King v. Mortimer , 37 Cal. 2d 430 ( 1951 )

SHENK, J.

The plaintiff sued as the assignee of 250 former investment certificate holders of Pacific States Savings and Loan Company to set aside the sales of their certificates and for reinstatement as certificate holders, or for damages. The action is based on alleged illegal acts and fraud of the defendant corporation. The Building and Loan Commissioner of the state was joined as a defendant. A judgment was entered on an order sustaining the defendants’ demurrer to plaintiffs’ amended complaint without leave to amend. The plaintiff appealed.

This is the second appeal in the case. The first appeal also was by the plaintiff from a judgment entered on an order sustaining the defendants’ demurrer to the original complaint without leave to amend. That judgment was reversed on the ground that leave to amend should have been granted. (King v. Mortimer (Jan. 1948), 83 Cal.App.2d 153 [188 P.2d 502].)

The amended complaint was filed on April 27, 1948. That pleading and the decisions in prior eases involving the affairs of Pacific States Savings and Loan Company (herein also referred to as the association) give the historical background leading to the present action. (See Pacific States Sav. & L. Co. v. Hise, 25 Cal.2d 822 [155 P.2d 809, 158 A.L.R. 955]; King v. Pacific States Sav. & L. Co., 26 Cal.2d 333 [158 P.2d 561].)

Pacific States was organized as a building and loan association in 1889. Operations of the association continued in good financial condition until 1929, when due to the world-wide economic depression its affairs became involved by the necessity to foreclose on real property holdings and because of excess demands for withdrawals by investors. On March 4, 1939, the Building and Loan Commissioner took possession of the association’s property, business and assets. It is alleged that beginning in 1931 to the date of the commissioner’s possession, the association through its agents engaged in a course of conduct designed to acquire outstanding investment certificates at less than their face value; that it commenced the sale of foreclosed properties to acquire funds for that purpose; that there was a market for its investment certificates by reason of the fact that holders were offering their certificates for sale and that they were being purchased; that the association had the power to and did within limits control the bid prices for the investment certificates although it could not fix prices so low that holders would not be induced to accept the prices offered; that the association was always able to fix prices on the market at substantially less than the face amount. The association purchased investment certificates aggregating $26,500,000 face value for approximately $17,500,000, representing a difference of approximately $9,000,000 between the face amount of the certificates and the amount for which they were purchased. The plaintiff’s assignors in the present action represent and seek to recover $690,646.78 of that difference. The action was commenced on October 18, 1943. It will be assumed that the present complaint sufficiently indicates that claims for the amount sought were theretofore duly presented to the Building and Loan Commissioner and were rejected.

The original complaint was framed to recover the stated difference on the theory that the alleged course of conduct rendered the purchases by the association illegal and void. In holding on the prior appeal that the plaintiff should have been permitted to amend, the District Court of Appeal said: “It must be conceded that the complaint does not plead sufficient facts upon which the transactions complained of could be held void.” After mentioning the former case of King v. Pacific States Sav. & L. Co., (supra 26 Cal.2d 333) the court continued: “The ease we have here is also founded upon charges of fraud. Unless the plaintiff can amend his complaint to show affirmatively wherein the contracts involved were void and not merely voidable, we must assume that if the plaintiff can recover at all it must be on the theory that the transactions complained of were voidable because of the fraudulent misrepresentations which brought them about. On this theory it would -become necessary for him to rescind the transactions and restore everything of value which he had received, or to plead facts showing that plaintiff’s assignors were entitled in any event to retain what they had received,” citing section 1691 of the Civil Code.

The amended complaint was an attempt to comply with the declared requirements. The questions to be determined are whether the complaint as amended contains allegations of fact sufficient to support a conclusion that the transactions were void; and if not, whether the plaintiff has brought himself within the provisions of section 1691 of the Civil Code by alleging restoration of or offer to restore benefits received, or facts showing the right to retain them in any event. The plaintiff has also added alleged causes for the alternative relief in damages in the event he has failed in the other respects. (See Bancroft v. Woodward, 183 Cal. 99, 102 [190 P.445].)

The plaintiff contends that the facts alleged in the amended complaint show a violation of section 6.02 of the Building and Loan Association Act as in effect during the times involved (Stats. 1931, p. 483; 1933, pp. 309, 1098, 1101; 1935, p. 800; 1 Deering’s Gen. Laws, Act 986.) The section placed limitations on investors’ withdrawals of funds by defining matured withdrawal claims (see section 6.01 for requirements to file notice of intention to withdraw by certificate holders), preferred claims, and “free money”; by stating when available funds are free money, when an association is on notice, or on a pro rata basis and by regulating when free money may be used and for what purpose. It is claimed that the alleged use of association funds was contrary to that section and was also prohibited by sections 9.01 and 9.02 which regulated the investments and loans that the association might make.

