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[Civ. No. 1492. Third Appellate District.--July 6, 1916.) E. A. MAJORS, Appellant, V. MARK A. GIRDNER,

Respondent. CORPORATION-SALE OF STOCK-NATURE OF TRANSACTION.—The accept

ance by a corporation of a promissory note given in payment for its stock upon the agreement that the corporation will issue the stock and deliver it to the purchaser upon the execution and delivery of the note, constitutes a present sale of the stock, and the stock becomes ipso facto the property of the purchaser, notwithstanding the

certificate therefor is not issued and delivered. ID.–CERTIFICATE OF STOCK--EVIDENCE OF OWNERSHIP.-A certificate of

stock of a corporation is only the evidence of the ownership thereof,

and merely constitutes proof of property which may exist without it. ID.-RESCISSION OF SALE-FRAUD-PLEADING-OFFER OF RESTORATION OF

STOCK-ESSENTIAL AVERMENT.-In an action by the assignee of a corporation to recover on a promissory note, assigned to the plaintiff for the purpose of collection only, and accepted by the corpo. ration for the purchase price of stock, where the answer asks for affirmative relief by way of a rescission of the contract of sale upon the grounds of fraud and misrepresentation, and the surrender and cancellation of the note for want of consideration by reason of such fraud, it is essential that the answer by appropriate averment show an offer to restore the stock, notwithstanding the eertificate therefor

has not been issued. Id.—-FRAUD OF CORPORATION-INSUFFICIENCY OF EVIDENCE.—The failure

of a corporation to keep its agreement, upon a purchase of its stock, that it will contemporaneously with the execution and delivery of the promissory note of the purchaser given therefor, issue the stock to the purchaser, and the failure to keep its agreement to sell the stock upon his demand at a price in advance of that paid therefor, does not involve such misrepresentation and fraud as will work a rescission of the contract of sale, but is merely a breach of the covenants of the contract.

APPEAL from a judgment of the Superior Court of Sonoma County, and from an order denying a new trial. Emmet Seawell, Judge.

The facts are stated in the opinion of the court.

E. J. Dole, for Appellant.

L. G. Scott, for Respondent.

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HART, J.—The action is on a promissory note for the sum of $350, which, it is alleged, was made and delivered by the defendant to the Pacific Coast Securities Company, a corporation (for brevity to be hereinafter referred to as "the corporation”), and after such execution and delivery, assigned by the original payee to the plaintiff, “who is now the lawful owner and holder thereof."

The answer admits the execution and delivery of the note as alleged in the complaint, but asserts that the instrument was procured from the defendant by the corporation above named through misrepresentation and fraud.

The gist of the charges of fraud set out in the answer may thus summarily be stated : That the corporation, through its duly accredited agents, called upon the defendant and offered him the stock of the corporation at the price of $15 per share, the par value of which was $10 per share; that said agents guaranteed and warranted said stock to be of the value at least of $15 per share; that at said time, as an inducement to the defendant to buy said stock, said agents entered into an agreement in writing, whereby they bound the corporation “to extend the time of payment of note to suit applicant for stock and to resell stock for $20, if so desired, by January 15, 1914," said agreement being signed by “E. H. McConkey, by Clements & Harold, agent." The further representations were made, so the answer states, that said stock “was very valuable,” that the same could be turned and sold at any time for $15 per share, and that the corporation was in a flourishing condition and was financially sound. It is alleged that each and all of said representations were made for the purpose of inducing the defendant to purchase said stock, and that they were false and fraudulent, made with the intent to deceive the defendant and to persuade him to buy the stock; that said stock was not at said time of any real market value, that there were no prospects of the same being of any material market value, and that it was not then “sworth $10 per share or any other amount, and that said corporation never intended to resell the same for $20 per share or $15 per share or $10 per share or for any other amount so far as said corporation had any knowledge”; that said corporation "was not in a money-getting and flourishing financial condition at the time or at any other time." It is alleged that the defendant believed the representations so

made, and was thus deceived and misled into purchasing, and did purchase, twenty-five shares of said stock, “which he would not otherwise have purchased."

