Reed v. Norman

GIBSON, C. J.

Hoyt Reed, a shareholder of Norman Decorating Co., Inc., brought this action to contest the validity of an election of corporate directors, to void shares of stock issued by the corporation to defendant Carl Norman, and to obtain an accounting of corporate funds. The trial court found and concluded that the shares were properly issued to Norman and that the election was valid. It also took an accounting and made certain findings with respect thereto. Judgment was entered accordingly, and Reed has taken this appeal.

The Norman Decorating Co., Inc., was organized in California in January, 1949, by Norman and two other men for the purpose of engaging in the paint contracting business. Sometime in March, 1949, Norman’s associates withdrew, and Reed took their place. The offices of the corporation were located on the premises of Carl’s Paint Store, a business which was separately owned by Norman. Reed worked in the field supervising painting jobs, and Norman worked in the office. Paints and materials used by the corporation were purchased from manufacturers and delivered by them directly to the jobs but were billed to the corporation through the paint store.

In April, 1949, the Norman Decorating Co., Inc., applied to the Commissioner of Corporations “for a permit to

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issue 500 shares of stock to Norman and Reed, or to either of them, at $10 par value, for cash. ’ ’ Pursuant to the application a permit was granted for the issuance of the 500 shares “for cash.” In the following September 245 shares were issued to Reed and 255 to Norman. Reed paid $2,450 for his shares. Norman paid $1,500 cash, and the books show that the sum of $1,050 remaining due for the stock was charged against Norman’s account. At that time the corporation was indebted to Carl’s Paint Store which, as we have seen, was owned by Norman, in a sum in excess of the amount charged against his account.

Differences arose between the parties with respect to the manner in which the business was being conducted and the amount charged the corporation by Carl’s Paint Store for materials. At a shareholders’ meeting on April 27, 1950, when the question of electing a new board of directors arose, Reed challenged Norman’s right to vote his 255 shares on the ground that they were void because not paid for with cash as required by the stock permit. Norman nevertheless voted all of his shares and elected a slate of directors which was composed of himself, Reed and one John Haskins.