Wilson v. Guaranteed Securities Co. , 73 Utah 157 ( 1928 )

This case involves the right to rescind a contract and recover back the consideration paid for capital stock of an investment company which in the sale of its capital stock had not complied with the Blue Sky Law.

In February, 1923, the plaintiffs loaned to Ferrin and his wife $2,000 on their promissory note due in three years, which was secured by their mortgage on real property alleged to be of the value of $3,500. The defendant Guaranteed Securities Company, on and prior to November, 1924, was an investment company engaged in selling and offering for sale its unissued capital stock and investment securities issued by it, and between February and the last of December, 1924, sold in Utah, without the consent or permission and without license from the State Securities Commission, to thirteen different persons, including the plaintiffs, 193 shares of its unissued capital stock of $250,000, divided into shares of the par value of $100 each. In November, 1924, the company, without license or a permit from the commission, sold to the plaintiffs in Utah 20 shares of its unissued capital stock at the par value of $100 each, in consideration of which the plaintiffs assigned and transferred to it the promissory note of the Ferrins. It is alleged that the plaintiffs were induced to purchase the stock through false representations of the company that it then was solvent, that it had earned and had accumulated a large profit or surplus sufficient to pay a dividend of 25 per cent and guaranteed to pay quarterly cash dividends after January 1, 1925, and because of other false and fraudulent representations. The plaintiffs sought to rescind the sale and contract of purchase on the ground of fraud and misrepresentations and of the illegality of the contract becase the company had no license or permit to sell its stock or other securities, and to recover back the note and mortgage assigned and transferred by them to the company.

A receiver was appointed for the company by the district court of Salt Lake county December 2, 1925. This action was commenced in the district court of Weber county on December 20, 1926. It was brought against both the Guaranteed Securities Company and the receiver, but without leave of court having first been had to bring it against the receiver or to make him a party. The receiver, however, voluntarily appeared in the action and filed a general demurrer to the complaint, which, having been overruled, he then filed an answer on behalf of himself and of the company. Upon his motion, a change of venue was granted from the district court of Weber county to the district court of Salt Lake county, where the case was tried to the court and judgment rendered and entered. The answer admitted the material allegations of the complaint, except the allegations of fraud and misrepresentations and the illegality of the contract, and admitted that the Guaranteed Securities Company was an investment company, and that it, between the dates stated and without a permit or license from the Securities Commission, had sold in Utah 20 shares of the par value of $100 each of its unissued capital stock to the plaintiffs and other shares to others. The receiver, however, denied that the contract or sale, for such or for any reason, was void, and affirmatively alleged that the action was barred by the provisions of subdivision 1 of section 6468, subdivision 1 of section 6470, Comp. Laws Utah 1917, and by section 18, c. 87, Laws Utah 1925. The receiver, before trial, proposed an amendment to his answer in effect averring that, after the assignment of the note and mortgage to the Guaranteed Securities Company, it issued and sold certain of its bonds which were secured by the mortgage to the extent of its face value, and that the persons to whom the bonds were sold were without knowledge of any defect, if any, in the title of the Guaranteed Securities Company to the mortgage, that none of the bonds had been paid, and that the holders of them had no other security, and that the receiver, as such, held the mortgage for their benefit and to secure the payment of their bonds. On objections of the plaintiffs on the ground that the proposed amendment stated no defense to the complaint, the court denied the amendment.

On a trial before the court, it held with the plaintiffs that the sale of the stock was void, ordered the note and mortgage to be surrendered up and delivered back to the plaintiffs, and rendered judgment accordingly, from which the receiver alone appeals.