It is further charged that the corporation represented and agreed that, upon the execution and delivery by the defendant to it of the note in suit, it would at once and without delay issue to said defendant twenty-five shares of its stock which would, as it was then represented was true of other stock of the same kind, earn and return dividends of not less than seven per cent per annum, “which was the only consideration for the execution of said note to said corporation, and that this was the only consideration ever to be given or paid for said promissory note, but defendant alleges that said corporation did not execute and deliver or issue stock to defendant or in his name or in any other person's name for him, and did never deliver to said defendant any certificate of stock, or thing at all, and there was nothing whatever given for said promissory note and the same was without consideration and has been at all times without consideration.' These facts, it is declared, were not discovered by the defendant until the time at which he applied for a renewal of the note so as to extend the time for the payment thereof, when, upon giving the renewal note and at the same time paying to the corporation $25 in cash as and for principal and pay. ing the interest accrued upon the original note, he asked what had become of the corporate stock certificate which the corporation had agreed to issue to him, and that he was then told and assured that the certificate for the twenty-five shares of stock had been issued as agreed upon, “which statement was false, and said corporation and the officers and members thereof knew that the same was false and untrue”; that “said stock was not then nor had it ever at any time been issued to defendant." It is averred, in effect, that but for the false representation then made as to the issuance of said stock and the further false representations as to the value of said stock and the flourishing and sound financial condition of the corporation, the defendant would not have made and delivered to the corporation the renewal note in lieu of the original note or paid to the corporation the sum of $25 on the principal and the accrued interest on the original note.

The "separate and further defense" set up in the fourth paragraph involves, in effect, along with some conclusions

31 Cal. App.-4

of the pleader, an iteration, substantially, of the allegations of the preceding paragraphs of the answer. It is to the effect that all the agreements, etc., between the corporation and the defendant "were purely executory, in that the matters and things and agreements on the part of said corporation were never performed and were matters precedent to the issuance of said note and notes, in that said corporation was, as per the stipulations, to execute and deliver to defendant the certificate of stock . . . before said note or notes were to be delivered or to take effect, and said corporation was to place defendant in a position that he should be protected and guaranteed that the stock would and should be of the guaranteed value of $15 per share, and in that said stock should meanwhile be drawing dividends, none of which matters and things were done or performed by said corporation, and the defendant had the right to rescind the same at any time, and did rescind the same in writing before the bringing of this action and before the acquisition or possession thereof by plaintiff herein, all of which matters and things plaintiff well knew before the taking over of said note by him,” etc.

The efficacy of the answer in the statement of defense to the action was not challenged by demurrer.

The cause was tried by a jury and a verdict returned in favor of the defendant. Judgment was entered accordingly.

The plaintiff appeals from the judgment and the order denying him a new trial.

In the outset, it is proper to state that no claim is here made that the plaintiff is an innocent purchaser of the note for value. On the contrary, it is conceded that the plaintiff is acting solely in this action for the corporation, the original payee, and that the note was assigned to him for the purpose of collection only.

The point is made for the first time in this court that the answer does not state facts sufficient to constitute a defense to the cause of action pleaded by the plaintiff.

One of the objections specifically made against the answer is that the defendant, who asks for affirmative relief by way of a rescission of the contract of sale upon the ground of fraud and the surrendering up and cancellation of the note in suit for want of consideration therefor by reason of such fraud, has not by appropriate or other averment in his answer offered to restore the stock which he alleges he purchased from

the corporation. The point is well taken. The transaction between the corporation and the defendant constituted, according to the history thereof as it is explained by the answer, an executed contract of sale, and the stock became the property of the defendant upon the consummation of that transaction, notwithstanding that the certificate for the stock was not, so the answer declares, issued and delivered to the defendant. (Mason v. Lievre, 145 Cal. 514, [78 Pac. 1040].) A certificate for the stock of a corporation is only the evidence of the ownership thereof, or, as the cases put the proposition, it merely constitutes proof of property which may exist without it. (Mitchell v. Beckman, 64 Cal. 117, [28 Pac. 110), and cases therein cited.) In that case, it is among other things said : "When the corporation has agreed that a person shall be entitled to a certain number of shares in its capital, to be paid for in a manner agreed upon, and that person has agreed to take and pay for them accordingly, he becomes their owner by a valid contract made upon a valuable consideration." In this case, according to the answer, the defendant made application for the purchase of the stock, and the same was approved by the corporation by accepting the note of the defendant in pay. ment therefor. This, as stated, constituted a sale (Civ. Code, sec. 1721, Johnson v. Dicon Farms Co., 29 Cal. App. 52, (155 Pac. 134) ; 35 Cyc. 25), and thereupon the title to or ownership of the stock ipso facto vested in the defendant.

It is a settled rule in equity and expressly affirmed by legislative fiat (Civ, Code, sec. 1691, subd. 2) that in an action for rescission the party seeking the remedy “must restore to the other party everything of value which he has received from him under the contract," etc. While there are in the answer some vague and indefinite allegations intended to disclose that the stock was not of the value it was represented to be by the agents of the corporation, there is no allegation in the defendant's pleading that it is wholly valueless. If it was of some value (and it may be assumed that it was, it being property), it was the duty of the defendant, as a prerequisite to his right to a rescission of the contract on the ground of fraud, to restore or offer to restore by appropriate and sufficient averment in his answer the stock to the plaintiff or to the corporation, for whose benefit the plaintiff is admittedly suing (Kelley v. Owens, 120 Cal. 502, [52 Pac. 797]), and to do this it was not requisite, as we have already

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