Zinn v. Ex-Cell-O Corp.

• Decision Date: 29 January 1957
• Docket Number: EX-CELL-O,No. 16372,16372
• Citation: 148 Cal.App.2d 56,306 P.2d 1017
• Court: California Court of Appeals Court of Appeals
• Parties: J. A. ZINN, H. Kemp, W. M. Nelson, L. P. Nelson, H. E. Ellis, Elizabeth C. McLaughlin, Ethel M. Zinn and Herbert Schroeder, Plaintiffs and Respondents, v.CORPORATION and H. Glenn Bixby, Defendants and Appellants.

Page 1017

306 P.2d 1017

148 Cal.App.2d 56

J. A. ZINN, H. Kemp, W. M. Nelson, L. P. Nelson, H. E. Ellis, Elizabeth C. McLaughlin, Ethel M. Zinn and Herbert Schroeder, Plaintiffs and Respondents, v. EX-CELL-O CORPORATION and H. Glenn Bixby, Defendants and Appellants.

No. 16372.

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

Jan. 29, 1957.

Rehearing Denied Feb. 28, 1957.

Hearing Denied March 27, 1957.

Walter K. Olds, San Francisco, Pillsbury, Madison & Sutro, Eugene M. Prince, Francis N. Marshall, Lloyd A. Carlson, San Francisco, of counsel, for appellants.

Livingston & Livingston, David Livingston, Lawrence Livingston, San Francisco, for respondents.

BRAY, Justice.

Defendants appeal from several judgments awarding plaintiffs damages in the sum of $628,284.85 principal plus $643,049.51 interest from April 13, 1939, to date of judgment--total, $1,271,334.36. ¹

Questions Presented.

1. Defendants were charged with fraudulently inducing plaintiffs to sell capital stock held by them in a distributing corporation which plaintiffs had organized. Defendants concede that there was a conflict of evidence as to whether defendants were guilty of misrepresentation in connection with their purchase of plaintiffs' stock, but contend that as a matter of law the evidence establishes that plaintiffs knew the allegedly concealed facts and did not act in reliance upon said representations, and that said representations were not material. Hence, say they, there was no actionable fraud.

2. Did plaintiffs state a cause of action?

3. Was Sealed-Pure's default waived, so that Ex-Cell-O had no right to terminate the agency contract?

4. Was the agency contract terminable at will?

5. Was there any basis for damages?

6. Were plaintiffs entitled to interest?

7. Were defendants denied a fair and impartial trial?

(1) Rulings of the court. (a) Reopening of case for deposition of plaintiffs. (b) Disregard of defendants' evidence.

(2) Remarks of trial judge.

(3) Changes in transcript.

(4) Trial judge employs one of plaintiffs' counsel in another matter.

General Facts.

This is the story of a revolution in the type of container used for retail marketing of milk on the Pacific Coast. In 1934 Zinn and others organized the Gold Star Creameries. He was president. The corporation distributed cheese. In 1935-36 it constructed a building in Everett, Washington, for milk distribution in paper containers. During this time Zinn corresponded with Ex-Cell-O Corporation inquiring about leasing or purchasing its Pure-Pak milk packaging machine. Ex-Cell-O was a Michigan corporation manufacturing machine tools, which had developed said machine for use in packaging and distributing milk in paper containers. Zinn also conceived the idea of establishing a distributorship for the Pure-Pak machine. Zinn spent considerable time and effort in interesting others with him and in contacting Ex-Cell-O to obtain such an agency. Eventually, on October 31, 1937, a final distributorship agreement was executed. This provided that a Washington corporation with a capital stock of 10,000 no par value shares was to be formed by Zinn, Kemp and Malkson. ² Six thousand shares were to be issued to be paid for by $5,000 to be advanced by Malkson. The remaining 4,000 shares were not to be issued at this time but were to be used later to raise additional capital. From the 6,000 shares, 500 were to be transferred to Ex-Cell-o. The agreement granted Zinn, Kemp and Malkson the exclusive rights to distribute Ex-Cell-O's machines in the eleven western states and Hawaii, and provided that upon the formation of the corporation these rights were to be assigned by them to it. The machines could not be sold, only leased, and orders would be binding on Ex-Cell-O only if accepted by it. The agents agreed to place three machines in said territory within 90 days and within 6 months to have installations in three dairies in specified areas, and within two years in 15 dairies in the territory. The agents were to receive 12 1/2 per cent of all rental payments as commissions. For a period of two years, Ex-Cell-O was to set aside 2 1/2 per cent of the royalties collected to be expended under the joint direction of the parties for advertising and promotional services. The agreement recited that a licensing agreement had been entered into between Fibreboard Products, Inc., and Ex-Cell-O under which Fibreboard was given the exclusive right to manufacture blanks for the Ex-Cell-O machines, paying Ex-Cell-O therefor a 5 per cent royalty on all its net mill sales. This sum when received by Ex-Cell-O was to be paid to the agents. Fibreboard was required to pay an additional royalty of .00675 per cent for a period of two years, which Ex-Cell-O was to be set aside for establishing and supporting a distributing agency.

