Vallee; SHINN; PARKER WOOD; VALLEE

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

Aug. 22, 1955.
Rehearing Denied Sept. 21, 1955.
Hearing Granted Oct. 19, 1955. ^*

Vallee, J., dissented.

William J. Currer, Jr., Los Angeles, and Donald E. Paterson, Jr., Granada Hills, for appellants.

Trihey & Mirich, San Pedro, for respondents.

SHINN, Presiding Justice.

Plaintiffs E. E. Wells and John M. Reynolds agreed to sell to H. Thomas Comstock, who agreed to buy, 440 shares of the capital stock of Finance Control, a California corporation, for the sum of $11,998.80, payable $2,000 down and the balance within 15 days. Grace E. Mendizza entered into a written agreement with the sellers that if Comstock defaulted in his contract to pay plaintiffs she would well and truly pay any sums that might remain unpaid. The $2,000 payment was made. Defendants refused to make any further payment and plaintiffs brought this action against Comstock and Mendizza for the recovery of $9,998.80 and attorney's fees. Defendants answered denying that plaintiffs were the owners of 440 shares of such stock and alleging that defendant Comstock was the owner of 380 shares. It was alleged that at all times plaintiff Reynolds was president and Wells treasurer of the corporation; that plaintiffs procured a permit from the Division of Corporations authorizing the issuance by the corporation to Reynolds, Robert E. Wood, D. W. McCormick and E. E. Wells or any or all of them not to exceed 500 shares for the price of $10 per share cash so as to net the corporation the full amount of the selling price; that 380 shares of said stock were issued without cash or any other consideration given to the corporation therefor. Comstock filed a cross-complaint for money had and received in the sum of $363.80; plaintiffs answered the cross-complaint. Judgment was in favor of plaintiffs against both defendants for the amount prayed for, namely, $9,998.80 and $459.95 as attorneys fees. Defendants appeal.

The court found that plaintiffs were the owners of 440 shares of stock, 405 shares belonging to Reynolds and 35 shares to Wells; that said stock was issued to them without the payment of cash or other consideration to the corporation but 'that the defendant, H. Thomas Comstock, participated in and induced the issuance of said certificates Nos. 3, 6, and 9, evidencing 380 shares of the capital stock of said Finance Control, a corporation, for a consideration other than $10 per share cash, and that at the time he participated in the issuance of said shares and induced the issuance thereof he knew that the issuance of said stock for a consideration other than $10 per share cash was contrary to and in violation of the permit issued by the Corporation Commissioner.' It was found that Comstock was estopped from asserting that said certificates 3, 6 and 9 are void or that they were issued in violation of the provisions of the Corporate Securities Act or said permit.

On behalf of Comstock it is urged (1) that there was no evidence to justify the finding that he knew that the 380 shares were issued other than for a cash consideration or contrary to the conditions of the permit, (2) that even though the parties were in pari delicto in causing the stock to be issued the contract of sale was itself illegal and hence unenforceable, and (3) that there was a breach of warranty of title and a total failure of consideration for the agreement in that plaintiffs had no title to the stock and that it was without value.

The contention that there was no evidence to justify the finding that Comstock knew that the stock was issued contrary to the conditions of the permit could properly be disposed of in a summary manner. The briefs of the defendants do not purport to set forth any of the evidence pertaining to that issue. We stated in Goldring v. Goldring, 94 Cal.App.2d 643, 645, 211 P.2d 342, 343: 'It is incumbent upon the appellant to state fully, with transcript references, the evidence which is claimed to be insufficient to support the findings. * * * we do now give notice that henceforth it will be the practice of this court to disregard claims of insufficiency of the evidence even though that be the only ground of appeal, where the appellant has failed to make a satisfactory statement in the opening brief, or a supplement thereto, of the evidence claimed to be insufficient, with transcript references. Counsel who ignore the rule may expect affirmance of the judgment or order appealed from in proper cases.' Of course, where there is no evidence whatever pertaining to a particular fact found, a statement to that effect is sufficient, but, for reasons of our own, we shall develop that this is not such a case.

