De Garmo v. Petitfils Confiserie

The plaintiff G. C. De Garmo purchased from defendant corporation 200 shares of its capital stock for which he paid $20,000. This is an action by plaintiff to rescind that purchase on the ground of fraud and misrepresentations.

The case was tried before the court sitting without a jury, and findings and judgment were in favor of defendant, from which judgment plaintiff prosecutes this appeal.

Appellant strenuously contends that the findings on all material issues are contrary to the uncontradicted evidence.

We think that this contention must be sustained.

The complaint further alleges that the foregoing statements and representations were false, untrue, and misleading in the following particulars: (1) That said dividends were not paid out of the net earnings of defendant, but only as the result of changing and falsifying its books, and for the sole purpose of defrauding, deceiving, and misleading prospective purchasers of its stock, etc.; (2) That the net earnings of the company were not at any time sufficient to pay any dividends and that defendant knew this at the time of making the foregoing statements and representations; (3) That W. M. Petitfils received $180,000 for the goodwill of his business; (4) That the lease on store No. 1 was not of the value represented by defendant; (5) That prior to soliciting plaintiff to purchase stock, W. M. Petitfils had entered into a secret agreement with one Beecher Laswell to sell his personal stock in the company.

The answer traverses practically all of the allegations of the complaint, and alleges the following special defenses: (1) That if any misrepresentations or false statements were made by defendant concerning the stock, they were made by Beecher Laswell, who was an independent contractor for the sale of defendant’s capital stock, and that defendant believed that the net earnings of the company were sufficient to warrant the payment of said dividends and each of them; (2) That plaintiff was guilty of laches in not attempting to rescind promptly.

The court found, among other things, that Beecher Laswell was the agent of defendant corporation, and that one

The court also found that said R. J. Leavitt delivered to plaintiff certain circular letters referring to said company, prepared by Beecher Laswell, with the approval of the company.

The court further found that representations designated above as Nos. 1, 2, 3, 6, and 8 were true and that the representation designated as No. 7 was true, except that one dividend only was paid to the stockholders of Petitfils Confiserie, and that the representations designated as Nos. 4 and 5 were not true.

The court also made findings in effect as follows: (1) Plaintiff did not believe or rely upon the statements made to him by R. J. Leavitt; (2) That these representations were not the proximate or any cause of plaintiff purchasing his stock in defendant corporation; (3) That plaintiff relied solely upon the fact that he was acquainted with the success of W. M. Petitfils’ business, and the profits made by him prior to incorporation; (4) That plaintiff did not believe or rely upon any of the statements or representations set out in the complaint in purchasing stock in the company, and that plaintiff made an independent investigation.

Therefore, if there is sufficient evidence in the record to support the last-mentioned findings that appellant did not rely upon the representations made by defendant and its agents, and was not induced thereby to purchase the stock in question, but, on the other hand, in making the purchase he relied solely upon the fact that he was acquainted with W. M. Petitfils’ business and the profits made by him prior to incorporation, then this appeal must fall and the judgment be affirmed, for these findings cover an essential element of appellant’s right of action.

We have, however, searched the record carefully and we are unable to find any evidence that will support the findings of the trial court that appellant “did not rely upon the alleged misrepresentations and did not believe them to be true,” or that he made an independent investigation.

Plaintiff testified that in October, 1923, E. J. Leavitt called upon him at his office in Los Angeles and, after introducing himself, said that he was connected with Beecher Laswell’s office, a stock broker having his offices in Los Angeles, and that they were selling stock of Petitfils Confiscrie; he thereupon handed plaintiff his card, reading: “Petitfils Confiserie, Fiscal Offices 610 Mortgage Guaranty Building, 626 South Spring St., Los Angeles, E. J. Leavitt, Personal Eepresentative. ” That was the first of a series of conversations with Leavitt, extending up to the time the plaintiff purchased his stock in November, 1923.

