England v. Christensen

• Decision Date: 12 July 1966
• Court: California Court of Appeals Court of Appeals
• Parties: John M. ENGLAND, trustee of the Estate of Christensen Manufacturing Co., a corporation, bankrupt, Plaintiff and Appellant, v. Andrew G. CHRISTENSEN, Grace H. Christensen, Harold P. Christensen, Dora J. Christensen, Victor I. Akers, George R. Alpert, and H. J. Dinubilo, Jr., Defendants and Respondents. Civ. 22497.

Page 402

52 Cal.Rptr. 402

243 Cal.App.2d 413

John M. ENGLAND, trustee of the Estate of Christensen Manufacturing Co., a corporation, bankrupt, Plaintiff and Appellant, v. Andrew G. CHRISTENSEN, Grace H. Christensen, Harold P. Christensen, Dora J. Christensen, Victor I. Akers, George R. Alpert, and H. J. Dinubilo, Jr., Defendants and Respondents.

Civ. 22497.

District Court of Appeal, First District,

Division 1, California.

July 12, 1966.

Jacobs & Hoffman, San Francisco, for appellant.

Truett, Durham, Conn & Breiner, San Rafael, for respondents, Andrew G. Christensen, Grace H. Christensen, Harold P. Christensen, Dora J. Christensen and H. J. Dinubilo, Jr.

Foley, Saler & Doutt, Lawrence D. Saler, Edmund B. Schultz, Albany, for respondents Victor I. Akers and George R. Alpert.

SULLIVAN, Presiding Justice.

We hold in this case that the purchase by the corporation out of stated capital of the shares issued by it was not made to compromise a controversy between said corporation on the one hand and the selling shareholders on the other and was therefore unauthorized and unlawful. As we explain, the trial court erroneously interpreted the statutes authorizing such a purchase and imposing liability upon selling shareholders for their violation. While we deem it unnecessary to order a new trial, our holdings on the fundamental issue of the legality of the transaction under scrutiny and on the related issues of the liability, if any, of the selling shareholders and directors resulting from such transaction will require the court on remand to make adequate findings of fact and conclusions of law in conformity with our views. We therefore reverse the judgment with directions to the trial court as detailed infra.

In early 1958 defendant Andrew Christensen (Andrew) and his son, defendant Harold Christensen (Harold), were, and for several years prior thereto had been, partners operating a general contracting and cabinet making business in Sausalito under the name of A. G. Christensen and Son. Harold had become acquainted with defendant William Chapman in the fall of 1957 through their common interest in boating and in March of the following year the two Christensens, Chapman and defendant Victor I. Akers discussed going into the business of manufacturing and selling boats, in particular a certain type of catamaran as designed by Chapman. ¹ Additional meetings were held with other interested persons, after which a written preincorporation agreement was entered into on June 6, 1958. In June 1958 Christensen Manufacturing Company (Corporation, bankrupt), a California corporation, was incorporated and commenced actual operations on June 13, 1958 for the manufacture of catamaran outboard motor boats.

Initial preliminary discussions among the organizers contemplated their investment of money in the new business and the rental by the corporation of the building owned by the Christensens and used by them in their contracting business. Subsequently the parties agreed that it would be more desirable to have the Christensens transfer their building and equipment to the Corporation in exchange for stock.

The authorized capital of the Corporation was $200,000, consisting of 20,000 shares of a par value of $10 each. Eventually, under a permit of the Corporation Commissioner ² authorizing 12,000 shares, the Corporation issued 11,600 shares. Of these, 7,500 shares were issued under an original permit to the two Christensens and their wives in exchange for the real property and equipment (see fn. 2, ante) and $5,000 in cash; 500 shares to Chapman for his interest in the design and idea for the catamaran (see fn. 2, ante); and the balance to various persons for cash, making a total of 9,600 shares. Pursuant to amendments to the stock permit, 2,000 additional shares were issued for cash to four new investors ³ in February 1959, bringing the total to 11,600 shares. In all instances the certificates were deposited and held in the customary approved escrow pending further order of the Commissioner. Thus the stated capital of the corporation was $116,000. (CORP. CODE S 1900. )⁴

