Findley v. Garrett

• Decision Date: 08 February 1952
• Citation: 240 P.2d 421,109 Cal.App.2d 166
• Parties: FINDLEY et al. v. GARRETT et al. Civ. 18172.
• Court: California Court of Appeals Court of Appeals

Page 421

240 P.2d 421

109 Cal.App.2d 166

FINDLEY et al. v. GARRETT et al.

Civ. 18172.

District Court of Appeal, Second District, Division 3, California.

Feb. 8, 1952.

Rehearing Denied Feb. 29, 1952.

Hearing Denied April 3, 1952.

Kenneth N. Dellamater and Ivan G. McDaniel, Los Angeles, for appellants.

Gibson, Dunn & Crutcher, Homer D. Crotty, Herbert F. Sturdy, Samuel O Pruitt, Jr., O'Melveny & Myers, Jackson W. Chance, Graham L. Sterling, Jr. and Philip F. Westbrook, Jr., all of Los Angeles, Frederick E. Hines, John A. Dundas and Louis Lieber, Jr., all of Santa Monica, Guthrie, Darling & Shattuck, Milo V. Olson, Morrow & Morrow, Hubert T. Morrow, and Leonard M. Comegys, all of Los Angeles, for respondents.

PARKER WOOD, Justice.

In this stockholders' derivative action, plaintiffs appeal from a judgment of dismissal which was entered upon an order sustaining a demurrer to the first amended complaint without leave to amend.

All the allegations of that complaint are upon information and belief, except the allegations in three of the paragraphs hereinafter set forth wherein it is stated that the allegations are not upon information and belief.

It is alleged in said amended complaint as follows:

Douglas Aircraft Company was incorporated in 1928, under the laws of Delaware, for the purposes of manufacturing and dealing in airplanes; acting as agent in dealing in aircraft manufactured by others; and obtaining and granting licenses with respect to manufacturing under and selling inventions, patents and trademarks. The Garrett Corporation, formerly known under other names, was incorporated in May, 1936, under the laws of California, for the purposes of manufacturing and acquiring aircraft parts, inventions, patents, licenses, and reselling and leasing same to Douglas Aircraft and other aircraft companies; acting as selling agent and distributor for various manufacturers in the sale or lease of aircraft parts, inventions and patents to Douglas Aircraft and other aircraft companies; and inventing, patenting and producing aircraft parts, and reselling and leasing same to Douglas Aircraft and other aircraft companies.

(Allegations of this paragraph are not upon information and belief.) Plaintiff Findley is, and has been since April 13, 1948, a stockholder in Douglas Aircraft Company (referred to as Douglas); and plaintiff Cohen is, and has been since July 12, 1935, a stockholder in said company.

From May, 1936, to October, 1939, the Garrett Corporation (referred to as Garrett) was promoted and organized in furtherance of a fraudulent scheme and conspiracy entered into by defendants J. C. Garrett, Northrop, Jay, Elliott, Bertrandias, Raymond, Doak, Larner and Conant, and by Mr. Wetzel and Mr. Cover, all of whom were officers, directors or executives of Douglas and of its subsidiary, Northrop Corporation. Defendants Leigh, Smith and Barlow, who were friends of some of said last-mentioned defendants, were associated with them in promoting Garrett and they had knowledge, from 1936 to the date of filing the amended complaint, of the fiduciary obligations of all said directors or executives of Douglas. Said conspiracy was made effective in the following manner: defendant organizers of Garrett have had control of Garrett from 1936 to date by reason of their ownership of a majority of its stock; seven of said defendants (organizers) continued as directors of Douglas, four of said defendants (organizers) discontinued as directors of Douglas and became directors of Garrett; and all those eleven defendants (organizers) joined with three other defendants (not directors of Douglas) who became directors of Garrett. The net total profits received by said individual defendants as dividends and by increase in value of Garrett stock is in excess of $7,500,000. The purpose of the conspiracy was to profit at the expense of Douglas through the medium of Garrett. Each person who became a director of Douglas after 1936 did so with full knowledge of the conspiracy and participated in the acts committed pursuant thereto.

