Victor Oil Co. v. Drum

This is an action by a corporation against four men who are alleged to have been its promoters, for the recovery of secret profits made by them on the sale of certain properties to the corporation. A joint and several judgment for thirty-two thousand five hundred dollars was rendered against the defendants, from which two of them appeal. The facts as disclosed either by the defendants’ answer, evidence that is undisputed, or the findings of the trial court are these:

In the early part of 1910 there was considerable excitement in the oil business in this state, and the defendants C. P. Drum and George H. Coffin formed a plan to find some oil properties and organize a corporation to take them over. They found two properties, one belonging to the Hamilton Oil & Gas Company and the other to the California Petroleum Lands Company. On March 23, 1910, Coffin secured' a written memorandum from the president and chief stockholder of the Hamilton Company which gave Drum an option to purchase that company’s land. Later there was substituted for this option a formal contract of purchase and sale, with the Hamilton Company as vendor and Drum as vendee. This contract is dated March 23,1910, the date of the option, but it certainly followed the giving of the option. Whether it followed on the same day or not does not positively appear, but there are circumstances which make it very probable that it was not executed until after the organization of the plaintiff some days later, and was then antedated to make it correspond to the date of the option. At any rate, the parties by their pleadings and counsel in their briefs all assume the fact to be that prior to the organization of the plaintiff all that Drum had in respect to the Hamilton lands was an option, and that he was not then the equitable owner of the property as vendee under a firm contract of purchase and sale.

Immediately upon the acquisition of the Hamilton option, Coffin and Drum, with the defendants Rischel and Coffin, Jr., a son of the other Coffin, began the organization of the plaintiff, and perfected it within a few days, the articles of incorporation being acknowledged on March 26, 1910, and filed with the county clerk two days later. Neither Coffin, Sr., nor Drum appear in the articles of incorporation as organizers of the company, but that they, with their codefendants, were the actual moving and controlling parties admits of no question. Those who appear as organizers were the defendants Rischel and Coffin, Jr., and three others. The organization meeting of the corporation was held on April 7, 1910, and the five appearing as organizers were elected directors, Rischel being made president and Coffin, Jr., secretary and treasurer. At the same meeting an offer in writing by Drum was submitted and accepted, whereby Drum proposed to sell to the company the Hamilton lands for fifty-two thousand five hundred dollars and the California Petroleum lands for thirty-one thousand dollars. Of the purchase price of the Hamilton lands, forty thousand dollars was to be paid in' money and twelve thousand five hundred dollars in shares of the company at twenty-five cents a share, or fifty thousand shares in all. Of the purchase price of the California Petroleum lands sixteen thousand dollars was to be paid in money and fifteen thousand dollars in shares at twenty-five cents a share, or sixty thousand shares in all.

The option and contract which Drum had for the Hamilton lands fixed the price of the lands at thirty-five thousand dollars, so that by his sale to the company he would make a profit of five thousand dollars in money and twelve thousand five hundred dollars in stock of the company at twenty-five cents a share. By the understanding which he had for the purchase of the California Petroleum lands the price of the lands was sixteen thousand dollars, so that on turning over these lands to the company he would make a profit of fifteen thousand dollars in stock of the company at twenty-five cents a share. It is these profits aggregating thirty-two

There is no evidence that the fact that Drum was making a profit on his sales to the company was disclosed to the directors of the company other than the defendants Rischel and Coffin, Jr. On the other hand, it was not represented to the directors that he was not doing so, and, of course, the transaction on its face being a direct sale by Drum to the company for a certain price not fixed, so far as appeared, by reference to what the properties had cost him, involved directly the possibility that he might be selling for a price greater than the cost to him.

Along with the organization of the company, steps were taken to secure subscriptions to its stock. A subscription paper was circulated stating that a corporation was being formed to take over the two properties, describing them, at the figures contained in the offer of sale by Drum. The identity of the seller is not disclosed by the subscription paper, nor is there any intimation that he is one of the organizers of the company and will make a personal profit on the purchase which the company was being formed to make. It appears, in fact, that this profit was not disclosed until several years later.

