Engineering Service Corp. v. Longridge Inv. Co.

• Decision Date: 22 August 1957
• Citation: 153 Cal.App.2d 404,314 P.2d 563
• Court: California Court of Appeals Court of Appeals
• Parties: ENGINEERING SERVICE CORPORATION, a California corporation, Plaintiff and Respondent, v. LONGRIDGE INVESTMENT CO., a Callfornia corporation, et al., Defendants. Frederick W. Henderson; Wayne Guthrie, Joseph H. Waxer, Sam Adams, and Mel Gordon, Appellants. Civ. 22126.

Page 563

314 P.2d 563

153 Cal.App.2d 404

ENGINEERING SERVICE CORPORATION, a California corporation, Plaintiff and Respondent, v. LONGRIDGE INVESTMENT CO., a Callfornia corporation, et al., Defendants Frederick W. Henderson; Wayne Guthrie, Joseph H. Waxer, Sam Adams, and Mel Gordon, Appellants.

Civ. 22126.

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

Aug. 22, 1957.

Frank C. Wood, Jr., Los Angeles, for appellant Joseph H. Waxer.

David Mellinkoff, Beverly Hills, for appellants Melvin Gordon and Sam Adams.

A. W. Brunton, Los Angeles, for respondent.

ASHBURN, Justice.

Defendants Melvin Gordon, Sam Adams, Joseph H. Waxer, Frederick W. Henderson and Wayne Guthrie, appeal from a decree of foreclosure of a mechanic's lien which holds them personally liable for the amount of plaintiff's claim of $16,839.61, principal and interest. Henderson and Guthrie have filed no briefs, thus abandoning their appeals. ¹

The principal argument presented on behalf of appellants is that the court erred in holding them personally liable for an obligation incurred in the name of Henderson of Longridge Investment Company; subsidiary contentions are that they were not liable as joint venturers and that it was error to hold that Longridge was their alter ego. The soundness of these arguments involves a consideration of the entire story of an attempted subdivision of certain mountainous property situated near the intersection of Mulholland Drive and Coldwater Canyon in the Los Angeles area. In reviewing the evidence we necessarily accept as established all inferences favorable to respondent which find substantial support in the evidence. New v. New, 148 Cal.App.2d 372, 306 P.2d 987.

Henderson, who had had previous experience in subdivision work and considered himself an expert therein, selected this land and entered into an escrow for its purchase, making an initial deposit of $5,000. That money was borrowed by him from his lawyer and friend, defendant Gordon. Defendant Sam Adams was the uncle of Gordon's wife and also a client of his. The three men entered into a written joint venture agreement on October 9, 1952, which recited Henderson's arrangement to purchase this land for $40,000 cash and a trust deed note for $209,700; stated that he lacked the cash and the other two parties were to make it available. They agreed to furnish $41,000 to complete the escrow; Henderson agreed to provide $20,000 'for the purpose of obtaining engineering studies' of the property. Adams and Gordon further agreed that they would make an additional $20,000 available for general after Henderson had made the said $20,000 expenditure for engineering. He agreed, upon acquiring title, to convey the land to Westwood Bonded Escrow Co. as trustee to hold same 'for the purposes of the trust agreement by and between the parties hereto, as expressed therein.' Paragraph 5 provides: 'It is agreed by and between the parties hereto that the trust hereinabove indicated is being created to keep the legal title to said real property from becoming subject to a cloud because of the death, divorce, or legal disability, of any or all of the parties hereto, which occurrence could affect the ability of the individuals to convey a good and sufficient marketable title to said real property without court proceedings.' Any profits were to be devoted to repayment of capital contributed by the respective parties, then to payment of the trust deed note and the remainder to be divided in the proportions of 50 per cent to Henderson and 25 per cent each to Adams and Gordon. Paragraphs 7 and 8 provide for participation and investment by other persons and that they should be listed as beneficiaries of the trust. A bank account was to be established and money drawn upon the signatures of any two parties to the agreement, i.e., Henderson, Adams and Gordon. The document is entitled 'Joint Venture,' the understanding is therein referred to as a venture and the participants as venturers. That this was in fact a joint venture is conceded by all counsel.

