Arnold v. Browne

• Decision Date: 23 August 1972
• Court: California Court of Appeals Court of Appeals
• Parties: Jim ARNOLD et al., Plaintiffs, Appellants and Respondents, v. George E. BROWNE et al., Defendants, Respondents and Appellants. Civ. 29712.

Page 775

103 Cal.Rptr. 775

27 Cal.App.3d 386

Jim ARNOLD et al., Plaintiffs, Appellants and Respondents, v. George E. BROWNE et al., Defendants, Respondents and Appellants.

Civ. 29712.

Court of Appeal, First District, Division 2, California.

Aug. 23, 1972.

William I. Cohen, Palo Alto, for plaintiffs and appellants.

Collins, Hays, Stewart, Berg, Pott & Sanford, Inc., by Walter V. Hays, San Jose, for defendants and appellants.

TAYLOR, Presiding Justice.

In these consolidated appeals, plaintiffs, Arnold, Hench and Scheetz, appeal from that portion of the judgment denying recovery in their action against the individual defendants on grounds of alter ego. ¹ Arnold, Hench and Scheetz contend that the evidence does not support the trial court's finding of no liability, and that in any event, the individual defendants are not entitled to attorneys' fees. Browne, Bolton, Valentine, Peterson and McCann ² appeal from that portion of the judgment denying them attorneys' fees. Their contention that Civil Cide section 1717 is a procedural statute intended to retroactively award attorneys' fees 'to any party in litigation' over a contract, presents a question of first impression.

The trial court found the facts as follows: In January 1967, Arnold Hench and Scheetz were the sole shareholders of Survey Copters, Inc., a California corporation. About that time, Browne, Peterson, Bolton, McCann, Valentine and Haggis entered into a general partnership under the name of Inter Helo Company. Browne was the managing partner and was given exclusive control over its business and affairs, including the power to sign contracts and to direct business operations.

On June 5, 1967, Browne, on behalf of the partnership, entered into a written agreement with Arnold, Hench and Scheetz for the purchase of all the common stock of Survey Copters (hereafter the agreement), the pertinent portions of which provided: 1) Arnold, Hench and Scheetz agreed to sell to Browne all shares of Survey Copters for a total purchase price of $54,038.25, payable in specified installments over approximately one year; 2) Browne had the right to assign the contract to Inter Helo Corporation and 'shall have no personal liability under this Agreement after any such assignment'; and 3) Inter Helo Corporation was to deliver to Arnold, Hench and Scheetz a negotiable promissory note, in corporate form, for the unpaid balance of the purchase price, payment to be secured by: 1) a pledge of the stock of Survey Copters, and chattel mortgages and security interests in the U 12 E helicopter and other personal property of Survey Copters owned at the closing. Survey Copters also guaranteed payment of the note. At the time Arnold, Hench and Scheetz transferred the stock of Survey Copters, that corporation had substantial assets and value; its net assets exceeded its liabilities by over $33,000, of which over $21,000 was cash.

Prior to the execution of the agreement, Browne, Peterson, Bolton, McCann, Valentine and Haggis made no misrepresentations of fact to Arnold, Hench and Scheetz. Prior to the execution of the agreement for the sale of the stock of Survey Copters, Browne stated to Arnold, Hench and Scheetz that he Expected Inter Helo Corporation to be capitalized in the amount of $150,000.

Inter Helo Corporation was incorporated on June 8, 1967. On June 9, 1967, a collateral note in the amount of $40,500 (the balance due to Arnold, Hench and Scheetz under the agreement) was executed by Browne as president of Inter Helo Corporation. Additional documents were delivered to Arnold, Hench and Scheeta, including a guaranty of payment of the note by Survey Copters; a security agreement from Survey Copters covering all equipment, including a chattel mortgage of the U 12 E helicopter; and a pledge agreement whereby Inter Helo Corporation pledged all of the stock of Survey Copters as security for the performance under the promissory note.

On June 10, 1967, Browne executed an assignment of his agreement with Arnold, Hench and Scheetz to Inter Helo Corporation, which accepted the duties of performance.

On October 23, 1967, Inter Helo Corporation obtained a permit from the California Corporations Commissioner authorizing the issuance of 5,000 shares of $10 par value stock to the individual defendants in exchange for the transfer to the corporation of their respective interests in the partnership. On November 14, 1967, pursuant to the permit, the individual defendants transferred, assigned and conveyed to Inter Helo Corporation all of their right, title and interest in and to the partnership in exchange for the issuance to them of 5,000 shares of $10 par value stock as follows: Browne, 1,715 shares; Peterson, 600 shares; Bolton, 280 shares; McCann, 680 shares; Valentine, 600 shares; and Haggis, 1,125 shares. No other assets were transferred to the corporation in exchange for stock by the individual defendants, or by any other person.

