Opinion
Rehearing Granted April 30, 1942.
Appeal from Superior Court, Los Angeles County; George A. Dockweiler, Judge.
Action by Elma I. Moore against E. F. Stella, individually and as trustee, etc., and others, for the return of money paid for mineral rights and shares of stock sold by defendants. From a judgment in favor of plaintiff, defendants appeal.
Judgment affirmed. COUNSEL
Charles I. Rosin, of Los Angeles, for appellants.
Joseph N. Owen, of Los Angeles, for respondent.
OPINION
PARKER WOOD, Justice.
The complaint, consisting of thirteen causes of action, was for the return of money paid for "mineral rights" and shares of stock, after notice of rescission by plaintiff. The first nine causes of action related to the mineral rights, and the tenth, eleventh and twelfth causes of action related to the shares of stock, and the thirteenth was for money had and received and was based upon the transactions involved in the preceding twelve causes of action. The judgment was for plaintiff against defendants as follows: Stella on all thirteen causes of action for the aggregate sum of $9,775; Stella-Harold Development Company on the seventh cause of action for $2,000; Dallas M. Steele on the tenth, eleventh and twelfth causes of action for $1,225.
The complaint alleged that Stella was a real estate broker; that Stella-Harold Development Company was a corporation and the alter ego of Stella; and as to the first nine causes of action, which related to the "mineral rights," that defendants sold plaintiff mineral rights in various two and one-half acre parcels of land in Tehama County, and plaintiff paid various sums of money therefor to defendants and received from defendants written agreements to deliver to plaintiff an assignment of the mineral rights in each parcel to be selected by Stella from the acreage in certain sections of land; and that in the mineral rights transactions referred to in the first nine causes of action defendants delivered such assignments signed "E. F. Stella, by Dallas M. Steele," except as to the ninth none was delivered, and as to the seventh it was signed "Stella-Harold Development Company by E. F. Stella, President"; that defendants made fraudulent representations as follows: as to the value of the rights; the lands had great potential oil and gas values; that defendants were diligently drilling an oil well near the land which was nearly ready for production and was near a commercially productive gas and oil well. The complaint further alleged that plaintiff was eighty years of age, inexperienced and had no independent advice; that the mineral rights were of no value, and the area had been extensively drilled without recovery of oil or gas in commercial quantities, and the well was not being drilled diligently but wilfully delayed, and that the gas well referred to as "near" had been abandoned four years, and the oil well referred to as "near" was eighteen miles away; that defendants had no permit or broker’s license from the Corporation Commissioner to sell the assignments of mineral rights and that the sales were void; that defendants have divided 1546 acres in Tehama County and 5760 acres in Glenn County into parcels of two and one-half acres each, and that defendants are engaged in the general business of selling such assignments and that such method is a scheme to evade the Corporate Securities Act, Gen.Laws 1937, Act 3814; that as to the certain acreage described in the fifth, sixth and seventh causes of action, defendants violated an order of the real estate commissioner, in that, a survey of the land required to be made was not made, and a map required to be recorded was not recorded, and that a copy of the order required to be delivered to purchasers was not delivered to plaintiff; that no surface rights or rights of ingress or egress were given, and adjacent acreage was sold to others; that plaintiff became aware of the facts on November 13, 1938, and served notice of rescission on November 21, 1938.
The complaint alleged as to the tenth, eleventh and twelfth causes of action, which related to the shares of stock, that defendants sold plaintiff shares of stock in three different corporations without having any permit from the Corporation Commissioner so to do, and fraudulently represented that they were reasonably worth the amount plaintiff paid therefor, although in truth they were of no value; that as to one of the corporations the sale was in contravention of an order of the Corporation Commissioner that no sale be made.
The answer of defendants alleged: That Stella received the money for the mineral rights in the sum of $8,550; and that Steele received the money for the shares of stock in the sum of $1,225; and in substance the answer was a denial of the other allegations of the complaint. They alleged that a permit from the Corporation Commissioner was not necessary for the sale of the mineral rights or the stock.
The court found: That Stella-Harold Development Company was the alter ego of Stella; that defendants had no permit or broker’s license from the Corporation Commissioner for the sale of the mineral rights or the shares of stock; that the order of the real estate commissioner was violated as to parcels referred to in the fifth, sixth and seventh causes of action; that the survey was not made and no map was recorded; that Stella-Harold Development Company sold rights only as referred to in the seventh cause of action; that the acreage in Tehama County was divided into parcels of two and one-half acres each, and the Glenn County land was divided into parcels of one acre each, and defendants were engaged in a general business of selling the mineral rights to the public, and that such method was a scheme wilfully used to evade the Corporate Securities Act that Steele was involved only in the sale of the shares of stock.
There were no findings of fact as to the eighth cause of action.
The court concluded that the mineral rights and stock were of no value and were sold in violation of the Corporate Securities Act and that the sales referred to in the fifth, sixth and seventh causes of action were in violation of the Real Estate Act, Gen.Laws 1937, Act 112, section 20g thereof; and that plaintiff had rescinded the transactions and was entitled to receive all the money paid.