There was evidence that Comstock was general manager of the corporation; his duties were the raising of money for the corporation and he was very active in the management of its affairs. Comstock testified that he gave Reynolds $150 with which to purchase 15 shares of stock about December 11, 1952; that about March 20, 1953, he gave Reynolds $100 with which to purchase 10 shares of stock and that he gave Mrs. Wells $150 with which to purchase 15 shares of stock. He testified that he arranged for the corporation to borrow $3,800 from his father-in-law, one Cherico, for which the corporation gave Cherico a note in that amount, which it paid in February 1953. The corporate books were falsified to show that the $3,800 represented the price paid to the corporation for 380 shares at $10 per share. The answer of the two defendants alleged that Comstock was the owner of the 380 shares. Mr. Reynolds testified that he paid nothing for any of the 380 shares. Comstock testified that he knew of the issuance of the 380 shares to Reynolds at the time they were issued and that he asked Reynolds if he (Reynolds) wanted to purchase the stock for him (Comstock). He (Comstock) paid nothing for the issuance of any of the stock except $400 as consideration to the corporation for the 40 shares which were issued to Reynolds and Mrs. Wells. He also testified that he knew that a permit was being applied for which would authorize the sale of stock for cash at $10 per share and that a permit was issued. It is clear from the evidence that he not only participated in the issuance of the 380 shares but that he initiated the scheme under which they were issued and in which it was pretended that the $3,800 borrowed from Cherico by the corporation was the consideration for the stock. The answer of the defendants alleged that these shares were issued without any consideration whatever. Although Comstock testified that he had never seen the permit the only material question was whether he knew that the stock was to be sold for $10 per share. In view of his transactions at that price and his knowledge that the application was for the sale of stock at $10 per share, there clearly is no semblance of merit in the claim that he did not know the price at which stock could be sold. Not only was there sufficient evidence to support the finding that he had such knowledge but we do not see how the court could reasonably have made a contrary finding.

The findings in question have firm support in the evidence and they establish that plaintiffs and Comstock were equally at fault in their wrongful conduct. Therefore the rules with respect to parties in pari delicto and the rule that one may not take advantage of his own wrong have application.

There is another fact which we must recognize, namely, that it was not established that the issuance of the stock and the subsequent contract of sale were a part of a single transaction or scheme. The stock was issued in December 1952 and March 1953; the contract was entered into June 19, 1953. Defendants did not plead nor offer evidence to prove and the court did not find that the two transactions were interdependent or related.

The foregoing facts require the consideration of two principles of law. The first is found in Restatement, Contracts, section 597, which reads: 'A bargain collaterally and remotely connected with an illegal purpose or act is not rendered illegal thereby if proof of the bargain can be made without relying upon the illegal transaction.' There is an exception to this rule which is recognized in the cases of contracts for the sale of stock which has been issued illegally in that the same was not authorized by permit or the issuance was contrary to the terms of the authorization. In such cases a purchaser of the stock, if innocent of any wrong, is not bound by his contract and may recover any sums paid on account of the purchase. But it is the fact that he was not a participant in the wrong which enables him to go behind his own transaction to prove the void character of the stock. Eberhard v. Pacific Southwest L. & M. Corp., 215 Cal. 226, 9 P.2d 302; Castle v. Acme Ice Cream Co., 101 Cal.App. 94, 281 P. 396; Bliss v. California Coop. Prod., 23 Cal.App.2d 245, 72 P.2d 885. Defendants seek to bring themselves within this exception but they are barred in this effort by the finding that Comstock was in pari delicto with plaintiffs. Where the parties are equally at fault the rule and not the exception applies. Domenigoni v. Imperial Live Stock etc. Co., 189 Cal. 467, 209 P. 36; Miller v. California Roofing Co., 55 Cal.App.2d 136, 130 P.2d 740.