Plaintiff further testified that “Leavitt said that Petitfils had incorporated the company with a capital stock of

Plaintiff then stated that Leavitt handed him some literature concerning the company, including a statement showing the profits Petitfils had derived from the business up to the time of the incorporation of the defendant company. In the literature given to plaintiff at that time was a circular letter signed “Petitfils Confiserie, W. M. Petitfils, President,” containing this clause: “On May 18, 1923, Petitfils Confiserie was incorporated under the management of Mr. W. M. Petitfils. On July 10th, a dividend of 5% was paid to all stockholders as of record on June 30th, and on October 15th, another 5% dividend was distributed to all stockholders as of record on August 31, 1923, the checks ranging in size from $5 to $14,500. This investment is now open to you for two reasons: first, it is a decided commercial asset to have a large- number of stockholders; the second, now is the strategic time for expansion and development because of the remarkable success of the three established stores and the general healthy condition of Los Angeles. ’ ’

Other circular letters of a similar character, but more alluring, were given plaintiff, signed “Petitfils Confiserie, E. A. Harter, Vice-President.” One of the paragraphs in one of these last-mentioned circular letters is as follows: “At one time you expressed a desire to learn the details regarding an investment in the securities of this soundly managed, dividend-producing company. This final effort is made, before the books are closed, to induce you to share in our investment and profits.”

Plaintiff further testified: “When Mr. Leavitt explained why he was there and told me of the business they were doing, the money they were making, and dividends they had paid, I said, ‘Mr. Leavitt, this is essentially a one-man

After this conversation with Mr. Long, plaintiff had another conversation with Mr. Leavitt and purchased the stock.

The foregoing is all the evidence showing what plaintiff said and did, and the information he sought and received before purchasing his stock, and this evidence is uncontradicted, except that Long testified that he told plaintiff the gross receipts was between fifty and sixty per cent and that all the leases were valued at $1,000,000.

Plaintiff made no independent investigation; all the investigation that he made was with officers and agents of the defendant. He only asked one question on the outside and that was from the bank, which was concerning a wholly immaterial matter.

Plaintiff testified positively that he believed and relied upon the representations made to him and would • not have purchased the stock had it not been for those representations, and that he made no further investigation other than that above stated, and there is not a fact or circumstance revealed by the record to rebut this statement.

The findings of nonreliance and disbelief in said representations must fall in the face of this uncontradicted evidence.

Having determined that certain representations were in fact made, and that they did induce appellant to purchase the stock, the next question arises, does the evidence show these representations to be true or false? As above stated, the court found that the representation to the effect that the defendant had been offered $400,000 for the cancellation of the lease on store No. 1 was false, and also that the statement that the lease on Flower Street was worth $1,000,000 was also false. The evidence amply supports both of these findings.

The complaint alleges, that neither the July nor October dividend was paid out of the net profits, but merely as the result of falsifying the books and for the sole purpose of defrauding prospective purchasers of stock in the company. The court found that only one dividend was paid and “that this was not paid merely as a result of altering the books or for the sole purpose of defrauding prospective purchasers.” No finding as to whether it was paid out of the profits of the company was made by the court.

The uncontradicted evidence shows that at the time appellant was being solicited by defendant to purchase the stock, he was told by Leavitt and Long that the company had paid two dividends of five per cent each. Appellant was also given several mimeographed letters,

The facts regarding the July dividend are, briefly, these: The property and assets of the Brown Candy Company, at the time it was transferred to defendant, were inventoried at $525,000; a dividend of five per cent was first paid to the stockholders of the Brown Candy Company, which reduced the assets of the Brown Candy Company to $500,000, and then the defendant corporation gave the Brown Candy Company 5000 shares of the capital stock of defendant corporation at $100 per share for the remaining $500,000 worth of assets of the Brown Candy Company. The $25,000 was distributed to the stockholders of the Brown Candy Company by the defendant corporation, but it was in no sense a dividend to the stockholders of the defendant corporation and was not earned by them; it was simply a five per cent dividend paid by the Brown Candy Company to its own stockholders at the time it sold out to defendant corporation.

The October dividend, which was the only one paid, was not paid out of the net earnings or profitsjff the defendant. Defendant had only been operating since June 15, 1923. The stock salesman had represented to plaintiff and other prospective purchasers that a five per cent dividend was paid on October 15, 1923, and was paid to all stockholders of record on August 31, 1923. The literature of defendant also contained this same statement. On August 31, 1923, there was outstanding 11,592 shares and a five per cent dividend which amounted to $57,960. From June 15, 1923, to October 1, 1923, the defendant had been charging off monthly on its books for depreciation, breakage, bad debts, etc., $10,000 per month. By this method of bookkeeping, the business was being operated at a loss, and there were no funds from which a dividend could be paid. Those who had purchased stock were inquiring daily at the stores and of the officers of the company as to when the dividend would be forthcoming and, as Mr. Harter, the vice-president, expressed it, “They were haunting us night and day, morning and noon, to know if we would not declare a dividend.” Harter further testified as follows: “Q. How did it happen that Petitfils Confiserie paid a dividend on

One of the guarantees of dividends was contained in a pamphlet entitled “Profits in Sweets,” reading in part as follows: “It is the expectation of Petitfils Confiserie to continue the regular five per cent cash dividends quarterly (20% per annum). Based on the estimated earnings of the new corporation, as shown below, the annual profits on the capitalization of $2,000,000 should be at least 28%.”