From May, 1936, to date Garrett committed acts as follows: purchased, invented, and acquired aircraft parts, inventions, patents, and licenses, and resold them to Douglas; acted as selling agent and distributor for various manufacturers in the sale of aircraft parts, inventions, patents, and licenses to Douglas and other aircraft companies; obtained numerous patents on aircraft parts and many of those patents were developed by Douglas at considerable cost; utilized the good will and credit rating of Douglas to establish the source of supply of aircraft equipment in which Garrett dealt; obtained large purchase orders from Douglas for future delivery and obtained large cash advances thereon; used said large orders to obtain credit and financing for Garrett; competed with Douglas for the purchase and sale of aircraft parts (1) by entering into exclusive contracts with third parties whereby those parties discontinued direct sales to Douglas, (2) by using their influence as directors of Douglas to prevent Douglas from buying supplies and entering into business in competition with Garrett, (3) by using their influence to obtain confidential plans and research information of Douglas, (4) by so controlling the supply of aircraft parts as to make Douglas dependent upon Garrett, (5) by establishing large research facilities, pertaining to inventions and patents, similar to those of Douglas, and (6) by inducing research employees of Douglas to accept employment with Garrett.

The said acts constituted a violation of defendants' fiduciary duties to Douglas because Garrett's profits were derived by interfering with Douglas transactions, selling products to Douglas at secret and unconscionable profits, exploiting the normal business and the experimental research and inventions of Douglas. The secret profits which were distributed through Garrett to directors of Douglas and other aircraft companies destroy competition, violate the Fair Trades Practices Act, and are fraudulent as to Douglas and its stockholders.

The total sales by Garrett to Douglas from 1936 through 1948 amounted to approximately $25,000,000, and Garrett received substantial commissions thereon.

Plaintiffs and the other stockholders of Douglas did not learn of said acts until 1948 because the acts were of a self-concealing nature in that: the information disclosing the organization of Garrett, and disclosing the names of its promoters and directors, was recorded in the books of Garrett which were not available to Douglas or its stockholders; the facts causing suspicion with respect to said acts are not disclosed in the books of account or the minutes of the board of directors of Douglas.

The plaintiffs or the stockholders of Douglas or Douglas had no knowledge, and are not chargeable with knowledge, of said acts prior to plaintiff Findley's discovery thereof in 1948 for the following reasons: (1) that from 1936 continuously to the date hereof all the directors of Douglas consented to, acquiesced in, and became active participants in all of said acts (alleged acts of conspiracy) of said defendants, and throughout said years to the date hereof said directors knowingly shielded and actively concealed said acts from the stockholders of Douglas by means of affirmative representations which purported to be full disclosures of material facts relating to the affairs of Douglas, but said representations were in fact fraudulent concealments of material facts accomplished by omissions and by statements of partial truths which indicated that the affairs of Douglas were being conducted with normal prudence and due regard to the obligations of the directors; (2) said directors also concealed from all the stockholders of Douglas (a) that in April, 1941, in connection with government contracts, the War Department admonished defendant Donald W. Douglas, the president of Douglas Aircraft, to fulfill his responsibilities regarding the ownership of Garrett stock by the defendant directors of Douglas Aircraft; and (b) that in March, 1941, the defendant directors of Douglas who organized Garrett were offered more than nine times the consideration they paid for their Garrett stock but they refused to dispose of said stock; (3) from 1936 to April, 1943, in annual proxy statements and in annual reports to the stockholders of Douglas, the directors of Douglas concealed that any of the directors or executives of Douglas had any financial interest in Garrett; (4) from April, 1943, to March, 1947, said directors, by statements of partial truths in proxy statements and annual reports to the stockholders of Douglas, represented that no director of Douglas had any financial interest in Garrett prior to 'fiscal year' 1942; (5) in April, 1941, defendant Donald W. Douglas, as president of Douglas Aircraft, by omissions and statements in a letter to the War Department, concealed the facts which were alleged in the amended complaint as acts of conspiracy; (6) the said concealments diverted any suspicions of fraud, prevented investigation by the stockholders and lulled them into a false sense of security; (7) the defendant directors of Douglas occupied a fiduciary relationship toward Douglas and its stockholders, and plaintiffs imposed confidence in said directors and relied upon their integrity and had no cause to suspect the violation of said relationship or to suspect the activities of the other defendants who acted jointly with the directors; (8) the said directors of Douglas by actively concealing said facts did thereby, from 1936 to the date hereof, continuously violate their fiduciary obligations to make full disclosures of all material facts to the stockholders, and by said violation the directors have become participants in all the fraudulent acts alleged in the amended complaint; (9) the defendants committed said acts secretly in order to avoid redress; (10) the said acts of...