When sufficient funds had been raised by the plaintiff company, the purchases by Drum from the Hamilton and California Petroleum Companies and the sales by him to the plaintiff were consummated, practically simultaneously, Drum paying for the properties out of the purchase money which he received for them. The 'profit which he made in money he divided equally with the other three defendants. The stock which he received he also divided with them, though apparently not equally. The division of the stock was concealed, at first by not having the stock transferred, and later by having it transferred into the names of others than the real owners. The division of the profits is denied by the defendants, but that the stock was actually divided is admitted, as is also the fact that Drum paid to or for the benefit of each of the other defendants an amount in money equal to what would have been his share on a division of the profits. The claim is that the stock and money were given for services in the way of securing subscriptions and for other considerations. The finding of the trial court is, how

It is also found by the court that neither the subscribers for stock of the plaintiff, other than the defendants, nor the plaintiff itself learned of the secret profits made by Drum and divided between the defendants prior to December 13, 1913, and that the action for their recovery which was commenced November 30, 1914, was brought w'ithin a reasonable time after such information was had. As we have said, judgment was given against the defendants jointly and severally for the full amount of the secret profit made by them. From the judgment the two Coffins alone appeal.

The primary question upon the foregoing facts is, Is there any cause of action against the defendants because of them? [1] It is to be noted in this connection that, as stated in Densmore Oil Co. v. Densmore, 64 Pa. St. 43 , “any man or number of men, who are the owners of any kind of property, real or personal, may form a partnership or association with others, and sell the property to the association at any price that may be agreed upon between them, no matter what it may have originally cost, provided there is no fraudulent misrepresentation made by the vendors to their associates. They are.not bound to disclose the profit which they made by the transaction.”

It is also to be noted that the present transaction appeared on its face to be a sale by Drum, so that the directors of the plaintiff who accepted the proposition of Drum must have understood that it was at least possible, if not probable, that he would make a profit.

It is also to be noted that if it were legitimate for Drum to make a profit on the sale, the fact that he afterward divided his profit with the other defendants is wholly immaterial. If the profit were legitimately his, he had a right to do with it as he pleased.

Upon these facts the defendants seek to have applied to the present case the principle just quoted from Densmore Oil Co. v. Densmore, whose soundness cannot well be controverted, claiming that by it Drum had a right to sell to the company, and the latter was not concerned with whether he made a profit or not.

That the law also will recognize the guilt and give relief because of it is well established. The defendants were promoters of the plaintiff corporation beyond question. The plaintiff was projected and organized by them, and they for some time after its organization managed and controlled it. The part they played was that of projecting and organizing a corporation to purchase certain properties, and inducing others to join with them in the enterprise. This is the essence of promotion. (Ehrich on Promoters, secs. 3, 4, 5; Ex-Mission L. & W. Co. v. Flash, 97 Cal. 610 , 626, [ 32 Pac. 600 ] ; Burbank v. Dennis, 101 Cal. 90 , 97, [ 35 Pac. 444 ].)

The defendants being promoters, in the language of Lomita L. & W. Co. v. Robinson, 154 Cal. 36 , 45, [ 18 L. R. A. (N. S.) 1106 , 97 Pac. 10 , 13], they “occupied a fiduciary relation to their cosubscribers and were bound to truthfully declare to their associates any personal interest that they had in the

The application of the general principle so stated to just such facts as those of the present case is found in Densmore Oil Co. v. Densmore, supra. There, after the statement we have already quoted that a vendor may, without disclosure of his profit, sell property which he owns to an association formed to purchase it and of which he is a member, the court goes on to say: “The second principle is that where persons form such an association, or begin or start the project of one, from that time, they do not stand in a confidential relation to each other and to all others who may subsequently become members or subscribers, and it is not competent for any of them to purchase property for the purpose of such a company mid then sell it at an advance without a full disclosure of the facts.” This statement was quoted with approval by this court in Burbank v. Dennis, supra, and the italics are those found in it as so quoted. It covers literally and exactly the present case. Drum and Coffin projected and had in mind the formation of a corporation in ivhich others would be associated with them at the time they first hit upon the lands which were subsequently sold the plaintiff. They in fact were at the time looking for lands for the purpose of such a corporation. They therefore from the beginning “stood in a confidential relation to all others who might become members or subscribers” to the corporation. Standing in this relation, “it was not competent for them to purchase property for the purpose of such a company and then sell it at an advance without a full disclosure of the facts, ’ ’ and yet they did so purchase and sell property without any disclosure whatever to those whom they induced to associate with them.