The second principle is that no one can take advantage of his own wrong, § 3517, Civ.Code. The maxim stated in the code section has been applied in many instances. Bliss v. California Coop. Prod., supra, 23 Cal.App.2d 245, 72 P.2d 885; Meyer & Holler v. Ramona Village, 5 Cal.App.2d 679, 43 P.2d 823, 44 P.2d 643; Castle v. Acme Ice Cream Co., supra, 101 Cal.App. 94, 281 P. 396; § 3517, West's Annotated Civil Code and notes of decisions thereunder. The defense of illegality introduced into the case by defendants was clearly an attempt to take advantage of Comstock's wrong. Plaintiffs made out a good case against Comstock by proof of the contract of sale and Comstock's default thereunder, but the circumstances under which they acquired the stock were not any part of their case. We must assume that the court regarded that as a separate and completed transaction. There was no evidence that at the time the stock was issued there was any agreement that Comstock would buy the 380 shares from Reynolds and Wells. When defendants introduced the issue of the unlawful issuance of the stock it was their purpose to prove that the plaintiffs alone were the wrongdoers in that transaction, but they thereby opened the door for proof that Comstock also was a participant in the wrong. When it was established that he was equally guilty of the illegal acts the defense of illegality was rendered unavailable to him. To have sustained that defense would have allowed him to take advantage of his own wrong. A party to a contract lawful on its face will not be permitted to escape the duty of performance upon the ground of the commission of illegal acts in which he was a wilful participant. The contract here involved was not of itself illegal. Granting the plaintiffs the relief they sought was not giving the court's aid to the accomplishment of an illegal purpose.

The present case must not be confused with attempts to enforce contracts which are themselves illegal. Here the attempt was to escape liability by proof of illegal, antecedent, unrelated transactions in which Comstock was a guilty participant. There are numerous principles of law in which defendants seek refuge and which would avail them if Comstock had been innocent of wrong in the issuance of the stock, or if the contract upon which suit was brought was, itself, illegal. As an innocent party he could have proved at least as against the guilty Reynolds that the stock was illegally issued and void. Or if the contract sued on had been illegal in itself the law would not have permitted its enforcement. The parties to the illegal contract would have been left where the court found them. Domenigoni v. Imperial Live Stock etc. Co., supra, 189 Cal. 467, 209 P. 36; Duntley v. Kagarise, 10 Cal.App.2d 394, 52 P.2d 560. But the claim of illegality could not have validity as a defense when it was shown that Comstock had actively participated in the illegal acts upon which the defense was founded. The court properly held defendants to be estopped to maintain that defense. This, of course, was not applying the doctrine of estoppel to give validity to an illegal contract. No such question was involved.

The defenses of breach of warranty of title and want of consideration were not pleaded by defendants except to the extent that they were encompassed within the defense of illegality. The validity of these defenses was destroyed by the finding that Comstock was a party to the illegal issuance of the stock. Through the application of the doctrine of estoppel, the issue of illegality was removed from the case. Moreover, the fact that Comstock knew exactly what he was getting under his purchase contract defeats the claims of breach of warranty and want of consideration. Harvey v. Dale, 96 Cal. 160, 31 P. 14; Sutro v. Rhodes, 92 Cal. 117, 28 P. 98; Giovannoni v. Bartmann, 59 Cal.App. 651, 661, 211 P. 844; Christy v. Sullivan, 50 Cal. 337.

It is contended further on behalf of defendant Mendizza that the doctrine of estoppel was improperly applied as against her. The obvious answer is that it has not been applied against her but as against Comstock. Her liability was commensurate with that of Comstock, § 2808, Civ.Code. It is the general rule that a guarantor may not avoid his obligation on grounds that are unavailable to his principal. Grace v. Croninger, 56 Cal.App. 659, 666, 206 P. 130; Stavnow v. Winfree, 99 Cal.App. 566, 278 P. 905; Union State Bank v. American Surety Co., 324 Mo. 438, 23 S.W.2d 1038, 1044; Stewart v. Bramhall, 74 N.Y. 85; Salvin v. Myles Realty Co., 227 N.Y. 51, 124 N.E. 94, 6 A.L.R. 58; Krekel v. Thomasma, 255 Mich. 283, 238 N.W. 255, 81 A.L.R. 786; Ebner v. West Hollywood T. Co., 45 Cal.App. 186, 187 P. 114. The promise of Mendizza was that she would pay if Comstock defaulted in the obligation. There was no other condition expressed in her agreement. No facts were alleged or proved which would have precluded enforcement of the contract of guarantee by plaintiffs. Defendant Mendizza established no defense to the action.

