In Re American Aluminum Metal Products Co., 15 F.2d 234 (S.D. Cal. 1926)

*235 Turnbull, Heffron & Kelley, of Los Angeles, Cal., for petitioning creditors.

W. T. Craig, of Los Angeles, Cal., for trustee.

Wood, Janeway & Pratt, of Los Angeles, Cal., for claimant Dempsey.

McCORMICK, District Judge.

In my opinion, under the stipulated facts as shown by the referee's certificate of review, the claimant Dempsey is estopped, as against the trustee in bankruptcy and the general creditors of the bankrupt corporation, from transforming himself from a stockholder in American Aluminum Metal Products Company, a corporation, into a creditor thereof, to the prejudice and damage of innocent general creditors of the bankrupt corporation, and claimant is therefore precluded from asserting any right against the bankrupt estate for the return of the purchase price of the corporate stock which he obtained under the contract of August 9, 1922.

Even if it be true that the issue of the stock to Dempsey under the contract of August 9, 1922, was void, because contrary to section 12 of the California Corporate Securities Act (St. 1917, p. 679), such invalidity cannot operate to impair and destroy the rights of innocent creditors, who knew nothing about the secret subscription contract, and who had a right to rely upon the trust fund doctrine of California in dealing with the corporation. Vermont Marble Co. v. Declez, 135 Cal. 579, 67 P. 1057, 56 L. R. A. 728, 87 Am. St. Rep. 143; R. H. Herron Co. v. Shaw, 165 Cal. 668, 133 P. 488, Ann. Cas. 1915A, 1265; Handley v. Stutz, 139 U.S. 417, 11 S. Ct. 117, 34 L. Ed. 706.

It is well settled in California that, while estoppel is unavailable as a plea in an action between parties to a void stock subscription contract, this rule has an exception that permits innocent creditors to invoke the conduct of the parties to the void contract as an estoppel and barrier against their asserting the invalidity of their contract, so as to defeat just claims of innocent creditors. Reno v. American Ice Machine Co. (Cal. App.) 237 P. 784; Moore v. Moffatt, 188 Cal. 1, 204 P. 220.

The conduct and actions of Mr. Dempsey in making the subscription agreement of August 9, 1922, under which he purchased the stock of the American Metal Products Company, and paid for it partly in cash and partly with promissory notes that were presently discounted by the corporation for cash, together with his acceptance of stock certificates issued from the company's books, and his acceptance of the position and salary of superintendent of the company's factory for several months, and the further acceptance of the office of president and director of the corporation, all under the agreement of August 9, 1922, which he continued to perform without objection until March 8, 1923, should and do estop him from repudiating his agreement to the prejudice of innocent third persons, and from claiming funds which induced innocent creditors to deal with the corporation and to part with value. To allow Mr. Dempsey's claim for the return of his money as against the just claims of the general creditors of the corporation, who were misled and deceived by his voluntary conduct, would be inequitable, unconscionable, unjust, and legally unwarrantable. In re Racine Auto Tire Co. (C. C. A.) 290 F. 939; Allen v. Commercial National Bank of Detroit, 191 F. 97, *236 111 C. C. A. 577; In re Desnoyers Shoe Co., 224 F. 372, 140 C. C. A. 58; Fletcher, Cyclopedia Corporations, vol. 2, § 716; Schulte v. Boulevard Gardens Land Co., 164 Cal. 464, 470, 129 P. 582, 44 L. R. A. (N. S.) 156, Ann. Cas. 1914B, 1013; Tidewater Southern Ry. Co. v. Vance, 31 Cal. App. 503, 160 P. 1097; 6 California Jurisprudence, p. 768.

Cases cited by claimant, of which California Bank v. Kennedy, 167 U.S. 362, 17 S. Ct. 831, 42 L. Ed. 198, and Concord First National Bank v. Hawkins, 174 U.S. 364, 19 S. Ct. 739, 43 L. Ed. 1007, are examples, to my mind are inapplicable to the instant case. In those two cases, and in all similar cases cited by claimant, it appears that the corporations dealt with were either national banks or companies functioning in jurisdictions where the trust fund doctrine of California corporations did not exist. At least none of these decisions seem to have considered the applicability of the trust fund doctrine as such has been uniformly applied to domestic corporations by the California courts. Moreover, in most, if not all, of the cases cited by claimant, the parties to the contract or their successors were the suitors, and the courts held that, the contract being void ab initio, it was totally ineffectual and unavailable to support any right or claim of any of the parties thereto.

But in the instant case there is an entirely different situation; for here it is the innocent creditors who are opposing an effort of one of the contracting parties to reap benefits on account of the invalidity of his own agreement, to the great prejudice and damage of such innocent creditors, who, the California decisions say, had a right to rely upon the apparent status of Dempsey as a stockholder, and who can invoke the doctrine of estoppel as against the claim of Dempsey.

The order of the referee, dated November 13, 1925, disallowing certain claims of B. A. Dempsey, is affirmed.