Talcott Land Co. v. Hershiser

195 P. 653, 184 Cal. 748, 1921 Cal. LEXIS 627
CourtCalifornia Supreme Court
DecidedJanuary 27, 1921
DocketS. F. Nos. 8951, 8998.
StatusPublished
Cited by14 cases

This text of 195 P. 653 (Talcott Land Co. v. Hershiser) is published on Counsel Stack Legal Research, covering California Supreme Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Talcott Land Co. v. Hershiser, 195 P. 653, 184 Cal. 748, 1921 Cal. LEXIS 627 (Cal. 1921).

Opinion

WILBUR, J.

This is an action by the plaintiff corporation to recover from the defendants, its former directors, the amount of its entire capital alleged to have been illegally divided among the- stockholders. Plaintiff recovered judgment for the full amount claimed, $122,750, against defendant W. A. Hershiser only, who appeals from the judgment and also from the order taxing costs. Both appeals will be considered together, as the latter appeal involves the costs for levying an attachment, and the ground of objection thereto is that the action is not one on a contract express or implied.

The section of the Civil Code (sec. 309) which prohibits the directors of a corporation from declaring dividends except from surplus profits arising out of the business, and from dividing, withdrawing, or paying to the stockholders, or any of them, any part of the capital stock, authorizes a recovery of the full amount of the capital stock so divided, withdrawn, paid out, or reduced from the directors under whose administration such distribution has occurred. The plaintiff claims that the division, although not made directly, was effected by means of a subterfuge, by which there was substituted for the assets' of the corporation a worthless promissory note of one W. M. Martin for $237,623.55, given ostensibly as the purchase price of the corporate assets. The plaintiff corporation was organized in 1908. The appellant W. A. Hershiser was one of the original incorporators. His *751 father-in-law, Henry F. Greer, was also one of the original incorporators, having sixty-five thousand shares of the capital stock. On January 6, 1916, there were outstanding 122,-750 shares of the capital stock of the plaintiff corporation of the par value of one dollar per share. The appellant had purchased the shares of Henry F. Greer for one hundred thousand dollars, executing in payment therefor his promissory note for the payment of which the shares were pledged. In December, 1912, H. F. Greer died, bequeathing the note in question to his daughter, the wife of the defendant, and to her brother, F. A. Greer, both thereupon becoming directors of the plaintiff corporation. The other directors were M. T. Minney, the appellant W. A. Hershiser, Mr. Lowell, and F. A. Greer. In September and October, 1915, M. T. Minney obtained an option to purchase all stock from all of the stockholders of the plaintiff corporation with a view of selling the stock to Mr. 0 ’Bear. In connection with these options, in order to induce the purchaser to take the stock, it was agreed by some of the stockholders that they would purchase some of the lots belonging to the plaintiff corporation, which was engaged in the business of selling and subdividing land, for the purposes of sale. The negotiations which were conducted by O’Bear resulted in P. B. Cross becoming a probable purchaser, but Cross decided that he would prefer to purchase the assets of the corporation rather than its stock. Thereupon, the following plan was devised: The corporation plaintiff entered into a contract with Cross for the sale to him of the most of the assets of the corporation for $162,230.66 in cash and certain mortgages aggregating over thirty-one thousand dollars. This contract, together with all the remaining assets of the corporation, except certain lots, was transferred to W. M. Martin, a brother-in-law of M. T. Minney, who, in payment therefor executed his promissory note as above stated. The remaining lots were transferred to M. T. Minney as commission for making the sale to Cross. On the same date Martin secured options to purchase their stock from all the stockholders in the corporation at various amounts fixed in the respective options, paying therefor with the assets of the corporation turned over to him in pursuance of the agreement of sale to him in consideration of his promissory note. Martin paid each stockholder the amount called for by his respective option *752 and took an assignment of the stock. By this method the entire assets of the corporation were distributed to the stockholders and in exchange therefor the several stockholders assigned their stock to Martin, who thus became the sole stockholder- of the plaintiff, whose sole asset was his own promissory note. The transaction having been completed on February 25, 1916, Martin instructed the Central National Bank to deliver all the shares of capital stock of the plaintiff corporation to M. T. Minney, and, in pursuance of his instructions, one hundred and twenty-two thousand shares of the capital stock were so delivered. No consideration passed from Minney to Martin, but the transfer of the stock was not made until Minney had agreed with the defendant, W. A. Hershiser, to pay certain costs and attorney’s fees, amounting to less than five thousand dollars. The state corporation license tax was not paid, and so, on the first Monday in March, 1916, the charter of the plaintiff corporation was forfeited. Immediately thereafter, however, on March 14, 1916, the directors, W. A. Hershiser, Julia M. Hershiser, F. A. Greer, and M. T. Minney, took the necessary steps to reinstate the corporate charter. Thereafter Ml. T. Minney caused certain other corporations in which he was a large stockholder to convey to the plaintiff corporation, for the nominal sum of ten dollars, two new subdivisions of land known as the Hollywood tract and the Beverly tract. Both these tracts were subject to large mortgages, amounting to about three hundred thousand dollars, and the plaintiff corporation assumed and agreed to pay these mortgages. M. T. Minney placed the one hundred and twenty-two thousand shares of stock upon the market and sold the stock to various purchasers. The new venture proved to be a failure, the corporation lost all its property, and the new stockholders transferred the stock to the present holders, on whose behalf the directors have begun this proceeding. It should be stated in passing that it appears from the evidence, and seems to have been the view of the court, that in the sale of the stock by Minney he informed all- the proposed purchasers fully in regard to the distribution of the assets of the corporation and solicited their purchase solely upon the faith of the new venture.

Appellant contends that the distribution prohibited by section 309 of the Civil Code must be by corporate act of the board of directors, and that as the jury in this case found *753 that two of the directors did not participate in the unlawful intent, there was no corporate act looking to the distribution of the assets to the stockholders, and further contends that there was no distribution of the capital to the stockholders, for the reason that the very scheme of distribution by which the title to the assets of the corporation was vested in the stockholders, called upon the stockholder to surrender his stock in payment therefor. In other words, he ceased to be a stockholder either before or at the time of the distribution to him. In furtherance of this view it is urged by appellant that the proceedings are penal in their nature and that a strict construction should obtain with relation to the application of the law to the facts, and in the interpretation of the law itself.

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Bluebook (online)
195 P. 653, 184 Cal. 748, 1921 Cal. LEXIS 627, Counsel Stack Legal Research, https://law.counselstack.com/opinion/talcott-land-co-v-hershiser-cal-1921.