Martinez v. Socoma Companies, Inc.

• Decision Date: 01 May 1974
• Citation: 113 Cal.Rptr. 585,521 P.2d 841,11 Cal.3d 394
• Court: California Supreme Court
• Parties: , 521 P.2d 841 Ignacio MARTINEZ et al., Plaintiffs and Appellants, v. SOCOMA COMPANIES, INC., et al., Defendants and Respondents. L.A. 29985.

Page 585

113 Cal.Rptr. 585

11 Cal.3d 394, 521 P.2d 841

Ignacio MARTINEZ et al., Plaintiffs and Appellants, v. SOCOMA COMPANIES, INC., et al., Defendants and Respondents.

L.A. 29985.

Supreme Court of California,

In Bank.

May 1, 1974.

Richard N. Fisher, Frank G. Ker and Brent N. Rushforth, Los Angeles, for plaintiffs and appellants.

Buchalter, Nemer, Fields & Savitch, Earl P. Willens, Richard D. Bronner, Los Angeles, Caditz & Grant and M. Alfred Karlsen, Beverly Hills, for defendants and respondents.

WRIGHT, Chief Justice.

Plaintiffs brought this class action on behalf of themselves and other disadvantaged unemployed persons, alleging that defendants failed to perform contracts with the United States government under which defendants agreed to provide job training and at least one year of employment to certain numbers of such persons. Plaintiffs claim that they and the other such persons are third party beneficiaries of the contracts and as such are entitled to damages for defendants' nonperformance. General demurrers to the complaint were sustained without leave to amend, apparently on the ground that plaintiffs lacked standing to sue as third party beneficiaries. Dismissals were entered as to the demurring defendants, and plaintiffs appeal.

We affirm the judgments of dismissal. As will appear, the contracts nowhere state that either the government or defendants are to be liable to persons such as plaintiffs for damages resulting from the defendants' nonperformance. The benefits to be derived from defendants' performance were clearly intended not as gifts from the government to such persons but as a means of executing the public purposes stated in the contracts and in the underlying legislation. accordingly, plaintiffs were only incidental beneficiaries and as such have no right of recovery.

The complaint names as defendants Socoma Companies, Inc. ('Socoma'), Lady Fair Kitchens, Incorporated ('Lady Fair'), Monarch Electronics International, Inc. ('Monarch'), and eleven individuals of whom three are alleged officers or directors of Socoma, four of Lady Fair, and four of Monarch. Lady Fair and the individual defendants associated with it, a Utah corporation and Utah residents respectively, did not appear in the trial court and are not parties to this appeal.

The complaint alleges that under 1967 amendments to the Economic Opportunity Act of 1964 (81 Stat. 688--690, 42 U.S.C. §§ 2763--2768, repealed by 86 Stat. 703 (1972)) 'the United States Congress instituted Special Impact Programs with the intent to benefit the residents of certain neighborhoods having especially large concentrations of low income persons and suffering from dependency, chronic unemployment and rising tensions.' Funds to administer these programs were appropriated to the United States Department of Labor. The department subsequently designated the East Los Angeles neighborhood as a 'Special Impact area' and made federal funds available for contracts with local private industry for the benefit of the 'hard-core unemployed residents' of East Los Angeles.

On January 17, 1969, the corporate defendants allegedly entered into contracts with the Secretary of Labor, acting on behalf of the Manpower Administration, United States Department of Labor (hereinafter referred to as the 'Government'). Each such defendant entered into a separate contract and all three contracts are made a part of the complaint as exhibits. Under each contract the contracting defendant agreed to lease space in the then vacant Lincoln Heights jail building owned by the City of Los Angeles, to invest at least $5,000,000 in renovating the leasehold and establishing a facility for the manufacture of certain articles, to train and employ in such facility for at least 12 months, at minimum wage rates, a specified number of East Los Angeles residents certified as disadvantaged by the Government, and to provide such employees with opportunities for promotion into available supervisorial-managerial positions and with options to purchase stock in their employer corporation. Each contract provided for the lease of different space in the building and for the manufacture of a different kind of product. As consideration, the Government agreed to pay each defendant a stated amount in installments. Socoma was to hire 650 persons and receive $950,000; Lady Fair was to hire 550 persons and receive $999,000; and Monarch was to hire 400 persons and receive $800,000. The hiring of these persons was to be completed by January 17, 1970.

Plaintiffs were allegedly members of a class of no more than 2,017 East Los Angeles residents who were certified as disadvantaged and were qualified for employment under the contracts. Although the Government paid $712,500 of the contractual consideration to Socoma, $299,700 to Lady Fair, and $240,000 to Monarch, all of these defendants failed to perform under their respective contracts, except that Socoma provided 186 jobs of which 139 were wrongfully terminated, and Lady Fair provided 90 jobs, of which all were wrongfully terminated.

