Papenfus v. Webb Products Co., Inc.

BARNARD, P. J.

This is an action for rescission in which the plaintiff sought to recover certain property delivered to the defendants in pursuance of a contract, or the value thereof in the event a redelivery could not be made.

In 1926 the individual defendants, as copartners, were engaged in the business of manufacturing cement and adhesive products in the city of San Bernardino. They formed a corporation for the purpose of taking over this business and early in 1927 a permit was issued permitting the corporation to sell and issue 1200 shares of stock to its incorporators for cash. Shortly thereafter the assets of the partnership were transferred to the corporation and in consideration thereof 200 shares were issued to Corkham, 450 shares to Webb and 25 shares to Webb’s brother. Although this and the subsequent issue of stock in exchange for property was in violation of the permit it is conceded that the incorporators were unaware of this fact and that there was no intentional fraud or bad faith on their part.

The plaintiff was engaged in the business of manufacturing wood putties and like products under secret formulae in the city of Los Angeles, which were marketed under a certain trade name. Under an agreement dated June 27, 1931, these two businesses were combined, the plaintiff transferred his tangible assets together with his formulae and the good will of his business to the corporation, 100 shares of its stock was issued to him, he entered the employ of the corporation and became its production manager, and the combined business was conducted without trouble for more than four years. On October 1, 1935, the plaintiff discovered that his stock, as well as that of the other stockholders, was not issued in conformance with the permit and on November 4, 1935, he brought this action for a rescission on the theory that there had been a constructive fraud since the stock issued to him was void. Judgment was for the defendants and the plaintiff has appealed.

The questions presented by the appellant are whether the issuance of such void stock is such a constructive fraud as will entitle the aggrieved party to rescind and recover damages, whether the aggrieved party may by his conduct be

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estopped from questioning the validity of such stock, and whether the judgment is supported by the evidence. A number of findings are specifically attacked which need not be considered, since they are immaterial in any event.