Section 6.02 prohibited the association from making a contract waiving the provisions of the section and provided that any such contract should be null and void. Section 14.05 declared the wilful violation of any provision of the act to be punishable as a criminal offense. Section 14.07 stated that except as “otherwise expressly provided in this act, no violation of any of the provisions of this act shall render invalid any agreement, contract, stock, share, investment certificate, note, trust deed, mortgage or other instrument.”

The plaintiff argues that the purchases of the certificates were void as contracts of waiver. Manifestly the transactions sought to be avoided were themselves not contracts of waiver of the provisions of section 6.02. They were purchases of the certificates on an admitted open market. No contracts of waiver are alleged. Thus the transactions were neither contracts of waiver nor pursuant to such contracts.

If the purchases on the market were contrary to the act as unlawful use of association funds, it may be assumed that they were violations but, pursuant to section 14.07, they were not thereby rendered invalid. That express prohibition against invalidity of the unlawful acts prevents the application of thé general rule relied on by the plaintiff that when a statute prohibits or attaches a penalty to the doing of an act, the act is void. (See Smith v. Bach, 183 Cal. 259, 262 [191 P. 14]; Stevens v. Boyes Hot Springs Co., 113 Cal.App. 479, 482-484 [298 P. 508], for statement of the general rule.)

The act of 1931 was a continuation of prior law (§14.03) with additions including saving clauses (§14.04). The .plaintiff contends that since section 14.07 was an addition in 1931 and therefore was not the law at the time the assignors became investors (or so we shall assume), it should not apply. He thereby invokes another general rule, namely, that the provisions of the law in force at the time the contract was made constitute a part of the contract. He argues that the addition of section 14.07 in 1931 was a subsequent material change which would unconstitutionally affect the assignors’ vested contractual rights (U. S. Const., art. I, § 10). It is unnecessary to consider what weight this argument might have if it were directed to purchases of assignors’ certificates occurring prior to August 14, 1931, the effective date of section 14.07. None of the alleged transfers was made prior to that date. When the assignors became investors section 1 of article XII of the state Constitution provided that all laws concerning corporations and all such future laws might be altered from time to time or repealed. Thus it was not a contractual right of investors that the Legislature could not make a subsequent change in the legal effect of a future violation of the act by the association. The further argument that the provisions of the act are for the protection of the investor and that the court should so apply them even to the exclusion of those deemed undesirable to that end is obviously not valid. The question of what balance should be maintained between individual investors and the association as a whole in the protective measures to be included is the concern of the Legislature. It was a matter for that body to consider what might be the disastrous possibilities if unlawful acts of such associations were to be held void. It was for the Legislature to determine whether in a proper case the investor should be held to the equitable remedy of rescission. It follows that the amended complaint does not allege facts sufficient to support a conclusion that the transactions were void.

The next question is whether the plaintiff has sufficiently alleged the right to the equitable remedy of rescission; or, in the alternative, the right to recover damages.

Pursuant to section 1691 of the Civil Code the assignors’ duty was to rescind promptly upon discovery of the alleged fraud and to restore or offer to restore everything of value received under the contract sought to be rescinded, namely, the price paid for their certificates.

Even if it be assumed that the alleged notices of rescission were sufficient from a standpoint of intention and timeliness, yet admittedly there was neither a restoration of nor an offer to restore the amounts received on the sale of the certificates. The plaintiff contends that the assignors are entitled to retain in any event the amounts they received on the sales. This contention may be deemed correct only if under the alleged alternative cause the measure of the damages is the difference between what the assignors received and the face amount of the certificates. For if what the assignors received on the sale of their certificates was part of an undisputed larger claim or debt then due, that measure would control at law, and in equity would determine the right to retain the benefits received. (Gilson Q. M. Co. v. Gilson, 47 Cal. 597; Westerfeld v. New York Life Ins. Co., 129 Cal. 68 [58 P. 92, 61 P. 667]; Matteson v. Wagoner, 147 Cal. 739 [82 P. 436]; Taylor v. Hopper, 207 Cal. 102, 105 [276 P. 990]; MacIsaac v. Pozzo, 26 Cal.2d 809, 815 [161 P.2d 449].)

To substantiate his contention that there was an undisputed claim then due in the face amount of the certificates sold, the plaintiff looks only to the face amount of the certificates. He likens the face amount to an. unpaid judgment for the recovery of a specified sum of money and argues that the possible insolvency of the association at the time the assignors sold for less than the amount “due” does not affect the measure of the damages recoverable on account of the alleged fraud.