The contemplated trust agreement was made on November 1, 1952. It named 16 beneficiaries, including Henderson and the three appellants, Gordon, Adams and Waxer. All of the named beneficiaries had invested in the enterprise prior to the execution of the declaration of trust except Henderson, who was to have a 50 per cent interest just as he had under the previous joint venture agreement. This is a dry trust (see 89 C.J.S. Trusts § 17, p. 730). The trustee handles no funds, takes no part in management of trust affairs and acts only upon joint direction of Henderson, Gordon and Adams. The written declaration of trust acknowledges conveyance to Westwood of the real property without consideration and for purposes of the trust, declares the respective interests of the beneficiaries and imposes upon the trustee this obligation: 'To Convey said real property to the Beneficiary, or to such person, firm or corporation as shall have been directed in writing, by Fred W. Henderson, Melvin Gordon, and Sam Adams, acting together, and the Trustee shall not be required to inquire into the propriety of any such direction, not put to any expense because of such direction.' It is expressly declared that the trustee has no duty to collect rentals, pay taxes or assessments, or to pay or attend to payment of interest or principal upon any lien on the property. The term of the trust is declared to be 21 years 'unless sooner revoked or terminated.' Section 5 says: 'This Trust may be amended, revoked or terminated at any time upon the written direction of Fred W. Henderson, Melvin Gordon and Sam Adams, acting together. No amendment, however, shall enlarge the duties or responsibilities of the Trustee nor affect its fees hereunder without its written consent.'

In its general features this declaration is a typical business or Massachusetts trust, but all powers of management reside in the three named representatives of the beneficiaries. It should be noted that none of the investors' money went to the trustee; it was paid into a bank account handled by the three original joint venturers and known as the Henderson-Adams-Gordon account. This reservation of complete management to the representatives of the beneficiaries and to the exclusion of the trustee leaves the participants in the status of partners or joint venturers and deprives them of the advantage of a true trust arrangement. In the leading case of Goldwater v. Oltman, 210 Cal. 408, 418, 292 P. 624, 628, 71 A.L.R. 871, the court says, concerning Massachusetts or business trusts: 'By the weight of authority, where the trustees have complete control of the business, the creators of the trust are treated as are the cestuis que trust of an ordinary equitable trust, and are exempt from direct personal liability to the creditors of the business; but if the trustees are subject to the control of the creators of the trust, the latter or their successors are liable as partners.' The quoted rule was adopted as the law of this state. Bernesen v. Fish, 135 Cal.App. 588, 602, 28 P.2d 67, 73, after reviewing the authorities, says: 'When the instant case is measured by these rules it is evident that the control of the trustee over the property of the trust estate is far too limited and the control over it and the actions of the trustee by the beneficiaries is too complete to permit any doubt of the fact that the trust here in issue cannot be classified as a Massachusetts or Business Trust. It comes within the other classification in which the beneficiaries reserve to themselves such control over the trustee and trust estate that a specie [sic] of partnership is created. It makes no difference that many of these powers of control are to be exercised by and through a 'business manager'. The beneficiaries expressly appointed him their agent for such purpose.' The last two sentences are significant. Henderson, Gordon and Adams were the business managers appointed by the beneficiaries for that purpose; control of the trust by those agents is control by all beneficiaries. An annotation in 156 A.L.R. 22, 42, says: 'According to this doctrine, whether an organization in the form of a business trust is a true trust or a partnership depends upon the manner in which the business is to be conducted and upon the repository of the ultimate power of control over the affairs and property of the concern. If, under the trust instrument, the trustees are vested with title to its property and with the exclusive right to manage its business and conduct its affairs, free from the control of the shareholders, the organization is treated as a trust; but if the trustees are subject to the control of the shareholders in these particulars, and the shareholders have the real mastery over the affairs of the concern, the organization is treated as a partnership and the shareholders as partners.' See also, 12 C.J.S. Business Trusts § 1(4), p. 814. The trust instrument at bar created a partnership or joint venture (the differentiation between the two types of association is too narrow to be of importance here). The court found it to be a joint venture. The parties, or at least some of them, seem to have recognized the true nature of the arrangement. The minutes of a meeting of the directors of Longridge (the alter ego) held on July 11, 1953, show that it was attended by Waxer and Guthrie, and that the following occurred: 'The chairman requested that the meeting consider a certain Option Agreement made this day by and between Melvin Gordon, Sam Adams and Frederick W. Henderson, as joint venturers for Westwood Bonded Escrow Co., and Longridge Investment Co.' When Adams and Gordon decided to file a notice of non-responsibility on November 23, 1953, they described themselves as 'the beneficial owners and representatives of other beneficial owners' of the land.

The declaration of trust was made on November 1, 1952. Longridge...