author: CARTER, J.

text:
    [S. F. No. 15797.
    In Bank.
    January 22, 1940.]
    AMERICAN TRUST COMPANY (a Corporation), Appellant, v. CALIFORNIA WESTERN STATES LIFE INSURANCE COMPANY (a Corporation), Respondent.

      Brobeek, Phleger & Harrison for Appellant.
    Williamson & Wallace, Ware & Ware, Downey, Brand & Seymour, Stephen W. Downey, James D. Adams and Mc-Cutchen, Olney, Hannon & Greene for Respondent.
    Neil Cunningham and George H. Downer, as Amici Cumae, on Behalf of Respondent.
   CARTER, J.

This is an action for declaratory relief with respect to an agreement of defendant and respondent to repurchase shares of its own stock previously sold to plaintiff and appellant. The case involves substantially the same issues as California Western States Life Insurance Co. v. Pacific American Co., Ltd., S. F. No. 16026, post, p. 763 [98 Pac. (2d) 511], and California Western States Life Insurance Co. v. Tucker, S. F. No. 16027 (post, p. 69 [98 Pac. (2d) 511]), this day decided. We are accordingly presenting the background of these three actions in this opinion. The essential facts, as found by the trial court in each case are practically undisputed and are amply supported by the evidence in the record. Since these facts are largely determinative of the issues, we set them forth in some detail.

Preliminary to any discussion of the transactions involved, it is necessary to identify the principal parties concerned. California State Life Insurance Company (herein called “California”) was, prior to August, 1931, a life insurance corporation organized and doing business under the law of California. Its main office was in Sacramento. Western States Life Insurance Company (herein called “Western”) was also a California life insurance corporation prior to August, 1931. Its main office was in San Francisco. Defendant and respondent, California Western States Life Insurance Company (herein called “California-Western” or the “combined company”), is the former California State Life Insurance Company which changed its name after its purchase of the business and assets of Western States Life Insurance Company in 1931, this purchase having effected a practical consolidation of the two companies. J. Roy Kruse was the president of California who wished to acquire the business of Western, and acted for California during the period of the negotiations leading toward consolidation. The shares of Western were owned by some 1400 persons, including the following four large stockholders, who held in the aggregate 45 per cent thereof: Pacific American Company, Ltd., and American National Company, wholly owned subsidiaries of Goldman-Sachs Trading Corporation, owning 25 per cent of the shares. (American Trust Company, plaintiff herein, acquired the interest and rights of American National Company prior to this action.) Mrs. Nion Tucker, owning 5 per cent. (Mrs. Tucker took no active part in the transactions, being represented at all times by her husband.) A. D. King, president of Western and a director thereof, owning 15 per cent. Nion Tucker was president of Tucker, Hunter, Dulin & Co., a brokerage firm, also a wholly owned subsidiary of Goldman-Sachs Trading Corporation, president and a director of Pacific American Company, a director of American National Company, and a director of Goldman-Sachs Trading Corporation, during the period of most of the transactions ; he was also a director of Western, and after the consolidation, a director in the combined company.

The transactions began in the early part of 1931, when Kruse, president of California, desired to acquire the business and assets of Western, the larger company. He needed the consent of two-thirds of the shares, and therefore approached Tucker, who was not only a director of Western but associated in various ways with the other large stockholders, and who represented them in these negotiations. The two placed a valuation of $7,000,000 on the business and assets of Western, and with its 100,000 shares, this amounted to $70 for each share of Western stock. Kruse was unable to raise the cash, and thereafter proposed an alternative plan to pay $4,000,000 in cash, and stock in his company (California) of the par value of $500,000. The par value of California stock was $5 per share, but its market value at this time was $40 per share. The contemplated method of payment was to give each Western shareholder $40 cash, plus one-half share of California stock, worth $20 at that time, or the equivalent of $60 for each Western share (which then was selling at between $46 and $56). California did not have the $4,000,000 in cash and it was intended that this sum should come from two sources: first, a new issue of California stock at its then market value, $40 per share (or $20 per half share), and second (the major portion), from the cash and liquid assets of California itself and of Western after its acquisition. The plan thus outlined eventually became the general offer to the Western shareholders.

This plan, however, meant a valuation of $60 per share of Western instead of the original valuation of $70, and although this was considered acceptable in so far as the general offer to stockholders was concerned, Tucker and his principals refused to sell for less than the original $70 price. Accordingly, it was agreed between Kruse and Tucker that the four large stockholders would sell their stock for the regular price, namely, $40 cash plus one-half share of California stock then worth $20, but that California would agree to repurchase the California stock of these four at $30 per half share, $10 more than its market value at this time. The repurchase was to take place within two years, with 6 per cent interest to be paid by California on the repurchase price. The four stockholders owned 45 per cent of the Western stock, or 45,000 shares, for each of which they were to receive a half share of California stock to be eventually repurchased at $30, with interest. California, therefore, was to undertake a liability under the repurchase agreements of $1,350,000, or with interest, approximately $1,400,000.

Tucker, Hunter, Dulin & Co., for its brokerage services in negotiating the deal, was to receive a commission of $200,000 if it succeeded. This was ultimately paid, and thereafter part was divided by Tucker, Hunter, Dulin & Co. between two of its principals, namely, Mrs. Tucker, who received $25,000, and King, president of Western, who received $100,000.

The plan outlined above was then reduced to writing and carried out in several agreements and proposals as follows:

1. Agreement between California and Tucker, Hunter, Dulin & Co. On June 10, 1931, an agreement was made between California and Tucker, Hunter, Dulin & Co., in which California offered to pay for each share of Western stock deposited under the offer, $40 per share and one-half share of California stock, provided that at least 66,667 shares (being 2/3) of the stock of Western were deposited before October 1, 1931. This agreement provided, in substance, (1) that California would make a general offer to Western stockholders (see infra); (2) that Tucker’s firm as broker was to attempt to obtain deposit of as many Western shares as possible, for which California was to pay a commission of $200,000; (3) that California would issue 100,000 additional shares, of which a maximum of 50,000 would be available for the purchase of the Western shares on the one-half share basis, and the rest should be offered for subscription at $40 per share, the incoming Western shareholders being entitled to subscribe to 20,000 of the new shares on the basis of 2 new shares for every 5 California shares acquired under the purchase; and (4) the offer was subject to the condition that the transaction be approved by the state insurance commissioner (see below).

2. General offer to Western stockholders, to buy their stock. This document stated (1) that a plan of consolidation of the two companies had been devised, and offered to buy shares at the above-mentioned price; it further stated (2) that the offer was subject to the condition that the insurance eommissioner approve the transfer of Western’s assets under a proposed agreement of sale and reinsurance; (3) that after consolidation there would be over $260,000,000 of insurance in force, over $45,000,000 of assets, and a paid-up capital of $1,750,000. This offer was, on June 12, 1931, sent to all Western stockholders by Western’s secretary. Later, about July 1, 1931, the secretary addressed a further notice to stockholders, in which he said, with reference to the general offer theretofore made: ‘ ‘ The complete terms of the offer are set forth in that letter.”

3. General offer to Western stockholders of subscription rights in California. This document recited the plan already described, and informed Western stockholders that if they sold their stock and received cash and California stock under the general offer, they would have the right to subscribe to two additional shares of California stock for every five shares they received. This offer was sent out by California.

4. Agreement of sale and reinsurance. This contract was made between California and Western, in which Western agreed to sell all its business and assets of every kind, in consideration of the payment by California for the credit of Western stockholders of $4,000,000 in cash, and 50,000 shares of California stock, which should be held by American Trust Company as depositary, for distribution to Western stockholders under the purchase agreement. California agreed to assume all liabilities of Western and to reinsure all policies. The agreement was made subject to approval of the insurance commissioner. Later, on August 19, 1931, he endorsed his approval thereon, finding the same to be in accordance with the law “and such as to protect the interest of all policy holders” of Western.

5. Repurchase agreements. Agreements were made on June 10, 1931, contemporaneously with the Tucker, Hunter, Dulin & Co. contract, between California and each of the four large Western stockholders, providing that in the event that they sold their shares to California in accordance with the general offer, California agreed to repurchase them within two years at $60 per share (i. e., $30 per half share) plus 6 per cent of the total sum (as interest), less any dividends declared on the repurchased shares.

We have thus far described the negotiations, the plan of purchase, and the instruments devised to carry it out. In all of the discussions Kruse acted by himself, without prior authorization by the California board of directors. Tucker also acted for his principals without authorization by the directors of Western. It therefore became necessary on June 10, 1931, when the Tucker, Hunter, Dulin & Co. contract and the repurchase agreements were signed, to obtain the approval of the two companies, and this constitutes the second stage of the transactions. For this purpose, Kruse met with the directors of California on June 12, 1931, and they authorized the Tucker, Hunter, Dulin & Co. agreement and the agreement of sale and reinsurance. At later meetings the issuance of the new stock was authorized. No one but Kruse and the then attorney for the company knew of the repurchase agreements, and Kruse made no mention of them. Some of the directors were led to believe that the company had or would receive an option to acquire stock, but no suggestion of an obligation to purchase any stock was made. Nor did Kruse enter these agreements in the corporate records or keep them with other documents of the company. He placed them in a private safe in his office to which he alone had access, and never disclosed their contents until 1933. The liability of about $1,400,000 under these agreements never appeared on the company’s statements to stockholders, nor on the books, and was not disclosed to the insurance commissioner’s representatives at the time of their examination of the books of the company.

