Topanga Corp. v. Gentile

Phillip Gentile (defendant) told Ernest Breault and Henry Luft about a land parcel available for purchase (Topanga Ranch). The three agreed to form a corporation (the corporation) (plaintiff) to make the purchase and further agreed that because Gentile had met with Topanga Ranch’s owners, Gentile would negotiate the purchase in his own name and then deed the property to the corporation. Gentile subsequently—and falsely—told Breault that Topanga Ranch’s owners agreed to sell Topanga Ranch for $210,000, payable as follows: (1) the exchange of a ranch owned by Gentile in Fresno, California (the Fresno ranch), claimed by Gentile to be worth $70,000; (2) $30,000 in cash; and (3) a promissory note secured by Topanga Ranch for $110,000. The actual purchase price Gentile negotiated with Topanga Ranch’s owners was only $150,000, consisting of the exchange of the Fresno ranch, which was assigned a value of just $10,000, the $30,000 cash payment, and the $110,000 secured promissory note. A pre-incorporation agreement signed by Gentile, Luft, Breault, and the corporation’s other promoters reflected a $210,000 purchase price for Topanga Ranch and provided that Gentile would receive a one-third ownership interest in the corporation in return for exchanging the Fresno ranch. Approximately one year following completion of the corporation’s acquisition of Topanga Ranch, the corporation’s board of directors reduced Gentile’s ownership interest in the corporation from $70,000 to $20,000 after the board received information about the value of the Fresno ranch from a third-party realty company but without knowing that the Fresno ranch had been exchanged by Gentile for only $10,000. The corporation then sent a notice of rescission to Gentile, with an offer to reissue shares to Gentile worth $20,000, or whatever amount a court would deem proper. The corporation later sued Gentile, seeking declaratory or other equitable relief as to the dollar amount of Gentile’s ownership interest in the corporation. The trial court determined that Gentile’s ownership interest should be reduced to $10,000, and Gentile appealed.