Beyerbach v. Juno Oil Co.

• Decision Date: 05 January 1954
• Court: California Supreme Court
• Parties: BEYERBACH v. JUNO OIL CO. et al. L. A. 22341.

Page 1

265 P.2d 1

42 Cal.2d 11

BEYERBACH v. JUNO OIL CO. et al.

L. A. 22341.

Supreme Court of California, In Bank.

Jan. 5, 1954.

Zeutzius & Steffes, A. P. G. Steffes, Los Angeles, and Jamison & Jamison, Porterville, for appellant.

Harry E. Templeton, Jessie Miller, Los Angeles, Guy Knupp, Jr., and Burford & Hubler, Porterville, for respondents.

O'Melveny & Myers, William W. Alsup, Philip F. Westbrook, Jr., Loeb & Loeb, Allen E. Susman, John L. Cole and Herman F. Selvin, Los Angeles, as Amici Curiae on behalf of respondents.

SCHAUER, Justice.

Plaintiff, a stockholder of defendant Juno Oil Co., instituted a stockholder's derivative suit to compel defendants Henderson and Carpenter to transfer a certain oil lease to defendant Juno Oil Co. and to account for and pay to Juno sums received under the lease as rents and royalties. Defendants moved, under section 834 of the Corporations Code, for an order requiring plaintiff to furnish security for reasonable expenses which might be incurred by defendants in connection with the action. Plaintiff failed to deposit security as ordered by the trial court and the court dismissed the action. From the judgment of dismissal plaintiff appeals. He contends that the applicable portions of section 834 are unconstitutional, particularly in their requirement that plaintiff furnish security for the expenses of individual defendants who are sued not as officers or employes of defendant corporation but as third persons who dealt with the corporation; that defendants established no ground for requiring any security or, in the alternative, that the trial court abused its discretion as to the amount and form of security required; and that the court erred in dismissing the action at a time when plaintiff's motion to modify the original order in respect to its requirements as to form and amount of security was pending. We have concluded that each of these contentions is without merit.

The applicable provisions of section 834 are found in paragraph (b) thereof. They are as follows: Within thirty days after service of summons in a stockholder's derivative suit the corporation or any defendant may move for an order, on notice and hearing, requiring plaintiff to furnish security. The motion may be based on either of the following grounds: (1) that there is no reasonable probability that prosecution of the cause of action against the moving party will benefit the corporation or its security holders; (2) that the moving party, if other than the corporation, did not participate in the transaction complained of in any capacity. At the hearing on the motion the court shall consider evidence material to the grounds of the motion and, when material, to a determination of the probable reasonable expenses, including attorney's fees, of the defense of the action. If the court determines that the moving party has established a probability in support of the grounds of the motion, it shall fix the amount and nature of security to be furnished by plaintiff for reasonable expenses, including expenses for which the corporation may become liable under section 830 of the Corporations Code. ¹ A determination as to the furnishing of security is not a determination of the merits of any issue in the action. 'The corporation and the moving party shall have recourse to such security in such amount as the court shall determine upon the termination of such action.' The amount of security from time to the within the court's discretion. If the court requires that security be furnished as to any defendant, the action shall be dismissed as to such defendant unless the security has been furnished within a reasonable time fixed by the court.

The complaint herein alleges that plaintiff, defendant Henderson, and Scott Carpenter ² orally agreed that defendant Juno Oil Co. would be organized to operate oil leases to be acquired by plaintiff and the individual defendants and transferred to the corporation in consideration of stock to be issued by it; that the corporation was formed and the stock issued; that plaintiff acquired and transferred to Juno certain oil leases; that the individual defendants undertook to and did acquire a certain oil lease, known as the Norris lease, but refused to transfer it to Juno as agreed; and that Juno, despite plaintiff's demands, refused to compel transfer of the Norris lease. The complaint seeks to compel transfer of such lease and payment to the corporation of proceeds therefrom allegedly received by the individual defendants for the benefit of the corporation.

Each defendant moved, under section 834 of the Corporations Code, that plaintiff be required to furnish security for probable reasonable expenses, including attorneys' fees, which might be incurred in defending the action. The motions were based on the ground that there was no reasonable probability that prosecution of the action would benefit the corporation and, in the case of the individual defendants, on the further ground that they did not participate in the transaction complained of. The trial court at the hearing of the motions considered substantially conflicting affidavits and testimony.