Tucker met with the directors of Western on June 10, 1931. The plan was described, the general offer to purchase discussed, and the directors adopted a resolution ordering the secretary to send the same to the stockholders. At a. subsequent meeting the agreement of sale and reinsurance was authorized. Of the thirteen directors who approved the purchase offer, only Tucker and those associated with him knew of the repurchase agreements. These were King, the president (one of the parties to the repurchase agreements), Lochead, vice-president and a director of plaintiff (American Trust Company), and Ford. They voted for the plan, but made no disclosure of the repurchase agreements.

The only record of these commitments which appeared anywhere was the entry by Pacific American Company in its books, and a general item in the Goldman-Sachs 1932 statement to its stockholders, which found its way into Moody’s Manual, that the California-Western stock of Pacific American Company was held “at contract sales price” of $60 per share. There was no mention of the repurchase agreements of the other stockholders, nor of the fact that California-Western was the buyer obligated under the contract referred to. None of the Calif ornia-W estern stockholders or directors other than those mentioned ever learned of the facts through these sources.

With approval of the companies thus obtained, the plan went into operation. Pour directors of Western became members of California’s board: Tucker, King, and Lochead (all of whom had knowledge of the whole transaction), and Hawley, holder of the proxy to vote the deposited Western stock (who did not have such knowledge). The four large stockholders deposited their holdings, and practically all the other Western stockholders also came in, so that by August 19, 1931, California owned substantially all of the outstanding Western shares. A meeting of Western stockholders was held and the sale of the business approved. The name of the combined company was changed to California-Western States Life Insurance Company. No disclosure was made to the stockholders of the repurchase agreements or the liability of the combined company under them. The plan was presented to the insurance commissioner and he approved the agreement of sale and reinsurance, but no disclosure of these facts was made to him. The capital stock was increased from 75,000 shares to 175,000 shares of the same par value and a permit was obtained from the insurance commissioner to issue the additional shares to subscribers, without disclosure of the repurchase agreements. The purchase was consummated by the deposit in escrow with American Trust Company, for Western stockholders, of 50,000 shares of stock and payment of the $4,000,000 in cash to Western. Of this sum, $2,000,000 was raised by the issuance of the new stock; $1,350,000 was taken from the assets of Western; and $400,000 of the balance was borrowed from American Trust Company.

The third development occurred in 1932 when Pacific American Company, needing money, entered into an agreement through G. Parker Toms, its then president, with Kruse, to satisfy its repurchase contract in advance of the due date at a discount. The agreement was evidenced by a letter from Kruse to Toms, dated July 8, 1932, in which Kruse, on behalf of California, stated that Pacific American Company’s 5,025 shares of California-Western stock would be taken up not later than July 22, 1932, at $50 per share (or $25 per half share, instead of the $30 called for under the agreements), a total of $251,250. At this time the market price of the stock was $30 per share. Kruse made no disclosure of this proposed transaction to his company, and in order to carry it out made use of Westerlic corporation, a wholly owned subsidiary of California-Western, as a conduit. Westerlic corporation had been used by California-Western in occasional business transactions, but had no assets. The arrangement was that Westerlic corporation bought the shares and paid the money to Pacific American Company. Then Kruse had a loan made by California-Western to Westerlic in the amount of the purchase price. Later in 1932 Westerlic obtained a bank loan to repay Calif ornia-W estern. The details of the repurchase thus did not appear on the books or financial statement of California-Western, nor in its report to the insurance commissioner, and consequently the repurchase agreements still remained secret.

The fourth stage begins in 1933. The repurchase agreements were to become due June 10, 1933, and California-Western was financially unable to perform. In a letter dated May 31, 1933, to Lochead of American Trust Company, Kruse listed various losses of the company in its operations, stating that “we cannot afford to make any disbursements at the present time that will in any way have a possible bearing upon the security of the policyholders,” and adding that “It is almost imperative that we secure the relief asked for.’’ Discussions followed, and an agreement was reached under which Calif ornia-W estern was to pay one-half the amount due under the repurchase agreements of American Trust, King and Mrs. Tucker, and receive an extension of time as to the balance, giving its promissory notes therefor to become due on March 1, 1934, and January 1, 1935. Toms, president of American Trust Company, sent Kruse copies of the proposed agreements and promissory notes drafted by its counsel. Toms also requested, on advice of counsel, that California-Western adopt a resolution reciting that California-Western had earned surplus equal to the full amount of the purchase price and that the stock was being purchased from earned surplus, and further, that the resolution comply with section 421 of the Civil Code relating to investments of life insurance companies, calling for a % vote of directors, with entries in the minutes of the names of approving directors and other data.

To carry out this agreement a directors’ meeting of California-Western was held on June 13, 1933, at which two-thirds, or seventeen directors were present. At this meeting the repurchase agreements were first disclosed to the board of California-Western, and the new agreement calling for partial payment was explained. The directors who had previous knowledge of the facts were Kruse, Tucker, Lochead, and a few others who had learned of them from Kruse at times prior to the meeting. The other directors were without any prior knowledge. In response to objections and protests by directors Gibbons and Grimshaw, Kruse stated that the repurchase agreements were binding and that the company had no alternative. The then counsel for the company was present and likewise advised that they were binding and it was necessary to comply with them. Thereupon the board voted to adopt the resolutions authorizing the partial payment and promissory notes for the balance in conformity with the agreements drawn by counsel for American Trust Company. The agreements were signed, the part payment made, and the notes delivered, following which the three stockholders (American Trust Company, King and Mrs. Tucker) turned in their stock. Half of the stock was however, deposited with American Trust Company in pledge to secure the promissory notes. The cash with which the half-payment was made was procured in part as a loan from American Trust Company. At the time of this transaction involving the partial performance of the repurchase agreements calling for a price of $60 per share, the market price of the stock was $20 per share.

The fifth and final stage began at the end of 1933 when other stockholders discovered the facts surrounding the repurchase agreements. In response to their demands the directors authorized suits to recover money paid under the repurchase agreements. Accordingly, California-Western, on December 5, 1933, disaffirmed the repurchase, the payments and the notes, gave notice of cancellation of the agreements, offered to return the certificates and to pay any dividends thereon from June 13, 1933. This was refused, and California-Western thereupon, as plaintiff, filed two action's, one against Pacific American Company, and the other against Mrs. Tucker. American Trust Company filed the present action as plaintiff, against California-Western, seeking declaratory relief with respect to the agreements. No suit was brought against King, for in 1933 he voluntarily agreed to set aside his contracts, and restored the money he had received, including his share of the commissions obtained through Tucker, Hunter, Dulin & Co. for the original negotiation of the deal.

The three cases were tried separately, separate findings were made in each, and separate appeals were taken. Nevertheless, as we have already stated, the basic issues and the evidence are the same and we have chosen to discuss them fully in this opinion.

The trial court in the instant case made comprehensive findings setting forth the facts summarized above, and further found as follows:

That it was not the intention or understanding of the parties that the agreements of June 10, 1931, should constitute one contract, or that the performance of the Tucker, Hunter, Dulin & Co. contract of sale and reinsurance contract were dependent on consummation of the repurchase contract; but the intention and understanding was that these several agreements were independent, severable, and to be performed separately.

That Kruse was not authorized to enter into the repurchase agreement on behalf of the corporation, and that California’s board of directors did not at the meeting of June 12, 1931, or at any other time authorize, approve or ratify the repurchase agreement.

That none of the other stockholders of Western, when depositing their stock or subscribing for shares of the new issue, knew of the repurchase agreements, but all believed and were not otherwise advised or informed, that the four large stockholders were depositing and subscribing strictly according to the terms of the general offer and on the same basis as the others.

That the repurchase agreement with American National Company was a secret and undisclosed stipulation modifying its subscription to the 7,150 additional shares, to the detriment of all the other subscribers, and to the detriment of defendant, California Western States Life Insurance Company, and its creditors and was prohibited by statute and was a fraud upon said defendant and all of its stockholders.

That the repurchase agreement became effective and irrevocable on July 14, 1931, when over two-thirds of the Western stockholders deposited their shares; and that up until August 14, 1931, said agreement to repurchase was in violation of section 354 of the Civil Code, and void for illegality.

That at the directors’ meeting of June 13, 1933, Tucker and Lochead who voted for the resolution were both at that time directors of American Trust Company (plaintiff), which company was interested in the repurchase both of its shares and those of Mrs. Tucker which it held as collateral security.

That at said directors’ meeting of June 13, 1933, there was no disclosure of the interests of Lochead and Tucker, nor were they noted in the minutes; nor, despite their knowledge of the facts, was it disclosed that the repurchase agreements had never been authorized or ratified by the directors or stockholders ; or that defendant did not have at this meeting date adequate earned surplus to make the purchase; or that the expenditure of these sums would seriously impair its financial condition and embarrass it in its operations; or that it would be necessary to borrow (and it did borrow) $400,000 from plaintiff (American Trust Company); or that the purchases would amount to more than 25 per cent of defendant’s capital and surplus and would exceed 30 per cent of its total capital; or that defendant had suffered heavy losses and the market price of its shares was not over $20 per share.

That on said date of June 13, 1933, the combined company did not have any earned surplus at all; that the price paid for the stock was three times its market value; that this payment amounted to more than 25 per cent of the capital and surplus and more than 30 per cent of the total capital of the company.

That the repurchase agreements were not reported to the insurance commissioner or approved by him at the time; nor were they reported to or approved by the stockholders, nor known to all of the directors.

That the resolution purporting to authorize the repurchase was not regularly or legally adopted and was void; that the payments and notes given are not binding, and are illegal and void; that the repurchase was a withdrawal and distribution of a substantial part of its assets to one stockholder to the exclusion of others, and was a fraud on the stockholders, its creditors, and against public policy and void.

