Gagnon Co. v. Nevada Desert Inn

• Decision Date: 04 November 1955
• Citation: 289 P.2d 466,45 Cal.2d 448
• Court: California Supreme Court
• Parties: The GAGNON COMPANY, Inc., a corporation, Ernest E. Gagnon, Ethel D. Glines, Bernard Martin, and Adelaide M. Martin, his wife, Individually and on behalf of Themselves and All Other Stockholders of Nevada Desert Inn Inc., a corporation, Plaintiffs and Appellants, v. NEVADA DESERT INN, Inc., a corporation, Stanley Burke, Lillian Nelson, John R. Barkley, E. N. Crosby, L. Clay Johnson, Harry Lillis Crosby sometimes known as Bing Crosby, Lela M. Anderson, Harold M. Morse, Frank Sinatra, Charles H. Tanner, Roy F. Wilcox, Larry Crosby, Barney H. Van Der Steen, George Guthrie, and The New Horizon, a corporation, Defendants. Stanley Burke, Respondent. L. A. 23254.

Page 466

289 P.2d 466

45 Cal.2d 448

The GAGNON COMPANY, Inc., a corporation, Ernest E. Gagnon, Ethel D. Glines, Bernard Martin, and Adelaide M. Martin, his wife, Individually and on behalf of Themselves and All Other Stockholders of Nevada Desert Inn Inc., a corporation, Plaintiffs and Appellants, v. NEVADA DESERT INN, Inc., a corporation, Stanley Burke, Lillian Nelson, John R. Barkley, E. N. Crosby, L. Clay Johnson, Harry Lillis Crosby sometimes known as Bing Crosby, Lela M. Anderson, Harold M. Morse, Frank Sinatra, Charles H. Tanner, Roy F. Wilcox, Larry Crosby, Barney H. Van Der Steen, George Guthrie, and The New Horizon, a corporation, Defendants Stanley Burke, Respondent.

L. A. 23254.

Supreme Court of California, In Bank.

Nov. 4, 1955.

J. George Bragin, Hollywood, and H. Ward Dawson, Jr., San Francisco, for appellants.

Pearlson & Pearlson and Herbert Pearlson, Beverly Hills, for respondent.

CARTER, Justice.

Plaintiffs, alleging that they were stockholders of Nevada Desert Inn, a Nevada corporation, commenced the instant action asserting it to be on their behalf and as representatives of the other stockholders. Among the defendants are the Desert Inn and Burke, a director and officer of Desert Inn, other directors of the Inn and also Lela M. Anderson and Harold M. Morse. Burke was the only defendant who answered the complaint. Presumably the others had not been served.

Plaintiffs alleged that defendant Burke had fraudulently breached a contract with the Inn under which he was to hold property in trust for it and supply funds to assist in the financing of the construction of a hotel in Las Vegas, Nevada, and he was to take stock in the Inn. They charged that he fraudulently took Inn funds; that the other directors knew of Burke's actions and yet they did not stop him; that the directors mismanaged the affairs of the Inn and misappropriated the funds thereof. They also alleged fraud on the part of defendant Barkley in the sale of the stock to them, and that Morse, attorney for some of the stockholders in an action commenced in Nevada against the directors, negligently permitted the action to be lost on nonsuit.

Burke answered and raised the defense of res judicata by reason of a judgment by a Nevada court of the eighth judicial district. The judgment which the trial court herein found to be res judicata came about as follows:

In 1947 the Inn commenced an action in the proper Nevada court. The complaint filed therein was verified by Lela Anderson who stated therein that she was the secretary of the Inn. This action is hereafter called second Nevada action. The complaint was signed by Morse and Graves, a firm of Nevada attorneys, by Harold M. Morse, as attorneys for plaintiff therein. The action made substantially the same charges against Burke as are made in the instant action. Burke answered raising the general issue. A 'Dismissal with Prejudice' signed by Morse and Graves, by Harold M. Morse, as attorneys for the Inn was filed in that action on November 16, 1950 (the instant action was commenced on April 11, 1949), and based thereon the Nevada court on the same day made its order that it appearing that plaintiff (the Inn) having filed its written dismissal of the action with prejudice and on motion of Morse and Graves, attorneys for plaintiff, the action is 'dismissed with prejudice.' Prior to the above mentioned Nevada action a similar action by the Inn, with Morse as counsel, had been commenced and tried and resulted in a nonsuit, hereafter referred to as first Nevada action.

