Opinion
For Opinion on Hearing see 91 Cal.Rptr. 605 478 P.2d 37.
Opinion on pages 322-331 omitted.
HEARING GRANTED
See 3 Cal.3d 667 for later opinion.
[86 Cal.Rptr. 599]Hansen & Dolle, Victor R. Hansen, Los Angeles, for appellants.
Beardsley, Hufstedler & Kemble, Charles E. Beardsley, Harry L. Hupp, Los Angeles, for respondent.
FLEMING, Associate Justice.
The question presented for decision is this: does the fact that stock is transferred from a shareholder in a corporation to a broker for services rendered the corporation, in violation of a permit of the Commissioner of Corporations requiring prior approval of such transfer and limiting the brokerage commission to a lesser number of shares, give the transferor shareholder the right to recoup the shares or their equivalent in value from the transferee broker after the corporation has been dissolved, the shares cancelled, and a liquidating dividend paid on the shares, where the corporation's creditors and other stockholders will not be affected in any way by the result reached? The trial court decided that it did and imposed a constructive trust in favor of the transferor's estate on the proceeds of the shares in the hands of the broker and its transferees.
The facts are as follows: Kenneth B. Cannon owned a business he wanted to expand. On 18 January 1950 he executed a letter agreement with Quincy Cass Associates (QCA), a California corporation, in which Cannon agreed to incorporate his business as Eastman Pacific Company (Eastman) in return for 30,000 shares of common stock and give QCA 5,000 shares if and when QCA raised $100,000 in additional capital. Thereafter, on 26 January 1950 Eastman was incorporated, and on 2 June 1950 the Commissioner of Corporations issued a permit authorizing the issuance of 30,000 shares of stock to Cannon for the transfer of his business to Eastman.
On 10 July 1950 Eastman filed an application with the Commissioner of Corporations for permission to issue preferred stock and to issue common stock in exchange for that already issued to Cannon. On 3 October the Commissioner issued a permit authorizing Eastman to issue 85,820 shares of common stock to Cannon and 'To sell and issue an aggregate of not to exceed 12,000 of its Participating Preferred shares, at par, for cash, lawful money of the United States, for the uses and purposes recited in its application, subject to an aggregate selling expense of not to exceed 20% of the amount received in cash on account of the selling price thereof, payable in cash (or partly in stock as provided in paragraph 3 hereof), including commissions payable only to duly licensed brokers or agents.
'3. Whenever and as often as 4 shares of Participating Preferred stock may be sold and issued under paragraph 2 hereof, and a liability to pay such 20% selling commission has been incurred, to sell and issue 1 of its Common shares in cancellation of one-fourth of such liability so incurred, not to exceed an aggregate of 3,000 Common shares.' The permit further provided: 'That none of the shares * * * shall be sold or issued unless and until the applicant first shall have selected an escrow holder and said escrow holder shall [86 Cal.Rptr. 600]have been first approved in writing by the Commissioner of Corporations; that, when issued, all certificates evidencing any of said shares shall be forthwith deposited with said escrow holder, to be held as an escrow pending the further written order of the said Commissioner; that the receipt of said escrow holder for said certificates shall be filed with said Commissioner; and that the owner or persons entitled to said shares shall not consummate a sale or transfer of said shares, or any interest therein, or receive any consideration therefor, until the written consent of said Commissioner shall have been obtained so to do.'
Between 30 October 1950 and 14 November 1950 Eastman issued 85,820 shares of common stock to Cannon, in the form of a series of certificates. One of the certificates, No. 34, was for 11,000 shares. All the certificates were deposited in escrow.
QCA sold the 12,000 shares of Eastman participating preferred stock authorized by the 3 October 1950 permit and was paid the authorized commission, one-fourth of it with 3,000 shares of common stock and the balance in cash.
On 20 November 1950 Cannon sent a letter to QCA which provided in part: 'The Eastman Pacific Company has been incorporated. I have assigned to the company all of my various enterprises and received in return 30,000 shares of stock. Upon receipt of these shares, I have certificate No. 4 issued in the amount of 5000 shares, holding them to be delivered to you under the terms of that Agreement.
