Groves v. Prickett

• Decision Date: 07 January 1970
• Docket Number: No. 23635.,23635.
• Citation: 420 F.2d 1119
• Parties: John G. GROVES, Trustee of the Estate of Dorado-Pacific Investment Corporation, a California corporation, Bankrupt, Appellant. v. Glenn F. PRICKETT, Ray G. Montalvo and Frank Lerrigo, James Thuesen and Eckhart Thompson, partners, associated in business under the common name and style of Lerrigo, Thuesen and Thompson, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

420 F.2d 1119 (1970)

John G. GROVES, Trustee of the Estate of Dorado-Pacific Investment Corporation, a California corporation, Bankrupt, Appellant. v. Glenn F. PRICKETT, Ray G. Montalvo and Frank Lerrigo, James Thuesen and Eckhart Thompson, partners, associated in business under the common name and style of Lerrigo, Thuesen and Thompson, Appellees.

No. 23635.

United States Court of Appeals Ninth Circuit.

January 7, 1970.

COPYRIGHT MATERIAL OMITTED

W. A. McGugin (argued), Fresno, Cal., for appellant.

James T. Caleshu (argued), of Miller, Groezinger, Petitt, Evers & Martin, San Francisco, Cal., William C. Meux, Fresno, Cal., for appellees.

Before HAMLIN, MERRILL and KILKENNY, Circuit Judges.

KILKENNY, Circuit Judge:

The appellant, Trustee in Bankruptcy for Dorado-Pacific Investment Corporation, a California corporation (Dorado), instituted this proceeding in Bankruptcy Court to determine the existence, nature, amount, extent, and validity of the claims of the parties in certain shares of the common stock of Skywest Public Golf Course, Inc. (Skywest), and in and to a fund then and now in the possession of the Trustee. After an extensive hearing, the Referee held that respondent Prickett and Dorado had violated a provision in Skywest's by-laws granting a right of first refusal to its shareholders and ordered that the stock be retransferred by Prickett to the Trustee in exchange for that part of the consideration paid by Prickett, which is now in the possession of the Trustee. On a petition for review, the District Court found there was substantial evidence in support of the Referee's decision and affirmed the order. This appeal is prosecuted from the District Court Order.

Dorado, prior to bankruptcy, engaged in the construction and the operation of golf courses. One of its obligations was an agreement for the construction and management of a golf course on premises owned by Skywest. Dorado, in exchange for the agreement to construct and operate the golf course, received approximately 70% of Skywest's common stock. Some of the shares were subsequently sold. In September, 1965, Dorado held 1402 shares of this stock. This represented approximately 52% of the outstanding shares. By that time, Dorado had defaulted on its agreement to complete the golf course in accordance with the lease arrangement with Skywest and another corporation, Airport Investors, Inc. Dorado was then in serious financial difficulties, including a misappropriation by its officers of approximately $50,000.00 of the assets of Skywest. During the same period, Dorado had undertaken to construct the Willow Park Golf Course, which involved Dorado in additional financial problems. The investors in Willow Park, recognizing Dorado's financial difficulties, insisted on a completion bond in the sum of $250,000.00. To obtain the bond, Dorado then entered into an agreement with Argonaut Insurance Company, under which Argonaut would deposit $100,000.00 in cash and be paid a premium of $5,000.00, the money to be advanced by Dorado. To obtain this money, Dorado started negotiations with respondent Prickett for the sale of the 1402 shares of Skywest's common stock.

One of the articles of Skywest's by-laws provided that a shareholder who desires to sell or transfer should first give written notice of his intention to do so. The same article provided that the other shareholders of Skywest had a right, for a period of 25 days, to purchase such shares on the same terms and conditions as contained in the written notice. Additionally, the Article¹ declared null and void a transfer where the parties failed to comply with the right of first refusal. Both Dorado and Prickett were aware of the provisions of these by-laws. The officers of Dorado attempted to obtain waivers from the remaining shareholders of Skywest. A number of the shareholders refused to execute waivers unless at least $45,000.00 of the proceeds of the sale be irrevocably dedicated to the completion of the Skywest Golf Course and to repayment of funds improperly diverted from Skywest. The sales price of the stock to Prickett was $170,000.00. The waivers recited that the shareholders were consenting to the sale on the basis of a sales price of $170,000.00, pursuant to the "escrow instructions attached." The escrow instructions, which were finally executed by Dorado and Prickett, materially differed from the documents presented to the Skywest shareholders. The shareholders had no knowledge of the fact that the agreement between Prickett and Dorado would be changed or that it was, in fact, changed. The signing of the contract between Prickett and Dorado on September 28, 1965, grew out of a conference on the same day at which Ray G. Montalvo was present. The record is clear that he, as principal agent of Dorado, agreed to advance $20,000.00 of the total sum of $170,000.00. Moreover, it is undisputed that Prickett attached great importance to the fact that this $20,000.00 would be advanced. Prickett forthwith advanced $125,000.00 on the total purchase price of $170,000.00. The balance of $45,000.00 has not been paid. No part of the $125,000.00 was used to complete the golf course, nor to replace the misappropriated funds as required by the executed waivers. Out of the $125,000.00 received by Dorado from Prickett, $105,000.00 was paid to the insurance company to obtain the bond. $100,000.00 of that amount has now been paid by the insurance company to the Trustee. The balance of $20,000.00 never reached the treasury of Dorado.