Soon after the complaint was filed plaintiff caused a writ of attachment to be levied upon property of defendants Stella and Stella-Harold Company. All of the defendants moved to discharge the attachment upon the ground that the action was not such as would support an attachment, in that plaintiff had the assignment of mineral rights and the shares of stock and could not fulfill the requirements that the attaching party must allege and show that plaintiff was not secured by any lien, or if so secured that the security had become valueless through no fault of her own. In plaintiff’s affidavit in support of the attachment she stated that the assignment and the issuance of the stock were made without a permit or broker’s license first had from the Corporation Commissioner, and she alleged that if she had any such purchaser’s lien as that given in sections 1789 and 3050 of the Civil Code that such security had become valueless without her fault.
Defendants’ motion for discharge of attachment came on for hearing on January 4, 1939, and counsel for the plaintiff stated that a decision upon the motion, as to whether the sales were in violation of the Corporate Securities Act, would be a decision of the main point in the case. The court stated that such a decision would in effect decide the lawsuit. Counsel for defendants stated: "Well, we can’t help that," and "Well, there are many lawsuits that are decided on preliminary motions before it comes to trial," and "That is not an unusual thing," and insisted that the hearing proceed. The hearing proceeded and required seven days for completion. The reporter’s transcript on the hearing consists of 469 pages. When the motion was submitted both counsel demanded that findings be made, and on March 14, 1939, the court signed and filed its findings of fact and conclusions of law, and order denying motion for discharge of attachment.
The court found in the proceeding to discharge attachment that: Each and all of the assignments of mineral rights, set forth in the complaint, by which defendants sold to plaintiff and plaintiff purchased from them certain alleged mineral rights in and to certain acreage in Tehama and Glenn Counties are and were securities within the meaning of the Corporate Securities Act, Act 3814, General Laws of California; that defendants, and each of them, had no broker’s license nor had they, or either of them, any permit from the Corporation Commissioner for the sale of said securities, and that in making said sales defendants violated sections 3, 4, 6, 7 and 9 of said act; that the parcels sold to plaintiff as described in the fifth, sixth and seventh causes of action lie in the area prohibited from sale by the report or permit of the real estate commissioner and agreed by the defendant Stella not to be sold until such time as the same had been surveyed, the exact area determined, and a map filed and recorded; that no such survey was made nor was any map based on such survey filed or recorded, but notwithstanding the failure of defendants to comply with such requirements, they sold said parcels to plaintiff in said prohibited areas; that said parcels were sold in violation of section 20g of the Real Estate Act, Act 112, General Laws of California; that as to the ninth cause of action no assignment has been delivered to plaintiff; that plaintiff rescinded said transactions and that said transactions are void; that the shares of stock of the Fortuna Holding Corporation, the Summit Holding Corporation and the K-B-P Holding Corporation, sold by defendants Stella and Steele to plaintiff were securities within the meaning of the Corporate Securities Act and that the same were sold without any permit and without any broker’s license being first secured from the Corporation Commissioner; that said stock was not the bona fide personally owned stock of said defendants or either of them; that Stella had acquired all the outstanding stock of said corporations prior to the transaction in question and had become the alter ego of said corporations; that for the purpose of evading the Corporate Securities Act he issued new stock in said corporations and caused the same to be sold to the public, including plaintiff, for the benefit of himself as issuer; that the methods used by him in marketing said stocks was an indirect promotion of a scheme with an intent on his part to evade the provisions of said act relative to procuring a permit and broker’s license; that said sales of stock are void and plaintiff rescinded the same; that said assignments of mineral rights and said stock of said corporations had, at the times of sales to plaintiff, and now have no value whatever.
From the order denying the motion to discharge the attachment the defendants appealed to the District Court of Appeal. The appeal was dismissed and a rehearing was denied.
The action came on for trial on October 13, 1939, before the judge who had presided at the hearing of the motion to discharge the attachment. A stipulation was proposed by counsel for defendants (appellants) that "the transcript to be prepared of the evidence introduced on the motion to discharge the attachment, and that all of the evidence introduced there may be considered as introduced in this trial at this time." Counsel for plaintiff stated that the stipulation was acceptable, except that the matters set forth in the findings and conclusions and judgment in the attachment matter were res judicata and need not be tried again, but if the court held to the contrary, that the former transcript may be considered as the testimony in the case without the necessity of going over it again. Counsel for defendants so stipulated. Counsel for plaintiff then introduced in evidence certified copies of the minute order of the District Court of appeal granting the motion to dismiss the appeal, and the order of that court denying appellant’s petition for a rehearing. The remittitur had not at that time been filed and counsel for plaintiff requested a continuance of the trial until after the remittitur had been received, but this request was denied, and counsel for plaintiff objected to the introduction of evidence upon the ground that the order of the court in the attachment matter was an appealable order, that an appeal was taken and dismissed and a rehearing denied and that the order was a final judgment, and plaintiff should not be compelled to relitigate those matters as to violation of the Corporate Securities Act which were decided in the former order. The matter was submitted for decision, and for ruling upon the objection as to res judicata. Before the signing of the findings of fact and conclusions of law, and after the remittitur had been filed, the court reopened the case and received the remittitur in evidence. Then the case was submitted again.
The ruling upon the objection appears in the document entitled "Findings of Fact and Conclusions of Law" preceding the formal findings of fact and is as follows: "* * * it now overrules the said objections to the introduction of any evidence in the matter, made by the plaintiff on the grounds that the merits of the action have been previously adjudicated and finds that there has been no previous adjudication of the merits of the action."