'After the issuance of the above mentioned 30,000 shares, the officers of the company, including myself, agreed with you that our original undertaking should be modified and a permit requested from the Corporation Department allowing the company to issue 85,820 shares to me in return for cancellation of the originally issued 30,000 shares and that instead of 5000 shares to be received by you under conditions of the contract, you should receive 11,000 shares out of the 85,820 shares issued.
'A permit was obtained from the Corporation Department allowing the issuance of these 85,820 shares to me with the restriction, however, that they be placed in escrow pending further instructions of the Corporation Department. I have caused these shares to be issued, including one certificate No. 34 for 11,000 shares.
'By this writing, I acknowledge the fulfillment by you of all the terms of the contract dated January 18, 1950, with modifications described in this writing, including completion of financing of the Eastman Pacific Company and the raising of $100,000 through the sale of preferred stock and acknowledge receipt of full consideration and undertake to deliver to you certificate No. ---- for 11,000 shares now held in escrow when and as permission to transfer the stock is given by the Corporation Department.
'During the period this certificate, evidencing these shares, is held in escrow and until they are delivered to you, I hereby grant to you a right to receive all dividends paid on these 11,000 shares and my proxy to vote them at any and all times and to exercise all the prerogatives of ownership, subject only to the order of the Corporation Department heretofore mentioned.'
On 14 January 1952 QCA declared a stock dividend to its shareholders consisting of the 11,000 shares of Eastman stock represented by Certificate No. 34, still in escrow in Cannon's name. This stock dividend was based on Cannon's letter of 20 November 1950, and the delivery of Eastman stock to QCA's stockholders was made subject to the consent of the Commissioner of Corporations. The shareholders of QCA entitled to receive this dividend of Eastman stock, or their successors in interest, are the defendants in the present action.
On 13 August 1962 Cannon died, and plaintiff Clyde R. Burr was appointed executor of his estate. Pending this appeal [86 Cal.Rptr. 601]Burr died and Southern California First National Bank was substituted as plaintiff in this action. On 15 April 1963 defendant Quincy Cass and his associate, defendant Frank Foellmer, were elected President and Secretary respectively of Eastman, and Frank Foellmer was elected to the Board of Directors of Eastman. Quincy Cass and another of his associates, defendant Ned Leavitt, were already members of Eastman's board. Prior to his death, Cannon had been looking for a buyer for Eastman and had been in touch with Anchor Coupling Company. After Cannon's death, a plan to liquidate Eastman was approved by the Commissioner of Corporations pursuant to which the assets of Eastman would be sold to Anchor Coupling for 25,000 of the latter's shares and cash.
In August 1963 Quincy Cass, as president of Eastman, applied to the Commissioner of Corporations for permission to cancel the escrow provisions on the 85,820 shares of Eastman common stock in order that the shares might be distributed to their owners. The Commissioner issued an order permitting the release of the shares from escrow upon condition that the shares be immediately cancelled. Permission was obtained by Frank Foellmer, as an officer of Eastman, to delay cancellation so that the Eastman liquidation dividend could be distributed to the proper recipients. On 20 September 1963 Quincy Cass and Frank Foellmer, as officers of Eastman, caused Certificate No. 34 representing 11,000 shares to be cancelled, and, in its place, Certificates Nos. 109 to 114 (representing 11,000 shares) to be issued to the shareholders of QCA, the defendants.
By 4 October 1963 Eastman's creditors and its preferred stockholders had been paid off, and 25,000 Anchor Coupling shares had been issued to Eastman. At that time Eastman's assets consisted of Anchor Coupling shares and cash. Of these assets, 1,430 shares of Anchor Coupling and $1,054 in cash constituted the liquidating dividend for the 11,000 shares represented by Certificates Nos. 109 to 114, and these assets were distributed to the holders of those certificates.
On 9 October 1963 a final Certificate of Dissolution was filed by Eastman. The 11,000 shares of Eastman represented first by Certificate No. 34, later by Certificates Nos. 109 to 114, were not inventoried as part of Cannon's estate. Neither QCA nor any of its shareholders (the defendants) ever filed a claim with Cannon's estate, and the time for filing claims has expired.