That the consummation of the repurchase substantially reduced and depleted the assets of the combined company, entirely exhausted its surplus, undivided profits and reserves, necessitated a reduction in the capital stock by the amount of $875,000 and correspondingly reduced the value of its outstanding shares to the direct injury of the corporation and all other stockholders and creditors, and rendered it unable to meet its obligations without said reduction of capital.

Judgment was accordingly rendered for California-Western in each case for the amount of the payments made under the repurchase agreements, with interest from June 13, 1933, and for the cancellation of the promissory notes. The stockholders were permitted to receive back the repurchased shares, together with dividends declared after the repurchase, with interest thereon.

Appeals were taken by each of the losing parties, and the attorney-general also filed a brief on behalf of the insurance commissioner in support of the judgment. Various legal propositions have been discussed, but in our opinion, the controlling issue is that of fraud, and on that issue the sole question is whether the findings, based on practically undisputed evidence, support the judgment. On the issue of illegality, which was argued in considerable detail in the briefs, it. may be noted that the repurchase agreements, which the court found were made before the 1931 Civil Code amend-, ments went into effect, were illegal and void; but the amendment to section 365 of the Civil Code in that year limited the remedy to the setting aside of the purchase to the extent necessary to meet1 ‘ existing liabilities of the corporation at the time of such sale”. What obligations constitute “existing liabilities” is greatly disputed. The trial court made no finding on this latter point, and the record is not, we believe, sufficiently clear for us to determine it without a retrial on the issue. Since, however, we hereinafter hold that the judgment is supported by the evidence and findings of fraud, it becomes unnecessary to decide this question of illegality. We therefore refrain from doing so, and proceed now to the discussion of the issue of fraud.

The manner in which the agreements, the subscriptions, and the transfer of assets, were procured, involving concealment and misstatement of material facts, relied upon by the stockholders and directors of both companies, and by the insurance commissioner, so clearly appears from the evidence and findings that fraud is an inevitable conclusion. Appellants, however, without disputing the essential facts, have presented a number of legal defenses thereto.

The chief defense is that there was no actual fraud, in the sense of active misrepresentation, but only nondisclosure, which does not amount to constructive fraud unless the party is a fiduciary with a duty to disclose the facts. They rely chiefly on Ryder v. Bamberger, 172 Cal. 791 [158 Pac. 753], McCord v. Martin, 47 Cal. App. 717 [191 Pac. 89], and Bacon v. Soule, 19 Cal. App. 428 [126 Pac. 384], which, they contend, stand for the general proposition that a corporation director owes no fiduciary obligation to the stockholder as such, but only to the corporation. Hence they conclude that nondisclosure by Kruse, Tucker and the others in their dealings with their own stock, and their nondisclosure of the repurchase agreements to the other Western stockholders, was not fraudulent because there was no duty to disclose.

The doctrine upon which appellants rely, which is said to be the majority rule, is in substance that a director is a fiduciary with respect to the corporation as an entity, and not to the stockholders as individuals. Otherwise expressed, it is' that in dealings with or for the corporation, the director is exercising a corporate function, and is subject to the usual fiduciary duty to disclose all material facts; but that in personal dealings with stockholders he is not exercising a corporate function, and is free to deal with them at arms’ length. Nearly all of. the cases applying the rule are concerned with transactions for the purchase of stock between director and stockholder, and they hold that the director need not disclose to the stockholder his special knowledge affecting the value of the shares. (See, generally, Carpenter v. Danforth, (N. Y.) 52 Barb. 581; Crowell v. Jackson, 53 N. J. L. 656 [23 Atl. 426]; Connolly v. Shannon, 105 N. J. Eq. 155 [147 Atl. 234] ; Du Pont v. Du Pont, 242 Fed. 98; 13 Am. Jur., see. 1010; 84 A. L. R. 615; Walker, 32 Yale L. J. 637.) In sharp contrast with this view is the so-called minority rule, which recognizes the director’s obligation to the stockholders individually as well as collectively, and refuses to permit him to profit at the latters’ expense by the use of information obtained as a result of his official position and duties. This view, while generally conceded to be in the numerical minority, is followed by able courts, and text-writers who have examined the subject. (See, e. g., Dawson v. National Life Ins. Co., 176 Iowa, 362 [157 N. W. 929, Ann. Cas. 1918D, 230, L. R. A. 1916E, 878]; Oliver v. Oliver, 118 Ga. 362 [45 S. E. 232]; Stewart v. Harris, 69 Kan. 498 [77 Pac. 277, 105 Am. St. Rep. 178, 2 Ann. Cas. 873, 66 L. R. A. 261]; Ballantine, Private Corporations, sec. 125; Stevens on Corporations, sec. 145; 3 Pomeroy, Equity Jurisprudence, sec. 1090; 19 Corn. L. Q. 103; 45 Harv. L. Rev. 1388; 39 Yale L. J. 582.)

But this simple statement of the majority and minority rules does not present the true picture, for a number of jurisdictions which are classed in support of the majority view have recognized a major exception in the so-called “special facts” doctrine: Conceding the absence of a fiduciary relationship in the ordinary case, they nevertheless hold that where special circumstances or facts áre present which make it inequitable for the director to withhold information from the stockholder, the duty to disclose arises, and concealment is fraud. The leading case is Strong v. Repide, 213 U. S. 419 [29 Sup. Ct. 521, 53 L. Ed. 853], which points out that active participation in the negotiations for a transfer of the corporate property may constitute the special circumstances to raise the duty. This case has been followed by many others. Thus, in Poole v. Camden, 79 W. Va. 310 [92 S. E. 454, 457, L. R. A. 1917E, 988], the court concedes the correctness of the majority rule, but holds that if the director instead of remaining silent, gives information to the stockholder, i. e., “undertakes to speak or become active in inducing the sale, he must speak fully, frankly, and honestly, and conceal nothing to the disadvantage of the selling stockholder”. To similar effect are Dutton v. Barnes, 162 Minn. 430 [203 N. W. 414] ; Bollstrom v. Duplex Power Car Co., 208 Mich. 15 [175 N. W. 492]; Gammon v. Dain, 238 Mich. 30 [212 N. W. 957]; McMynn v. Richardson-Phenix Co., 186 Wis. 442 [201 N. W. 272] ; Voellmeck v. Harding, 166 Wash. 93 [6 Pac. (2d) 373, 84 A. L. R. 608], all of which expressly recognize the majority rule as ordinarily applicable, but follow the exception declared in Strong v. Repide, supra. In Goodwin v. Agassiz, 283 Mass. 358 [186 N. E. 659], the Massachusetts court, long committed to the majority rule, applied it where a director purchased shares on a stock exchange, but Rugg, C. J., added this warning: “On the other hand, directors cannot rightly be allowed to indulge with impunity in practices which do violence to prevailing standards of upright business men. Therefore, where a director personally seeks a stockholder for the purpose of buying his shares without making disclosure of material facts within his peculiar knowledge and not within reach of the stockholders, the transaction will be closely scrutinized and relief may be granted in appropriate instances” (citing Strong v. Repide, supra). (See, also, notes, 47 Harv. L. Rev. 353; 19 Corn. L. Q. 103; 14 Minn. L. Rev. 530; 13 Am. Jur., see. 1011; 3 Fletcher, Corporations, (Perm. Ed.) sec. 1171.)

Having seen that'the so-called “majority” rule for which appellants contend is subject to important limitations and exceptions even in jurisdictions which follow it, while the so-called “minority” rule has the strong support of a number of courts and distinguished writers, we proceed now to examine the three California cases so heavily relied upon for a reversal herein. Upon such examination we find that each case is entirely supportable on its facts, but is clearly distinguishable from the instant case.

In Bacon v. Soule, 19 Cal. App. 428 [126 Pac. 384], the first of the group, plaintiff Frank Bacon and his two sisters were the owners in equal shares of the entire capital stock of the Bacon Land and Loan Company, a small corporation, of which they were directors and officers. They quarreled bitterly over policy, maintained no friendly relations, and finally decided to abandon the business, dissolve the corporation and partition its properties. This was done and plaintiff received as his share a lot and dwelling house with an agreed valuation of $30,000. Thereafter he sued, alleging that the house had originally contained furnishings worth $2,000 which he believed were still in place but which had been previously sold by the corporation and removed, and that this fact had not been disclosed to plaintiff by defendants. He relied on theories of confidential relationship arising out of their blood relationship, and their business “partnership”. The lower court sustained a demurrer to the complaint, and the decision was affirmed on appeal. The appellate court pointed out the following matters, all of which are in sharp contrast to the facts of the instant case: (1) The parties were hostile to each other for ten years, dealt at arm’s length, had no personal communication or dealings with each other, and hence plaintiff had no reason to place any confidence in the defendants, and they had no reason to suppose that he did. (2) It did not appear that the defendants by words or artifice induced the belief that the property was in the same .condition in which plaintiff originally saw it. (3) Plaintiff accepted the property without making any investigation or inspection of its contents, which were entirely open to him. The court then briefly mentioned the rule that directors are trustees only in respect of their acts relating to the property or business of the corporation, and concluded that the defendants were dealing with plaintiff as individuals in a transaction purely personal to each of them.

