Minton v. Cavaney

• Citation: 15 Cal.Rptr. 641,56 Cal.2d 576,364 P.2d 473
• Court: United States State Supreme Court (California)
• Decision Date: 05 September 1961
• Parties: , 364 P.2d 473 William MINTON et al., Plaintiffs and Respondents, v. Maude N. CAVANEY, as Executrix, etc., Defendant and Appellant. * L. A. 25881.

Page 641

15 Cal.Rptr. 641

56 Cal.2d 576, 364 P.2d 473

William MINTON et al., Plaintiffs and Respondents, v. Maude N. CAVANEY, as Executrix, etc., Defendant and Appellant. ^*

L. A. 25881.

Supreme Court of California, In Bank.

Sept. 5, 1961.

Rehearing Denied Oct. 4, 1961.

William E. McIntyre, Los Angeles, for defendant and appellant.

William M. Cavaney, in pro. per., as amicus curiae on behalf of defendant and appellant.

Charles H. Manaugh and Michael K. Lanning, Beverly Hills, for plaintiffs and respondents.

TRAYNOR, Justice.

The Seminole Hot Springs Corporation, hereinafter referred to as Seminole, was duly incorporated in California on March 8, 1954. It conducted a public swimming pool that it leased from its owner. On June 24, 1954 plaintiffs' daughter drowned in the pool, and plaintiffs recovered a judgment for $10,000 against Seminole for her wrongful death. The judgment remains unsatisfied.

On January 30, 1957, plaintiffs brought the present action to hold defendant Cavaney personally liable for the judgment against Seminole. Cavaney died on May 28, 1958 and his widow, the executrix of his estate, was substituted as defendant. The trial court entered judgment for plaintiffs for $10,000. Defendant appeals.

Plaintiffs introduced evidence that Cavaney was a director and secretary and treasurer of Seminole and that on November 15, 1954, about five months after the drowning, Cavaney as secretary of Seminole and Edwin A. Kraft as president of Seminole applied for permission to issue three shares of Seminole stock, one share to be issued to Kraft, another to F. J. Wettrick and the third to Cavaney. The commissioner of corporations refused permission to issue these shares unless additional information was furnished. The application was then abandoned and no shares were ever issued. There was also evidence that for a time Seminole used Cavaney's office to keep records and to receive mail. Before his death Cavaney answered certain interrogatories. He was asked if Seminole 'ever had any assets?' He stated that 'insofar as my own personal knowledge and belief is concerned said corporation did not have any assets.' Cavaney also stated in the return to an attempted execution that '(I)nsofar as I know, this corporation had no assets of any kind or character. The corporation was duly organized but never functioned as a corporation.'

Defendant introduced evidence that Cavaney was an attorney at law, that he was approached by Kraft and Wettrick to form Seminole, and that he was the attorney for Seminole. Plaintiffs introduced Cavaney's answer to several interroga tories that he held the post of secretary and treasurer and director in a temporary capacity and as an accommodation to his client.

Defendant contends that the evidence does not support the court's determination ¹ that Cavaney is personally liable for Seminole's debts and that the 'alter ego' doctrine is inapplicable because plaintiffs failed to show that there was "(1) * * * such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow." Riddle v. Leuschner, 51 Cal.2d 574, 580, 335 P.2d 107, 110; Automotriz Del Golfo De California S. A. De C. V. v. Resnick, 47 Cal.2d 792, 796, 306 P.2d 1, 63 A.L.R.2d 1042; Minifie v. Rowley, 187 Cal. 481, 487, 202 P. 673.