On 25 July 1966 plaintiff filed the present action seeking a constructive trust on the proceeds of Certificate No. 34 (or Certificates Nos. 109 to 114) in the hands of defendants, an accounting, damages for conversion, and declaratory relief. The trial court found:
'3. The agreement of November 20, 1950, of Kenneth B. Cannon to deliver Certificate No. 34 and the shares said certificate represented of Eastman Pacific Co., to Quincy Cass Associates, was a promise to pay a sales commission to said Quincy Cass Associates for its services as a securities broker in selling the preferred stock of Eastman Pacific.
'4. Plaintiff is not estopped to assert his claims herein, in that neither plaintiff nor Kenneth B. Cannon by their acts or conduct misled defendants, nor did defendants rely on the acts or conduct of plaintiff or Kenneth B. Cannon, nor were defendants ignorant or uninformed as to any relevant facts, nor were plaintiff and Kenneth B. Cannon fully informed of all the facts or law at any relevant time, nor did plaintiff or Kenneth B. Cannon do any acts or assert any facts upon which they intended defendants to rely to their detriment.
'5. Neither plaintiff nor Kenneth B. Cannon was in pari delicto or equal fault with defendants or any of them.
'6. The letter agreement of November 20, 1950, violated the conditions of the permit of October 3, 1950, in that:
'(a) The purported transfer of Certificate No. 34 and the shares it represented [86 Cal.Rptr. 602]to Quincy Cass Associates was made while said share certificate was held in escrow, and no order of the Commissioner of Corporations was obtained either before or after said date permitting the transfer;
'(b) The consideration for the said purported transfer passed without an order of the Commissioner of Corporations; and
'(c) The consideration for said transfer constituted a selling commission in excess of that allowed by said permit.
'The purported transfer of said Certificate No. 34 and the shares it represented was a nullity.
'7. The transfer by Quincy Cass Associates on January 14, 1952, of interests in and to share of stock represented by Certificate No. 34 to various defendants herein or their predecessors created no interest in said defendants or their predecessors, in that Quincy Cass Associates had no interest in said shares and the purported transfer of said shares to the various defendants or to their predecessors and subsequently to defendants, was in violation of the conditions of the permit of October 3, 1950.
'8. The issuance of Certificates Nos. 109 through 114, respectively, of Eastman Pacific Co., created no interest in the persons to whom said certificates purported to be issued, in that there was no valid transfer to said persons or their predecessors of the shares represented by Certificate No. 34, and in that there was no permit from the Commissioner of Corporations for the issuance of said shares, and no order permitting the transfer of the shares represented by Certificate No. 34.
'9. The defendants * * * acquired their respective portions of the liquidating dividend of Eastman Pacific Co. attributable to Certificate No. 34 of said company as trustees for plaintiff.
'10. The defendants Quincy Cass and Frank Foellmer, for themselves and as agents of Quincy Cass Associates, used their position as officers and directors of Eastman Pacific Co. to cause the issuance of Certificates 109 through 114, and to cause the issuance of the liquidating dividend to the defendants as hereinabove set forth.'
The court concluded: 'The purported transfer of Certificate No. 34 of Eastman Pacific Co., and its proceeds to defendant Quincy Cass Associates, and thence by Quincy Cass Associates to the remaining defendant, was illegal, void, and a nullity, and created no interest in and to the shares represented by said Certificate No. 34 in the defendants or any of them.
'2. The defendants hold the proceeds of Certificate No. 34, plus all dividends, income, profits, accretions and proceeds therefrom, in trust for the plaintiff, and should account to the court for the same.
'3. The plaintiff and Kenneth B. Cannon are not estopped to obtain relief herein.
'4. The plaintiff and Kenneth B. Cannon are not in pari delicto or equal fault with defendants or any of them.
'5. The defendants Quincy Cass, Frank Foellmer, and Quincy Cass Associates converted Certificate No. 34 and its proceeds and should respond to the plaintiff in damages therefor.'
