Fletcher v. A. J. Industries, Inc.

• Decision Date: 02 October 1968
• Citation: 266 Cal.App.2d 313,72 Cal.Rptr. 146
• Court: California Court of Appeals Court of Appeals
• Parties: Maurice FLETCHER et al., Plaintiffs and Respondents, v. A. J. INDUSTRIES, INC., Defendant and Appellant, and C. J. Ver Halen, Jr., and Joseph J. Malone, Defendants and Respondents. Civ. 24251.

Page 146

72 Cal.Rptr. 146

266 Cal.App.2d 313

Maurice FLETCHER et al., Plaintiffs and Respondents, v. A. J. INDUSTRIES, INC., Defendant and Appellant and C. J. Ver Halen, Jr., and Joseph J. Malone, Defendants and Respondents.

Civ. 24251.

Court of Appeal, First District, Division 4, California.

Oct. 2, 1968.

Rehearing Denied Nov. 1, 1968.

Hearing Denied Dec. 11, 1968.

O'Melveny & Myers, Rodney K. Potter, and William D. Moore, Los Angeles, for defendant and appellant.

Walker Wright, Tyler & Ward, Los Angeles, for plaintiffs and respondents Maurice Fletcher, and others.

Gibson, Dunn & Crutcher, Sherman S. Welpton, Jr., G. Edward Fitzgerald, Kenneth E. Ristau, Jr., Los Angeles, for defendant and respondent C. J. Ver Halen, Jr.

Irsfeld, Irsfeld & Younger, Hollywood, for defendant and respondent Joseph J. Malone.

RATTIGAN, Associate Justice.

This appeal is from certain orders entered in a stockholders' derivative action against appellant A. J. Industries, Inc. (hereinafter called the 'corporation,' or 'AJ'). The questions presented are whether, under the circumstances of the present case, the corporation should be required to pay attorneys' fees and costs incurred in the action (1) by the stockholders who brought it as plaintiffs, or (2) by two officer-directors of the corporation who were named as defendants and whose alleged misconduct was the basis of the action.

Respondents Maurice Fletcher and Bradley, both stockholders of the corporation (and hereinafter 'plaintiffs'), commenced the derivative action in December, 1964. The named defendants included the corporation; respondents Ver Halen and Malone; Messrs. Wendell Fletcher and E. J. Sargent; and the personal representative of George T. Fox, deceased. Ver Halen was president of the corporation, Malone was its treasurer. Both men, and Sargent, were members of its board of directors. Wendell Fletcher and Fox had been board members before the action was commenced.

The complaint alleged generally that at relevant times Ver Halen had dominated and controlled the board and the management of the corporation; that he had dominated and acted in concert with Wendell Fletcher, Sargent, Fox and Malone in several transactions which had occurred while all were members of the board; ¹ and that, in consequence, the corporation had been damaged in the various transactions, which were then detailed in seven causes of action in the complaint. In an eighth cause of action, plaintiffs alleged that Ver Halen had breached his contract of employment with the corporation. The complaint prayed for several forms of relief on behalf of the corporation, including a money judgment against Ver Halen for $134,150 and one against all the individual defendants in the amount of $1,000,000.

Ver Halen appeared in plaintiffs' action and noticed a motion for security for his litigation expenses, pursuant to subdivision (b) of section 834 of the Corporations Code. The corporation subsequently made a general appearance and joined in Ver Halen's motion.

During the course of a protracted hearing on the joint motion, a settlement of the action was negotiated. Plaintiffs, the corporation, Ver Halen and Malone (the lastnamed appearing for the first time) filed a formal stipulation executed by their respective attorneys. The stipulation provided that its purpose was to settle all claims set forth in plaintiffs' complaint; that upon performance of the stipulation's 'executory provisions,' the action was to be dismissed with prejudice; and that, pending dismissal, the trial court was to make an order approving the stipulation, the action was not to be prosecuted further, and the trial court was to retain jurisdiction for the purpose of enforcing its order of approval.

The 'executory provisions' of the stipulation included these agreements: Four incumbent directors were to be replaced by persons acceptable to plaintiffs, to Ver Halen, and to the corporation; failing their agreement, the new directors were to be appointed by the trial court. The corporation agreed to employ a new officer who would be in charge of its 'operations,' and who would be one of the four new directors. In the election of future directors, Ver Halen's voting powers as a stockholder were to be limited so as to permit him to elect only two of the board's nine members. His employment contract was to be amended to provide that he could be employed as president of the corporation or, at the board's option, as chairman of the board. Malone was to be one of the directors replaced, and he was to resign as the corporation's treasurer.

