Richard L. Chartrand, Appellant, v. Barney's Club, Inc., a Nevada Corporation, Appellee, 380 F.2d 97 (9th Cir. 1967)

This is a diversity action arising out of a counterclaim by Richard L. Chartrand to compel Barney's Club, Inc., a Nevada corporation, to issue to Chartrand fifteen shares of its capital stock or, in the alternative, to pay damages in the sum of $25,000.¹  After a trial without a jury, judgment was entered for defendant corporation. Chartrand appeals.

We first summarize the district court's findings of fact. In the summer of 1960, Chartrand and Barney E. O'Malia (O'Malia), entered into an agreement in contemplation of incorporating Barney's Club, Inc. In this contract, Chartrand and O'Malia each agreed to contribute $80,000 as an investment in a proposed operation of a casino at Stateline, Nevada, to be known as Barney's Club. In consideration of this contribution, each was to receive an equal interest in fifty-one percent or more of the corporation. Therefore, under the terms of the pre-incorporation agreement, Chartrand was to have a 25½ percent or more interest in the business.

Both O'Malia and Chartrand contributed their respective $80,000, either in cash, services, or by making expenditures on behalf of the corporation. All of Chartrand's contribution was made in cash, but the final $30,000 of his share was not paid until April, 1961, which was after some of the events described below.

Upon the incorporation of Barney's Club, Inc., in August, 1960, capital stock in the amount of $500,000 was authorized, divided into one thousand shares having a par value of five hundred dollars each.²  Thereafter, on February 1, 1961, Chartrand executed and delivered to the Nevada Gaming Control Board an invested capital questionnaire signed and sworn to by him, in which he claimed only a twenty-four percent interest in Barney's Club, Inc.

This document was filed concurrently with an application for a state gaming license made by O'Malia, as president of the corporation. In this application, it was stated that C. & O. Investment Co., Inc., (C. & O.) had a fifty-one percent interest in Barney's Club, Inc., parceled among Chartrand, forty-five percent, O'Malia, forty-five percent, William F. O'Malia, five percent, and Frances L. O'Malia, five percent. William and Frances were respectively the son and wife of Barney E. O'Malia. Chartrand's stated forty-five percent interest in C. & O. thus amounted to a twenty-four percent interest in Barney's Club, Inc.

At that time Chartrand and O'Malia contemplated the incorporation of C. & O. to hold their stock interests in Barney's Club, Inc. On February 17, 1961, the board of directors of Barney's Club, Inc., comprised of O'Malia and his wife and son, adopted a resolution approving the issuance of 510 shares of Barney's Club, Inc. capital stock to C. & O. On March 14, 1961, articles of incorporation for C. & O. were filed.

However, C. & O. was never fully organized or activated.³  On March 20, 1961, the board of directors of Barney's Club, Inc.,⁴  adopted a resolution rescinding its resolution of February 17, 1961, and approving the issuance of capital stock of Barney's Club, Inc., as follows: O'Malia, 240 shares; Chartrand, 240 shares; Frances O'Malia, fifteen shares; William F. O'Malia, fifteen shares.

Capital stock of Barney's Club, Inc. was issued in accordance with the resolution of March 20, 1961. Since June, 1961, Chartrand has repeatedly demanded an additional fifteen shares of the the capital stock of Barney's Club, Inc. This would have given Chartrand a total of 255 shares, representing 25½ percent of the total authorized stock in accordance with the pre-incorporation agreement.

On the basis of these findings, the trial court found and concluded that the knowledge of O'Malia concerning the terms of the pre-incorporation agreement should be imputed to Barney's Club, Inc., and that corporation, at all times pertinent, had knowledge of such agreement. The court further concluded, however, that the evidence created a substantial uncertainty whether Barney's Club, Inc. adopted the pre-incorporation agreement. Finally, the court concluded that the credible evidence refuted the inference of adoption which would otherwise be justified frrom acceptance of benefits with knowledge of the agreement, and Chartrand therefore did not sustain the burden of proving such adoption.⁵ 

On this appeal Chartrand argues, in effect, that since the trial court found and concluded that Barney's Club, Inc. accepted the benefits of the pre-incorporation agreement by receiving Chartrand's $80,000 contribution, and assertedly did so with imputed knowledge of that agreement, the court erred in further concluding that Chartrand had failed to sustain the burden of proving that the corporation had adopted the pre-incorporation agreement.