We think the trial court erred in determining that Cannon's estate had a claim superior to defendants' in law or equity for the 11,000 Eastman shares. Undoubtedly, the transfer of the shares was effected without permission of the Commissioner of Corporations and in violation of the conditions of his permit of 30 October 1950. The transfer was therefore void. (Corp.Code, § 26100, as then in effect.) But the shareholders of QCA, which company had performed services for Eastman and had been promised 11,000 shares of Eastman stock by Cannon, obtained the proceeds of those shares and were in possession of them at the time of this suit. Since the purpose of the Corporate Securities Law is to protect the public and the purchasers of securities and not the seller (Corp.Code, § 25508, in effect until 1968; [86 Cal.Rptr. 603]Rankin v. Bankey, 196 Cal.App.2d 554, 560, 16 Cal.Rptr. 721); since no stock was transferred to QCA's stockholders until after all Eastman's creditors and preferred stockholders had been fully paid; since Cannon's estate was apparently the only common stockholder (besides QCA, which held 3,000 shares); since Eastman was in the process of dissolution, thus precluding the possibility of any new issuance of stock to the public; and since the Eastman shares delivered to QCA's stockholders were not to be transferred but cancelled on payment of the liquidations dividend, no reason existed why Eastman could not pay the liquidation dividend on the shares to QCA (or its shareholders) rather than to Cannon's estate. In such situation, where only the seller and the purchaser of shares transferred without a permit have an interest in the ownership of the stock and in the adequacy of the consideration paid therefor, the corporation should treat the purchaser as the equitable owner of the shares and pay him the liquidation dividend. (Domestic & Foreign Pet. Co., Ltd. v. Long, 4 Cal.2d 547, 558-560, 51 P.2d 73; Western Oil and Refining Co. v. Venago Oil Corp., 218 Cal. 733, 743-745, 24 P.2d 971; Randall v. California L. B. Syndicate, 217 Cal. 594, 597-598, 20 P.2d 331; Eberhard v. Pacific Southwest L & M Corp., 215 Cal. 226, 9 P.2d 302; Rankin v. Bankey, 196 Cal.App.2d 554, 16 Cal.Rptr. 721.)
Defendants and their predecessors in interest were not wrongdoers for several reasons. First, what happened in effect was that Cannon agreed to give QCA more compensation (11,000 shares) than the Commissioner of Corporations would allow (3,000 shares) for the same consideration which was contemplated by the Commissioner's permit--i.e., the raising of capital by selling the preferred stock. QCA committed no wrong in performing that consideration.
Second, Cannon and QCA had agreed that the 11,000 shares of Eastman stock would be transferred to QCA only when permission from the Commissioner of Corporations had been obtained. No wrong was committed by QCA in entering into said agreement. (Indeed, the 'agreement' was in fact a unilateral contract accepted by QCA's performance of the consideration.)
Third, QCA, upon dissolution of Eastman and payment of all creditors and preferred stockholders, was entitled to the 11,000 Eastman shares; therefore, no wrong was committed in transferring the shares to QCA. Since Cannon himself, who must be regarded as the seller of the shares, would not have been entitled to affirmative relief against those who merely carried out the terms of his agreement, his estate should similarly be barred. (Cf. Blackburn v. Union Oil Co., 90 Cal.App.2d 775, 777-778, 204 P.2d 69.)
Finally, the transfer of Certificates Nos. 109 to 114 to QCA, after the dissolution of Eastman and after distribution of assets to the creditors and preferred stockholders, subject to the immediate cancellation of the certificates and payment of the liquidation dividend, was a transfer of securities in form only and of no concern to the Commissioner of Corporations, absent fraud or unfairness in Cannon's dealings with QCA. In essence, what the transfer amounted to was a transfer of Cannon's own property to another in return for services bargained for and rendered to the corporation as bargained. The transfer of Cannon's shares to QCA and payment of the liquidation dividend thereon must be regarded as payment of a debt owed by Cannon to a creditor. The rights of this creditor-transferee to corporate assets were subordinate to the general creditors and preferred stockholders, but superior to that of the debtor and principal holder of the common stock, Cannon. In effect, once the general creditors and the preferred stockholders had been paid off, the only remaining interest in the affairs of Eastman were those of Cannon and QCA. Performance of the bargain between themselves was primarily a matter of contract [86 Cal.Rptr. 604]and only incidentally related to the issuance of securities.
The judgment is reversed.
ROTH, P. J., and HERNDON, J., concur.
Hearing granted; WRIGHT, C. J., did not participate.