The findings of fact and conclusions of law in the attachment matter and the order therein were not included as a part of the record on appeal. After this case was placed upon the appeal calendar, respondent made a motion for permission to file certified copies of such findings of fact and conclusions of law and order denying the motion to discharge attachment, upon the ground that said documents were inadvertently omitted and were necessary in the consideration of the contention that there had been an a adjudication of the issue as to violation of the Corporate Securities Act. Appellants objected to the motion upon the ground that such documents had no place in the record because no appeal was taken by respondent. That motion has heretofore been granted and in addition thereto this court ordered that the original Notices of Motion to Discharge Attachment and the Amendment thereto, together with the original affidavits in support thereof and in opposition thereto, be transmitted by the County Clerk of Los Angeles County to this court for consideration upon this appeal.
Appellant contends as follows
1. That the findings are not supported by the evidence;
2. That this being an action for rescission, the court erred in ordering unconditional judgment for repayment of money without providing for restitution by respondent; 3. That the sale of a mineral deed to mineral rights in real property of sufficient area that purchaser may maintain independent drilling operations and development work thereon, and which is not subject to participation in the benefits derived therefrom, or in the property itself, by any other person or under agreement, is not a security within the meaning of the Corporate Securities Act;
4. That changing par value of all shares of stock of a corporation, or increasing or decreasing the number of shares, as a result of amendment to articles of incorporation, where the stock certificates as changed represent the same interest as the stock did before the amendment is not a new issue, and does not require a new permit from the Corporation Commissioner if the original stock had been issued validly under a permit;
5. That as to the Summit Holding Corporation that stock had been issued under a permit and was personally owned by the seller thereof and the owner had the right to sell same without a permit;
6. There was no evidence upon which to base a judgment against Stella-Harold Development Company on the seventh cause of action;
7. There was no evidence upon which to base a judgment against Stella on the tenth, eleventh, or twelfth causes of action.
Respondent contends that the order denying the motion to discharge the attachment is res judicata as to the issues (1) whether the sales of the mineral rights and the shares of stock were in violation of the Corporate Securities Act and void, and (2) whether the said assignments and shares of stock were valueless and there was a failure of consideration in so far as plaintiff was concerned.
This contention must be sustained. In order to decide whether the motion to discharge the attachment should be granted or denied, the court was required to determine whether plaintiff was secured by any lien by reason of the assignments to her of the mineral rights, or by reason of the transfer to her of the certificates of shares of stock.
The direct questions presented, for the decision of the trial court and which were decided, upon the motion were:
1. Were the assignments of the mineral rights and the certificates of shares of stock securities within the meaning of the Corporate Securities Act?
2. If they were such securities, did the defendants have a permit or broker’s license from the Corporation Commissioner to make the sales?
3. Were the sales of such assignments and certificates in violation of the act and were the assignments and certificates therefore valueless?
These same questions were the main questions presented upon the trial, for the decision of the court. The parties were the same upon the motion and the trial. The evidence in both proceedings was identical, it having been stipulated that the evidence upon the motion, as shown by the reporter’s transcript, might be deemed the evidence upon the trial. It thus appears that the issues determined upon the motion were not incidental and collateral to the main controversy, but were the principal questions to be determined upon the trial and were determined upon the motion upon the identical evidence submitted at the trial.
It further appears that the attorneys for the parties had in mind at the time of the hearing of the motion that a decision upon the motion would be a decision upon the main issues of the action. The attorney for plaintiff objected to proceeding with the hearing upon the ground that such a hearing would be a trial of the case and that the ruling would render substantially all issues res judicata. The attorney for defendants insisted that the hearing proceed.
An appeal lies from an order dissolving or refusing to dissolve an attachment. Sec. 963, Code Civ.Proc. An appeal was taken by defendants from the order denying the motion to discharge the attachment, and the appeal was dismissed and a rehearing was denied. The order became final.
It is not a requirement that an issue be determined in an independent action in order to apply the rule of res judicata. The rule may be applied when the issue is determined upon a motion. In the case of Lake v. Bonynge, 1911, 161 Cal. 120, 129, 118 P. 535, 539, it is stated: "When * * * a substantial right or the merits of the case are involved and determined, the judgment is res adjudicata, notwithstanding the decision is made on an appeal from a motion." In the same case it is also stated (161 Cal. at page 129, 118 P. at page 539): "Freeman on Judgments, § 323, declares: ‘The tendency of the recent adjudications is to inquire whether an issue or question has been in fact presented for decision and necessarily decided, and, if so, to treat it as res adjudicata, though the decision is the determination of a motion or summary proceeding, and not of an independent action.’ " (Emphasis added.) And further in that case (161 Cal. at page 129, 118 P. at page 539), quoting from Commissioners v. McIntosh, 30 Kan. 234, 1 P. 572, it is said: "* * * Now, that the decision of a motion can be preserved in a separate record, and taken up by itself, presupposes a full and careful consideration in both the trial and the appellate courts; and when that is had it would seem that the question thus separately and carefully considered should be finally disposed of, and not be thrown back for further litigation at the mere caprice of either party."
Appellant contends that the matter of res judicata is not properly before the court for three reasons: (1) That there is no record on appeal to indicate res judicata, such as the moving papers, findings, conclusions, and order in the attachment proceeding; (2) there was no plea of res judicata; and (3) that the finding of the trial court was that "there has been no previous adjudication of the merits of the action," and the plaintiff (respondent) did not appeal from this finding, and not having appealed cannot on the appeal of the opposite party challenge the correctness of a finding which is contrary to his contention.