The court made no findings with respect to the allegations of the cross-complaint but no point is made of this omission.

The judgment is affirmed.

PARKER WOOD, J., concurs.

VALLEE, Justice.

I dissent.

Plaintiffs require the aid of a void contract, one contrary to public policy, to establish their case. As officers and directors of the corporation they issued the securities to themselves. They did so in violation of the permit. The securities were void. Corp.Code, § 26100. As a part of the same transaction they entered into a written contract with defendant Comstock to sell the securities to him and he agreed to buy. The contract was void. No title passed. Domenigoni v. Imperial Live Stock etc. Co., 189 Cal. 467, 475, 209 P. 36; First Nat. Bk. of Calexico v. Thompson, 212 Cal. 388, 404, 298 P. 808; Castle v. Acme Ice Cream Co., 101 Cal.App. 94, 99, 281 P. 396; Tatterson v. Kehrlein, 88 Cal.App. 34, 48, 263 P. 285. A contract proscribed by law is against public policy. Tevis v. Blanchard, 122 Cal.App.2d 731, 733, 266 P.2d 85. The fact that the contract to purchase was entered into June 19, 1953, whereas the securities were issued in December 1952 and March 1953, did not give life or validity to the securities which were lifeless and void ab initio.

The majority say 'that it was not established that the issuance of the stock and the subsequent contract of sale were a part of a single transaction or scheme,' and '[t]here was no evidence that at the time the stock was issued there was any agreement that Comstock would buy the 380 shares from Reynolds and Wells,' and '[h]ere the attempt was to escape liability by proof of illegal, antecedent, unrelated transactions in which Comstock was a guilty participant.'

The evidence, without conflict, is directly contrary to these statements. Plaintiff Reynolds, president of the corporation, testified that certificates 3, 6, and 9 for 380 shares, those in question and originally issued to him, were originally issued pursuant to an oral agreement with defendant Comstock; that they had 'a working agreement'; the agreement was entered into some two months prior to the issuance of the stock; the agreement 'was talked about from time to time'; '[a]t that time this 380 shares was held to be divided at a later date'; Comstock said he wanted the stock issued in his (Reynolds') name '[b]ecause he could not get it in his name'; it was discussed on different occasions; the idea of having the stock issued in his (Reynolds') name was Comstock's. Comstock testified that before the certificates were issued he and Reynolds discussed issuing them in Reynolds' name; he asked Reynolds if he wanted to purchase the stock, the entire 380 shares, 'for me' (Comstock); that he 'was not in a position where [he] wanted to have any assets.' In reply to questions by the court Comstock further testified: 'The Court: He was to hold it for you? The Witness: That's right,' 'The Court: You considered he was holding that stock for you? The Witness: That's right.' There was no other evidence on the subject. It cannot be assumed that the trial judge regarded the circumstances under which plaintiffs acquired the stock as a separate and completed transaction, for at the conclusion of the trial he stated: 'That he [defendant Comstock] had some arrangement, the exact details I don't know, under which they [the stock certificates] were issued in the name of the plaintiff, but for his benefit as he so testified directly.'

The uncontradicted and only evidence definitely and positively established that the issuance of the stock and the sale to Comstock were part of a single scheme. The evidence is not susceptible of any other reasonable conclusion. The uncontradicted and only evidence was that at the time the stock was issued it was agreed Comstock would buy the 380 shares from plaintiffs. The stock was first issued in the names of plaintiffs because Comstock did not want any assets in his name at that time. The bargain on which plaintiffs sue was not 'collaterally and remotely connected with an illegal' act, nor was it an unrelated transaction. It was a part of the same transaction and scheme.

Section 609 of the Restatement of Contracts says: 'A bargain that is illegal when formed does not become legal '(a) by reason of a change of fact, except where both parties when the bargain was made neither knew nor had reason to know the facts making it illegal, * * *'.