Therefore, in order to satisfy the present stockholders and to allure new ones into purchasing stock, a scheme was worked out by the secretary of the defendant and its stockholders, by which the books were changed and all amounts that had been set aside for depreciation, breakage, bad debts, etc., were ordered placed back on the books. By so doing, the books showed there were profits enough to pay a dividend and, therefore, out of this the October 15th dividend was declared.

It is clear, therefore, that no July dividend was paid to the stockholders of the defendant corporation, and that the October dividend was not paid out of the net earnings, but out of the gross earnings of the company. No dividend should have- been paid, or could have rightfully been paid, in October, and the defendant changed its books to show a false profit in order to pay this dividend. It is clear from the undisputed evidence that the October dividend was pot paid in good faith, and was not paid from the net earnings of defendant, but paid out of its reserve fund. The representations made to appellant that from the earnings of defendant a five per cent dividend had been paid in July and October were false.

The complaint further alleges that defendant, as an additional inducement to plaintiff, stated to plaintiff that

The evidence shows, without conflict, that other misrepresentations of material facts were made to plaintiff, but we deem it unnecessary to go into detail relative to them.

We have reviewed the entire record carefully and we are fully convinced that the findings of the trial court favorable to defendant cannot be sustained by the evidence. In reaching this conclusion, we áre not unmindful of the fact that some of the representations made to appellant, especially those relating to the future earnings, of the defendant corporation, are merely to be considered “expressions of opinion,” and not fraudulent representations, although positively made and afterward proven to be untrue. However, excluding entirely all statements that could be termed “expressions of opinion,” there remains in the record abundant uncontradicted evidence of many false representations made to appellant by defendant concerning past and existing facts, which defendant knew to be false and made for the purpose of inducing appellant to purchase the stock, and said false representations did, in fact, lead him to invest $20,000 in stock of Petitfils Confiserie Corporation, which he would not have done had the true financial condition of defendant corporation been revealed to Mm. Neither are we unmindful of the well-settled rule that this court cannot reverse a judgment for insufficiency of the evidence if there is a conflict in the testimony, or if there is any substantial evidence to support the findings and judgment of the trial court. But in this case, there is absolutely no evidence that we are able to discover, that will support the findings and judgment of the trial court. The only witness produced by defendant was Mr. Long, the former secretary of the defendant corporation, and there were only two points of conflict in his testimony with that of the appellant. Appellant testified that Long told him that the defendant was making a net profit of

There is no merit in the contention of defendant, ' or the finding of the trial court, that appellant was guilty of laches in rescinding the purchase. The following facts are uncontradicted: Appellant purchased the stock in November, 1923. In February, 1924, he inquired concerning the dividend. Defendant stated that payment of the dividend had been delayed by order of the corporation commissioner until a reserve had heen set aside to cover depreciation in defendant’s leases. On May 2, 1924, appellant received a $500 check and at that time was notified that another dividend would be paid in July; that about July 1st appellant was advised by defendant that the additional dividend would be set out within a few days. On July 4th plaintiff left on a trip to Europe and was absent from California until October 15, 1924. During appellant’s absence he did not know that the promised dividend had not been paid and did not learn this until he returned to Los Angeles on or about October 15, 1924. While absent from California appellant did not receive any information regarding the defendant or his stock. Appellant testified that between October 15th and October 20th he discovered the fraud and on October 21, 1924, served the notice of rescission. It appears that appellant gave notice of rescission promptly after discovering the fraud.

Defendant contends that appellant cannot maintain this action because he did not offer to return the $500 dividend before suit. There is no merit in this contention. The complaint alleges, “That at the time plaintiff rescinded the contract, he tendered to the defendant and offered to return . . . said 200 shares of stock so purchased by him and every other thing of value received by him in connection

Judgment reversed.

Sturtevant, J., and Nourse, J., concurred.

A petition by respondent to have the cause heard in the supreme court, after judgment in the district court of appeal, was denied by the supreme court on September 2<4, 1928.

All the Justices present concurred.