Since the objective in equity is to place the rescinding party in his .former position, the collectibility of a debt or judgment has no bearing on the amount recoverable. (Campbell v. Birch, 19 Cal.2d 778, 790-793 [122 P.2d 902]; Bank of America v. Greenbach, 98 Cal.App.2d 220, 238-239, 305-306 [219 P.2d 814].) Here it is true that the condition of the association and the measure of the damages are unrelated, but it does not follow that the correct measure is the one invoked. The fallacy in the plaintiff’s argument is the assumption that at the time of the sale of the certificates there was an undisputed claim due in the face amount of the certificates or in any amount. The situation might have been comparable to the cases relied on involving fraudulent settlement of existing judgments, if the assignors had matured claims for withdrawal in the amounts of their certificates and they were by fraud induced to take less. Contrary to the plaintiff’s assumption however the- complaint fails to show that there was any matured claim or debt due to the assignors from the association at the time they sold their certificates.

In the final analysis neither the alleged cause for rescission nor that for damages may be premised on an assumption that the certificates had an undisputed value in the face amount. The pleading discloses the unquestionable fact of the existence of an open market for the investors’ certificates; that due to association losses sustained by necessary real property foreclosures, and the insolvency or threatened insolvency of the association because of the widespread economic conditions which materially depressed values generally, the sale value of the certificates offered in the open market was also affected. The plaintiff’s assignors sold in this adverse market. Therefore the only measure of their damages is that provided by section 3343 of the Civil Code, namely, the difference between the price at which they sold and any greater amount which the market would have brought save for the alleged fraudulent conduct of the association. No facts in this connection are alleged or relied on.

It must follow that the plaintiff has not shown sufficient facts to support a recovery on either of the alternative grounds. As to damages, the material facts by which the proper measure may be applied are lacking. The only measure offered is contained in the allegation that if the assignors had not been induced by the alleged fraud to sell their certificates but had retained them, they would have been paid during liquidation the full amount of their certificates; that therefore they were damaged in the amount of the difference between the face amount and the amount paid, or $690,646.78. All that the plaintiff is saying is what might have been, had rescission been accomplished. As to" rescission, the facts alleged do not disclose the assignors’ right to retain the consideration received on the sale of their certificates and at the same time be reinstated in the position of the investors who retained their certificates pending liquidation and eventually participated in the increased values of the association’s assets following the second world war. It would be impossible now to compute what the outcome would have been had liquidation proceeded with the assignors in the position of continuing certificate holders pursuant to an accomplished rescission. It would also be highly inequitable at this stage of the proceedings, nearly 20 years after the alleged activities, for the court to make unprecedented exceptions to the rules applicable in rescission by permitting the assignors to share in property and assets in the preservation of which they declined to continue their support by failing to comply with equitable requirements at the time of their attempted rescission. The court may not thus secure for them a continuing choice to be out or in, depending on whether the fortunes of economics took a turn for worse or better. To do so would be in effect to treat the alleged sales as void rather than voidable, a result express!;' prohibited by the statute.

Nor is there ground for extending relief on the basis that a fiduciary relationship existed between the association and the certificate holders. There is nothing in the investment contract, in the statute, or in the facts alleged indicating the creation of that relationship. No ease so holding is cited and the treatment in pertinent cases is a recognition that the relation is that of debtor and creditor. (See In re Pacific Coast Bldg.-Loan Assn., 15 Cal.2d 134 [99 P.2d 251]; Bureau of Welfare, etc. Assn. v. Drapeau, 21 Cal.App.2d 138, 146 [68 P.2d 998]; Zottarelli v. Pacific States Sav. & L. Co. 94 Cal.App.2d 480, 502 [211 P.2d 23].) The duties and obligations of the association are setfforth in the statute; the statute provides what penalties shall follow from violations thereof, and prohibits resulting contracts to be treated as void.

The insuperable obstacle which the plaintiff faces is that, conceding a possible cause for relief, he or his assignors failed to take the necessary steps to secure for themselves the only remedy by which they could again be made whole. As a consequence of this failure the plaintiff cannot recover what he seeks, namely, the difference between the price at which his assignors sold their certificates and the face amount thereof.

The amended complaint does not meet the requirements which were held on the prior appeal to be essential to a sufficient statement of a triable cause. And the foregoing also compels the conclusion that such a cause cannot be stated.

The judgment is affirmed.

Gibson, C. J., Edmonds, J., Traynor, J., Schauer, J., and Spence, J., concurred.