Automotriz Del Golfo De California S. A. De C. V. v. Resnick

• Decision Date: 30 January 1957
• Citation: 306 P.2d 1,47 Cal.2d 792,63 A.L.R.2d 1042
• Court: California Supreme Court
• Parties: , 63 A.L.R.2d 1042 AUTOMOTRIZ DEL GOLFO DE CALIFORNIA S. A. DE C. V., Plaintiff and Respondent, v. Erwin G. RESNICK, W. D. Cowan and R. William Cowan, Defendants and Appellants. L. A. 24232.

Page 1

306 P.2d 1

47 Cal.2d 792, 63 A.L.R.2d 1042

AUTOMOTRIZ DEL GOLFO DE CALIFORNIA S. A. DE C. V., Plaintiff and Respondent, v. Erwin G. RESNICK, W. D. Cowan and R. William Cowan, Defendants and Appellants.

L. A. 24232.

Supreme Court of California, in Bank.

Jan. 30, 1957.

Rehearing Denied Feb. 27, 1957.

Levy, Bernard & Jaffe, Los Angeles, and Geo. W. Rochester, Beverly Hills, for appellants.

C. P. Von Herzen and Samuel L. Laidig, Los Angeles, as amici curiae, on behalf of appellants.

Francis B. Cobb, Los Angeles, for respondent.

GIBSON, Chief Justice.

Plaintiff, a Mexican corporation, brought this action for the balance due on the price of either automobiles which it alleges were sold to defendants E. G. Resnick, W. D. Cowan and R. W. Cowan. The trial court found for plaintiff, and defendants have appealed from the judgment.

Defendants contend first that plaintiff cannot maintain this action because, they assert, the transaction was intrastate and plaintiff did not allege or prove that it had qualified to do business in California by complying with chapter 3 of the Corporations Code, § 6400 et seq. Section 6801 of the Corporations Code provides in part: 'A foreign corporation subject to the provisions of Chapter 3 of this part which transacts intrastate business in this State without complying therewith shall not maintain any action or proceeding upon any intrastate business so transacted in any court of this State, commenced prior to compliance with Chapter 3 until it has complied with the provisions thereof, * * *.'

The burden of proving that section 6801 precludes maintenance of an action is upon the party pleading the bar of the statute. W. W. Kimball Co. v. Read, 43 Cal.App. 342, 346, 185 P. 192; see McMillan Process Co. v. Brown, 33 Cal.App.2d 279, 284, 91 P.2d 613; Indian Refining Co., Inc., v. Royal Oil Co., Inc., 102 Cal.App. 710, 716, 283 P. 856. Defendants, in order to prove that the statute applies, were required to show that the particular transaction involved here was an intrastate sale. There is evidence that, prior to the sale of the eight automobiles, several similar transactions had been arranged by telephone between plaintiff in Mexico and Resnick in Los Angeles. After agreement on the price, the cars woudl be sent to Los Angeles, and the buyer would pay the cost of transportig them from Mexico. Sales made in that manner were not intrastate transactions. Plaintiff sometimes shipped cars to the 'L. A. automobile auction,' and, on occasion, if they were not sold there, its agent would offer them to Resnick, usually negotiating by telephone from Mexico. The only evidence as to how the transaction for the sale of the eight cars was handled was the testimony of plaintiff's sales representative that 'it could be possible' that they were 'picked up' at the 'L. A. automobile auction.' In this state of the record the trial court was clearly justified in concluding that defendants had failed to meet the burden of proving that the sale involved here was an intrastate transaction.

Defendants next contend that the evidence is insufficient to support the trial court's finding that they were doing business as individuals. We do not agree.