By formal order dated August 27, 1951, the trial court ordered that 'plaintiff shall, within thirty days from the date hereof, deposit' security of $5,000 as to each of the individual defendants and $1,000 as to Juno, in the form of cash or bonds of a surety company, and that if plaintiff 'fails to provide such security for any of the defendants herein, within the time herein provided, then upon a proper showing thereof, this action shall be dismissed as to any or all defendants for whom such security has not been given in the sums and in the manner as herein specified.'

On September 24, 1951, plaintiff obtained an ex parte order which purported to grant him thirty days from the date thereof in which to deposit the security, and on October 22, 1951, plaintiff obtained anotehr ex parte order which purported to grant him thirty days from the date thereof in which to deposit the security. On October 26, 1951, plaintiff filed a 'Notice of Motion for Order Changing the Amount and Form of Security,' by which he asked that the amount of security be reduced to $2,000 as to the individual defendants and $400 as to Juno, that plaintiff be permitted to file an undertaking executed by personal sureties, and that such security be furnished on or before December 1, 1951.

On October 30, 1951, defendants filed notices of motions to dismiss the action on the ground that plaintiff had failed to deposit the security required by the order of August 27, 1951. On November 19, 1951, the motions of plaintiff to change the form and amount of security and of defendants to dismiss the action were argued and taken under submission.

On November 27, 1951, defendant Juno Oil Co. filed another notice of motion to dismiss, and on November 28, 1951, the individual defendants filed a similar notice of motion. These motions were heard and submitted on December 3.

On December 14, 1951, the trial court granted the last mentioned motions of defendants. On December 19 the court denied plaintiff's motion to change the amount and form of security, denied without prejudice defendants' motions to dismiss of which notice had been filed on October 30, and entered the judgment of dismissal from which this appeal is taken.

It appears that plaintiff did not comply with any part of the order for security. Instead, he contends that section 834 violates the equal protection clause of the federal Constitution (Amendment XIV, § 1) and the provisions of the state Constitution against special laws (art. IV, § 25) and against special privileges and immunities (art. I, § 21). Fundamentally, plaintiff's arguments as to constitutionality are answered, either directly or by necessary implication, by Cohen v. Beneficial Industrial Loan Corp. (1949), 337 U.S. 541 (69 S.Ct. 1221, 93 L.Ed. 1528) (which upheld the constitutionality of a New Jersey statute with a purpose similar to that of section 834; so far as appears, the New Jersey statute contained no provision as to, and the opinion does not discuss, individual defendants who were not officers or employes); and Hogan v. Ingold (1952), 38 Cal.2d 802, 243 P.2d 1 (in which the problem as to such individual defendants did not arise); see also Whitten v. Dabney (1915), 171 Cal. 621, 631, 154 P. 312 (which did not involve the problem of constitutionality of the statute but which pointed out that 'Not only should a plaintiff in such a fiduciary capacity (held to be equivalent to that of a guardian ad litem, who is not in his own right a party to the cause) be willing to take no act that did not first receive the sanction of the court of equity to which he has appealed, but, more than this, he is not permitted to take any act without such sanction'). However, inasmuch as some of the particular aspects of plaintiff's arguments as to the constitutionality of a provision for security for and possible indemnification of an individual defendant who is not sued as an officer or employe of a corporation appear to be advanced in this case for the first time we give specific consideration to those aspects of his arguments.

The unconstitutional discrimination exists, says plaintiff, because section 834 requires plaintiff to furnish security for defendants' expenses if the trial court finds that there is no reasonable probability that the corporation will benefit from the derivative action, but does not contain a comparable provision requiring the corporation to post security for plaintiff's expenses if the trial court finds a probability that the corporation will benefit. This is not a denial of equal protection. As was pointed out in Hogan v. Ingold (1952), supra, 38 Cal.2d 802, 812, 243 P.2d 1, 'If the power of the state over this type of fiduciary litigation is plenary, as the Cohen case states (Cohen v. Beneficial Industrial Loan Corp. (...