These contentions will be discussed in the order in which they are stated.
As to the first: The motion of respondent to file copies of the Findings of Fact and Conclusions of Law and Order Denying the Motion to Discharge Attachment in the attachment matter has been granted by this Court, and in addition thereto this Court ordered that the original Notices of Motion to Discharge Attachment, the Amendment, and the original affidavits relating thereto, be transmitted to this court for consideration, and thereby the record on appeal has been completed.
As to the second: It was not necessary for plaintiff to plead res judicata for the reason it was relied upon as evidence of an element of the causes of action. "With respect to a plaintiff, it has been said that the rule requiring a former adjudication to be pleaded defensively ‘does not apply to the statement of a cause of action,’ since in such case it is merely evidence of some ultimate fact which must be pleaded. * * *" 15 Cal.Jur. 209, sec. 230. In the case of Ahlers v. Smiley, 1909, 11 Cal.App. 343, 346, 104 P. 997, 998, it is said: "While as a general rule, in order to render evidence available in support of a defense based upon matters of estoppel, such matters must be pleaded, the rule does not apply to the statement of a cause of action by plaintiff. * * * Nevertheless, the record may be given in evidence with the same conclusive effect as if it had been specially pleaded."
When the complaint was filed in this case, of course, the facts in the attachment proceedings upon which plaintiff now bases the claim of res judicata had not occurred. The transcript reveals that plaintiff claimed res judicata at the beginning of the trial and that it was discussed extensively by counsel for the parties and by the court. The question of res judicata was properly before the court. Counsel for plaintiff offered "the pleadings and findings and judgment in the attachment matter" in evidence. Counsel for defendants said: "I don’t think it is necessary. The whole matter is a matter of record in the case." Counsel for plaintiff then said: "Of course, the question of res adjudicata should be pleaded or raised by evidence, and that was my thought. It is not pled because there was no chance of pleading it; and secondly, if there is any question about the evidence, it is before the court." The court said: "Well, that is satisfactory."
In Beckjord v. Traeger, 1934, 3 Cal.App.2d 385, 387, 39 P.2d 523, 524, it is said: "It may be admitted that estoppel must ordinarily be pleaded, but an inspection of the transcript reveals the fact that estoppel was discussed in the opening discussion of the case and in the testimony that followed and was in effect carried into the findings. In such circumstances it became an issue of the case as effectively as though it had been pleaded."
As to the third: The objection made by plaintiff that the order on the motion was res judicata had been submitted to the court for a ruling on the objection, and the court announced its ruling on the objection (overruling the objection) in the recitals immediately preceding the formal Findings of Fact. The fact that the court adopted this method of stating the ruling does not alter the fact that it was only a ruling upon an objection, and did not make the ruling an appealable order. The so-called finding that "there has been no previous adjudication of the merits of the action" also appeared preceding the formal Findings of Fact and was an explanation of the ruling upon the objection and a conclusion of the court.
It is true, as claimed by appellants, that the respondent cannot on the appeal of the opposite party ask a court of review to consider any errors against her. The respondent, however, may ask that the judgment in her favor be sustained irrespective of any erroneous rulings against her on objections made during the trial. Respondent had no right to appeal from an adverse ruling upon an objection, and there was no reason why she should appeal. The judgment was in her favor for the amount prayed for and she was not aggrieved. "No rule of decision is better or more firmly established by authority, nor one resting upon a sounder basis of reason and propriety, than that a ruling or decision itself correct in law, will not be disturbed on appeal merely because given for a wrong reason. If right upon any theory of the law applicable to the case, it must be sustained regardless of the considerations which may have moved the trial court to its conclusion." Rapp v. Southern Service Co., 1931, 116 Cal.App. 699, 706, 4 P.2d 195, 197.
An additional issue at the trial was the alleged fraudulent representations, but no additional evidence was offered in support thereof, and counsel for plaintiff stated that "if the court holds with me in this matter [referring to Corporate Securities Act violation] I would not push the representations as to fraud," (referring to the general allegations of fraud) and "those allegations of the complaint I would not attempt at this time to prove." Under these circumstances the findings to the effect that the general allegations of fraud in the complaint are true cannot be sustained.
Another issue at the trial was whether the Stella-Harold Development Company was the alter ego of Stella. The court found that the allegations of paragraph II of the complaint were true, and by such reference, therefore, found: "* * * that said Stella is the owner of a majority of the shares of said corporation, that he controls and dominates said corporation and its acts, and that in truth and fact it is his alter ego." In an express finding (not by reference) the court found: "* * * that it is true that defendant Stella was an officer, to wit, president, thereof and that he controls and dominates it and is in fact its alter ego." Appellant contends that such findings are not supported by the evidence. Stella testified that he "owns" no stock in the corporation; that Mrs. Grace Harold owns all the stock; that he is president of the company; that he was one of the original organizers of the company. There was no testimony that he did not own stock at the time of the transactions involved herein. Stella received the money paid for the mineral rights. In appellants’ opening brief it is stated: "In proximity to the development work [[[[referring to two prospective oil wells] that he [Stella] was doing, he acquired, by mineral deed, considerable acreage, taken in the name of Stella-Harold Development Company, giving him the right to explore for oil or gas, with right of ingress and egress to the property. * * * Appellant Stella divided this acreage in parcels of two and a half acres each and sold the same to the public, giving an assignment of all his right, title and interest in and to the mineral rights in and to the said property." Mrs. Harold was a real estate broker in Stella’s office, and he paid her a commission when she made sales. When Stella was asked who pays the office rent and for the telephone he said: "I pay it and Mrs. Harold is paying it." The "Agreement" delivered to plaintiff provided thereon as follows: "If official acknowledgment of this agreement or any future payments is not received by purchaser within 5 days from date thereto, notify E. F. Stella, 831 West Second Street, Los Angeles, California." "(Make all checks, drafts or money orders payable to E. F. Stella, Trustee.)" "Notice: E. F. Stella will not be responsible for payments made with currency unless said currency has actually been received by him."