Inter Helo Corporation was not so inadequately capitalized as to justify a finding that the corporation was the alter ego of the individual defendants. Specifically, the individual defendants contributed the following assets:

a) Through the partnership, $13,000 in cash and much more in uncompensated time on necessary promotional work, including: 1) the negotiation of a contract with U.S. Geological Survey; 2) the purchase of a SL--3 helicopter in New Mexico; and 3) the negotiation for the purchase of Survey Copters.

b) A $25,000 loan from Haggis, personally guaranteed by the individual defendants, less than $4,000 of which was repaid by Inter Helo Corporation.

c) A $55,000 loan on the SL--3 helicopter, personally guaranteed by Bolton.

The corporate affairs of Inter Helo Corporation were conducted in accordance with normal corporate paractice. None of the individual defendants converted any assets of the corporation to their personal use and benefit, comingled personal and corporate funds, or committed any other acts of fraud or bad faith.

Subsequent to the incorporation of Inter Helo Corporation, the individual defendants entered into a written partnership agreement for Inter Helo Company, wherein they agreed that the value of the partnership was $50,000. Subsequently, the individual defendants, as officers and directors of Inter Helo Corporation, adopted a resolution finding that the fair value to the corporation of the partnership, Inter Helo Company, was $50,000 and agreed to issue to themselves as partners 5,000 shares of $10 par value stock of Inter Helo Corporation, in exchange for their interests in the partnership.

Shortly after its incorporation, Peterson advised the board of directors of Inter Helo Corporation that at least $115,500 in cash would be required from capitalization to meet its operating costs and obligations, including those to Arnold, Hench and Scheetz under the promissory note, for the period from June through December 1967, if the operation was to be expanded as planned.

After the transfer of stock of Survey Copters, the individual defendants made themselves directors and officers and as such, executed the guaranty, the security agreement, and other documents to secure to Arnold, Hench and Scheetz the payment by Survey Copters of the monies due and owing by Inter Helo Corporation. The individual defendants, as officers and directors of Inter Helo Corporation also executed the pledge agreement, whereby the stock of Survey Copters was pledged to secure the performance by Inter Helo Corporation of the payments under the promissory note.

Survey Copters defaulted on its guaranty and failed to make any payments thereunder after due notice and demand. Inter Helo Corporation likewise defaulted on the payments of its obligations. As of April 7 1970, the balance owing was $15,393.21, plus $1,238.55 accrued interest. In addition, Arnold, Hench and Scheetz incurred a reasonable attorneys' fee of $7,000 and reimbursable expenses of $3,923.18, as well as out-of-pocket expenses in the following amounts: Arnold, $303.92; Scheetz, $298.88, and Hench, $218.78 for transportation expenses. Inter Helo Corporation and Survey Copters are unable to pay plaintiffs the monies due and owing to them. Survey Copters has no assets.

Shortly after incorporation and transfer of the stock of Survey Copters, Inter Helo Corporation assumed and paid the promotional expenses of Browne incurred by him on behalf of the corporation, as well as those of Inter Helo Company, the partnership. Inter Helo Corporation also repaid to the individual defendants loans it had made from them at a time just prior to and after default by Inter Helo Corporation. Inter Helo Corporation also assumed and became primarily liable to the Bank of Montreal on defendant Haggis' personal obligation, which was personally guaranteed by Valentine, Peterson and Browne. Inter Helo Corporation stipulated to liability at the outset of the trial. The individual defendants incurred reasonable attorneys' fees in the sum of $7,000 in defense of the action.

The court concluded that: 1) Arnold, Hench and Scheetz were entitled to judgment against Inter Helo Corporation; 2) the facts Do not justify disregarding the corporate entity of Inter Helo Corporation and holding the individual defendants liable on grounds of alter ego; 3) defendants have not presented facts entitling them to relief on their counterclaim without prejudice to the assertion of any rights they may have under the agreement should facts and circumstances arise entitling them to relief in the future; 4) the individual defendants are not entitled to attorneys' fees. The court entered its judgment accordingly.

I. THE ARNOLD, HENCH AND SCHEETZ APPEAL FROM THE PORTION OF THE JUDGMENT DENYING LIABILITY ON GROUNDS OF ALTER EGO.

As indicated above, the major contention on this appeal is the sufficiency of the evidence to support the findings and judgment.

There is substantial evidence contained in the record to uphold the...