The next case is Ryder v. Bamberger, 182 Cal. 791 [158 Pac. 753]. Plaintiff was a minority stockholder in the Salt Lake Oil Company of California. Defendants Wood, Bamberger and Price were officers and directors, owning a majority of the stock. Plaintiff’s theory was that they conspired to incorporate the Amalgamated Oil Company, as a holding company, half the stock of which was to be owned by Associated Oil Company, a large and prosperous corporation; that they induced the minority stockholders of Salt Lake Oil Company to sell their stock for $2 per share, by depositing it with an escrow holder, representing that the Salt Lake Oil Company was in bad condition, and that they, the majority stockholders and directors, had accepted the same offer. Plaintiff sold his stock, and later the Amalgamated Oil Company prospered and its stock greatly increased in value. Plaintiff contended that the fiduciary relation between defendant directors and himself made it their duty to disclose the entire details of the Amalgamated Oil Company transaction, and that their failure in this respect was fraud. Judgment went for defendants, and was affirmed on appeal. Comparing this with the instant case, the following distinctions may be noted: (1) The trial court found that every representation made by defendants was fair and true, and that the company was in bad condition. (2) The evidence showed and the trial court found that the representative of Associated Oil Company, negotiating with defendants for the formation of Amalgamated Oil Company, had no interest in buying out the minority shares of plaintiff and others, but contemplated “squeezing” them out by subsequent assessments on their stock; and that defendants insisted on the offer to the minority stockholders for the protection of such stockholders, and refused to go into the deal until that offer was made. (3) The price received by defendants was no greater than that received ly plaintiff, and the increase in value of the Amalgamated shares was largely due to a valuable gusher which developed on other land previously owned by defendants which they had transferred to Amalgamated Oil Company in which' land plaintiff never had any interest whatsoever. (4) Disclosure of the details of the Amalgamated deal would have been of no value to the minority stockholders since they could not have come in had they wanted to; instead of sale of their stock being necessary, it was in fact not wanted at all, and only the insistence of defendants resulted in an offer to purchase, rather than a squeeze-out. These are the facts, as found by the trial court and related in the opinion. The court then goes on to say that it is “unnecessary” to consider such cases as Strong v. Repide, supra (which expounds the “special facts” exception), and that there is “as little need” to consider the line of authority that directors are not bound to acquaint stockholders with all the facts. In other words, the reference to the “majority” rule by the court is no more an approval of it than its mention of the rule of Strong v. Repide, supra, and the case was actually decided on the evidence and findings, that defendants acted in good faith and for the interests of the plaintiff as well as for themselves, and that plaintiff suffered no damage as a result of the alleged nondisclosure.

The last case is McCord v. Martin, 47 Cal. App. 717 [191 Pac. 89]. Plaintiff, a stockholder in Lost Hills Mining Company, alleged that defendant Martin knew that a prospective buyer wished to purchase 20,000 shares at more than $5 per share; that defendant Martin and appellant Lindemann represented to ■ stockholders that they knew someone who would buy 20,000 shares at $5 per share, and that defendants would join with the others in pooling their shares to reach that amount; that the pool was made in reliance upon those representations, and that the buyer, under a secret agreement with defendants, bought all the stock at $8 per share, of which plaintiff and the others received but $5 per share. The court said: “If these facts had been shown and found it could hardly be seriously argued that plaintiffs were not entitled to a judgment against defendants. The proper legal characterization of the transaction might be in some doubt, but at any rate the principles of equity as formulated in the code and administered by the courts are ample to reach and defeat such iniquitous conduct.” But the trial court found against these allegations, concluding that Lindemann knew nothing of the arrangement. It was further asserted by plaintiff that Lindemann was secretary of the corporation; that he received a letter from Mercantile Trust Company stating that if a client of theirs purchased a majority of the stock, the said client would pay Lindemann $15 per share for his shares. Subsequently this was done, and plaintiff contended that Lindemann should have disclosed to the other stockholders his receipt of this letter. But the court pointed out these facts, distinguishing it from our present case: (1) The stockholders placed no reliance whatsoever on any repi'esentations of Lindemann, but were influenced by Martin, and that Lindemann knew nothing of the plans of Martin and did not aid them in any way. (2) Lindemann was not even a director, but the secretary, a mere ministerial officer. The court does say that in Ryder v. Bamberger, supra, it was held that directors are not bound to acquaint the stockholders with facts concerning the shares, but, as we have already shown, the Ryder ease does not so hold, nor does it even approve the rule by dictum, but merely refers to it in passing.

A brief reference to the above three cases was made in Robbins v. Pacific Eastern Corp., 8 Cal. (2d) 241, 256 [65 Pac. (2d) 42], but the case was decided on other grounds.

These are the cases which appellants say will sanction the concealment and misrepresentation practiced in this case. We have already pointed out some of the more obvious differences in their facts; but there are other, more basic distinctions which we now come to consider. In this connection, we may observe that the question is still open in this state as to whether we shall follow the majority rule, the majority rule as modified by the “special facts” doctrine, or the minority rule; and a decision on this question would be immaterial here. For the purposes of this opinion, we may apply the strictest form of the majority rule, and still the conduct of the parties herein finds no justification. Appellants have, to make their case fit the rule, assumed a state of facts at variance with the record, and we now proceed to an analysis of these fundamental differences which render their argument without substance.

In the first place, this is not a case of individual dealings by a director with a stockholder to buy his stock. Kruse and Tucker did not solicit the Western stockholders to sell or buy from them personally, concealing special knowledge which they had concerning the transaction. It was the corporation, California, which did the soliciting, buying, issuing of new stock, and later the repurchasing from the favored stockholders. Kruse and Tucker were acting for their corporations in these matters, not for themselves; they committed the corporations to the agreements, and fastened the liabilities upon them. Tucker was also acting for Western, and his activities resulted in that corporation's soliciting its stockholders to come into the deal. Nor was this a mere purchase or issuance of stock. The entire object was to purchase the business and assets of Western; the stock transactions were used as a means to accomplish that end. The general offer to Western stockholders, summarized above, characterized the proposal as one that the businesses “be consolidated”, and declared: ‘ ‘ The plan under which such a consolidation might’ be consummated has been carefully considered.” The offer further asserted that certain business advantages would result “after the consolidation”, and declared the intention to change the name of California thereafter to reflect the presence of both original institutions. Furthermore, an essential agreed condition to the entire transaction was the approval by the insurance commissioner of the transfer of assets, in-1 dicating clearly that the parties never had the slightest intention of buying and selling stock except as a means of accomplishing the real object, a merger of the two companies. It is impossible, therefore, to perceive any application of the doctrine relied upon by appellants, even in its most extreme form. Every important phase of the transaction herein involved corporate acts; in every development the corporations, as entities, were involved and their interests affected; and in each act prior to the 1933 discoveries, both corporations acted without knowledge of the material facts, which facts were concealed by these directors. The ease therefore comes within the settled principle that a corporation director owes to the corporation the highest fiduciary obligation and the fullest duty of disclosure. To this doctrine there is no dissent whatever. (See 3 Fletcher, Corporations (Perm. Ed.) sees. 838, 884; Ballantine, Private Corporations, sec. 122a; Stevens, Corporations, sec. 142; 13 Am. Jur., sec. 997; 3 Pomeroy, Equity Jurisprudence [4th ed.], sec. 1090; Dunnett v. Arn, 71 Fed. (2d) 912.)

This basic distinction between individual purchases from stockholders, and transactions for the purpose of acquiring the corporate assets, is illustrated in an important and well-considered case by the Circuit Court of Appeals, Dunnett v. Arn, supra, closely similar in its facts to the instant ease. Plaintiffs were minority stockholders of Operators Oil Company. Defendants Cloud and Dunnett were president and secretary of the corporation and majority stockholders. Sun-ray Company wanted a valuable oil lease belonging to the corporation. Defendants devised a plan for Sunray Company to buy all its capital stock and contracted to deliver their own shares. Defendants then wired the minority stockholders that they had sold their own shares and advised the minority to accept an offer for their shares then being mailed to them. Various minority stockholders accepted, believing the majority had sold on the same basis. Later they sued on the ground that defendants had received a higher price per share. Relief was granted and on appeal the judgment was affirmed. The court mentioned the conflicting rules, characterizing the nondisclosure rule as the weight of authority, but pointed out that the case did not come within the scope of the rule because the contract contemplated that Sunray Company should acquire all the stock of Operators Company. The court said (p. 918): 1 ‘ While in form the plan provided for a sale by the stockholders of their individual stock, in substance it was a sale to the Sunray Company. It was therefore in substance and effect a corporate transaction.” That this case is not a minority rule decision is made clear in the opinion, and also by a later decision of the same court, Roby v. Dunnett, 88 Fed. (2d) 68, 69, which arose out of the same transaction. Referring to the majority rule the court said: “We noted that rule in our former opinion. We adhere to it.”

The same analysis and conclusions appear in Commonwealth Title Ins. & Trust Co. v. Seltzer, 227 Pa. 410 [76 Atl. 77, 136 Am. St. Rep. 896], where defendants, president and a director of a corporation having its capital invested in a valuable piece of real estate, made a contract with an agent of another corporation giving him an option to buy the controlling shares, and thereafter defendants acquired the shares and sold them to the agent at a profit. The object of the purchaser was to obtain the land. In holding that defendants must account for their secret profits, the court said (p. 79) : “It is quite true that the profits in the present case were made to appear on the surface as not coming from the sale of the property of the corporation; but, as all the facts show that the purchaser only wanted the real estate, and not the control of the franchise of the corporation, there is little or no doubt that the profits paid to the two defendants were considered by the purchaser as part of the cost of the real estate. . . . The conclusions of the court below were reached, and are here sustained, on the peculiar facts in this case, with a full and express recognition of the general rule that a stockholder, even though he be one of the managing officers of a corporation, has the right to buy and sell its stock and to keep any profits which he may thus acquire. But the corporation officers cannot under cover of this rule carry through a transaction such as appears in this case ivithout accounting for profits thereby diverted from their corporation.”