Plaintiffs here describe their action as 'derivative' and insofar as they, as stockholders of the Inn, are seeking redress for wrongs done the Inn, it is such an action. 'A stockholder's representative suit has been called a 'derivative action' for the reason that the wrong to be redressed is one against the corporation, and normally the corporation would bring the suit. Where, however, the corporation fails or refuses to act after proper demand, the stockholder's ultimate interest in the corporation is sufficient to justify the bringing of a 'propulsive' action designed to set in motion the judicial machinery for the redress of the wrong to the corporation.' Klopstock v. Superior Court, 17 Cal.2d 13, 16, 108 P.2d 906, 908, 135 A.L.R. 318. And, 'Generally, a stockholder may not maintain an action in his own behalf for a wrong done by a third person to the corporation on the theory that such wrong devalued his stock and the stock of the other shareholders, for such an action would authorize multitudinous litigation and ignore the corporate entity. Under proper circumstances a stockholder may bring a representative action or derivative action on behalf of the corporation. (Citations.) '* * * The action is derivative, i. e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its assets. '' Sutter v. General Petroleum Corp., 28 Cal.2d 525, 530, 170 P.2d 898, 900, 167 A.L.R. 271. Being a derivative action, a judgment on the merits against the corporation on the wrong alleged to have been done to it would ordinarily be res judicata in an action by the stockholders on behalf of the corporation for the same wrong. This follows because the wrong was to the corporation as such and not the stockholders individually, hence a bar to an action by the corporation would be a bar to an action by the stockholders for the corporation. Scarbourough v. Briggs, 81 Cal.App.2d 161, 183 P.2d 683; see Beyerbach v. Juno Oil Co., 42 Cal.2d 11, 28, 265 P.2d 1; Fletcher Cyc. Corps. (perm.ed.) § 5859; 50 C.J.S., Judgments, § 794.

Here we have a judgment (the Nevada judgment) of dismissal with prejudice, rendered by the court on a motion therefor by plaintiff. Whether such a judgment is a bar res judicata as to another action on the same cause in this state is controlled by Nevada law. See Code Civ.Proc. § 1913; Rall v. Lovell, 105 Cal.App.2d 507, 233 P.2d 681; Smith v. Smith, 115 Cal.App.2d 92, 251 P.2d 720; In re Kimler, 37 Cal.2d 568, 233 P.2d 902; Goodrich on Conflict of Laws, pp. 630-634; Rest.Conflicts, § 450. The rule is stated: '(1) The effect of a valid judgment upon the rights or other interests of the parties and persons in privity with them is determined by the law of the state where the judgment was rendered.

'(2) The effect of a valid judgment as a conclusive adjudication between the parties and persons in privity with them of facts which were or might have been put in issue in the proceedings is determined by the law of the state where the judgment was rendered.' (Rest.Conflicts, § 450.) Our courts take judicial notice of 'the laws of the several states of the United States and the interpretation thereof by the highest courts of appellate jurisdiction of such states'. Code Civ.Proc. § 1875. In Nevada the statute with reference to dismissal, at the time the dismissal here was made, provided that an action may be dismissed by plaintiff at any time before trial if no affirmative relief is sought by defendant; by either party with the consent of the other; by the court when plaintiff fails to appear at the trial; by the court when upon trial plaintiff 'abandons' it; on nonsuit; and in 'every other case the judgment shall be rendered on the merits.' Nevada Compiled Laws 1929, § 8793, as amended in 1939, Nev. Stats.1939, p. 33. ^* It has been held by the Supreme Court of Nevada that where there is a dismissal of the action at plaintiff's behest but nothing is said about prejudice that the judgment is not on the merits and hence not a bar to a subsequent action by plaintiff on the same cause, Van Vliet v. Olin, 1 Nev. 495; James v. Leport, 19 Nev. 174, 8 P. 47; Christensen v. Duborg, 38 Nev. 404, 150 P. 306, but where it is dismissed on the stipulation of the parties it is on the merits and a bar. Phillpotts v. Blasdel, 10 Nev. 19. We find no Nevada statute or case law covering the case we have here where the plaintiff moved the court for judgment of dismissal with prejudice and the judgment of dismissal was with prejudice. Under those circumstances we will assume the Nevada law is not out of harmony with ours and thus we look to our law for a solution of the problem. See Strout v. Burgess, 144 Me. 263, 68 A.2d 241, 12 A.L.R.2d 939; Knox v. Pryor, 10 Cal.App.2d 76, 51 P.2d 106; McDonald v. Hartford Trust Co., 104 Conn. 169, 132 A. 902; Dimon v. Dimon, 40 Cal.2d 516, 542, 254 P.2d 528, concurring and dissenting opinions. In Lewis v. Johnson, 12 Cal.2d 558, 563, 86 P.2d 99, 102, we said: 'There is a well-recognized distinction between a dismissal voluntarily made by the clerk's entry, which is presumed to be without prejudice to the bringing of another action, and a dismissal entered in open court pursuant to stipulation, which is ordinarily effective as a retraxit. In the absence of such stipulation or motion addressed to the court, there is no retraxit.' Here, according to the recital in the Nevada judgment, the dismissal with prejudice was made with prejudice on the motion of the Inn's attorneys. It would seem clear that a dismissal with prejudice by plaintiff of its action is a bar to a subsequent action on the same cause; otherwise there would be no meaning to the 'with prejudice' feature. 'A dismissal with prejudice terminates the action and the rights of the parties are affected by it. It is a final judgment in favor of defendants and they are entitled to recover their costs. But a mere statement that a judgment of dismissal is 'with prejudice' is not conclusive. It is the nature of the action and the character of the judgment that determines whether it is res judicata. The intention of the court to make a determination on the merits may be important, but if the judgment is clearly not on the...