Hogan v. Ingold

• Decision Date: 22 April 1952
• Citation: 243 P.2d 1,32 A.L.R.2d 834,38 Cal.2d 802
• Court: California Supreme Court
• Parties: , 32 A.L.R.2d 834 HOGAN v. INGOLD et al. L. A. 21794.

Page 1

243 P.2d 1

38 Cal.2d 802, 32 A.L.R.2d 834

HOGAN v. INGOLD et al.

L. A. 21794.

Supreme Court of California.

April 22, 1952.

Rehearing Denied May 15, 1952.

McLaughlin & Casey, Los Angeles, for appellant.

Kenny & Morris and Robert W. Kenny, all of Los Angeles, as amicus curiae on behalf of appellant.

Flint & MacKay, William R. Flint, Roscoe C. Andrews, J. D. Willard and Hunter & Liljestrom, all of Los Angeles, for respondents.

SCHAUER, Justice.

This case presents to this court for the first time the question as to whether section 834 of the Corporation Code ¹ (Stats.1949 ch. 499, § 1) is validly applicable to a stockholder's derivative suit commenced after the effective date of the statute but concerning wrongs allegedly committed before that date and which suit is instituted by a shareholder who acquired his stock otherwise than by operation of law, and at a time subsequent to the commission of the wrongs complained of but prior to enactment of the statute. We conclude that the statute is procedural, that application of it here is prospective and does not divest the plaintiff of any substantive vested right, and that the order of the trial court dismissing the action for failure to furnish security for costs and expenses as required should be affirmed.

The legislation in question imposes two principal conditions on the institution as maintenance of stockholder's derivative suits: (1) The complaint must allege that plaintiff 'was a registered shareholder * * * at the time of the transaction or any part thereof of which he complains' or that the shares devolved upon him by operation of law from one who was a registered shareholder at such time. (2) On motion (on the grounds specified in the statute and hereinafter epitomized) the court may require the plaintiff to furnish security for 'the probable reasonable expenses, including attorney's fees, of the corporation and the moving party which will be incurred in the defense of the action.' On failure to furnish the required security within a reasonable time to be fixed by the court 'the action shall be dismissed.'

The grounds upon which the motion for security may be based are: (a) That there is no reasonable probability that prosection of the cause of action alleged against the moving party will benefit the corporation or its security holders; (b) That the moving party, if other than the corporation, did not participate in the transaction complained of in any capacity. The trial court in this proceeding concluded that ground (a) was established; its conclusion was amply supported if the statute is valid and applicable.

Plaintiff's complaint was filed on December 9, 1949; section 834 of the Corporations Code had become effective October 1, 1949; plaintiff became a stockholder not earlier than March, 1949, on conveyance to him by one Finnegan of 215 shares. All the transactions complained of, with one exception hereinafter noted, occurred prior to plaintiff's becoming a shareholder. The one transaction excepted (alleged leasing of property, with option to purchase at below its market value, to an organization controlled by defendants) assertedly took place on October 7, 1949, after plaintiff became a stockholder and after the effective date of the statute.

In material substance the complaint alleges: That plaintiff is the owner of 215 of a total of 1,235 outstanding shares of the Washington Holding Company, a corporation, and that the individual defendants concerned on this appeal own, or are registered as owning, shares in respectively stated numbers varying from 5 to 643, and aggregating 718; that the corporation, Washington Holding Company (hereinafter called Washington), has owned, since 1932, described real and personal property. Four individual defendants, Shoor, Ingold, Jenkins and Jesson control Washington and are the officers and directors thereof. Other defendants, Powell, Tanner and Hunt are officers of Washington. Since the organization of Washington in 1932, the four individual defendants have conspired to acquire all the property of Washington to the exclusion of the other shareholders, by issuing false financial statements of Washington, leasing its property to organizations under their control for less than its market rental value, failing to collect such rentals, representing that Mary Eloise Clark was a director when she was not, selling and acquiring stock for delinquent stock assessments unnecessarily levied during 1934-1939, and giving, in 1949, as heretofore mentioned, the lease with an option to purchase on improper terms. The individual defendants have concealed the foregoing from plaintiff. Since the action was commenced, plaintiff Hogan died and his executrix has been substituted in his place.