The second fundamental reason which makes the protection of the majority rule unavailable is that this is not a case of mere nondisclosure, but of suppression of facts and active misrepresentations. Appellants have assumed, in their assertion of the doctrine that the director owed no duty of disclosure here, that the only fraud charged was constructive nondisclosure by a fiduciary. In fact, the evidence established and the court found actual fraud. Kruse and his associates did not merely solicit these transactions without making any representations about their nature. On the contrary, they made or authorized a great many statements, to the directors, to the stockholders, and to the insurance commissioner; and in every important instance their description of the transaction was false. Kruse related the details of the deal to his board, and failed to tell all of the details; he spoke of options, knowing that these were in reality repurchase agreements; he authorized applications to the insurance commissioner which did not tell all the facts; and permitted the corporation books and financial statements to falsely represent the actual condition of its finances, and its commitments and liabilities. Tucker described the deal to his board without telling the whole truth, and permitted the secretary of Western to state to the stockholders that the complete terms of the offer were set forth in the general letter, knowing that this was not true, and that in fact the Western stockholders who subscribed to the new issue of stock were coming into a company with a concealed liability of $1,400,00, 80 per cent of the amount of paid-up capital ($1,750,000) represented in the general offer.

This is actual fraud. Regardless of whether one is under a duty to speak or disclose facts, one who does speak must speak the whole truth, and not by partial suppression or concealment make the utterance untruthful and misleading. This doctrine is declared by our Civil Code (see. 1710, subd. 3), and is everywhere recognized as a sound rule of law. (See Harper on Torts, sec. 219; Sullivan v. Helbing, 66 Cal. App. 478 [226 Pac. 803].) For example, in Sullivan v. Helbing, supra, where the parties were negotiating for an exchange of real property, defendants stated that their property was under lease for a rental of $155 per month. They failed to disclose the fact that they were regularly accepting a lesser sum from the tenant. The court held that the representation, though literally true, was actually rendered deceptive and fraudulent by the concealment. The very cases which lay down the majority rule on lack of a duty of disclosure on the part of a director recognize the clear difference between mere nondisclosure of personal knowledge, and concealment or misrepresentation; and all concede that the latter is actionable. (See the cases cited above, and 3 Fletcher, Corporations (Perm. Ed.), sec. 1172; Stevens, Corporations, sec. 145; 13 Am. Jur., sec. 1011; note, 45 Harv. L. Rev. 1078.)

The final distinction is that this is not merely a case of fraud between two parties to a transaction, whereby one was induced to act or enter into it by the fraud of the other. The transaction herein involves an agreement between several parties to defraud others. The plan of operation involved misrepresentation of the actual deal to the stockholders of Western. The representation that the general offer was the complete offer was deliberately made to induce them to come in; and a number of stockholders, including some directors and officers, testified that they relied on these representations and the apparent fact that the four large stockholders were accepting the same offer. This evidence was overwhelming, and the court so found, as above stated.

The evidence and findings bring the case within the general principle that an agreement to defraud third persons is illegal and void. (See, generally, 6 Williston on Contracts (Rev. Ed.), sec. 1738, p. 4912, collecting the authorities; Bacciocco v. Transamerica Corp. 2 Cal. App. (2d) 595 [38 Pac. (2d) 417] ; Clifton v. Tomb, 21 Fed. (2d) 893, 900.)

Other defenses raised by appellants on the issue of fraud, only two of which require discussion, are equally unsound.

The first one is that Calif ornia-W estern, the combined company, is the wrong party to sue for the fraud on Western stockholders. The assumption here is that the only fraud was in paying the four favored stockholders a higher price, in effect, than the other stockholders, to the injury of the stockholders who get less than they were entitled to. This is a misconception of the situation. The general offer was entirely fair and proper, and the general transaction, with the exception of the repurchase agreements, was approved by all, including the insurance commissioner. The Western stockholders were not entitled to any more; the favored four merely received too much, and the payments made under the repurchase agreements came from the combined company, Calif ornia-W estern, the assets of both of the original companies being used to raise the money. This part of the fraud consisted in fastening upon California-Western an unwarranted liability, and it was the corporation as such, and not the individual stockholders, who suffered the injury. It is true that some of the misrepresentations were to the stockholders generally, but others were to the directors of the two corporations. And regardless of whether the actual misstatements were made to individuals or to the directors acting for the corporation, all the misstatements were made for the purpose of accomplishing the transfer of assets, and concurrently fastening the secret liability upon the combined company to be formed. The objection that the combined company cannot sue is therefore without any force: The representations were intended to induce action by that company. The governing rule in such a situation was fully discussed by this court in Crystal Pier Amusement Co. v. Cannan, 219 Cal. 184 [25 Pac. (2d) 839, 91 A. L. R. 1357], where false representations concerning construction materials were made to officers of a corporation, which in reliance upon them built an amusement pier. Later the same individuals organized another corporation to build structures on the pier. It was held that the second corporation could sue for the fraud, notwithstanding the fact that it was not in existence at the time the representations were made. The court, upon a full review of the authorities, concluded that fraud, to be actionable, need not consist of representations made directly to the parties seeking recovery; but that representations made to one person, with the intention that they reach another and be relied upon by him, are actionable by that other.

It should be noted that in the foregoing case there was not even an assignment of rights by the first corporation to the second. In the instant case, the agreement of sale and reinsurance assigned to California-Western all choses in action of Western. It is, of course, well settled in California that the right to recover money or property obtained by fraud may be thus assigned. (Jackson v. Deauville Holding Co., 219 Cal. 498 [27 Pac. (2d) 643] ; see, also, Crystal Pier Amusement Co. v. Cannan, supra, p. 187.) It should further be noted that we hereinafter hold this transaction to constitute a fraud on the policyholders of the combined company, and it seems obvious that the corporation must be the proper party to sue in their behalf.

The other contention is that there was no fraud because there was no discriminatory treatment of the Western shareholders; that the four large shareholders got no better bargain but only a different one, and that it was Kruse who wanted the right to repurchase, instead of the four shareholders who wanted the right to resell. It is sufficient to point out that all the evidence is against this interpretation, and the record shows clearly, as the court found, that the agreements were a condition insisted on by the four large shareholders. It was all to their advantage, for the price was higher than the then market value. If the stock went down they were protected; if they believed it would go up they could simply buy more shares in the market (or subscribe to some of the new issue). In other words, they could subscribe to new stock at $40 per share, holding meanwhile the contract of California to repurchase the other stock held by them at $60 per share. And that is, in truth, what they did; they all subscribed to their allotted new shares at $40, and Pacific American Company immediately resold its new shares at a $2 profit.

There is finally, a much graver fraud committed in this case than that hereinbefore discussed, namely, the fraud on the policyholders of the companies. A life insurance company is something more than an ordinary business corporation, and its policyholders are not ordinary creditors. The directors of such a corporation cannot say that they owe fiduciary duties only to the corporate entity as such. The statutes of this state and the states generally contain the most positive assertion of duties owed to policyholders, and declare in unmistakable terms the public policy of this state to protect them from any such abuses by those entrusted with the management of their companies. The insurance commissioner, as their representative, is charged with the duty of regularly scrutinizing the financial affairs of the corporation, and of approving or rejecting plans for the issuance of stock, or the purchase of assets. (See Vance on Insurance, 2d ed., p. 29.) In such a crucial change as the complete absorption of one company by another, it is of the highest importance that the commissioner be possessed of all facts concerning the assets and liabilities involved, and the law expressly requires the presentation of those facts to him, and his approval, before such action may be taken.

The instant case exhibits a course of fraudulent misstatement and concealment in reports, books, and records of the company, designed to procure the approval of the transaction by the commissioner, and ultimately succeeding in that object. As a result of the fraud, the commissioner unknowingly approved a deal involving a secret liability which impaired the capital of the company and seriously threatened the interests of its policyholders. Kruse admitted this danger in his letter to Lochead in 1933; the court below so found; and the fact that in 1933, despite the unexpected restoration by King of his share of the repurchase money and commissions, the company was compelled to reduce its capital from $1,750,000 to $875,000 to avoid a deficit, speaks for itself. The witness Rouble, chief examiner of the insurance commissioner, testified that if the repurchase agreements were known, and taken into consideration, the company’s reserves would have been deficient in 1931. Instead, the report of the commissioner in 1932 showed a surplus of $1,000,000 which the $1,400,000 secret liability would have changed into a showing of impaired capital.

The fact that this condition no longer exists today, and that the corporation is today financially sound, is, of course, no defense for the appellants.

It is our conclusion, therefore, that the judgment of the trial court herein was correct, and it is hereby affirmed.

Gibson, J., Shenk, J., Curtis, J., Goodell, J., pro tem., Edmonds, J. and Waste, C. J., concurred.


source: Caselaw Access Project

license: Public Domain

text:
    [S. F. No. 16027.
    In Bank.
    January 22, 1940.]
    CALIFORNIA WESTERN STATES LIFE INSURANCE COMPANY (a Corporation), Respondent, v. PHYLLIS DeYOUNG TUCKER, Appellant.

      Garret W. McEnerney and Andrew F. Burke for Appellant.
    Williamson & Wallace, Ware & Ware, Downey, Brand & Seymour, McCutchen, Olney, Hannon & Greene, Stephen W. Downey and James D, Adams for Respondent.
    Neil Cunningham and George N. Downer, as Amici Curiae, on Behalf of Respondent.
   CARTER, J.