The rule is not, as stated by the majority, that 'When it was established that he [defendant Comstock] was equally guilty of the illegal acts the defense of illegality was rendered unavailable to him.' On the contrary, the rule is that a court will not be "a handmaid of iniquity of any kind." Domenigoni v. Imperial Live Stock etc. Co., 189 Cal. 467, 475, 209 P. 36, 39. Whenever the illegality appears, whether the evidence comes from one side or the other, the disclosure is fatal to the case. Loving & Evans v. Blick, 33 Cal.2d 603, 607, 204 P.2d 23; Domenigoni v. Imperial Live Stock etc. Co., 189 Cal. 467, 475-476, 209 P. 36; Bank of Orland v. Harlan, 188 Cal. 413, 422, 206 P. 75; Mansfield v. Hyde, 112 Cal.App.2d 133, 138, 245 P.2d 577; Campbell v. Julian Merger Mines, 111 Cal.App. 649, 651, 295 P. 1040. Comment b. on section 597 of the Restatement of Contracts (section 597 is quoted by the majority) says: 'Even though a plaintiff's case can be made out without indicating anything unlawful, it may be shown that the bargain is illegal because of facts not brought out in the plaintiff's case, provided that the facts so offered show a close enough connection with an illegal transaction. * * *'

A court will not aid one party or another to an illegal transaction where they stand in pari delicto, but will leave them just where it finds them. The rule is one of universal application. It applies where the illegal transaction is entered into voluntarily and the turpitude of the parties is mutual. Knowles v. Sandercock, 107 Cal. 629, 642-644, 40 P. 1047; Colby v. Title Ins. & Trust Co., 160 Cal. 632, 638-640, 117 P. 913, 35 L.R.A.,N.S., 813; Hedges v. Frink, 174 Cal. 552, 555, 163 P. 884; Domenigoni v. Imperial Live Stock etc. Co., 189 Cal. 467, 475-476, 209 P. 36; Haruko Takeuchi v. Schmuck, 206 Cal. 782, 787, 276 P. 345; Campbell v. Julian Merger Mines, 111 Cal.App. 649, 651, 295 P. 1040. 'Under a statute under which the parties are in pari delicto and equally within its prohibition, executed transactions stand and executory contracts are invalid; neither party can obtain affirmative relief because of the policy against aiding one who has done a wrong to the public. The law washes its hands of both parties.'

(34 Cal.L.Rev. 697. See cases cited supra and Smith v. California Thorn Cordage, Inc., 129 Cal.App. 93, 99-100, 18 P.2d 393; Miller v. California Roofing Co., 55 Cal.App.2d 136, 141, 130 P.2d 740.

Smith v. California Thorn Cordage, Inc., supra, 129 Cal.App. 93, 18 P.2d 393, quotes 6 Ruling Case Law 825 with approval (p. 100): 'Where the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other. The only equitable remedies which they can obtain are such as are purely defensive.'

and says: Under the foregoing authorities, where the parties to an illegal contract are in pari delicto, the courts will not, on the one hand, undo what has been done, nor on the other, perfect what has been left unfinished.

The facts in Duntley v. Kagarise, 10 Cal.App.2d 394, 52 P.2d 560, were substantially the same as those in the case at hand. Each plaintiff owned stock. Each entered into a contract to sell his stock to the defendant, one of the original incorporators of the corporation, in violation of the permit. The defendant executed notes to the plaintiffs in part payment for the stock. The action was on the notes. The judgments were for the defendant. On review it was held that notes were void, the attempted sale was void, the doctrines of estoppel and ratification had no application, and the judgments were affirmed. See also Gridley v. Tilson, 202 Cal. 748, 752-754, 262 P. 322; Silverthorne v. Percey, 120 Cal.App. 83, 87, 7 P.2d 746. A "promissory note may not depend upon a consideration which is a violation of an express statutory inhibition." Tevis v. Blanchard, supra, 122 Cal.App.2d 731, 738, 266 P.2d 85, 90. The contract of guaranty was an integral part of the transaction, and as such equally infected with illegality. (Id.) Holding the contract effectual on the ground of estoppel is to make it valid.