Under Nevada law, if a pre-incorporation contract made by promoters is within the corporate powers, the corporation may, when organized, expressly or impliedly ratify the contract and thus make it a valid obligation of the corporation. This is especially true if the agreement appears to be a reasonable means of carrying out any of the corporate powers or authorized purposes. Alexander v. Winters, 23 Nev. 475, 49 P. 116, rehearing denied, 24 Nev. 143, 50 P. 798.

The pre-incorporation agreement here in question is of a kind which is within the corporate powers of Barney's Club, Inc., and appellee does not contend otherwise.⁶  Nor does appellee assert that the pre-incorporation agreement entered into by O'Malia and Chartrand was not a reasonable means of carrying out the corporate powers and authorized purpose of that corporation.

Consistent with this Nevada rule, which accords with the weight of authority,⁷  it is generally held that if a corporation, with full knowledge of a contract that was formulated before the corporation came into existence, accepts the benefits thereof, it will be required to perform the contract obligations. European Motors, Ltd. v. Oden, 75 Nev. 401, 344 P.2d 195, 197; Alexander v. Winters, supra, at 49 P. 119; Murry v. Monter, 90 Utah 105, 60 P.2d 960, 962. Such knowledge on the part of the corporation may be imputed from that of a promoter who has become a director, officer and major stockholder of the corporation he has helped to form. As noted above, in recognition of this rule pertaining to imputed knowledge, the trial court specifically found and concluded that O'Malia's knowledge of the pre-incorporation agreement between him and Chartrand should be imputed to Barney's Club, Inc.⁸ 

Although there are no Nevada court decisions directly supporting this proposition of law enunciated by the trial court, this court has always given great weight to determinations as to the law of a particular state made by a district judge sitting in that state. State Farm Mutual Automobile Ins. Co. v. Thompson, 9 Cir., 372 F.2d 256, 259.

Courts in other jurisdictions are not consistent in their interpretation of this rule, but it is generally held that knowledge of a promoter, without more, is not imputed to a corporation.⁹  Most courts, however, recognize an exception which allows a promoter's knowledge to be imputed to the corporation where a promoter becomes a director and stockholder in the corporation or is the controlling stockholder.¹⁰ 

This exception was recognized by this circuit in Federal Land Value Ins. Co. v. Taylor, 9 Cir., 56 F.2d 351, in which it was held that a corporation is chargeable with the knowledge of its promoter in respect of all the facts in relation to a contract made by him where he subsequently becomes the sole stockholder, aside from qualifying shares which were assigned by him to the directors who acted for him. In view of what is said above, we hold that, in the case now before us, the trial court did not err in applying this exception.

In so holding we have not overlooked appellee's argument that the trial court erred in assertedly finding that where the corporation accepted benefits, knowledge of the pre-incorporation agreement would be imputed to it.

The trial court made no such finding with regard to imputed knowledge. It found and concluded that O'Malia's knowledge of the contract should be imputed to Barney's Club, Inc. because O'Malia became the president, director and guiding spirit of the corporation.¹¹ 

The corporation's acceptance of the benefits of the pre-incorporation agreement has nothing to do with the question of imputed knowledge. Instead, it relates to the question of whether the corporation, with such knowledge, ratified that agreement or otherwise obligated itself to fulfill the concomitant obligations which went with the acceptance of benefits under the agreement.

This brings us to the critical question presented on this appeal. In view of the corporation's acceptance of the benefits of the pre-incorporation agreement with imputed knowledge of its terms, it would, under normal circumstances, be obliged to fulfill the obligation of that contract to issue 255 shares of stock to Chartrand. However, because of Chartrand's conduct: (1) in representing to the Nevada agency that his interest in the corporation was twenty-four percent instead of 25½ percent, and (2) his payment of the $30,000 balance due on his $80,000 contribution after being issued only 240 shares of stock, the trial court determined that Chartrand had not sustained his burden of proving that Barney's Club, Inc. had adopted the pre-incorporation agreement. The question we must resolve is whether this determination is supportable on the findings of fact in this record.