1. He contends the complaint, as to him, did not state a cause of action because it is not averred therein that leave was had to sue the receiver or to make him a party. The complaint contains no such allegation. What divergent views there may be on the subject, the later decisions are to the effect, and the weight of authority is, that failure to obtain leave is not jurisdictional nor fatal to the maintenance of the action. High, Receivers (4th Ed.) § 254A; Pruyn v. McCreary, 105 A.D. 302, 93 N.Y.S. 995, affirmed 182 N.Y. 568, 75 N.E. 1133; Goodale PhonographCo. v. Valentine, 69 Wn. 263, 124 P. 691; Curtis v.Mauger, 186 Ind. 118, 114 N.E. 408; Manker v. Phoenix LoanAss'n, 124 Iowa 341, 100 N.W. 38; Fox River Paper Co. v.Western Envelope Co., 109 Ill. App. 393. It is no ground for demurrer. Leuthold v. Young, 32 Minn. 122, 19 N.W. 652.

The receiver, voluntarily appearing and pleading to the merits and moving for and obtaining a change of venue, waived whatever right he may have had to object to the plaintiffs' proceeding against him without leave of court. Colorado Fuel Iron Co. v.Rio Grande Southern R. Co., 8 Colo. App. 493, 46 P. 845;Southwestern Surety Ins. Co. v. Pacific Coast Casualty Co.,92 Wn. 654, 159 P. 788; Murray v. Etchepare, 132 Cal. 286,64 P. 282; Flentham v. Steward, 45 Neb. 640, 63 N.W. 924.

2. The receiver further urges that the court erred in denying his amendment to the answer. Counsel do not say much about this. They but say that though, as between the parties, the plaintiffs and the Guaranteed Securities Company, the purchase and sale and the assignment and transfer of the note and mortgage were void, yet were valid as to the holders of bonds to secure which the Guaranteed Securities Company and the receiver held the note and mortgage. But the amendment does not aver nor tender any issue that the note or mortgage was in any sense negotiated to holders of the bonds, or that they in any sense became or were due course purchasers or holders of the note or mortgage within the meaning of the Negotiable Instruments Law. What is averred rather implies the contrary. Nor is it sufficiently or properly averred to show how or in what sense the receiver in his capacity as such acted for or represented the alleged bondholders. I think, therefore, no error was committed in denying the amendment.

3. The chief complaint relates to the rulings holding the sale of the stock and the assignment and transfer of the note and mortgage void and to overruling the pleaded bar of the statute of limitations. These may be considered together. With respect to such questions, it is not contended that the receiver does not stand in the shoes of the Guaranteed Securities Company or that whatever rights in such respect the plaintiffs may assert against the company may not also be asserted against the receiver. I shall therefore so regard the matter. Under the Blue Sky Law of the state, the Guaranteed Securities Company was such an investment company as to be under and within the provisions of that act, and to properly and legally sell its capital stock it was required to first obtain a license or permit from the State Securities Commission. Admittedly no such license or permit was obtained by it. Section 24, c. 17, Special Session Laws of 1919, in force in November, 1924, when the sale of the stock was made, was as follows:

"Any contract of sale made in violation of the terms of this chapter or without first applying for and receiving the license as herein required shall be unlawful and void and every person, firm, domestic or foreign corporation participating directly or indirectly in the sale of any security in violation of the terms of this act and every officer, director, and agent of any corporation where acting as an investment company or dealer, or agent, shall be liable to the purchaser in a civil action instituted in any court of competent jurisdiction for the amount of the purchase price paid and all damages the purchaser may sustain, without proof of actual or constructive fraud."

In 1925 the Legislature of Utah repealed the 1919 act and re-enacted a new Blue Sky Law (Laws Utah 1925, c. 87). In lieu of section 24 of the 1919 act, section 18 of the 1925 act was adopted. So far as material here, section 18 of the 1925 act reads as follows:

"Every sale or contract for sale made in violation of any of the provisions of this act shall be voidable at the election of the purchaser and the person making such sale or contract for sale and every director, officer or agent of or for such seller who shall have participated or aided in any way in making such sale shall be jointly and severally liable to such purchaser in an action at law in any court of competent jurisdiction upon tender to the seller of the securities sold or of the contract made for the full amount paid by such purchaser, together with all taxable court costs and reasonable attorney's fees in any action to tender under this section; provided, that no action shall be brought for the recovery of the purchase price after two years from the date of such sale or contract for sale. * * *"

The 1925 act contained a proviso that "all actions or proceedings commenced and prosecuted under the provisions of Chapter 131, Laws of Utah, 1921, and pending at the time this act shall take effect [May, 1925] shall not be affected by said repeal."

