Taylor v Wright. | Civ. No. 12701. First Dist., Div. One. May 29, 1945| PETERS, P. J.

EMMA FOY TAYLOR

MARIE A. WRIGHT et al
Summary: Taylor brought an action for damages because of fraud against Mother and Son
wright. Resps concealed their identities and acted through an agent when they bought the stocks
from Taylor for a value less than the real market value of the stocks. The court held that
according to the special facts rule, where special circumstances or facts are present which make
it inequitable for the director to withhold information from the stockholder, the duty to disclose
arises, and concealment is a fraud. Here the Wrights had the duty to disclose their identity as
directors when they purchased her stocks because they had the knowledge of the true value of
the stocks. Because the stocks were bought for a lesser price, taylor sustained damage

FACTS

Facts: (Sorry mahaba talaga facts at complicated)

 Emma Foy Taylor, brought this action against Marie A. Wright and Allen J. Wright, mother
and son, and others, to recover damages for fraud alleged to have been committed by
defendants in buying 3,750 shares of stock owned by her in the Commonwealth
Acceptance Corporation at less than its actual value.
 Parties:
o Taylor is a widow, aged 77 years.
 She purchased 3,750 shares of stock in the Commonwealth Acceptance
Corporation in 1928 or 1929 for $15,000, from a Miss Cousins, who
introduced her to Mr. Lester Johnson,(Bro-in law of Allan Wright) president of
the company.
o Johnson was originally named as a defendant but was granted a nonsuit at the first
trial. taylor had implicit faith in Johnson and relied upon him for advice.
 Johnson and A. Wright were the two executives of the company and actually
ran the company.
o Allen Wright was also a stockholder and an officer, being secretary
 Director
o Mrs. Wright was a large stockholder of the company.
 Director
 From 1933 through 1936 Mrs. Wright began to buy additional stock in the
company, and by the end of 1936 she owned about half the issued stock.
 Commonwealth Acceptance Corporation
o Delaware company
o principal office : Oakland, California.
o originally organized in 1925 to handle automobile financing
o 1931, it began to deal in stocks, and ultimately its greatest business was in the
investment field.
 One of the securities it began to purchase in 1931 was Shell Union stock. By
December of 1935 the Shell stock had appreciated in value over
$80,000(meaning it could have earned them a profit of 80 k if they sold it)
 The company through its BoD, the wrights and Johnson constituting a majority of the
board, stopped paying dividends in 1931, the last dividend being paid in October of 1931.
1

1Each year, about March or April, the company issued to its stockholders a financial statement
for the preceding year. ;The statement of 1933 showed a net profit of $86.35 for the year's
operation.;For 1934, issued in March 1935, showed a net loss of $3,615.53.;These various
 o The financial statements were valueless because it did not state the present market
value of the securities
 Taylor who owned 3,750 shares of stock in the company she was the 5 th largest
stockholder in 1935
o Taylor was indebted to the American Trust Company, and in 1931 pledged the
3,750 shares with that bank, together with other collateral, to secure the loan.
o By 1935 she had reduced the loan to $5,700.
 The loan was a "distressed loan," the security was not sufficient to support
the loan and respondent was apparently unable to make the called for
payments.
 The bank had several times tried to ascertain the value of the Commonwealth stock.
o The stock was not listed on any exchange and there was no over-the-counter
market.
o The bank's officers had several times called Johnson or appellant Allen Wright and
had been told by them that there was no market or prospective purchasers for the
stock.
 (Fall 1935) some of the stockholders of the company, excluding taylor, became dissatisfied
with the way Johnson and the Wrights were running the company.
o In particular, they were disturbed by a transaction whereby another corporation
wholly owned by Johnson and the Wrights, and which owed Commonwealth over
$26,000, became a "subsidiary" of Commonwealth, and by this means apparently
the debt was extinguished.
 Summary: CAC was a corporation which had been transformed into an investment
company that was highly solvent and which could on very short notice have liquidated just
one of its assets--the Shell stock--at a profit of over $80,000.
o No dividends had been paid for four years.
o The only way it could make a profit was to sell some of its stock.
o the financial statements issued to the stockholders showed that the company was
being operated at a loss, which was increasing year by year.
o Some stockholders were getting impatient with the management.
o Under these circumstances, appellant Allen Wright hired Ben T. Stowell as an agent
for his mother to have him ascertain the attitudes of the various groups of
stockholders.
 Wright also authorized Stowell to offer to buy the shares of dissatisfied
stockholders who wished to sell
 Stowell's compensation for services was a commission of 20 cents per share
for each share of stock purchased.
 Stowell was instructed not to volunteer any information as to who his
principal was, and it is
 Wright hired Stowell to buy the stock of stockholders and
deliberately withheld from the prospective sellers the identity of the
purchaser.
 this was done as part of a scheme conceived by Wright whereby he
and his mother could secure the stock of this company at depressed
values for lower than the real value of such stock.
 The stock at this time had a liquidation value of at least $2.20 per share, and an
actual value much higher