In arguing that the findings which were entered by the trial court are sufficient to support the conclusion that Barney's Club, Inc., did not adopt the pre-incorporation agreement, appellee relies upon Murry v. Monter, 90 Utah 105, 60 P.2d 960. In that case a pre-incorporation agreement was entered into between R. J. Murry and L. J. Monter under the terms of which Murry was to receive 120,000 shares of Tintic Prince Mining Corporation in consideration of his conveyance, to the corporation, of his interest in certain mining claims.

However, Murry subsequently signed the articles of incorporation in which it was recited that shares were to be issued to the incorporators, Murry, Monter, R. E. Marsell, Dorothy Monter and H. A. Smith, in the amounts subscribed to by each. Murry subscribed for 60,000 shares. The articles recited that all such subscriptions had been fully paid by the transfer to the corporation of the interests of each subscriber in the mining claims. There was testimony that, at the incorporation meeting, which Murry attended, it was explained that it had been decided to cut down the intended capitalization from two million to one million shares, and that the subscriptions of the incorporators would be reduced accordingly. Murry was issued only 60,000 shares, and thereafter brought suit to obtain an additional 60,000 shares.

The court in Murry held that since there was no evidence tending to show that any of the incorporators other than Murry and Monter had any knowledge of the Murry-Monter pre-incorporation contract at the time of the incorporation, it could not be said that the corporation accepted the benefits with knowledge of such contract. The court concluded that the only contract binding upon the corporation was that evidenced by the articles of incorporation, wherein Murry agreed to convey his interest in the mining claims for the 60,000 shares of stock to which he had subscribed. The court further stated that, although the number of shares received by Murry was cut in half because of the reduced total capital of the corporation, Murry subscribed for and received the proportion of stock originally contemplated.

In the case now before us, however, the trial court specifically found that Barney's Club, Inc., at all times pertinent, had knowledge of the pre-incorporation agreement in question. This finding must be sustained in view of our appraisal of the evidence summarized above.

It is further apparent that here, unlike the Murry case, Chartrand would wind up with a smaller proportion of the corporation's total stock (240 shares) than he was originally scheduled to receive under the pre-incorporation agreement (255 shares). We therefore hold that the trial court erred in concluding that the facts referred to above refuted the inference of adoption which otherwise must be drawn.

In Alexander v. Winters, 23 Nev. 475, 49 P. 116, rehearing denied, 24 Nev. 143, 50 P. 798, supra, the Nevada Supreme Court held that a corporation, having accepted the benefits of a promoter's agreement, cannot later repudiate its burdens. Quoting from a text, the court stated:

"`A person shall not be allowed at once to benefit by and repudiate an instrument, but, if he chooses to take the benefit which it confers, he shall likewise take the obligations or bear the onus which it imposes. No person can accept and reject the same instrument.'" 49 P. at 119

In the case now before this court, the benefit accruing to Barney's Club, Inc., was the $80,000 invested by Chartrand. Having accepted the entire $80,000 as part of the capital of the new corporation, with full knowledge of the burdens which would accompany such a contract, Barney's Club, Inc. did adopt the pre-incorporation contract and is now obliged to perform its side of the pre-incorporation agreement, unless it can show that the terms of this agreement were ambiguous, which does not appear to be the case here,¹²  or were changed or modified by some subsequent agreement.

It may very well be that there are circumstances which would warrant a conclusion, upon some such theory as contract modification, abrogation, or equitable estoppel, that Barney's Club, Inc., was relieved of what would otherwise be its obligation to issue 255 shares of Barney's Club, Inc. stock to Chartrand. Absent findings of fact which reveal such circumstances, however, we are of the opinion that the ultimate conclusion drawn by the trial court cannot stand. Moreover, it is apparent that the trial court did not base its holding upon any of these theories.

Reversed and remanded for further proceedings consistent with this opinion.