This action was commenced in December, 1926, more than nineteen months after the act of 1919, and as amended in 1921 had been repealed, and two years, one month and thirteen days after the sale of the stock. The 1919 act as amended in 1921 fixed no period of limitation within which an action could be brought to recover back the amount of the purchase price paid or for damages sustained by the purchaser. Under the 1925 act such an action was required to be commenced within two years after the sale. The 1919 act as amended in 1921 rendered every contract of sale made in violation of the terms of the act, or without first applying for and receiving a license as in the act provided,unlawful and void. The 1925 act rendered it voidable at theelection of the purchaser. It is the contention of the receiver that the action having been brought, not within two years after sale, is barred by the provisions of the 1925 act. He further contends that the action also is barred by subdivision 1 of section 6468, Comp. Laws Utah 1917, which provides that "an action for liability created by * * * the statute of this state other than a penalty or forfeiture under the laws of this state shall be begun within one year."

A liability created by statute is a liability which would not exist but for the statute. Hawkins v. Iron Valley FurnaceCo., 40 Ohio St. 507. That is the general rule. The plaintiffs' cause of action is not founded on nor dependent upon such a liability. Long before and independently of the act in question actionable liability and right of action existed to rescind contracts and sales on the ground that they were illegal or otherwise void and to recover back what was parted with, or to maintain an action at law to recover what was so paid or damages sustained by the purchaser. The 1919 act, as amended in 1921 and in force when the sale of stock was made in 1924, declaring that contracts of sale made in violation thereof and without a license or permit were unlawful and void, and rendering an investment company and its agents participating in the sale liable to the purchaser for the price paid and all damages sustained by him without proof of actual or constructive fraud, did not thereby create a new liability or a cause of action where theretofore none existed. That a liability to account for or pay back what was received on an illegal or void contract or sale or transaction was actionable either in equity or at law is as old as jurisprudence itself and was so recognized at common law, in equity and by Codes. The basis of the rule was that no one was allowed to enrich himself through his own wrongful or illegal acts at the expense of another; that no right could be founded upon a violation of law; that contracts or transactions prohibited or forbidden by law to protect one class from another parties thereto were not regarded as in pari delicto, and thus what the wrongdoer so received was held by him for the use and benefit of the injured party and was recoverable from him, though based alone on the wrongful or illegal or invalid contract or transaction and without allegations or proof of actual fraud. The act of 1919, as amended in 1921, declaring a contract or sale of capital stock of an investment company without a permit or license to be unlawful and void, because it further provided that under such circumstances the investment company and its agents participating in the sale were liable to the purchaser for the amount of the purchase price paid and all damages sustained by him without proof of actual or constructive fraud, added nothing to such a liability, for, as is seen, without such further provision, a purchaser paying money or parting with a thing of value on an unlawful or void transaction or sale had the undoubted right either at law or in equity to recover back what was so paid and all damages sustained by him. Thus had the act but declared the contract or sale unlawful and there stopped without the further provision, it could not successfully be contended that a purchaser had not the right, based alone on such invalidity of the contract or sale, either at law or in equity, to recover back what he had parted with. In such case a cause of action accrued and vested in him when the unlawful and void sale was made and the purchase price paid by him. Hence, after the act declared the contract or sale unlawful and void, what it further provided, whether regarded as of right or merely of remedy, was but declaratory of what theretofore was recognized at common law, in equity, and by Codes. And, as is well asserted by the plaintiffs, the action was not, nor was it required to be, brought under that act, and that it was merely invoked to show the illegality of the acts by which the note and mortgage sought to be recovered were obtained. Such views, as I think, are supported not only by ample but by the great weight of authority. Jeremy Fuel Grain Co. v. D. R.G.R. Co.,60 Utah 153, 207 P. 155; National Underwriting Co. v. Simon (C.C.A.) 9 F.2d 920; Karamanou v. Greene Co., 80 N.H. 420,124 A. 373; Edward v. Ioor, 205 Mich. 617, 172 N.W. 620, 15 A.L.R. 256; Webster v. U.S.I. Realty Co., 170 Minn. 360,212 N.W. 806; Vercillini v. U.S.I. Realty Co., 158 Minn. 72,196 N.W. 672; Baum v. Thoms, 150 Ind. 378, 50 N.E. 357, 65 Am. St. Rep. 368; Stewart v. Brady, 300 Ill. 425, 133 N.E. 310;Weitz v. Quigley, 88 N.J.L. 617, 97 A. 254; Parker v.Otis, 130 Cal. 322, 62 P. 571, 927, 92 Am. St. Rep. 56. I therefore am of the opinion that the pleaded one-year statute did not apply.