This is a companion case to American Trust Co. v. California Western States Life Insurance Co., S. F. No. 15797 (ante, p. 42 [98 Pac. (2d) 497]), this day decided. The factual background and basic legal issues involved in the instant case have been fully reviewed in the opinion in the American Trust Company case, and need not be repeated here. We shall, however, mention briefly two defenses made by defendant herein which were not discussed in the former opinion.

The first is that the contracts under which California-Western was obligated to take back the stock originally issued to the four large stockholders were not in fact repurchase agreements. The theory is advanced that the appellants sold their Western stock for $70 per share; they were paid $40 cash, and were to receive $30 later, as a deferred payment; the California-Western stock was given them in pledge, to secure the deferred payment; and the so-called repurchase by California-Western was merely a redemption of the pledged stock by payment of the debt. The difficulty with this theory is that it is contrary to all the evidence and the findings. The contracts, drafted by able counsel representing experienced business men, speak of repurchase and make no mention of a plegde; all the parties who participated in the negotiations referred to them as repurchase contracts; and there is no testimony whatsoever to support the interpretation sought to be placed upon the documents in flat contradiction of their express terms. With the record in this state, the findings of the trial court against this theory are conclusive.

The other objection is that the form of the action in the instant case is improper, in that the suit was for money had and received, instead of for damages. This contention is plainly without merit. The form of the action is immaterial, if a cause of action is actually stated; the doctrine of “theory of the pleading” has long been repudiated in this state. (See Von Schrader v. Milton, 96 Cal. App. 192 [273 Pac. 1074] ; Masero v. Bessolo, 87 Cal. App. 262 [262 Pac. 61] ; Feig v. Bank of Italy Nat. T. & S. Assn., 218 Cal. 54 [21 Pac. (2d) 421]; Pascoe v. Morrison, 219 Cal. 54 [25 Pac. (2d) 9] ; 22 Cal. L. Rev. 208; 1 So. Cal. L. Rev. 369; see, also, as to propriety of pleading on a common count, Long v. Harrison, 113 Cal. App.321 [298 Pac. 148]). And the cancellation of the promissory notes is a logical and necessary consequence of the holding that the partial payment should be recovered and the stock returned.

For the reasons stated in the opinion in American Trust Co. v. California Western States Life Insurance Co., supra, the judgment of the trial court herein is affirmed.

Gibson, J., Shenk, J., Curtis, J., Goodell, J., pro tern., Edmonds, J., and Waste, C. J., concurred.


author: THE COURT.

text:
    [L. A. No. 17287.
    In Bank.
    January 22, 1940.]
    In the Matter of the Application of BEN B. STEPSAY for Admission to Practice Law.

      L. Arion Lewis, Jr., for Petitioner.
    Philbrick McCoy for Respondent State Bar.
   THE COURT.

Petitioner herein was admitted as an attorney at law in the State of Michigan in October, 1922, and practiced law continuously in the city of Detroit in that state for a period of thirteen years, until February, 1937, when due to the ill health of his son, he removed to the State of California. On May 27, 1938, he filed his application before the committee of bar examiners of the State Bar of California for registration as an attorney applicant for admission to practice law in this state. His application met all the requirements prescribed by the rules of the State Bar of California, and was accompanied by the fee required by law of attorney applicants. It came on for hearing before the committee of bar examiners on the 16th day of August, 1938, as to petitioner’s moral character. Upon the conclusion of said hearing the committee denied the application of petitioner on the ground “that the applicant had failed to meet the burden of showing that he is possessed of the requisite good moral character and of removing reasonable doubt as to his moral fitness”. Petitioner filed a petition for a rehearing of his application which was denied by the committee. Thereafter and on the 5th day of May, 1939, petitioner filed a supplemental application for registration which was accompanied by fourteen letters addressed to the committee of bar examiners purporting to have been written by prominent judges and attorneys residing in Detroit, the former home of petitioner. This supplemental petition was also denied by the committee of bar examiners. Thereupon petitioner filed in this court the present petition asking that this court set aside said resolution of the committee of bar examiners denying petitioner’s application, and for an order permitting him to take the next regular attorney’s examination to be conducted by said committee. On presentation of said petition, this court made its order addressed to the State Bar of California to show cause why said petition should not be granted. The State Bar has made its return in which it has set forth the facts of the case substantially as narrated above. It will be seen therefrom that the sole ground for the denial of the application of petitioner for registration as an attorney applicant for admission to practice law in this state was that he “failed to meet the burden of showing that he is possessed of the requisite good moral character and removing reasonable doubt as to his moral fitness ”• There is, of course, no question that one of the prerequisites to practice law in this state, and in all other jurisdictions, so far as we are advised, is the possession on the part of an applicant of a good moral character. In answer to a question contained in the questionnaire annexed to petitioner’s application to the committee of bar examiners, in which petitioner was asked if any charges had ever been made or filed, or proceedings instituted against him, the petitioner replied, “None except those shown by affidavit of Miles H. Knowles, Secretary of Grievances, Third Judicial District, State Bar of Michigan, arising out of disputes for fees, and which were in all cases dismissed by Secretary of Detroit Bar Association without having been submitted to any grievance committee.” In the affidavit of the secretary of the grievance committee referred to in petitioner’s answer to the above question, it is stated that “three complaints were filed against petitioner for unprofessional conduct” and “that the said complaints were of a trivial nature, being dismissed by the Secretary of Grievances as not having sufficient importance to be referred to the Grievance Committee”.

At the hearing before the committee of bar examiners held on August 16, 1938, the petitioner was the only witness. He was interrogated respecting the three complaints made against him to the grievance committee in Detroit. Nothing was developed by the evidence before the committee as to any of these complaints except as to the one made by Richard Mueller. As to that, the petitioner testified that he brought suit on a contingency basis for his client Mueller to collect for services rendered by the latter. The case was tried ■ in the justice’s court and resulted in a judgment in favor of petitioner’s client. The case was appealed, but settled, and the defendant agreed to pay the amount due on a partial payment plan. Petitioner collected the entire amount and sent to his client all amounts due his client except the sum of $25. He wrote to his client that he was at the time unable to send him this balance due, but in a short time thereafter he mailed to his client a check for $25, the full amount due. The letter containing the check was returned as the client had moved. The letter with the check enclosed was retained by petitioner until he received a telephone call from the Bar Association regarding the matter. Petitioner immediately responded to the call and appeared personally before the association with the letter containing the check, which the secretary opened. The petitioner then paid the $25 due his client and no further action was taken respecting the complaint. This happened some two or three months after petitioner collected the money for Mueller. Petitioner testified that the Mueller instance was the only one during his entire practice in which he withheld funds belonging to any of his clients. Upon this evidence the committee of bar examiners adopted the resolution quoted above, denying petitioner’s application to register as an attorney applicant to practice law in this state.

It is the contention of The State Bar that the offense of petitioner as shown by the above evidence was of such a serious nature that he should be forever barred from practicing law in this state. Without attempting to palliate petitioner’s offense and with no desire to excuse him for this offense, we find ourselves unable to agree with the conclusion reached by the committee of bar examiners.

That petitioner violated his duty to his client in withholding the money for a period of two to three months cannot be denied. An attorney’s fidelity to his client is one of the highest duties growing out of the relation of attorney and client. Any deviation on the part of the former in the strict performance of his obligations has always met the severe censure of the courts. The withholding of money due a client by an attorney has been the moving cause of many disciplinary proceedings against offending attorneys in the courts of this state. Usually the penalty imposed for such offense is suspension from practice for periods varying from three months to two or three years. In Barbee v. State Bar, 213 Cal. 296 [2 Pac. (2d) 353], and Goldstone v. State Bar, 214 Cal. 490 [6 Pac. (2d) 513, 80 A. L. R. 701], the suspension was for three months; in Smuckler v. State Bar, 2 Cal. (2d) 80 [38 Pac. (2d) 777], and Oster v. State Bar, 2 Cal. (2d) 625 [42 Pac. (2d) 627], the suspension was for six months; in Bentson v. State Bar, 216 Cal. 58 [13 Pac. (2d) 512], and Ring v. State Bar, 4 Cal. (2d) 196 [47 Pac. (2d) 704], one year; in McArthur v. State Bar, 215 Cal. 652 [12 Pac. (2d) 453], eighteen months, and in In re Tyler, 71 Cal. 353 [12 Pac. 289, 13 Pac. 169], two years. It has only been in extreme cases that the court has felt called upon to disbar an attorney for such offense. (Seavey v. State Bar, 4 Cal. (2d) 73 [47 Pac. (2d) 281], Allen v. State Bar, 218 Cal. 19 [21 Pac. (2d) 107], and Wilcox v. State Bar, 2 Cal. (2d) 614 [42 Pac. (2d) 631].) But even in the Barbee and Gold-stone cases where the suspension was for only three months, the offenses charged against the accused attorneys were far more serious than that against petitioner herein. It is true that the inquiry as to the moral character of an attorney in a proceeding for his admission to practice is broader in scope than in a disbarment proceeding. (Spears v. State Bar, 211 Cal. 183 [294 Pac. 697, 72 A. L. R. 923] ; In re Wells, 174 Cal. 467 [163 Pac. 657]), and the court may properly refuse to admit an applicant to practice law upon proof which would not justify an order of disbarment. In the two cases in which this rule was announced each of the applicants was found guilty of a most flagrant offense and each was found to have made false statements either in his application or in affidavits in support thereof. While we are in accord with the rule there announced it can have but slight applicability in the instant case where the factual situation is so entirely different.

