * * * (f) In any respect wilfully violates * * * any * * * permit * * * of the commissioner under this division. (g) With one or more other persons, conspires to violate any permit * * *.' Enforcement of sales, and contracts growing out of sales, in violation of these penal sanctions can be denied. (Duntley v. Kagarise (1935), 10 Cal.App.2d 394, 397, 52 P.2d 560.)

Both parties advance arguments based upon the general purpose of the Corporate Securities Act to protect the public against fraudulent or unlawful stock schemes. Where, as here, both parties with full knowledge have joined in the illegal scheme, there can be no problem of applying the above quoted sections of the Corporate Securities Act to protect one from the other. (Cf. Regulation and Civil Liability under the California Corporate Securities Act: III, IV, ...