Olson v. Basin Oil Co. of Cal.
| Decision Date | 26 October 1955 |
| Court | California Court of Appeals Court of Appeals |
| Parties | Patricia K. OLSON et al., Plaintiffs and Appellants, v. BASIN OIL CO. OF CALIFORNIA, a corporation, and C. G. Willis, Defendants and Respondents. Civ. 20919, 20933. |
Richard Richards, Richards, Watson, Smith & Van Petten, Kenny & Morris, Los Angeles, for appellants.
Thomas A. Wood, Larwill & Wolfe, Los Angeles, for respondent Basin Oil Co. of California.
Chandler, Wright, Tyler & Ward and Hartke & Brant, Los Angeles, for respondent C. G. Willis.
This is a stockholders' derivative suit against Basin Oil Company of California, hereinafter referred to as Basin, and C. G. Willis, its president. Defendants filed separate motions to require plaintiffs to furnish security to cover reasonable expenses, including attorney's fees, that are likely to be incurred in connection with the action. These motions were pursuant to the provisions of the Corporations Code, section 834. After a hearing, based on voluminous affidavits, the trial court found 'that there is no reasonable probability that the prosecution of the cause of action alleged in the complaint against the moving parties * * * will benefit the defendant Basin Oil Company or its security holders.' The court thereupon ordered plaintiffs to deposit security for such probable reasonable expenses within 30 days. Plaintiffs failed to deposit the required security. The action was thereupon dismissed. Plaintiffs' main appeal (No. 20919) is from the judgment of dismissal.
Plaintiffs seek to impress a trust in favor of Basin on the interest of Willis in certain oil leases in the East Los Angeles area, and demand an accounting of the moneys received by him in his operations therefrom. Their theory is that Willis individually seized a corporate opportunity which rightfully blonged to Basin.
There are two basic questions on the main appeal: (1) did the trial court, on the record, abuse its discretion in determining that there was no reasonable probability that the prosecution of this action would benefit Basin or its security holders; and (2) was the amount of security required to be posted unreasonable?
Defendant Willis is a trained and experienced geologist and petroleum engineer, having had post graduate work in those fields. From 1921 to 1928 he was employed as a geologist by various major oil companies, spending considerable time working on the geology and the oil potential of the Los Angeles area, and, among other things, prepared a complete geological report of the area covered by the leases which are involved in this action. During this period he had an opportunity to review the reports of numerous geologists working for these companies and thus gained a great amount of geological information as to the oil production areas in the Los Angeles basin as well as elsewhere.
In 1928 he started out on his own, doing independent geological research in the Los Angeles territory and soon became an independent oil operator. As such, he leased certain land in the vicinity of Signal Hill and organized the Hildon Oil Company, of which he was president, for the development thereof, with the understanding, however, that he would have the right to retain his status as an individual oil operator and to continue his search for other oil fields on an individual, independent basis.
In 1938, Willis reviewed the geological work he had directed some years before in the Manchester Avenue area in East Inglewood. He concluded that oil could be developed there and, individually, took leases in that area. For the purpose of developing these leases, Willis organized Basin. He assigned these leases to Basin, reserving, however, certain overriding royalties. He purchased 3,000 shares of Basin's stock for cash and became a director and president of the corporation. Oil was discovered in paying quantities on these leases.
During the first six months Willis received no salary for his services as president of Basin. Effective, however, on January 1, 1939, the board of directors voted Willis a salary of $500 a month. The minutes of that board meeting disclose that Willis stated 'that while he would devote the necessary attention to Basin's affairs, he still wanted to retain his status as an independent operator, especially since he [had] other oil interests such as Hildon Oil Company and Desert Oil Company.' He advised the board that his business had always been that of a petroleum engineer and oil operator and that it was his intention to continue in this business independently, and that he expected to procure other properties for oil development purposes and desired to feel free to deal with and develop the same as he might see fit.
When the development of the Manchester Avenue area was completed, Willis' salary was reduced to $200 a month. Later however, it was restored to $500 and has been kept at that figure since 1945. The minutes of the meeting at which this increase was voted show that it was 'with the understanding that he was still to have the right to continue his status as an independent operator.'
Prior to September 13, 1944, Willis had acquired, at his individual expense, certain oil leases in the industrial section of Inglewood. At a meeting of the board on October 5th Willis advised the members that he had personally acquired these leases in the Inglewood area; that the company had spent no money in connection therewith, and had no interest therein. He indicated, however, his willingness to make a deal with Basin for financing the development of these leases. As a consequence, a deal was made by which Willis agreed to assign the leases to Basin with the understanding, however, that he would maintain his status as an independent oil operator and that an agreement would be drawn which would recognize his status as such and would not limit his activities outside the Inglewood area. To effectuate this purpose, Basin employed John C. MacFarland, of the law firm of Gibson, Dunn & Crutcher, as special counsel, to prepare the necessary corporate resolution and agreement between it and Willis. Such resolution was offered at the board's meeting on October 11, 1944, by Director Asa Call, and unanimously adopted, Willis, however, not voting. This resolution contained, inter alia, the following recitals:
'Whereas, Cornelius G. Willis, the president of this corporation has, in his individual capacity as a petroleum engineer and oil operator, investigated certain territory in the industrial section of the City of Inglewood * * * and, in such individual capacity as an independent petroleum engineer and oil operator, has acquired certain leases and is in the process of acquiring other leases covering said area.
* * *
* * *
'Whereas, all of the directors of this corporation are cognizant of the financial interests of Mr. Willis in his individual capacity in said transaction and the directors have come to the conclusion that said proposal of Mr. Willis is fair and that the proposed contract or transaction is just and reasonable as to this corporation; and
'Whereas, the directors of this corporation and Mr. Willis desire to agree upon an area in the general neighborhood of the territory in which it now operates and the territory in which it will operate under the leases so to be assigned by Mr. Willis to it, in which area Mr. Willis will not carry on any operations, transactions or negotiations whatsoever except for the benefit of, and on behalf of, this corporation, and to agree that in all territory outside of said area Mr. Willis shall be permitted to carry on operations, transactions and negotiations in his individual capacity as a petroleum engineer and oil operator, without obligation to account to this corporation for any such operations, transactions or negotiations; * * *'
It was then resolved that 'said agreement contain a paragraph or clause satisfactory to said officers in which Mr. Willis will agree that in the area described * * * he will not carry on any operations, acquire any leases, make any geological explorations, or otherwise deal in or with said properties or with the owners thereof, except for the benefit of and on behalf of this corporation, but that in all other territory, outside of the above described property * * * Mr. Willis shall be free to operate in his individual capacity as a petroleum engineer and as an oil operator without any obligation to account to this corporation for any advantage, benefit or profit, financial or otherwise, which he may obtain as the result of his operations therein.'
At the time this contract was authorized, Basin had 270,000 shares outstanding. Five of its six directors were present and they, together with their immediate families, owned 194,895 shares of Basin's stock. Pursuant to the foregoing resolution, an agreement was prepared by Mr. MacFarland which was executed by both Willis and Basin under date of February 13, 1945. Paragraph 10 of that agreement reads as follows:
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