At all times material herein, the board of directors of the Corporation consisted of seven members, including Andrew and Harold Christensen. ⁵ The two Christensens together with Wornum and Dinubilo apparently represented the 'Christensen interests,' so that, with four of the seven board members, Andrew was in control of the Corporation, conceding at the trial that he could 'pretty much count on' 8,100 shares out of the total of 11,600 shares. Andrew was elected president of the Corporation, a position which he held until his final resignation; Harold was elected vice-president; Chapman, secretary; and Akers, treasurer. For a period of time the four new shareholders also appeared to be 'informal' directors and even after their removal as such continued to have a voice in the corporate affairs. ⁶

Sometime prior to April 1959, cash in various amounts totalling $33,000 was advanced to the Corporation by a group of investors ⁷ upon the understanding that they were to receive shares of stock when an appropriate permit had been obtained. The permit was issued but suspended a short time later. Nevertheless the $33,000 'was put into the general fund and used to pay bills and run day by day operations of the company.' The amount was carried as a current liability on the Corporation's books and was still outstanding at the time of the transfer around which the present dispute revolves.

There was evidence that in the latter part of April or early May 1959 a number of meetings of the Corporation were held. An indication is found in the record that these were brought about by the suspension of the stock permit authorizing issuance of shares to the Professor Davis group. Some were business meetings, some duly noticed directors' and shareholders' meetings and some adjourned meetings. At almost all of them all directors except Wornum were present; frequently the shareholders who were not directors were present; on some occasions members of the Professor Davis group attended. At these meetings there were discussions about the issuance of stock to the Davis group. Andrew Christensen continued to voice opposition to such an application ⁸ because he was adamantly opposed to the changes the new investors desired to make.

This position taken by Andrew and joined in by Harold, along with several smaller management decisions made by Andrew, ⁹ appears to have brought the dissension out into the open. Some of the Professor Davis group who attended meetings became disgruntled about Andrew's 'being in the driver's seat.' Threats were made to Andrew that if he didn't 'get out' the new investors would demand immediate return of their $33,000, bring suit and attach; and that if Andrew did not agree to the new issue of shares, they would commence an action to dissolve the Corporation.

Finally, at one of the meetings the proposal was made to Andrew that he and the Christensen interests get out of the company entirely. This crucial decision that the Christensens be removed from the Corporation having been made sometime in early May, the following days were taken up with several meetings whose object was to determine the best method of removing them.

In seeking the best method of effecting their plan the directors several times consulted with Grydyk, the Corporation attorney, and also Mr. Bantz, a certified public accountant. It was finally decided that the Corporation would retransfer ownership of the land and buildings to the Christensens in exchange for the 7,500 shares of stock held by them. This plan had been arrived at prior to May 20, 1959 but was first formally evidenced by a resolution passed at the meeting of May 20, 1959, set forth in pertinent part in the footnote. ¹⁰

Various other details had to be worked out. Among these were: (1) the securing of the Corporation Commissioner's consent to the release of the Christensen shares from escrow; (2) the securing of a guarantee of $11,000 of the $33,000 liability to the Professor Davis group by minority stockholders who were financially responsible; and (3) the negotiation of a lease from the Christensens back to the Corporation. In seeking consent to release of the shares from escrow, the attorney for the Corporation submitted a copy of the above resolution and a copy of a balance sheet at April 30, 1959. Consent was issued May 21, 1959. ¹¹

Harold and Andrew resigned their positions with the Corporation on May 24, 1959. Then, on June 3, 1959 the Corporation delivered to the Christensens a grant deed to the real property, in return for which the Christensens delivered over the 7,500 shares to the Corporation for cancellation. This consummated the purchase by the Corporation out of stated capital of the 7,500 shares of the Christensen stock. Bankruptcy soon followed.

On November 16, 1959 an involuntary petition in bankruptcy was filed with the clerk of the United States District Court. On January 12, 1960 the Corporation caused to be filed with said court its consent to the entry of an order of adjudication which, on January 14, 1960, was made and filed in said court adjudging the Corporation to be bankrupt. On March 1, 1960 plaintiff John M. England was appointed trustee in bankruptcy of the bankrupt's estate. During the month of December 1959, prior to his being appointed trustee, plaintiff 'ran the business, processing and building boats.' Then, after the Corporation was adjudicated bankrupt, plaintiff, following the usual procedures, sold the assets of the Corporation, receiving therefor $17,391.

On October 13, 1961, plaintiff as trustee commenced the instant action setting forth two separately stated causes of action: the first against the Christensens as sellers of shares improperly purchased by bankrupt out of stated capital; and the second against certain directors for having acted negligently in causing such...