Murphy v. Wood

FOX, J. This is a suit by the payees of a promissory note against the maker. From a judgment for defendant, on the ground that there was no consideration for the note, plaintiffs appeal.

In January, 1951, defendant Jim Wood and plaintiff Murphy discussed informally the acquisition of an automobile dealership. Wood was district manager for the DeSoto Motor Corporation. Murphy was an automobile dealer in Culver City. A dealership was located in San Pedro that, was for sale for $25,000. Murphy (who represented his eoplaintiff throughout this entire transaction) and Wood worked out an arrangement whereby plaintiffs would furnish the money to buy the dealership, Wood to put up $10,000 working capital and operate the business at a salary of $500 per month and $150 expenses; plaintiffs’ investment to be repaid out of the profits, after which defendant’s investment would also be returned, and then the profits would be shared equally between the plaintiffs and the defendant. Plaintiffs provided $25,550 to purchase the business. (The price was increased $550 to cover a service truck that was added.) Defendant’s contribution was made up of $8,500 cash and two automobiles valued at some $1,700. The new group took over the agency on March 1, 1951, with Wood in charge.

Murphy arranged for Charles Rollinson, who had represented his firm for some time, to handle the legal work of this new enterprise.* Here the picture becomes somewhat [257]cloudy because Mr. Rollinson died and certain of the corporate books and records which were apparently in his' possession have not been located. It does appear, however, that Mr. Rollinson had organized a corporation known as Jim Wood, Inc., with a capital of $25,000 and having 25,000 shares at a par value of $1.00 each. Defendant Wood was president and his wife was secretary. An application for a permit to issue stock was filed with the Division of Corporations. A permit was granted on April 17th, authorizing the issuance of 12,501 shares to defendant and 12,499 shares to plaintiffs for cash. Soon thereafter stock certificates for these shares, made out to the respective parties, were signed by Wood and his wife as president and secretary, respectively, and the corporate seal affixed. Wood then delivered these certificates to Rollinson, who later turned them over to Murphy. No money was then or thereafter paid to the corporation by any of the parties.

About the middle of March, Murphy told Albert Berg, an accountant, whose firm had done work for him, that he was interested in a DeSoto-Plymouth dealership in San Pedro and suggested he see Wood about “setting up the corporation.” As a consequence Berg was employed to handle the accounting work of the new enterprise. He was to come in monthly and prepare quarterly reports. The corporation had its own bookkeeper. In the course of preparing the report for June 30, 1951, Berg contacted Rollinson, relative to the .capital stock structure of the corporation. Rollinson advised him that the corporation had been authorized to issue 25,000 shares of $1.00 par value stock for cash. Berg told him, “the corporate records did not reflect any deposit of cash in the corporation bank account for which the corporate stock could be issued, ’ ’ that the $25,550, which had been used to purchase the business with, had been credited on the corporation records to an account designated “Due to Jim Wood.” This, of course, was the capital furnished by plaintiffs. In order to meet this situation, Rollinson suggested that the corporation write a cheek in favor of Wood in the amount of $25,550 and charge that check against the Jim Wood advance account on the corporate records and that subsequently a deposit of $25,000 (out of this check for $25,550) he made in the corporation’s bank account as a means of showing payment in cash for the stock. Bookkeeping entries to this effect appear to have been made though the check was not actually issued and the redeposit was not