statements listed as an asset an item of "marketable securities" at "cost." ;The various stocks
were not listed, but the cost price of the entire portfolio was set forth;
 o It was Wright's desire to buy as much of the stock as possible at about $1.00 a
share and thus not only make a handsome profit, but also, through his mother, get
control of the company.
o Although wright said he thought the liquidation value of the stock was about $1.50
per share, he actually knew it was at least $2.20.
o All during this period Wright was in frequent communication with Johnson about
corporate affairs
 Wright gave Stowell a list of some of the stockholders. Mrs. Taylor's name was not on the
list but her cousin’s name was and Stowell learned about Taylor and her stockholdings
through the cousin
 Stowell met with Taylor and she then told him that the stock was pledged with the
American Trust Company.
 Stowell told Wright and the latter authorized Stowell to offer $1.00 a share for the stock.
o Wright knew the stock had been pledged with the bank and knew the general
condition of the loan.
 Stowell called upon the officers of the bank and offered them $3,750, that is $1.00 a
share, for the stock
o Note the liquidating value of the stock on this date was $2.20 a share, and
there is evidence that the book value was $3.10, $2.79 per share book value
was admitted by the resps.
 There is conflicting evidence as to whether Stowell furnished the bank with any
computations.
 the bank's officers got in touch with Mrs. Taylor and offered $3,750 but taylor refused went
home.
o offer had been raised to $4,000 but Taylor felt the price was too low but after
talking with Johnson she agreed
o the bank closed the transaction, and the stock was sold to Stowell for $4,000,
Stowell receiving a commission from Wright of $50.
o Although this transaction was completed December 5, 1935, Wright did not
have the stock certificate changed into his mother's name on the books of the
company until April 28, 1936.
 Taylor did not know Stowell was acting for a director, and that had she known
that fact she would not have sold at such a price.
 Taylor only found out several months after the deal was closed when she heard from a
boarder at her home, a law student, rumors that her stock had been bought by an
"insider."
 She icalled Johnson, and after talking with him she did not believe the rumor
 Several years later the law student again came to her with this rumor, and she again
called Johnson and after she still did not believe the rumor.
o But Johnson then knew Stowell had acted on behalf of the Wrights. I
 It was not until she heard the rumor again in December, 1939, that she really
became suspicious, and after investigation, filed this action.

ISSUES + RULING

whether directors and officers of a company owe any duty at all to stockholders in
relation to transactions whereby the officers and directors buy for themselves shares
of stock from the stockholders YES

three rules: (1) majority rule (2) minority rule (3) special facts rule

1. majority rule (American Trust case)