The "Agreement" as to the sale of mineral rights described in the seventh cause of action was signed "E. F. Stella By Dallas M. Steele" and Stella states that he received the money paid for the rights; but the "Assignment" as to those mineral rights was signed "Stella-Harold Development Company, by E. F. Stella, president." Stella admits that he received the money from all sales of mineral rights described in the nine causes of action. His plan was to make the sale in his name and then as president of the Stella-Harold Development Company execute an assignment of the rights, so sold, to himself as an individual, and then as an individual to execute as assignment to the plaintiff.
It is not necessary to decide in this action whether the company was the alter ego of Stella. The judgment was against both of them on the seventh cause of action. They both participated in the sales of the mineral rights and both are charged with the knowledge that the sales were in violation of the Corporate Securities Act and in violation of the order of the real estate commissioner that sales in that section be not made until a survey was made and a map recorded, and that the sales were void and the rights were valueless. Stella acted for himself individually in the signing of the agreement, and as president of the company acted for the company in signing the assignment. A wrong was committed and both participants are liable. The judgment against both Stella and Stella-Harold Development Company on the seventh cause of action was proper.
As to the sales of the stock referred to in the tenth, eleventh and twelfth causes of action, judgment was against Stella and Dallas M. Steele. Mrs. Steele was a saleswoman in Stella’s office. She made all of the sales of the mineral rights and shares of stock to plaintiff. The tenth cause of action relates to the sales of 38 shares of stock of Fortuna Holding Corporation for $100. The eleventh cause of action relates to the sale of 10 shares of Summit Holding Corporation for $125. The twelfth cause of action relates to the sale of 10 shares of K. B. P. Holding Corporation for $1,000. Stella acquired all of the stock in the three corporations referred to in these three causes of action. A brief history of these corporations is stated in order that the relationship of Stella and Steele to the stock transactions may be more clearly presented. The Fortuna Holding Corporation was originally known as the R. & B. Knitting Mills, Inc. After he acquired all of the stock of the company he changed the name to Fortuna Holding Corporation and changed the capital structure. The original structure was 2500 shares of the par value of $10 each, and this was changed to 4500 shares of no par value, and new certificates of stock were issued and a permit for the new issue was not obtained. The Summit Holding Corporation was incorporated October 27, 1931, for 50,000 shares. On December 9, 1931, a permit was issued authorizing the issuance of 25,000 shares and said permit expired on June 9, 1932. The application for the permit stated in part: "* * * the applicant does not request, nor will it require, the permission to sell or dispose of any of its capital stock to the public, * * *." The sale of Summit stock to plaintiff was on April 18, 1938. The K. B. P. Holding Corporation was originally known as the Montroy Electric Co., and on July 15, 1937, a permit was issued allowing the issuance of 7800 shares. After Stella acquired all of the stock in the company he changed the name to K. B. P. Holding Corporation, and changed the capital structure from 25,000 shares of the par value of $1 to 4800 shares of no par value, and issued new certificates of stock and did not obtain a permit for the new issue.
The situation is that Stella acquired all of the stock of the three corporations, and as to the companies now known as the Fortuna Holding Corporation and the K. B. P. Holding Corporation he changed the names and the capital structure and issued new shares instead of the outstanding old shares. As to the Summit Holding Corporation there was no change in name or capital structure, and the permit expired on June 9, 1932, and the application for the permit stated in substance that the stock was not to be sold to the public.
Defendant Steele testified that she bought the Fortuna and Summit stock from Stella and some of it was as a bonus for work, and that he gave her the stock in the K. B. P. Company as a bonus for work and to make up for a $150 loss resulting to her from a deal she had with Stella regarding an oil lease; that she did not know how much of the stock she bought or the total amount she had paid or agreed to pay for it; that she endorsed the three checks for $100, $125 and $1,000, which she received from plaintiff for the stock in the three companies and delivered the checks to Stella to apply as payments for mineral deeds which she had received from Stella before she had paid for the deeds; that when she delivered the checks to Stella she did not know the number of acres in which she had purchased mineral rights or how much she had agreed to pay for the rights or how much was still due Stella; that she did not keep accounts of her transactions with Stella.
Appellants contend that the shares of stock sold by Steele to plaintiff were shares of stock personally owned by Steele and that a permit to sell the stock was not necessary and that the sales were not in violation of the Corporate Securities Act. As shown above, however, it was adjudicated in the attachment proceeding that the sales of stock were in violation of the Corporate Securities Act. And further, as above shown in the findings in the attachment proceeding, the court found that the stock was not the bona fide personally owned stock of Steele or Stella. The evidence supports this finding.