Several of the specific charges alleged in plaintiffs' complaint related to claimed mismanagement of the corporation due to Ver Halen's 'domination' of its affairs; to Malone's allegedly excessive salary; and to Ver Halen's asserted breach of his employment contract. The stipulated agreements summarized above apparently disposed of these matters.

Most of the other charges made in the complaint related to specific transactions in which plaintiffs asserted misconduct on the part of Ver Halen. In other 'executory provisions' of the stipulation it was agreed that these would be referred to arbitration, to be conducted in a subsequent proceeding. The question to be arbitrated, in each instance, was 'whether or not' the alleged misconduct had occurred. The parties to the stipulation agreed to be bound by the arbitrator's decision as to each transaction, and the stipulation clearly contemplated the prospect that the corporation could receive a monetary award when the arbitration proceeding had been concluded.

Whether the corporation was entitled to monetary recovery in any respect was, thus, to be determined in the future. In contrast, the stipulated agreements--providing for the reorganization of the corporation's board of directors and its management, the ouster of Malone, and the amendment of Ver Halen's contract of employment--were to be performed immediately.

The stipulation further provided that the arbitrator could award attorneys' fees, to be paid by the corporation, to any counsel who appeared in the arbitration proceeding, except that plaintiffs' attorneys could be awarded fees only in the event the corporation received a monetary award. The parties acknowledged (1) that plaintiffs' and the individual defendants' attorneys intended to apply to the trial court--as distinguished from the future arbitrator--for fees and costs to be paid to them by the corporation 'in connection with this action,' but (2) that the corporation could take 'any position in connection with such applications that it may choose.'

The trial court entered an order which referred to the stipulation, approved it, and ordered the parties to perform its executory provisions.

In the order the court made this finding:

'The Court finds that, in view of the terms, conditions and provisions of said written stipulation, the best interests of the corporation and of all of its shareholders have been, are, and will be, fully protected; that the necessity for prolonged and expensive litigation will be avoided and; further, that the arbitration proceedings provided for in said written stipulation will be less time consuming and less expensive but will, nevertheless, insure to the corporation and to its shareholders the benefit of any financial recovery to which it or they may be entitled, if any.'

Plaintiffs noticed and filed their application for an order requiring the corporation to pay their attorneys' fees and costs incurred in the action. Ver Halen and Malone separately noticed application for indemnity, to be assessed against the corporation, for their fees and costs incurred as defendants. After hearings--at which the corporation opposed all three applications, as it was free to do under the stipulation--the trial court entered orders granting each. We now consider these orders in each of their two separate categories.

The Order Awarding Attorneys' Fees and Costs to Plaintiffs

In its order granting plaintiffs' application for attorneys' fees and costs, the trial court found that they had employed their attorneys to prosecute the derivative action, in good faith, on behalf of themselves and the other stockholders of the corporation, and that the corporation was able to pay the fees and costs incurred. The court also found that by reason of the action, and its settlement, 'substantial benefits have been conferred' upon the corporation. ² Based upon these findings, the court ordered the corporation to pay plaintiffs' attorneys' fees ($64,784) and costs ($2,179.26).

The validity of the foregoing order is the issue first presented on the corporation's appeal. Under the general rule in California and in most American jurisdictions, the party prevailing in an action may not recover attorneys' fees unless a statute expressly permits such recovery. The California expression of the general rule, itself statutory, is found in Code of Civil Procedure section 1021. ³

An exception to the general rule is found, however, in the so-called common-fund doctrine, which is applicable in equity cases and recognized as such in California. As the Supreme Court has stated, 'It is a well-established doctrine of equity jurisprudence that where a common fund exists to which a number of persons are entitled and in their interest successful litigation is maintained for its preservation and protection, an allowance of counsel fees may properly be made from such fund. By this means All of the beneficiaries of the fund pay their share of the expense necessary to make it available to them. (Citations.)' (Italics from the quoted text.) (Winslow v. Harold G. Ferguson Corp. (1944) 25 Cal.2d 274, 277, 153 P.2d 714, 715. See id., at p. 285, 153 P.2d 714; Estate of Stauffer (1959) 53 Cal.2d 124, 132, 346 P.2d 748; Estate of Reade (1948) 31 Cal.2d 669, 671--672, 191 P.2d 745; 3 Witkin, Cal. Procedure (1954) Judgment, § 35, p. 1917.)

The common-fund...