No claim is made that the petitioner did not fully, fairly and truthfully answer all questions propounded to him in the questionnaire annexed to his application. He was frank in all his statements before the committee of bar examiners at the hearing of his application and apparently attempted to conceal nothing from the committee. It is true that the burden of establishing good moral character was upon him. (Spears v. State Bar, supra), but, in our opinion, he met this burden not only by his open and frank testimony before the committee, but by the production before the committee of the letters from judges and attorneys above referred to. Nine of these letters are from judges of the circuit and other courts in the city of Detroit. One is from a lawyer who was the former employer of petitioner, and the others are from practicing attorneys in said city. They all speak in the highest terms of petitioner’s honesty, integrity and good character. Some of the letters emphasize his courtesy and patience while others speak of “the esteem of his colleagues and of the bench”. These letters are entitled to a most respectful consideration by this court when passing upon petitioner’s moral fitness to practice law in this state. In the case of Warbasse v. State Bar, 219 Cal. 566, 571 [28 Pac. (2d) 19], similar letters were before this court, and the question for its decision was the moral character of the petitioner in that proceeding who sought to be admitted to practice law in this state. Referring to such letters, the court said: ' ‘ There has been filed by petitioner letters of recommendation from judges, attorneys and business men. Most of the letters are from judges of the Appellate Division, Second Department, of the Supreme Court, the court which suspended him. Although the' number of letters is not unduly large, they are from persons whose position indicate that they possess a real sense of responsibility for the integrity of the legal profession, and who, therefore, would not be induced by reasons of friendship, or any reason other than a sincere belief in his honesty and integrity, to recommend him for admission to our bar. The letters attest petitioner’s ability, his wide experience and the worth of his character. We believe that the writers thereof were giving an honest estimate of his character and that we may unqualifiedly accept that estimate.”

These letters filed with the commission in the present proceeding taken in connection with petitioner’s truthful answers to the questions contained in the questionnaire, although one of them referred to the complaints made against him before the Detroit grievance secretary, and the full and complete disclosure made by petitioner before the committee respecting these complaints are indicative of petitioner’s real character. We are satisfied that they are a more truthful index to his real character than the one isolated offense which it is apparent he committed during his thirteen years of active practice of law. In view of the showing thus made by petitioner we are of the opinion that his petition herein should be granted.

It is therefore ordered that petitioner be permitted to take the next regular attorney’s examination to be conducted by the committee of bar examiners of the State Bar of California, and' to take such other steps as may be required to entitle him to be admitted to practice law in this state.


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    [L. A. No. 16854.
    In Bank.
    January 26, 1940.]
    GEORGE DAWSON, Appellant, v. COUNTY OF LOS ANGELES (a Body Corporate and Politic), Respondent.

      Stater & Dawson and John H. Dawson for Appellant.
    Holbrook & Tarr, W. Sumner Holbrook, Jr., Miller, Chevalier, Peeler & Wilson and Melvin D. Wilson, as Amici Curiae, on Behalf of Appellant.

      J. H. O’Connor, County Counsel, S. V. O. Prichard, Assistant County Counsel, A. Curtis Smith, Deputy County Counsel, for Respondent.
    Percy C. Heckendorf, District Attorney (Santa Barbara), and Rigmor 0. Carlsen, Deputy District Attorney, as Amici Curiae, on Behalf of Respondent.
   CARTER, J.

Plaintiff appeals from a judgment entered after demurrer to his complaint had been sustained without leave to amend.

The action is one to recover a tax in the amount of $449.80 imposed on certain stocks owned by the plaintiff on the first Monday of March, 1935. Said tax was imposed under the provisions of section 3627a of the Political Code which then provided for the imposition of an ad valorem tax on intangible personal property. It is the plaintiff’s theory that the tax was unlawfully imposed and collected because of the enactment on June 13, 1935, of the Personal Income Tax Act (Stats. 1935, chap. 329) which tax concededly was substituted for and was to be in lieu of the former ad valorem, tax contemplated by section 3627a, supra. (See amendment of latter section, Stats. 1935, p. 2251.) In the case of Weber v. Santa Barbara County, L. A. No. 16106, this day filed, {post, p. 82 [98 Pac. (2d) 492]), we held that the ad valorem tax on intangible personal property imposed as of the first Monday of March, 1935, did not fall within the “in lieu” provision substituting the income tax therefor. For the reasons there advanced, we are of the view that the appellant’s contention in this particular lacks merit.

In addition to the foregoing contention, which has failed of its purpose to work a return of the entire tax, plaintiff advances a second contention which, if meritorious, would necessitate a refund of only a portion of the tax. This latter contention is addressed to the manner of the assessment of his stocks. Briefly, it is the plaintiff’s position that in the county of Los Angeles at all times pertinent to our inquiry real property was assessed at 50.2 per cent of its market or cash value while intangible personal property was assessed at 100 per cent of its market or cash value. As a result, plaintiff’s stocks were subject to an assessment 49.8 per cent greater than the assessment on real property. He contends, therefore, that, regardless of rate, in so far as the “tax burden ’ ’ imposed upon intangible personal property exceeds the “tax burden” on real property in the same taxing jurisdiction in proportion to the actual value of such property, to that extent the tax imposed is illegal and in violation of the 1933 amendment of section 14 of article XIII of the Constitution. Upon this premise, plaintiff seeks to recover 49.8 per cent of the tax alleged to have been excessively levied upon his stocks by reason of the asserted equivalent excessive assessment. The defendant county responds that the “tax burden” contemplated and referred to in the cited constitutional provision is not measured or determined by either the rate or assessment alone but that such “tax burden” is “the rate times the assessment” and that it is only when the product of the two is excessive that the property bears an undue tax burden. We are of the view that this latter reasoning is unanswerable and that the plaintiff in his argument has considered only the “assessment” factor to the complete exclusion of the “rate” factor.

At the time of the imposition of the tax here challenged, section 14 of article XIII of the Constitution, relied on by the plaintiff, authorized the legislature, among other things, to “classify any and all kinds of personal property for the purposes of assessment and taxation in a manner and at a rate or rates in proportion to value different from any other property in this state subject to taxation”. The provision thus authorized the classification of personal property for “assessment” purposes, sanctioned a different manner of taxation for such personal property and approved a “rate or rates in proportion to value” different from that imposed on other taxable property. The only limitations upon this authorization was that intangible personal property shall not be taxed “at a rate in excess of four-tenths of one per cent of the actual value of such property” and that “no tax burden shall be imposed upon any personal property . . . which shall exceed the tax burden on real property in the same taxing-jurisdiction in proportion to the actual value of such property”.

Neither section 3627a, supra, nor the tax imposed thereunder and here sought to be recovered, runs counter to either of these constitutional limitations. The first limitation declared that the tax should not be at a rate in excess of “four-tenths of one per cent of the actual value” of the property. The tax provided for in the statute and collected from plaintiff was exactly one-half thereof, viz., at the rate of two-tenths of one per cent of the actual value. Nor do we think said statute or tax imposed a “tax burden” in excess of that on real property in the same taxing jurisdiction in proportion to value. Considering both the assessment and rate factors which, as we have already stated, jointly determine the tax burden, it requires no mathematical demonstration to establish that a tax at the rate of two-tenths of one per cent of the actual value of intangible personal property imposes not a greater but a smaller tax burden than a tax on an equivalent amount of real property assessed at 50.2 per cent of its actual value and computed upon a rate of $1.21 for every $100 of such reduced assessed valuation. While the plaintiff failed to allege the rate of taxation on real property in Los Angeles County, an indispensable factor in determining and comparing tax burden, the defendant county in its briefs has stated the rate to be as above indicated. No denial or challenge of such stated rate is made by the plaintiff. We are satisfied, therefore, that the tax here authorized and imposed created no greater tax burden on intangible personal property than that on real property in proportion to value.

Moreover, we are of the view that plaintiff having failed to object to the assessment before the board of supervisors sitting as a board of equalization is not now in a position to challenge it. When read in conjunction with the companion case of Mahoney v. City of San Diego, 198 Cal. 388, 391 [245 Pac. 189], the ease of Luce v. City of San Diego, 198 Cal. 405, 406, 407 [245 Pac. 196], is authority for the proposition that when the asserted error complained of is an error of assessment, as here, resort must first be had to the board of equalization and in the absence of objection there the taxpayer is precluded from obtaining a refund, and this even though, as here, the alleged error was the result of an asserted uniformly excessive assessment upon all property of the same class. There can be no question that the requirement of preliminary objection to the board of equalization applies equally to an alleged excessive assessment of personal property. (Southern Cal. Hardwood Co. v. County of L. A., 49 Cal. App. 712 [194 Pac. 62].)

What we have said sufficiently disposes of the issues involved.

The judgment is affirmed.

Shenk, J., Gibson, J., Waste, 0. J., Edmonds, J., and Curtis, J., concurred.


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    [L. A. No. 16106.
    In Bank.
    January 26, 1940.]
    HILDA OLSEN BOLDT WEBER, Appellant, v. COUNTY OF SANTA BARBARA, Respondent.

      Griffith & Thornburgh for Appellant.
    Stater & Dawson, John J. Dawson, Pillsbury, Madison & Sutro, Alfred Sutro, Francis N. Marshall, Holbrook & Tarr, W. Sumner Holbrook, Jr., Miller, Chevalier, Peeler & Wilson and Melvin D. Wilson, as Amici Curiae, on Behalf of Appellant.