The Restatement says: 'A party to an illegal bargain can neither recover damages for breach thereof nor, by rescinding the bargain, recover the performance that he has rendered thereunder or its value,' with exceptions not applicable here. (Rest., Contracts, § 598.) Comment a. on section 598 in part says: '[T]he rule of public policy that forbids an action for damages for breach of such an [illegal] agreement is not based on the impropriety of compelling the defendant to pay the damages. That in itself would generally be a desirable thing. When relief is denied it is because the plaintiff is a wrongdoer, and to such a person the law denies relief. Courts do not wish to aid a man who founds his cause of action upon his own immoral or illegal act. If from the plaintiff's own statement or otherwise it appears that the bargain forming the basis of the action is opposed to public policy or transgresses statutory prohibitions, the courts ordinarily give him no assistance. The court's refusal is not for the sake of the defendant, but because it will not aid such a plaintiff.' (Italics added.)

The prohibitions and penalties of the Corporate Securities Act are leveled solely against the seller and not against the buyer, Robbins v. Pacific Eastern Corp., 8 Cal.2d 241, 278, 65 P.2d 42; Tatterson v. Kehrlein, 88 Cal.App. 34, 49, 263 P. 285; they are not meant to benefit the seller. Silva v. Holme, 109 Cal.App.2d 461, 467, 241 P.2d 21. The courts declare securities issued in violation of a permit absolutely void as between the issuer and purchaser (or subpurchaser) whenever it is to the detriment of the purchaser to declare them valid, and will declare them enforceable whenever it is to the benefit of the purchaser. (See 10 So.Cal.L.Rev. 483; 34 Cal.L.Rev. 553.)

The doctrine of estoppel ordinarily may not be invoked to give validity to a contract which is void through violation of the law. The rule has been declared and applied in cases dealing with shares of stock which are void because of nonconformity with a permit. The doctrine of estoppel by conduct and ratification has no application to a contract which is void for the reason that it violates an express mandate of the law or the dictates of public policy. Such a contract has no legal existence for any purpose, and neither action nor inaction of a party to it can validate it, and no conduct on his part can be invoked as an estoppel against asserting its invalidity. Hedges v. Frink, 174 Cal. 552, 555, 163 P. 884; Pollak v. Staunton, 210 Cal. 656, 662-664, 293 P. 26; Walker v. Harbor Realty etc. Corp., 214 Cal. 46, 48, 3 P.2d 557; Mary Pickford Co. v. Bayly Bros., Inc., 12 Cal.2d 501, 524, 86 P.2d 102; Fewel & Dawes, Inc., v. Pratt, 17 Cal.2d 85, 91, 109 P.2d 650; Honn v. Hamer, 81 Cal.App. 276, 277, 253 P. 336; Reno v. American Ice Machine Co., 72 Cal.App. 409, 413, 237 P. 784; Miller v. California Roofing Co., 55 Cal.App.2d 136, 141-143, 130 P.2d 740; Live Oak Cemetery Ass'n v. Adamson, 106 Cal.App., Supp., 783, 790-792, 288 P. 29. Comment a. on section 599 of the Restatement of Contracts says: 'There is no estoppel to plead illegality or to prove facts showing that a plaintiff is a guilty party to an illegal bargain'

The majority say that 'the rules with respect to parties in pari delicto and the rule that one may not take advantage of his own wrong have application.' They do. But the rule with respect to parties in pari delicto is misapplied and the plaintiffs, wrongdoers who are guilty of a criminal offense, Corp.Code, § 26104, are permitted to take advantage of their own wrong. Just how defendant Comstock would be taking advantage of his own wrong by a judgment leaving the parties where they stand is not made clear, nor can it be. And an innocent guarantor is penalized to the enhancement of the guilty plaintiffs. I would reverse.

Rehearing denied; VALLEE, J., dissenting. --------------- * Opinion vacated 297 P.2d 961.