In Burbank v. Dennis, supra, two men, Dennis and San-born, associated themselves on April 20th in a project to acquire certain lands and sell them to a corporation which they would organize and induce others to become share

So far we have been discussing the general question of the defendants’ liability upon the facts shown. From the conclusion that they are liable we see no escape. But there are a number of particular contentions made on behalf of the defendants which should be considered. It is claimed, for example, that the profit made by Drum was a legitimate one, since the fact that Drum was selling to the corporation was not concealed from the directors, three of whom were not parties to the scheme to make a profit, and to whom the possibility, if not the probability, that Drum was making a profit must have been evident, and there was no representation that he was not making a profit. It is also claimed that there is no evidence that the fact that Drum was to make a profit was not disclosed. [3] The answer to the latter proposition is, of course, that when once it is apparent that Drum occupied a fiduciary relation toward the corporation and his associates in it, the burden rested on him to show the full disclosure, without which the transaction was

Now, we do not mean to infer that the three directors other than Eischel and Coffin, Jr., were there, consciously to themselves, to cheat the shareholders. But they were there for that purpose so far as the defendants were concerned, and the latter were the directing and controlling power. Any disclosure to the director's would have been futile under the circumstances, and any disclosure which, under the circumstances, would meet the requirements of the law had to be a disclosure not to the directors but to those who were asked to subscribe. The subscription agreement did not make such disclosure, and it is a fair inference that it was not made in any other manner. In any case, the burden of showing such disclosure rested on the defendants, and it was not shown.

[5] Another contention made on behalf of the defendants is that the complaint fails to state a cause of action. What

[6] It is also claimed that the defendants are not liable because there is neither allegation nor proof that the lands purchased were not equal in value to what the company paid for them, and that, therefore, it does not appear that the plaintiff was injured by the defendants’ fraud. Along the same line, it is contended that a recovery from the defendants of the secret profit made was not proper in any case; that the remedies of the plaintiff consisted in either rescinding the purchase, something that is now impossible, or in obtaining damages. The answer to both contentions is the same. It is that the wrong which the defendants committed consisted in their making a profit at the expense of their associates when they had no right to make it. It is wholly immaterial whether the property purchased was or was not worth what the association paid for it. The wrong lies, not there, but in the profit that was wrongfully made. The proper relief in such a ease is to compel the return to the association of the profit so made out of it. Putting it in another way, the defendants were under the duty, if they sold to the plaintiff, of making the sale without profit, unless they disclosed that they would receive a profit. They made the sale, but they did not make the disclosure. In this situation they cannot retain the profit. It is as if made for the corporation, and must be accounted for to it. It has been repeatedly so held, and a recovery of the profit permitted, in practically every ease of this character which we have previously cited. In addition to them we might also cite Western States etc. Co. v. Lockwood, 166 Cal. 185 , [ 135 Pac. 496 ].

[7] It is also claimed that a joint and several judgment against the defendants for the full amount of the profits was not proper, that as against the defendants other than Drum at least, the judgment should have been only for the

[8] It is claimed by the defendants that the amount of the judgment is not correct, since to the extent of twenty-seven thousand five hundred dollars, it represents not money which the defendants received as profits, but the one hundred and ten thousand shares of the plaintiff which they so received and which the court for the purposes of the judgment transmuted into money at the rate of twenty-five cents a share without any evidence, according to the claim of defendants, that they were in fact of that value. The original issue of the shares was a wrong upon the plaintiff by the defendants. The plaintiff therefore had the right either to reclaim the shares themselves or to recover their value as of the time of the wrong. (Hayward v. Leeson, 176 Mass. 323 , [ 49 L. R. A. 725 , 57 N.

[9] The defendants also contend that the court erred in refusing them leave to file a supplemental answer pleading a judgment against the plaintiff and Drum in an action by the Hamilton Company, wherein a number of the questions of fact involved here were, according to defendants’ contention, determined adversely to the plaintiff. The only object of the supplemental answer was to set up the judgment by way of estoppel. The refusal of the court to permit this was correct, since the judgment would not have so operated. It would not so operate because it was not between the parties to this litigation. It is true that both Drum and the plaintiff were parties defendant in the action in which the judgment was rendered, but the judgment was not between them, but between them on the one side and the plaintiff in that action on the other. A judgment may operate as an estoppel between parties to it only when they are adverse parties, so that the judgment is a determination of issues between them. (Code Civ. Proc., see. 1910; 23 Cyc. 1237.)

