Opinion
Hearing Granted by Supreme Court June 3, 1937.
Appeal from Superior Court, Los Angeles County; Lester W. Roth, Judge.
Action by T. W. Mitchell, after whose death Pearl F. Mitchell, as community administratrix of the estate of herself and deceased, was substituted as plaintiff, against W. D. Dilbeck, who filed a cross–complaint. From a judgment for substituted plaintiff, defendant appeals.
Reversed and remanded, with instructions.
COUNSEL
Sherman & Sherman and Austin Sherman, all of Los Angeles, for appellant.
Richard F. Bailey, of Los Angeles, for respondent.
OPINION
DESMOND, Justice pro tem.
In this case defendant appeals from a judgment by which he is required to pay respondent the sum of $13,275.77, found by the court to be the balance due upon an agreement between them. It is contended that certain findings are contrary to, or find no support in, the evidence; therefore, that the judgment based on such findings should be reversed.
Both parties to this action had been engaged for many years in the insurance business when they entered into the written agreement upon which this action is based. It reads, so far as pertinent to this discussion, as follows:
"State of Texas, County of Hill.
"T. W. Mitchell, first party, and W. D. Dilbeck, second party, make the following agreement:
"1. First party agrees to and does hereby sell to the second party all of his right, title and interest to all of the monies, assessments, dues and other benefits owned by him as Secretary-Treasurer of the Home Benefit Association, of Hillsboro, Texas.
"2. Second party agrees to pay as consideration for the above property, $5.00 per thousand of insurance in force at this date payable as follows: $2,955.00 cash representing $1.00 per thousand of insurance, the receipt of which cash is hereby acknowledged; $11,820.00 representing $4.00 per thousand of insurance, said $11,-$820.00 to be paid out of 50% of all premiums collected from members of the Home Benefit Association who transfer to the Equitable Mutual Life Insurance Company, Dallas, Texas, said 50% of said premiums to belong to first party until said amount is fully paid. * * * It is further agreed by second party that the payments out of premiums shall not be less than $1,000.00 per month, beginning with thirty days from this date and second party hereby personally guarantees that said payments of of said premiums shall be at least $1,000. per month, said guarantee to be in full force and effect and recoverable upon, regardless the amount of premiums collectted or the length of time for which collected and said agreement and guarantee that first party shall receive said $1,000.00 per month shall be and is continuous until the full amount of the consideration out of premium has been paid. * * *
"3. Second party in consideration hereof agrees to carry out and perform the proposals which are substantially set forth in the attached paper marked ‘proposals of W. D. Dilbeck’, which proposals are made a part hereof just as tho written herein. * * *
"Proposals of W. D. Dilbeck:
"Satisfactory arrangements to be made with T. W. Mitchell, as Secretary of the Home Benefit Association, as to remuniation and working arrangements.
"Four members of the Board of Directors of the Home Benefit Association to resign in favor of four directors to be selected by Mr. Dilbeck. * * *" For approximately fifteen years prior to the date of this agreement, November 28, 1932, respondent had been secretary-treasurer of Home Benefit Association of Hillsboro, Tex., and as such officer had derived a substantial income from fees or commissions allowed him as "secretary’s expense" on death assessments paid by the members of the association. The schedule of rates, expenses, and benefits were all set up in the by-laws of the organization, which, together with the constitution and certificate of authority, were approved by the board of insurance commissioners of Texas after an act passed in 1929 (as amended, tit. 78, art. 4875a--1 et seq. Vernon’s Ann.Rev.Civ. Stats.) brought under control of the board local mutual aid associations which had been operating for some years previously. (See article 4875a--23.)
One of the by-laws (art. III, § 3) of the Home Benefit Association provided, inter alia, as follows: "The Secretary-Treasurer shall be T. W. Mitchell, and he shall remain in office until he shall die, resign or be removed from office in the manner for some one or more of the causes specified in Article 2, Section 4 of the By-Laws of this Association. * * *
"It is agreed and understood that the property rights of the office of the Secretary-Treasurer are and shall be both legally and equitably vested in the said T. W. Mitchell, and he is and shall be entitled to all the fees, emoluments, and perquisites thereof prescribed by the Constitution and By-Laws of this Association, and any amendments thereto which may hereafter be adopted. In the event charges are filed against the said T. W. Mitchell, to remove him from office he shall have the right, after such charges are filed and even after removal from office, to transfer and assign the equipment and property of said office and the fees, perquisites and emoluments thereof prescribed by the Constitution and By-Laws of this Association and any amendments thereto, which may hereafter be adopted."