In September of 1952 Resnick and several other persons formed Erbel, Inc., a California corporation. After obtaining releases from his associates of their interest in the corporation, Resnick arranged with W. D. Cowan and his son, R. W. Cowan, to establish a car company. It was orally agreed that Resnick, who was to manage the business, was to receive 50% of the 'profits' and that each of the Cowans was to receive 25%, and the three of them became officers and directors of Erbel, Inc. The corporation never issued stock or applied for a permit to issue stock, and, although defendants testified that they contributed $5,000 to the capital of Erbel, Inc., the court did not find that this was true, and such a finding was not compelled by the record. There is no evidence that any bank account was ever maintained in the name of Erbel, Inc., but a checking account was opened by defendants with the Bank of America under the name 'Erbel, Inc. dba Bi-Rite Auto Sales.'

The volume of sales from the automobile business conducted by defendants ran between $100,000 and $150,000 a month. The method used to finance the purchase of cars which were to be offered for sale was complex, but it is clear that the funds required for this purpose were supplied by the Cowans and not by the corporation. According to defendants, they bought cars for resale with money furnished by the Cowans, and title was held by the Cowans until a purchaser for a car was found. The proceeds of resale were apparently deposited in the Bank of America account, and checks were drawn on that account by Resnick to reimburse the Cowans for the money advanced. In this connection, the trial court found that the Cowans made advances in the amount of $223,445 which were used by defendants to operate the business and which were repaid in part from time to time.

Erbel, Inc. filed a voluntary petition in bankruptcy, listing liabilities of $146,247.43 and assets which were subsequently liquidated by the trustee in bankruptcy for approximately $16,000. The record shows that about a month and a half before initiation of the bankruptcy proceedings, when it was apparent that the business was in financial difficulties, the Cowans transferred to Erbel, Inc. the automobile titles which they were then holding.

Prior to entering into any transactions with defendants, plaintiff informed Resnick that it would not accept his check or draft, and it agreed to deal with him only after it was assured that W. D. Cowan was 'going into business' and would be 'backing the business up.' In previous transactions plaintiff had been given checks drawn on the Bank of America account, and the present action is based upon two checks which were drawn by Resnick on that account and later dishonored by the bank.

It is the general rule that the conditions under which a corporate entity may be disregarded vary according to the circumstances in each case. See H. A. S. Loan Service, Inc., v. McColgan, 21 Cal.2d 518, 523, 133 P.2d 391, 145 A.L.R. 349; Stark v. Coker, 20 Cal.2d 839, 846, 129 P.2d 390. It has been stated that the two requirements for application of this doctrine are (1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow. Stark v. Coker, 20 Cal.2d 839, 846, 129 P.2d 390; Watson v. Commonwealth Ins. Co., 8 Cal.2d 61, 68, 63 P.2d 295.

The failure to issue stock or to apply at any time for a permit, although not conclusive evidence, is an indication that defendants were doing business as individuals. Geisenhoff v. Mabrey, 58 Cal.App.2d 481, 137 P.2d 36; see Marr v. Postal Union Life Insurance Co., 40 Cal.App.2d 673, 105 P.2d 649. In the Marr case the court stated: 'While the fact standing alone that a corporation remains inchoate without stockholders or stock is not of itself determinative of an alter ego relationship upon its part, nevertheless it does indicate that such corporation may exist merely to serve the interests of another a corporation or an individual.' 40 Cal.App.2d at page 682, 105 P.2d at page 654.

Another factor to be considered in determining whether individuals dealing through a corporation should be held personally responsible for the corporate obligations is whether there was an attempt to provide adequate capitalization for the corporation. In Ballantine on Corporations (rev. ed., 1946), at pages 302-303, it is stated: 'If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of the law that shareholders should in good faith put at the risk of the business unincumbered capital reasonably adequate for its prospective liabilities. If the capital is illusory or trifling compared with the business to be done and the risks of loss, this is a ground for denying the separate entity privilege.'

The rule that inadequate capitalization may be considered as a factor in determining whether the corporate entity should be disregarded was followed in Shea v. Leonis, 14 Cal.2d 666, 96 P.2d 332, 334, where a lessee attempted to escape liability for rent due under a lease by assigning his interest in the lease to a corporation which was without other assets. The court held that the owners of the corporate stock were liable for the rental payments,...