The final contentions of the defendants which require consideration are that the action was barred by the statute of limitations and by laches. The fraud by the defendants was consummated by May, 1910, and the action was not brought until November, 1914. The statute of limitations which applies is subdivision 4 of section 338 of the Code of Civil Procedure. It provides that an action for relief on the ground of fraud must be brought within three years of the accrual of the cause of action, but that “the cause of action in such case not to be deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.” The question therefore is, Was the fraud discovered by the plaintiff less than three years before the action was commenced 1 In this connection two some

Taking up the first point, the evidence amply sustains the finding that the plaintiff did not have actual knowledge of the fraud until December, 1913. The defendants claim, however, that it should have had such knowledge prior to that time and more than three years prior to the commencement of the action, and rely upon the well-established rule laid down in Lady Washington etc. Co. v. Wood, 113 Cal. 482 , [ 45 Pac. 809 ], that discovery is different from knowledge, that where a party defrauded has received information of facts which should put him upon inquiry, and the inquiry if made would disclose the fraud, he will be charged with a discovery as of the time the inquiry would have given him knowledge. (See, also, Bancroft v. Woodward, 183 Cal. 99 , [ 190 Pac. 445 ].)

[10] The circumstances which the defendants rely upon as placing the plaintiff under the duty of inquiry prior to the three-year period are that at a stockholders’ meeting in April, 1911, the defendants appeared as representing by proxy the ostensible shareholders into whose names the shares received by Drum had been transferred upon their division, and that, according to the evidence for the defendants, it was stated to one or more of the directors other than the defendants that the latter were the real owners of these shares. The mere appearance of the defendants as proxies for the ostensible shareholders would, of course, mean but little. As to the information that the defendants were the real owners of the shares, it is doubtful if the plaintiff would be charged with having such information, even if it were disclosed to the then directors. The defendants were still, if not in complete control of the corporation,, at least the most important factors in it, and were its managing officers. There was as yet no really free and independent board of directors. But, however this may be, information that the defendants other than Drum were then the owners of portions of the stock which Drum had originally received as a part of the purchase' price of the prop

[12] As to the point of pleading, the rule laid down in Lady Washington etc. Co. v. Wood, is that where an action for relief on the ground of fraud is brought after the expiration of the statutory period of three years, the complaint must show (1) when the fraud was discovered, which, of course, must be within the three-year period, (2) why it was not discovered sooner, and (3) the circumstances under which it was discovered, so that the court may determine whether or not it was in truth discovered only within the three-year period. The complaint in the present case did allege the date of discovery, and such date was within the three-year period. As to the reason why a discovery was not sooner had, the complaint alleged the facts which constituted the fraud and which showed the fraud to be a concealed one, and also that the defendants concealed the facts from the plaintiff. This was sufficient showing as to why there was no discovery sooner. It in fact comes within the exact language of the Lady Washington case, which is that “He [the pleader] must show that the acts of fraud were committed under such circumstances that he would not be presumed to have any knowledge of them—as that they were

[14] As to the defense of laches, the complaint, as we have stated, was not filed until nearly a year after the date at which it alleges a discovery was had. The defendants furthermore contend that as early as 1912 an investigation was started resulting in a report in April, 1913, disclosing facts sufficient to charge the plaintiff with a discovery as of that time. It is not necessary to consider the accuracy of this contention. If it be true, the discovery was still within the period of limitation. Mere delay in bringing an action for a time less than the period of limitation does not amount to laches. There must be also present the element that the delay has been to the prejudice of the opposite party. (Cahill v. Superior Court, 145 Cal. 42 , 46, [ 78 Pac. 467 ] ; Cohen v. Cohen, 150 Cal. 99 , 105, [11 Ann. Cas. 520, 88 Pac. 267 ].) Nothing of this sort of any substance appears in the present case, bearing in mind that we are speaking only of the delay in bringing the action after the discovery of the fraud. Furthermore, it is exceedingly doubtful if under our statute, which provides that the cause of action does not accrue until discovery of the fraud, the plaintiff has not the unqualified right to bring the action at any time within three years thereafter. It was held in Estudillo v. Security Loan Co., 149 Cal. 556 , 565, [ 87 Pac. 19 ], that the plaintiff had such right for the statutory period after the commission of the fraud, and that the doctrine of laches had no application. If his cause of action docs not

There are no other points which justify discussion. Judgment affirmed.

Shaw, J., Wilbur, J., Sloane, J., Lennon, J., Lawlor, J,, and Angellotti, C. J., concurred.

Rehearing denied.

All the Justices concurred.