Appellants further contend that even if there is a liability to plaintiff by reason of the sales of the stock that a judgment against both Stella and Steele is not proper. The contention is that if she sold her own stock Stella would not be liable, and if she sold it as the agent of Stella she would not be liable.
It will not be necessary to determine in this proceeding whether the relationship of principal and agent existed between Stella and Steele in the stock sales to plaintiff. As above shown the issue as to whether the stock was the personally owned stock of Steele or Stella is res judicata. If the relationship of principal and agent did exist, it is clear that Steele is charged with knowledge that the sales were wrongful in nature and therefore, she would be liable. Sec. 2343, Subdiv. 3, Civil Code. Furthermore, even if an agency relationship did not exist there was a joint participation by Stella and Steele in these wrongful stock transactions, with knowledge of their wrongful nature. The judgment against both Stella and Steele on the tenth, eleventh and twelfth causes of action was proper.
There were no findings of fact upon the eighth cause of action which related to the sale of mineral rights to plaintiff on September 15, 1938, for $350. The thirteenth cause of action was for money had and received and was based upon the transactions involved in the preceding twelve causes of action which, of course, included the transaction involved in the eighth cause of action. There were findings upon the thirteenth cause of action and therein it was found that Stella received from plaintiff for the use and benefit of plaintiff on September 15, 1938, the sum of $350. Although there were no findings on the eighth cause of action the $350 involved therein should not be deducted from the judgment since that item is included in the findings and judgment on the thirteenth cause of action.
Appellants contend further that the judgment, being based upon rescission, was erroneous in that it did not require plaintiff to return to defendants the consideration alleged to have been received by plaintiff, that is, to assign to defendant Stella the mineral rights and the certificates of stock. It having been adjudged that the assignments of the mineral rights and the certificates of stock were void and valueless in that they were sold in violation of the Corporate Securities Act, there was nothing to return. As a practical matter it perhaps would be of convenience to Stella if plaintiff were to execute an assignment of the alleged mineral rights to Stella, however, it would not be proper for the court to direct that plaintiff execute such assignments, or that the same be executed at all, for the reason such assignments have been adjudged to be in violation of the Corporate Securities Act.
The judgment is affirmed.
SHINN, Justice (concurring in the judgment).
I concur in the judgment of affirmance.
I cannot agree with the opinion of Mr. Justice WOOD in its application of the doctrine of res judicata. The point is not necessary to a disposition of the appeal.
The evidence adduced at the trial, which was the same as that given at the hearing of the motion to dissolve the attachment, was, I think, sufficient to support the findings. The findings and conclusions with reference to the first nine causes of action were to the effect that the assignments or transfers of mineral rights were securities and were subject to the provisions of the Corporate Securities Act. Defendant Stella acquired mineral rights in lands situated in Tehama and Glenn Counties. These were subdivided into 2 1/2-acre parcels and were sold to the public. Stella had been sales manager of El Claro Oil and Gas Company, a corporation, which in 1932 was engaged in selling interests in oil leases in Glenn County under a scheme which was denounced by a decision of the District Court of Appeal in El Claro Oil, etc., Co. v. Daugherty, 1936, 11 Cal.App.2d 274, 53 P.2d 1028, 55 P.2d 488, as in violation of the Corporate Securities Act. Stella’s operations which are involved in the instant case were a continuation of the same general promotional activities in different properties under a slightly different scheme. However, the one here under review, I think failed as the one denounced in the El Claro case did, to successfully circumvent the provisions of the Corporate Securities Act. The mineral deeds, upon the record before us, constituted securities and they were sold without a permit. The property which was acquired by the investors consisted of a right to extract oil, gas, and other mineral substances from the parcels of land conveyed and, it may be assumed for the purposes of this decision, such surface rights as would have been necessary in order to carry on exploratory and development work for the production of oil, gas, and other minerals. The question before the trial court was whether the scheme under which these deeds were given was one which in practical effect contemplated and involved participation by the investors in an enterprise or business conducted by others for earnings and profit, or more specifically, whether investors were not led to part with their money in the expectation and upon the promise that they would be able at some future time to lease their interests to some oil company upon a royalty basis and whether this expectation, though not expressed, was in reality the main inducement for the making of the investment. If the correct answer to this question is in the affirmative then the deeds in question partook of the very essence of those types of investment contracts which throughout the history of legislation on the subject in this state have been deemed to be proper subjects for regulatory supervision. It is not necessary to assume, and is not assumed, that a conveyance of mineral rights in a parcel of land comprising 2 1/2 acres is necessarily a security within the meaning of the Corporate Securities Act. It may or may not be a security. The determination of that question depends upon a great deal more than the mere fact of the conveyance. What is to be said on that subject herein relates exclusively to the facts of the instant case.