- a director is a fiduciary with respect to the corporation as an entity, and not
to the stockholders as individuals.
 - 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 arm's 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.
- predicated on the theory that the corporation--the collective stockholders--is a separate
and distinct legal entity, an artificial personality, to whom the director owes his duty
2. minority rule
- 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.
- such a duty exists because the stockholders have placed the directors in a strategic
position where they can secure first-hand knowledge of important developments, and
where they can make it appear the shares are much less valuable than they really are.
- the detailed information a director has of corporate affairs is in a very real
sense property of the corporation, and that no director should be permitted
to use such information for his own benefit at the expense of his
stockholders. The so-called majority rule permits a director to secure for himself
profits rightfully belonging to all. Such a rule offends the moral sense, and is contrary
to our modern concept of the duty of a director towards those he represents.
3. Special Facts rule
- Exception to majority rule
- where special circumstances or facts are present which make it inequitable for the
director to withhold information from the stockholder, the duty to disclose arises, and
concealment is a fraud."
- Strong v Repide: it was fraudulent for a director to buy from a shareholder without
disclosing his identity. "Concealing his identity when procuring the purchase of the
stock, by his agent, was in itself strong evidence of fraud."
 Assuming that the "special facts" doctrine, at least, is applicable in this state, there can be
no reasonable doubt but that the appellants, under the facts, owed respondent a
duty, and violated that duty to her damage.
o The stock here involved was not sold or traded on any exchange.
o appellants actively and successfully concealed their identity as the purchasers.
o appellants, by reason of their position as directors, had full knowledge of the actual
value of the stock
o they were active in inducing the sale.
o They sought out the respondent and made no effort to tell her the real value of her
stock, but kept that knowledge, which they had acquired as directors, to
themselves.
o the appellants knew they were buying pledged stock, and that the loan for which
the stock was pledged was "distressed."
o They knew that the bank's primary interest was to secure enough for the stock to
put the loan in a sound condition.
o They knew that respondent would find it difficult to resist their offer should the bank
deem it acceptable.
 Therefore appellants were guilty of fraud within the meaning of the "special
facts" rule

Other contentions
 a. Appellants : no legal requirement that they disclose the market value of the
securities to the stockholders, and that setting forth security values at cost in the
financial statements is an approved accounting practice.

Court:

 That may be true but we are here dealing with a corporation which was largely
controlled by two men who had intimate and detailed knowledge of the market
value of the company.
 They knew as practical men that none of the stockholders had that knowledge.
 When Wright actively solicited a sale from respondent he was, under the facts, under a
duty to speak fully, fairly and honestly which he did not do
b. Appellants
 the books of the company disclosed the information as to the ownership of the Shell Union
stock, and that such books were located at the Oakland office.
 Any stockholder, according to appellants, could have come to the office and ascertained
the true facts for themselves.

Court: Such argument loses sight of the realities of the situation. A stockholder is not bound
to anticipate fraud on the part of his trusted director. The legal right to look at the
books, in view of the complexity of modern accounting practices, cannot preclude a
stockholder from recovering from a fraudulent director.

c. Appellants: they did not buy from respondent but bought from the bank at a
pledgee sale

Court: Under any theory respondent had an equity in the stock. There is substantial evidence
that whatever the legal rights of the bank may have been the bank sought and secured
respondent's consent to the sale before it was consummated. The bank purported to act and did
act as her agent in completing the sale.

d. Appellants : cause of action barred by the statute of limitations contained in

subdivision 4 of section 338, Code of Civil Procedure which requires actions based
on fraud to be commenced within three years: contested the reasonableness of
taylor in not discovering the fraud sooner

Court:"The cause of action in such case not to be deemed to have accrued until the discovery by
the aggrieved party, of the facts constituting the fraud or mistake."

 Taylor heard the rumors from the boarder and called Johnson several times throughout the
years and as a result she did not believe the rumors
 Johnsonknew the true facts.
 Under the circumstances the question as to whether respondent acted
reasonably in not discovering the fraud sooner was one of fact for the jury.
e. Appellants: It was error to instruct the jury that it, in its discretion, could make an
award for exemplary damages and for interest. I in this action neither of these items
is recoverable.

Court: In title II, chapter 1, article II of that division appears section 3288 "In an action
for the breach of an obligation not arising from contract, and in every case of
oppression, fraud, or malice, interest may be given, in the discretion of the jury."

Judgment affirmed