The figurative terminology 'alter ego' and 'disregard of the corporate entity' is generally used to refer to the various situations that are an abuse of the corporate privilege. Ballantine, Corporations (rev. ed. 1946) § 122, pp. 292-293; Lattin, Corporations, p. 66; Latty, The Corporate Entity as a Solvent of Legal Problems, 34 Mich.L.Rev. 597 (1936). The equitable owners of a corporation, for example, are personally liable when they treat the assets of the corporation as their own and add or withdraw capital from the corporation at will (see Riddle v. Leuschner, 51 Cal.2d 574, 577-581, 335 P.2d 107; Thomson v. L. C. Roney & Co., 112 Cal.App.2d 420, 429, 246 P.2d 1017); when they hold themselves out as being personally liable for the debts of the corporation (Stark v. Coker, 20 Cal.2d 839, 847, 129 P.2d 390); or when they provide inadequate capitalization and actively participate in the conduct of corporate affairs. Automotriz Del Golfo De California S. A. De C. V. v. Resnick, supra, 47 Cal.2d 792, 796, 797, 306 P.2d 1; Riddle v. Leuschner, supra, 51 Cal.2d at page 580, 335 P.2d 107; Stark v. Coker, 20 Cal.2d 839, 846-849, 129 P.2d 390; Shafford v. Otto Sales Co. Inc., 149 Cal.App.2d 428, 432, 308 P.2d 428; see Carlesimo v. Schwebel, 87 Cal.App.2d 482, 492-493, 197 P.2d 167; Ballantine, Corporations (rev. ed. 1946) § 129, pp. 302-303; Lattin, Corporations, pp. 68-72; Fuller, The Incorporated Individual: A Study of the One-Man Company, 51 Harv.L.Rev. 1373, 1381-1383.

In the instant case the evidence is undisputed that there was no attempt to provide adequate capitalization. Seminole never had any substantial assets. It leased the pool that it operated, and the lease was forfeited for failure to pay the rent. Its capital was "trifling compared with the business to be done and the risks of loss * * *." Automotriz Del Golfo De California S. A. De C. V. v. Resnick, supra, 47 Cal.2d 792, 797, 306 P.2d 1, 4. The evidence is also undisputed that Cavaney was not only the secretary and treasurer of the corporation but was also a director. The evidence that Cavaney was to receive onethird of the shares to be issued supports an inference that he was an equitable owner (see Riddle v. Leuschner, supra, 51 Cal.2d 574, 580, 335 P.2d 107), and the evidence that for a time the records of the corporation were kept in Cavaney's office supports an inference that he actively participated in the conduct of the business. The trial court was not required to believe his statement that he was only a 'temporary' director and officer 'for accommodation.' In any event it merely raised a conflict in the evidence that was resolved adversely to defendant. Moreover, section 800 of the Corporations Code provides that '* * * the business and affairs of every corporation shall be controlled by, a board of not less than three directors.' Defendant does not claim that Cavaney was a director with specialized duties (see 5 U.Chi.L.Rev. 668). It is immaterial whether or not be accepted the office of director as an 'accommodation' with the understanding that he would not exercise any of the duties of a director. A person may not in this manner divorce the responsibilities of a director from the statutory duties and powers of that office.

There is no merit in defendant's contentions that the 'alter ego' doctrine applies only to contractual debts and not to tort claims (Marabito v. San Francisco Dairy Co., 1 Cal.2d 400, 406, 35 P.2d 513; see Ballantine, Corporations (rev. ed. 1946) § 127, p. 298); that plaintiffs' cause of action abated when Cavaney died (Civ. Code § 956; see Damiano v. Bunting, 40 Cal.App. 566, 567, 181 P. 232), or that the judgment in the action against the corporation bars plaintiffs from bringing the present action. Dillard v. McKnight, 34 Cal.2d 209, 214, 209 P.2d 387, 11 A.L.R.2d 835. Defendant Cavaney waived the defense of the statute of limitations by failing to plead that defense in the answer to the complaint or by specifying the statute of limitations as a ground of its general demurrer. Union Sugar Co. v. Hollister Estate Co., 3 Cal.2d 740, 741-745, 47 P.2d 273; Miller v. Parker, 128 Cal.App. 775, 776, 18 P.2d 89; see Burke v. Maguire, 154 Cal. 456, 462, 98 P. 21; 2 Witkin, California Procedure, §§ 489, 545, pp. 1476-1477, 1541; Limitations of Actions, 31 Cal.Jur.2d § 243, p. 659.

In this action to hold defendant personally liable upon the judgment against Seminole plaintiffs did not allege or present any evidence on the issue of Seminole's negligence or on the amount of damages sustained by plaintiffs. They relied solely on the judgment against Seminole. Defendant correctly contends that Cavaney or his estate cannot be held liable for the debts of Seminole without an opportunity to relitigate these issues. Motores De Mexicali, S. A. v. Superior Court, 51 Cal.2d 172, 176, 331 P.2d 1; see also Dillard v. McKnight, supra, 34 Cal.2d 209, 214, 209 P.2d 387, 11 A.L.R.2d 835. Cavaney was not a party to the action against the corporation, and the judgment in...