The receiver, however, chiefly urges the bar by reason of the 1925 act. He says that act repealing the 1919 act as amended in 1921 took away all defenses or assaults of illegality of the sale the same as though such statute had not existed, and that hence the plaintiffs, to avail themselves of any assault on or complaint of the sale of the stock on the ground of illegality, were required to bring themselves within the 1925 act, which they did not do. On the assumption that it was the 1919 act as amended by the act of 1921 which alone gave the plaintiffs a cause or right of action, and without which they had none, and that such demand or right was lost by the repeal of that act by the 1925 act, the cited cases of Willcox v. Edwards, 162 Cal. 455,123 P. 276, Ann. Cas. 1913C, 1392, and Washburn v. Franklin, 24 How. Prac. (N.Y.) 515, to some extent support the receiver's contention. If, however, the assumption is groundless, the cases are inapplicable; and, even on the assumption, they do not in my judgment declare the weight of authority. Under the act in force when the sale was made, the act of 1919, as amended in 1921, the transaction and sale were unlawful and void; under the 1925 act subsequently passed transactions and sales of such character were made only voidable. But it is the act in force when the sale was made and the transaction had which applies. The sale under that act being unlawful and void was not by subsequent changes of the act rendered lawful or valid, nor was its void and unlawful character or status changed to one merely voidable. Plaintiffs' cause of action accrued and vested in them when the stock was sold and the purchase price paid. That being so, the plaintiffs acquired a vested right in and to a demand or cause of action for the moneys paid or other valuable thing parted with, which could not be affected by subsequent changes or a repeal of the act. In other words, such right or state of things which had grown out of the act when in force and which had ripened into a demand, and a cause of action could not be canceled nor annihilated by a subsequent repeal of the act. I think that familiar doctrine, and is, as I think, supported by the great weight of authority.Morrison v. Farmers' Elevator Co., 319 Ill. 372,150 N.E. 330; Coe v. Portland Farmers' Elevator Co., 236 Mich. 34,209 N.W. 829; Whitaker v. Pope, 29 Fed. Cas. 961, No. 17528;Peters v. Goulden, 27 Mich. 171; Ettor v. Tacoma,228 U.S. 148, 33 S.Ct. 428, 57 L.Ed. 773; Jacobs v. Seattle,100 Wn. 524, 171 P. 662, L.R.A. 1918E, 131; State v. Williams,10 Tex. Civ. App. 346, 30 S.W. 477.

The plaintiffs' cause of action thus did not arise out of, nor was it affected by, or dependent upon, the 1925 act, and hence the pleaded bar of that act likewise was ineffectual. I therefore am of the opinion that the cause of action was not barred by either of the pleaded statutes, and that it is controlled by the general statute of four years' limitation. It is not claimed that the action is barred by that statute. I thus think the judgment of the court below should be affirmed.