The complaint contains 11 causes of action. The second, fourth, and sixth causes of action seek damages of $3,607,500 against Socoma, $3,052,500 against Lady Fair, and $2,220,000 against Monarch, calculated on the basis of 12 months' wages at minimum rates and $1,000 for loss of training for each of the jobs the defendant contracted to provide. The third and fifth causes of action seek similar damages for the 139 persons whose jobs were terminated by Socoma and the 90 persons whose jobs were terminated by Lady Fair. The first, seventh, and eighth causes of action seek to impose joint liability on Socoma, Lady Fair, and Monarch as joint venturers, alleging that they negotiated the contracts through a common representative and entered into a joint lease of the Lincoln Heights jail building. The ninth, tenth, and eleventh causes of action seek to impose the liability of the corporate defendants upon their officers and directors named as individual defendants, alleging that the latter undercapitalized their respective corporations and used the same as their Alter egos. ¹

Each cause of action alleges that the 'express purpose of the (Government) in entering into (each) contract was to benefit (the) certified disadvantaged hard-core unemployed residents of East Los Angeles (for whom defendants promised to provide training and jobs) and none other, and those residents are thus the express third party beneficiaries of (each) contract.'

The general demurrers admitted the truth of all the material factual allegations of the complaint, regardless of any possible difficulty in proving them (Alcorn v. Anbro Engineering, Inc. (1970) 2 Cal.3d 493, 496, 86 Cal.Rptr. 88, 468 P.2d 216), but did not admit allegations which constitute conclusions of law (Faulkner v. Cal. Toll Bridge Authority (1953) 40 Cal.2d 317, 329, 253 P.2d 659) or which are contrary to matters of which we must take judicial notice (Chavez v. Times-Mirror Co. (1921) 185 Cal. 20, 23, 195 P. 666). (See Witkin, Cal.Procedure (2d ed. 1970) Pleading, §§ 328, 800.) When a complaint is based on a written contract which it sets out in full, a general demurrer to the complaint admits not only the contents of the instrument but also an pleaded meaning to which the instrument is reasonably susceptible. (Coast Bank v. Minderhout (1964) 61 Cal.2d 311, 315, 38 Cal.Rptr. 505, 392 P.2d 265.) Moreover, where, as here, the general demurrer is to an Original complaint and is sustained without leave to amend, 'the issues presented are whether the complaint states a cause of action, and if not, whether there is a reasonable possibility that it could be amended to do so.' (MacLeod v. Tribune Publishing Co. (1959) 52 Cal.2d 536, 542, 343 P.2d 36, 38; see 3 Witkin, Cal.Procedure (2d ed. 1971) Pleading, § 845.) Thus, we must determine whether the pleaded written contracts support plaintiffs' claim either on their face or under any interpretation to which the contracts are reasonably susceptible and which is pleaded in the complaint or could be pleaded by proper amendment. This determination must be made in light of applicable federal statutes and other matters we must judicially notice. (Evic.Code, §§ 451, 459, subd. (a).)

Plaintiffs contend they are third party beneficiaries under Civil Code section 1559, which provides: 'A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.' This section excludes enforcement of a contract by persons who are only incidentally or remotely benefited by it. (Lucas v. Hamm (1961) 56 Cal.2d 583, 590, 15 Cal.Rptr. 821, 824, 364 P.2d 685, 688.) American law generally classifies persons having enforceable rights under contracts to which they are not parties as either creditor beneficiaries or donee beneficiaries. (Rest., Contracts, §§ 133, subds. (1), (2), 135, 136, 147; 2 Williston on Contracts (3d ed. 1959) § 356; 4 Corbin on Contracts (1951) § 774; see Rest.2d Contracts (Tentative Drafts 1973) § 133, coms. b, c.) California decisions follow this classification. (Southern Cal. Gas Co. v. ABC Construction Co. (1962) 204 Cal.App.2d 747, 752, 22 Cal.Rptr. 540; 1 Witkin, Summary of Cal.Law (8th ed. 1973) Contracts, § 500.)

A person cannot be a creditor beneficiary unless the promisor's performance of the contract will discharge some form of legal duty owed to the beneficiary by the promisee. (Hartman Ranch Co. v. Associated Oil Co. (1937) 10 Cal.2d 232, 244, 73 P.2d 1163; Rest., Contracts, § 133, subd. (1)(b).) Clearly the Government (the promisee) at no time bore and legal duty toward plaintiffs to provide the benefits set forth in the contracts and plaintiffs do not claim to be creditor beneficiaries.

A person is a donee beneficiary only if the promisee's contractual intent is either to make a gift to him or to confer on him a right against the promisor. (Rest.,...