After the complaint was filed, defendants Ingold, Shoor, Tanner, Powell, Hunt and Jenkins moved, on the grounds stated in the statute, for an order requiring plaintiff to furnish security as therein provided. Supporting and opposition affidavits were filed and the matter heard. Pursuant to the motion, an order was made requiring security, and plaintiff having failed to furnish it within the time specified, the action was ordered dismissed as to the moving defendants. From the latter order this appeal is taken.

The affidavits presented on the motion raise various material issues of fact but, since it appears that the trial court based its order at least in part, and although indirectly, probably controllingly, on its finding, supported by ample evidence, that plaintiff (which term is used herein as indicating either the decedent who commenced the action or the present plaintiff) was, with the exception of the one transaction already noted, not the owner, registered or otherwise, of any stock at the time of any of the transactions or any part thereof complained of and did not acquire his stock by operation of law from one who was a stockholder at any such time, we treat the case on that basis.

Such finding, as above indicated, appears to have been substantially relied upon by the trial court in reaching its conclusion that there is no reasonable probability that prosecution of the cause of action alleged against the moving parties would benefit the corporation. It is to be noted, however that the order dismissing the action is not based on a holding that the complaint fails to state a cause of action; rather, the court considered the facts as to the time and circumstances of plaintiff's acquirement of his stock, and the provisions of subdivision (a)(1) of section 834, and placed reliance thereon in reaching its conclusion that there was no reasonable probability that prosecution of the cause of action alleged would benefit the corporation, and hence, that it was proper to require plaintiff to furnish security for costs and attorney's fees in a reasonable amount. As previously mentioned, and now repeated for emphasis, it was for failure to furnish the security as ordered that the action was dismissed. Thus as applied here the statute did not operate to absolutely preclude plaintiff from maintaining the suit; it merely required him to furnish the security if he were to proceed further in his fiduciary capacity.

Plaintiff contends that her decedent as an incident of acquiring ownership of the stock by purchase acquired an unconditional vested property right to come into equity in a fiduciary capacity and in that role to institute and maintain this action on behalf of the corporation as to all wrongs complained of and that to impose the conditions prescribed by section 834 on the institution and maintenance of the action is to give the statute retroactive effect and illegally deprive decedent and this plaintiff of a valuable property right. This contention cannot be sustained; a person has no property right in being appointed or in acting on his own nomination as a guardian ad litem. He may nominate himself but he cannot compel the court to accept his nomination; he has no property right to be accepted by the court to institute and maintain an action in the right of another on terms beyond the control of the court or the legislature.

It should be observed that section 834 is not designed and does not operate to deprive a shareholder of any vested property right. By its very words the section relates solely to actions which may be 'instituted or maintained in the right of any domestic or foreign corporation by the holder * * * of shares * * * of such corporation.' (Italics added.) Since the statute is directed only at actions instituted or maintained 'in the right' of the corporation it has no application to actions or suits seeking directly to enforce personal rights of shareholders. Stockholders, if they have a personal cause of action, are still free to sue the corporation, the majority stockholders, or the directors of the corporation, and to recover for any cause they can establish. It becomes important therefore to clearly understand at once the precise nature of a stockholder's derivative action.

In Whitten v. Dabney (1915), 171 Cal. 621, 630-631, 154 P. 312, this court said: 'And here again it becomes necessary to call attention to the fact that these plaintiffs have no personal wrongs for which they are entitled to seek redress in this action. The stockholder does not bring such a suit because his rights have been directly violated, or because the cause of action is his or because he is entitled to the relief sought. He is permitted to sue in this manner simply in order to set in motion the judicial machinery of the court.' (3 Pomeroy's Equity, 3d ed., sec. 1095.) * * * What is the exact situation of a plaintiff in such an action? He is a trustee pure and simple, seeking in the name of another a recovery for wrongs that have been committed against that other. His position in the litigation is in every legal sense the precise equivalent of that of the guardian ad litem. The guardian ad litem stands as the...