Preparing for the agency contract, the Sealed-Pure corporation was organized October 21, 1937. Malkson put up $5,000 for the issuance of 6,000 shares. Of these, 1,667 went to Zinn, who was president, 1,667 went to Kemp, who was secretary, 1,667 to Malkson, who was treasurer, 499 to Ellis and 500 to Ex-Cell-O as agreed. Later Zinn bought 1,875 shares of the treasury stock at $1 per share. Seven hundred ninety-one shares of the treasury stock were issued to Kemp who transferred 625 of them to L. P. Nelson. Fifty shares were issued to Schroeder and the remaining 1,284 shares were issued to Malkson. Gold Star was issued 1,875 shares of that stock. Of the Gold Star stock 875 shares were transferred to W. M. Nelson, 40 shares to McLaughlin and 60 shares to Ethel Zinn. Within five months of the incorporation all of the Sealed-Pure stock had been issued. Most of its capital, plus $1,875 which Ex-Cell-O had paid it as advance commission on a machine placed with Gold Star, had been loaned to Gold Star, the parties feeling that in order for the agency to succeed, the Gold Star paper container operation, the first in the west, must be successful. By early 1938 Sealed-Pure had only about $800 as working capital. This bred dissension between Malkson, Zinn and Kemp, which was increased by the fact that the operation of the machine leased to Gold Star was delayed by a Seattle ordinance prohibiting the sale of milk in cartons. Huffman, an Ex-Cell-O employee, went to Seattle to assist in setting up the Ex-Cell-O machine. By this time Sealed-Pure was near default of the requirement that within 90 days it place three machines. Huffman, at Malkson's request, wired Ex-Cell-O requesting extension of 'four months from time of dairy opening for shipment of second machine.' Scott replied that Ex-Cell-O appreciated the delay and 'Will gladly cooperate in extending installation date * * * provided aggressive sales effort is made.' Huffman then reported to Ex-Cell-O in more detail concerning Sealed-Pure's situation. Zinn wired and then wrote Scott giving his story of the situation, and accusing Huffman and Malkson of collusion. Late in February, 1938, Scott met plaintiffs in Seattle, and told them that Bixby, the president of Ex-Cell-O was 'terribly dissatisfied' with the conduct of the business and threatened to cancel the agency contract unless the matter was straightened out. Scott made suggestions. He then wrote Bixby his impression of the situation.

March 9, 1938, Zinn, Kemp and Malkson met with Scott and told him their differences had been resolved, and that they were ready to make the changes suggested by him. Accordingly, Malkson was made president of Sealed-Pure, in place of Zinn, and also treasurer and general manager. Zinn was elected vice president, and Scott and Malkson's brother directors. A headquarters for Sealed-Pure was established in San Francisco. Scott and Malkson then called upon all the major dairies in several California areas. They called upon Sneed, president of Lucerne Cream & Butter Co., a subsidiary of Safeway, who had previously visited the Gold Star plant and was unfavorably impressed with the operation of the Pure-Pak machine, although, having tested consumer acceptance of the milk sold in paper cartons by Gold Star he found that favorable. Sneed told Malkson and Scott that he was not ready for a trial installation. They both reported this to Zinn.

April 30th, the six months given by the contract to install machines in dairies in three specified areas, elapsed, without such installations. May 2, 1938, Malkson wrote Zinn that he had seen Sneed and that the latter's final decision as to whether he would take a machine depended on 'what the Everett stores do the next few months' and that Scott had agreed to make trial installations at 'Los Angeles and here,' and if they could get the right dairy, 'So, we are still in the ring.' May 9, 1938, Malkson wrote Kemp that Petersen, a Sealed-Pure salesman, was making some progress in the Los Angeles area and new contacts in the San Francisco area, and that Ex-Cell-O 'has given us authority to place a machine either in Bellbrook, Safeway or Marin Dell on a trial basis.' As will later appear, Ex-Cell-O on July 25, 1938, accepted an order from Safeway for one machine on a 90 day trial with fixed amounts to be paid if it kept that machine and desired more.

At the time Bixby was negotiating with Safeway, he told Malkson that he was dissatisfied with the way Sealed-Pure had functioned and that he could see nothing to do but to cancel the contract. Malkson said he did not blame him but that he did not want the contract cancelled. He then asked Bixby for a job if the contract were cancelled. Bixby then said he planned to go to Seattle to look into the Gold Star affairs and perhaps work something out with Zinn and Kemp. At Seattle on July 28, 1938, Bixby met with Zinn, W. M. Nelson, Kemp and Ellis and told them of his dissatisfaction with the way Gold Star was meeting its obligations on the machine leased to it. Bixby told them that Ex-Cell-O was going to cancel the contract. The stock in Sealed-Pure which Gold Star...