In deciding whether a given instrument is a security the courts have invariably looked through mere form to substance. People v. McCalla, 1923, 63 Cal.App. 783, 791, 220 P. 436; People v. Eiseman, 1926, 78 Cal.App. 223, 241, 248 P. 716; People v. Smith, 1931, 111 Cal.App. 177, 186, 295 P. 105; People v. Ratliff, 1933, 131 Cal.App. 763, 772, 22 P.2d 245; People v. Reese, 1934, 136 Cal.App. 657, 672, 29 P.2d 450; El Claro Oil, etc., Co. v. Daugherty, 1936, 11 Cal.App.2d 274, 281, 53 P.2d 1028, 55 P.2d 488; People v. Yant, 1938, 26 Cal.App.2d 725, 735, 80 P.2d 506. For the following discussion we have accepted as a basis of fact certain inferences which we believe were necessary to be drawn by the trial court in order to support the findings and which could be properly drawn from the evidence. They relate, as will be seen, to ultimate and controlling facts with reference to the nature of the rights acquired by the purchasers of "mineral rights," to the reasonable possibilities of the realization of returns in the way of oil or gas production, and to the practical and not merely the theoretical positions they occupied as owners of mineral rights in small parcels of land in a wilderness of undeveloped and unproven acreage. We assume that the trial court believed that it was highly improbable that these parcels could be developed for oil or that either the defendants or the purchasers expected that they would be so developed unless they should be grouped into tracts of sufficient size to justify expensive exploratory drilling. Our statements are to be understood as being predicated in part upon the inferences mentioned.
In the case of the El Claro Oil Company, in connection with purchases of mineral rights, investors had executed transfers of the same in order that they could be leased under community oil leases. By reason of this fact the transfers were held to be securities. In the instant case no such transfers or leases were made, but from the nature of the transactions and the surrounding circumstances it is clear that such leases were contemplated and in a practical sense that they would become necessary in order to accomplish the exploration and development of the land for oil. The lands were located in unproven territory. There was a well producing gas which was under the control of Stella, who was financing the drilling of another well in the same locality. The cost of the latter well, if it should be drilled without mechanical trouble, was estimated by Stella at $75,000. There is no pretense that any of the investors would ever be able to drill oil wells themselves or that they had any intention of doing so. In a letter to the real estate commissioner dated June 21, 1937, Stella said in part, referring to the well he was drilling: "I should complete it within a short period of time providing I am able to meet the financial requirements for the carrying on of the uninterrupted drilling. I find however that since the permit was granted my volume of sales has been very disappointing due to the fact that I am compelled to sell two and a half acre drill sites and must require down payments of not less than $25 and $25 monthly payments thereafter. I know of a good many worthy people who hold fairly good positions and have been steadily employed for many years and have been steadily employed by the same people for whom they are working who are really desirous of acquiring one of these drill sites, but the payment of $25 per month is more than they can possibly stand, and therefore they have to forego the opportunity of purchasing same." The letter was written as a request that the sale of drill sites of one acre each without change of existing prices might be authorized. Of course each owner of a drill site would have the right to drill a well on it or to lease it separately for the drilling of a well (assuming that he also held the necessary surface rights), but the scheme of the promotion cannot be given a pattern drawn on this fantastic possibility. In his testimony defendant Stella frequently referred to sales and leases of small tracts of land in proven oil fields as justifying the prices he was receiving from investors in his own promotional schemes, and the inference is inescapable that these same arguments must have been a part of the stock in trade of the defendants and their salesmen. In theory an oil field might be developed of such great value that each investor would be able to lease each drill site he owned separately and without joining with other owners in a community lease. It is a matter of common knowledge, however, that exploration for new oil fields is carried on under leases embracing large areas and that it is only in proven oil fields which have first been developed by those holding large acreage that further development is carried on under leases of smaller tracts, that the instances are yet more rare in which the development goes into closely subdivided areas under community leases, and that in yet rarer instances small parcels in well proven fields become the subject of independent development. The trial judge was fully justified in believing that the defendants in this case and the investors to whom they were selling the so-called mineral rights had in mind that eventually oil development could only be extended to the lands of the investors through the meduim of community leases and that the scheme was in its essentials no different from the one denounced in the El Claro case, the only difference in form being that under the latter scheme community leases were executed in connection with the original sale of mineral rights, whereas under the scheme involved in the instant case the actual execution of community leases, while essential to the exploration of the lands of the investors, was deferred to some indefinite future time when conditions might warrant the leasing of the land by oil-producing companies financially able to conduct oil development in a normal and businesslike manner. Undoubtedly the trial court was justified in concluding that the sale of the mineral rights involved would be valueless in the hands of the investors and in a practical sense incapable of development except in the event and by means of operations conducted by others in which the several investors, as lessors, would be given the right to share ratably in landowners’ royalties.