      Percy Heckendorf, District Attorney, and Rigmor 0. Carl-sen, Deputy District Attorney, for Respondent.
    J. H. O’Connor, County Counsel (Los Angeles), S. Y. 0. Prichard, Assistant County Counsel, and A. Curtis Smith, Deputy County Counsel, as Amici Curiae, on Behalf of Respondent.
   CARTER, J.

Action to recover a tax paid under protest and alleged to have been unlawfully collected. Defendant’s demurrer to the complaint was sustained without leave to amend and plaintiff prosecutes this appeal from the judgment of dismissal thereafter entered.

The tax sought to be recovered is in the amount of $7,170.58 and was imposed on certain stocks and bonds owned by the plaintiff on the first Monday of March, 1935. Section 3627a of the Political Code, as it then read, provided for the imposition of an ad valorem tax on intangible personal property as of the first Monday of March, which tax, under the section, was immediately due and payable except when, by virtue of the provisions of section 3717 of the same code, it became a lien on any real property of the taxpayer, which lien attached as of the same date. In view of these statutory provisions, there can be no question but that the tax here sought to be recovered was imposed as of the first Monday of March, 1935. Plaintiff, however, seeks to invalidate its imposition and collection by reason of the subsequent enactment of the Personal Income Tax Act (Stats. 1935, chap. 329), effective by its terms on June 13, 1935, approximately three months after imposition of the ad valorem tax here involved. As shall more fully hereinafter appear, the income tax was intended as a substitute for and was to be in lieu of the ad valorem tax theretofore imposed on intangible personal property (other than solvent credits) under the provisions of section 3627a, supra. While approved by the governor on June 13, 1935, and by its terms effective immediately, the income tax was- to be computed retroactively upon all income received or accrued on or after January 1, 1935. It is this retroactive feature of the income tax that underlies and constitutes the basis of the plaintiff’s contention that said tax superseded and vitiated the ad valorem tax already imposed (and in many instances paid) prior to the enactment of the income tax statute.

The parties heréto are in agreement upon the proposition that the income tax was intended as and is a substitute for the ad valorem tax formerly imposed under section 3627a, supra, on intangible personal property, except solvent credits. The amendment of the latter section at the same session of the legislature, effective September 15, 1935, three months after the enactment of the income tax statute, definitely indicates that the method of ad valorem tax therein provided for was to be abandoned and superseded if and when an income tax “shall be passed or adopted”. In Pacific Co. v. Board of Supervisors, 8 Cal. (2d) 611, 613 [67 Pac. (2d) 335], this court declared the income tax to be a substitute or in lieu tax for the tax. theretofore imposed by section 3627a, except as to solvent credits, not here involved. Neither party to this litigation questions the correctness of that decision. However, that ease is distinguishable from the present one for it involved a tax for the year 1936. The parties hereto agree, as already indicated, that the income tax superseded the old ad valorem tax for that and subsequent years. They disagree as to the year 1935. It is the plaintiff’s theory, as indicated above, that inasmuch as the substituted income tax was operative upon and measured by income derived on or after January 1, 1935, though the act imposing such tax was not effective until June 13, 1935, it served to nullify the ad valorem tax theretofore imposed under section 3627a on the first Monday of March, 1935, prior to the enactment of the Income Tax Act. The defendant county, on the other hand, while generally conceding the income tax to be in lieu of the former ad valorem tax imposed by section 3627a, urges that the 1935 amendment of the latter section after declaring the income tax to be a substitute for the ad valorem tax theretofore imposed under its provisions, by express proviso or “saving clause” made all taxes theretofore imposed thereunder “fully collectible and distributable”. It is the defendant county’s theory that said proviso or saving clause referred solely and alone to the tax imposed under the section as of the first Monday of March, 1935, which would include the tax here sought to be recovered by the plaintiff. Inasmuch as the solution of this problem .turns on a construction of the 1935 amendment of section 3627a it is well that we have the same before us. It reads: “The property aforesaid, except solvent credits, shall no longer be taxable under the provisions of this section if and when a net income tax shall be passed or adopted in this State. Upon the passage or adoption of such tax and from the time such income tax becomes effective such net income tax shall be in lieu of the tax herein provided for upon notes, debentures, shares of capital stock, bonds, deeds of trust, mortgages and any legal or equitable interest therein. Provided, however, that any and all taxes imposed herein on such property prior to the passage or adoption of such net income tax and the effective date thereof shall remain fully collectible and distributable hereunder.” (Stats. 1935, p. 2251.)

In her effort to preclude the foregoing proviso or saving clause from applying to the ad valorem tax imposed as of the first Monday of March, 1935, the appellant argues that the effective date of the substituted income tax, as distinguished from the effective date of the act imposing the same, was fixed retroactively so as to be prior to the date of the ad valorem tax imposed by section 3627a on the first Monday of March, 1935. From this she reasons that the latter tax was not a tax “imposed . . . prior to the passage or adoption of such net income tax and the effective date thereof” so as to “remain fully collectible and distributable” under said proviso or saving clause.

We cannot accept the appellant’s reasoning. It confuses the date from which the substituted income tax was to be computed with the effective date of the enactment of such tax or act imposing the same. It distorts the obvious intention of the legislature and undertakes to give effect only to the italicized phrase “the effective date thereof” to the utter and complete exeluson of the thrice-repeated phrase “upon the passage or adoption” of the substituted net income tax. This latter phrase is peculiarly appropriate to the effective date of the act imposing the new or substituted tax and not to the asserted effective date of the tax itself. It is a cardinal rule of statutory construction that in attempting to ascertain the legislative intention effect should be given, whenever possible, to the statute as a whole and to every word and clause thereof, leaving no part or provision useless or deprived of meaning. As appears from the above chronological statement, a tax was,“imposed” upon the plaintiff’s stocks and bonds by the express language of section 3627a on the first Monday of March, 1935. At the time such tax was “imposed” there was no Income Tax Act in existence. The latter act was not effective until June 13, 1935, though the tax therein provided for was to be computed on income derived on or after January 1,1935. In view of this chronology, we think the conclusion is inescapable that the proviso or “saving clause” in section 3627a relates specifically and solely to the tax which was “imposed” and became a lien on the first Monday of March, 1935. In adding the proviso, it was the undoubted purpose of the legislature to make it plain that the ad valorem tax so imposed in March, 1935, prior to the enactment of the income tax but subsequent to the date from which such substituted income tax was to be computed, was not to fall within the in lieu provision contained in the earlier portion of the 1935 amendment of section 3627a. This intention clearly appears from the language employed by the legislature.

In City Inv., Ltd., v. Johnson, 6 Cal. (2d) 150, 153 [56 Pac. (2d) 939], where for a portion of the first year after the enactment of an in lieu or substituted tax there was an admitted overlap (as here) between the old ad valorem, franchise tax there involved and the new or substituted franchise tax measured by net income, this court declared, in part, that “The ad valorem franchise tax had become a valid charge . . . prior to the 1928 amendment, and the ‘in lieu’ provision of that amendment cannot be given the effect of destroying the right to collect it.” And this, without the presence of a “saving clause” such as is here involved. There, as here, the substituted tax was measured by and computed upon income derived in part during the period covered by the old or ad valorem tax. In passing, it should be pointed out that the cited ease is also authority for the settled principle that the simultaneous imposition of an ad valorem tax on property and of a tax measured by the income from such property, does no violence to constitutional inhibitions against double taxation. Plaintiff’s contention that the overlap here sanctioned represents unconstitutional double taxation is therefore lacking in merit.

Aside from our conclusion that the legislature clearly evidenced its intention to save and to make “fully collectible and distributable” such ad valorem taxes as had been imposed on intangible personal property in March, 1935, prior to the enactment of the substituted income tax, we are also of the view that a statute (such as the 1935 amendment of sec. 3627a) releasing property from a particular form of tax should be strictly construed against the taxpayer. (Hunton v. Commonwealth, 166 Va. 229 [183 S. E. 873].) Such a statute differs from one imposing a tax which is construed liberally in favor of the taxpayer. Here we find no clear legislative expression vitiating the already imposed 1935 ad valorem tax on intangible personal property, assuming such power rests in the legislature. Such intention certainly should not be implied. In fact, as already shown, the legislative intention appears to be clearly to the contrary.

In addition to what already has been said, it might be stated that the proviso contained in the 1935 amendment of section 3627a would be useless and without meaning unless construed, as here, to have been added by the legislature out of an abundance of caution to make it plain that the already imposed ad valorem tax of March, 1935, was not to fall within the “in lieu” provision merely because the substituted tax was to be computed upon or measured by income partly accrued at a time antedating the imposition of such ad valorem tax. The proviso or saving clause was not needed to protect or render collectible ad valorem taxes imposed on intangible personal property in 1934 and prior years. (City Inv., Ltd., v. Johnson, supra, 153; Biley v. Howard, 190 Cal. 522 [226 Pac. 393, 99 A. L. R. 1062, 1068].) It necessarily must have been added merely to clarify the situation caused by the temporary overlap of the two taxes.

In our consideration of this cause we have examined not only the briefs of the parties hereto but those of amici curiae in support of the respective contentions advanced, as well as the briefs of the parties and amici curiae in the case of Dawson v. County of Los Angeles, L. A. 16854 (ante, p. 77, [98 Pac. (2d) 495]), involving the same issue, and decided! this day.

Inasmuch as the tax here sought to be recovered was properly imposed and collected, it is unnecessary for us to determine whether the filing of a claim under section 4075 of the Political Code was a necessary prerequisite to the commencement of suit.

The judgment is affirmed.

Shenk, J., Gibson, J., Waste, C. J., Edmonds, J., and Curtis, J., concurred.