Appellant contends: "It would be a vicious set-up to permit officers of mutual benefit associations to build by-laws whereby one of the officers (Secretary-Treasurer) should hold office for life, or during good behavior, and further building a by-law whereby he should be indefeasibly vested with the property right to all revenues thereafter to be derived for the running expenses of the association, and to further build a by-law that, even though he should be convicted of a criminal offense for malfeasance in office, he would still own, in his own right, the future accumulations coming into the Expense Fund of the association."
Respondent answers this contention by asserting that the by-laws of this Texas company were approved by the board of insurance commissioners of that state and therefore are legal and valid; consequently a contract drawn, with these conditions present in the minds of the parties, must stand. However, conceding for the purpose of argument the correctness of respondent’s position on this point, the judgment in our opinion should be reversed on the ground that the contract is contra bonos mores, in that it contemplates dealing with corporate officers for personal gain. The case of Forbes v. McDonald, 54 Cal. 98, seems in point. There contention arose among five directors of a mining corporation. Forbes was one of the five, and the other four were at odds, two against two. One group agreed to pay a certain bill due Forbes by signing a note therefor in consideration of Forbes’ resigning and aiding them in electing a successor. Suit was brought upon this note, the defense being based on want of consideration and illegality of consideration. The opinion states (pages 99, 100): "It does not appear to us to be at all doubtful, that if the whole or a part of the consideration be that a trustee resign his trust, the consideration is illegal. It is contra bonos mores. Trustees of corporations owe duties to others besides themselves; they have been placed in a position of trust by the stockholders, and to those stockholders they must be faithful. It is a violation of that trust for them to be bought out of office. They may resign when they please, but they must not make profit or benefit to themselves in the matter of such resignation."
Matching these facts with those of the present case, it appears that at a meeting of the directors of the Home Benefit Association, held on November 28, 1932, the same day the contract was signed by the parties, the plaintiff tendered his resignation as secretary. He testified: "I resigned and he (Dilbeck) asked me to serve on as much as three or four months until the members were transferred, as many members as could be transferred." It appears also that the plaintiff arranged for four other directors of his board to resign, to be replaced by men chosen by Mr. Dilbeck. The plaintiff testified:
"Q. Did you tell him (Dilbeck) that the members of the board of directors of the Home Benefit Association would resign at your request in favor of directors to be appointed by him? A. I told him I thought they would, yes, sir.
"Q. Did you instruct some of those directors to resign in favor of nominees of W. D. Dilbeck? A. I did.
"Q. And was that part of the consideration for Mr. Dilbeck agreeing to pay you this money? A. He did. It was. (Italics ours.)
Respondent argues that since the proposal was made by Mr. Dilbeck that "four members of the board of directors of the Home Benefit Association should resign in favor of four directors to be selected by Mr. Dilbeck," it was incumbent upon Dilbeck and not upon the respondent to perform this part of the contract. It must be apparent, however, that the four directors who did resign would not have taken that action at Mr. Dilbeck’s request alone; in fact, the respondent testified that if he had not received the down payment upon the contract and relied upon Dilbeck’s agreement to pay $1,000 monthly thereafter, he would not have had the directors resign, nor would he have resigned himself. These circumstances, as well as others that appear in a review of the testimony, lead us to the conclusion that the contract was contrary to public policy, under a doctrine that has been adopted in practically all the states of the Union, many authorities being collected in 12 A.L.R. 1071.
The defendant in this case filed a cross-complaint seeking recovery of the sum of $3,183 "for and on account of money had and received by cross-defendant for the use and benefit of cross-complainant." However, since both parties voluntarily undertook a transaction which in our view was contrary to public policy, we favor the rule, usually given effect in such cases, which leaves the parties as it finds them. 13 Cor.Jur. 493; Ripperdan v. Weldy, 149 Cal. 667, 676, 87 P. 276.
The judgment is reversed and the cause remanded to the superior court with instructions to enter judgment in this action in favor of appellant, W. D. Dilbeck, and against him on his cross-complaint.
We concur: HOUSER, P. J.; YORK, J.