ISSUES PRESENTED

Summarized, the issues presented on appeal are:

(1) Was the shareholders' right of first refusal, as outlined in Article XII of Skywest's by-laws, a reasonable restraint on the transfer of its common stock?

(2) Did the Referee commit error in voiding the contract between Dorado and Prickett and in requiring that the stock be transferred to appellant and the $100,000.00 in appellant's possession be returned to Prickett?

(1) While under California law, a corporate by-law must not place an unreasonably restrictive curtailment on the right of alienation, nor must it otherwise unreasonably deprive a shareholder of substantial rights, Spencer v. Hibernia Bank, 186 Cal.App.2d 702, 736, 737, 9 Cal.Rptr. 867 (1960); Bennett v. Hibernia Bank, 47 Cal.App.2d 540, 552, 305 P.2d 20 (1956), a by-law reserving a right of first refusal in other shareholders does not unreasonably restrict the right of alienation, nor deprive the shareholder of a substantial right. Vannucci v. Pedrini, 217 Cal. 138, 17 P.2d 706 (1932); Bennett v. Hibernia Bank, supra. For that matter, by-laws restricting a transfer in closed corporations are sometimes essential to a successful enterprise. It has been said that such by-laws are "necessary for the protection of the corporation and its stockholders against rivals in business or others who might purchase its shares for the purpose of acquiring information, which might thereafter be used against the interests of the company * * *." Mancini v. Patrizi, 87 Cal.App. 435, 262 P. 375, 376 (1927). A recent California Supreme Court case restating the same rule is Tu-Vu Drive-In Corp. v. Ashkins, 61 Cal.2d 283, 38 Cal.Rptr. 348, 391 P.2d 828 (1964). We find nothing unreasonable in the requirements of the challenged by-law. The parties concede that California law controls the legal issue on the validity of the challenged by-law. In full support is Diamond Nat'l Corp. v. Lee, 333 F.2d 517, 521 (9th Cir. 1964).

A valid preference right, such as stated in Article XII, may be specifically enforced by the corporation. To limit a corporation to an action for damages would defeat the very purpose of the contract and would not furnish an adequate remedy. Moreover, if the stock has already been sold, a court of equity will cancel the sale and enforce the preference right to purchase. 12 Fletcher, Cyclopedia of the Law of Private Corporations, § 5457.1 (1957 Rev. Vol.). The California courts are in complete harmony with and enforce the same rule. Addiego v. Hill, 238 Cal.App.2d 842, 48 Cal.Rptr. 240 (1965); Addiego v. Hill, 268 Cal.App.2d 280, 73 Cal.Rptr. 901 (1968). The facts in the latter case bear more than a casual resemblance to those before us.

(2) The record discloses a clear portrait of a number of corporations interested in golf clubs, all on the verge of insolvency. In this frenzied atmosphere, it is small wonder that the officers of the bankrupt were jumping by plane from place to place in a frantic effort to secure waivers from the minority stockholders, while at the same time giving promises and assurances to Prickett that certain conditions would be met if he would advance forthwith $170,000.00 for the purchase price for the stock. To round out the picture it seems quite clear that Prickett was relying on his attorney Bjorklund, while Bjorklund was relying entirely on attorney Irwin, who apparently was acting for Skywest, Dorado and a few others. Both Prickett and Bjorklund were quite positive of their position, while Irwin seemed to recall very little about the entire transaction.

We summarize, in part, the conditions outlined in the escrow instructions: (1) that Prickett, his lawyer Bjorklund, and one Sherman, be elected to the Board of Directors;² (2) that a notice of completion and a waiver of lien, in form satisfactory to Prickett's attorney, be executed and delivered showing that there were no liens against the golf course³ or any of the leasehold properties; (3) a certification as to the precise amount of money owing to Skywest by Baldock-Pacific and/or Bob Baldock and/or Palmer Crow; (4) a requirement that Ray Montalvo, one of the officers of Dorado-Pacific and one of the principal promoters of the transaction, advance $20,000.00 of the total $170,000.00; (5) a requirement that the holders of 724 shares of the capital stock of Skywest waive and quitclaim to Glenn Prickett their rights under an agreement between Skywest and various...