The case furnishes only another example of the almost infinite number of ingenious devices conjured up by wily promoters designed to give them freedom to operate without regulation by law through the Department of Corporations. Such schemes, however, inexorably fall within the ban of the Corporate Securities Act wherever their essential purposes, regardless of the mere forms of procedure employed, lead investors into enterprises where the earnings and profits of business or speculative ventures must come through the management, control, and operations of others and which, regardless of form, have the characteristics of operations by corporations, joint stock companies, trusts, and similar business structures. The reasoning in People v. Jackson, 1937, 24 Cal.App.2d 182, 74 P.2d 1085, and the cases therein cited has direct application to the facts of the instant case and fully supports the conclusion of the trial court that the mineral deeds herein involved were "securities." The finding of the trial court that the stocks purchased as alleged in the tenth, eleventh and twelfth causes of action were securities and were illegally sold to plaintiff without a permit is, I believe, likewise supported by the evidence. The stock stood in the name of defendant Dallas M. Steele and was sold by her to plaintiff. All of the sums received by Mrs. Steele were immediately paid over to defendant Stella. The latter was financing the drilling of oil wells on lands and under leases in which the three corporations, Fortuna Holding Corporation, Summit Holding Corporation, and KBP Holding Corporation, were interested and in the returns from which they would share in the event of successful development. He was using the money derived from the sale of mineral rights to finance these oil drilling operations. As stated in the opinion of Mr. Justice Wood, Stella had acquired all of the stock of these three corporations, which stock appears to have been issued under permits of the Department of Corporations. It may be conceded that this personally owned stock could lawfully have been sold by Stella. In this connection no consideration will be given to any questions which may arise from the fact that while he was the sole stockholder Stella caused the capital structure of one of the corporations to be altered so as to provide for a greater number of shares of capital stock and that no permit was obtained for the sale of those shares. In some fashion or other, Mrs. Steele acquired from Stella the stock which she later sold to plaintiff. The sums which plaintiff paid therefor, when they were paid by Mrs. Steele to Stella, were credited by the latter upon alleged purchases by Mrs. Steele from Stella of the same type of mineral rights as those sold to plaintiff. Both Mrs. Steele and Stella testified that Mrs. Steele owned the stock and that she had acquired some of it for cash consideration, some of it in exchange for interests she held in the El Claro Oil Company, and other shares as bonuses in connection with the promotional enterprises in which defendants were engaged. The inquiry into the transactions between Mrs. Steele and Stella relating to her alleged purchases of mineral rights and her acquisition of the stocks was exhaustive and, as an effort to learn the truth of the situation, was far from fruitful. The testimony of both defendants on these subjects was contradictory, evasive in the extreme, and disclosed an intention to conceal important facts. Mrs. Steele was utterly unable to tell when she had purchased mineral rights, how many parcels she had purchased, what acreage was embraced in the purchases, how much she had ever owned at any one time, how much she owned at the time of trial, how much she ever agreed to pay Stella for the conveyances, how much she had paid him, or how much she owed him, if anything. Defendant Stella produced some cards which purported to record purchases of mineral rights by Mrs. Steele, but the latter had no knowledge of these records and no records of her own. Equally unsatisfactory was the testimony of these witnesses with reference to the shares of stock supposedly acquired by Mrs. Steele, portions of which were later sold to plaintiff. No records of these transactions were kept by either party, there was no tangible or satisfactory evidence that Mrs. Steele had acquired any of the stock in bona fide business transactions, and the trial court was fully justified in concluding that the shares standing in the name of Mrs. Steele were held for defendant Stella and were to be disposed of for his benefit. It was reasonably to be inferred that the stock was actually sold to plaintiff for the benefit of defendant Stella and that the alleged sales of mineral rights by the latter to Mrs. Steele were but a device set up to justify the payment to Stella of the proceeds from the stock sales. The three corporations whose stock was sold to plaintiff held mineral rights or leases or interests in production and part of the stock of some of the corporations was owned by the other corporations. It was largely to their use and for their benefit that defendant Stella was financing the drilling of the several oil wells. The trial court was justified in drawing an inference that the stock transactions between defendants Stella and Steele on the one side and plaintiff on the other were not bona fide dealings in personally owned stock but were dispositions of the stock for the use and benefit of the corporations themselves, which benefit was received through the use of the proceeds from stock sales to finance the oil drilling operations on behalf or in the interests of the corporations. The plan of the defendants in the larger view was to carry on oil development to attract purchasers of the mineral rights, and to use the money received on sales of mineral rights to carry on the development work and for the purchase of additional mineral rights. By devious means defendants sought to accomplish the same purposes that would have been accomplished in a lawful and legitimate manner by the authorized sale of stock of a corporation holding title to the mineral rights and engaged in developing them with the proceeds of stock sold to investors and for the benefit of stockholders. In other words, defendants had a lawful purpose, which they chose for reasons which we do not know and which are unimportant, to accomplish in an illegal manner. If perchance the conclusions of the trial court, with which we believe we must agree, were reached without complete knowledge of the business transactions between defendants Steele and Stella, the responsibility must rest upon those defendants. Their methods of operations, intricate, devious, and fraught with uncertainty as they were, coupled with the obvious unwillingness of the two defendants to disclose the entire truth, presented to the trial court questions of great difficulty and, unfortunately, left to inference important questions of fact which perhaps could have been decided with more assurance and certainty had the court received the benefit of a greater measure of cooperation from the defendants. An extensive consideration of the record discloses no reason for disturbance of the findings or conclusions of the trial court.
On the questions of liability of the several defendants I agree with the conclusions stated in the opinion of Mr. Justice WOOD.
SCHAUER, Presiding Justice (concurring in the judgment).
I concur in the judgment of affirmance and in the conclusion reached by Mr. Justice SHINN that the substantially identical evidence adduced both on the motion to discharge the attachment and at the trial was sufficient to support all essential findings. I do not hold that the doctrine of res judicata has no applicability here but since the judgment must be sustained regardless of such doctrine it seems preferable to dispose of this appeal on consideration of its claimed merits rather than by application of a technical proposition of law. I therefore express no opinion as to the applicability of such doctrine and except as otherwise herein indicated concur in the opinion of Mr. Justice SHINN.