Rankin v. Frebank Co.
| Decision Date | 10 April 1975 |
| Citation | 121 Cal.Rptr. 348,47 Cal.App.3d 75 |
| Court | California Court of Appeals Court of Appeals |
| Parties | James N. RANKIN and William D. Myers, Plaintiffs, Respondents, and Appellants v. FREBANK COMPANY, a corporation, et al., Defendants and Respondents. John G. McCoy and Joseph Tillery, Defendants and Appellants and Respondents. Civ. 44093. |
Kenneth N. Dellamater, Canoga Park, Toxey H. Smith, Hollywood, Robert C. Kent, Canoga Park, for plaintiffs, respondents and appellants.
Newell & Chester, Los Angeles, for defendants, appellants and respondents.
On December 4, 1967 plaintiffs James N. Rankin and William D. Myers filed a complaint against John G. McCoy ('McCoy'), Fred Bankey, Joseph Tillery, Frebank Company, a corporation ('Frebank'), Frebank Company Profit Sharing Plan, a trust, and Marion W. McCoy. In essence, the complaint prayed for an involuntary dissolution of Frebank and the recovery of 'secret profits' said to have been wrongfully diverted by the controlling officers, directors and stockholders. The trial judge ordered the dissolution of Frebank, but denied recovery of most of the claims for secret profits. Plaintiffs have appealed from the judgment, claiming the trial judge awarded too little; defendants McCoy and Tillery also have appealed, claiming the trial judge awarded too much.
Frebank Company was incorporated under the laws of California in July 1950. In conformity with a permit issued by the Corporation Commissioner, 100 shares were issued to Bankey, and 100 shares were issued to one E. S. Rockwell. After a series of transactions not relevant here, by late 1953 McCoy had become the rightful owner of Rockwell's original shares.
The history surrounding the 100 shares issued to Bankey is more complex. Bankey had purchased the shares at least in part with funds provided by Rankin and Myers on the understanding that they would become shareholders. Thus in November 1950, Bankey had one-third of his shares issued in the name of Myers, and another one-third issued in the name of Rankin. However, when McCoy became the owner of Rockwell's former shares, Bankey entered into a campaign to conceal from McCoy the existence of Rankin and Myers as shareholders. Instead, McCoy was to believe that there were but two equal shareholders in the corporation: McCoy and Bankey. Bankey told McCoy that he was a 50% Shareholder, and at some time between November 14, 1952 and December 31, 1956 the stock book of Frebank was altered in a way calculated to conceal the status of rankin and Myers. Plaintiffs contended that they played no part in the design to deceive McCoy and that McCoy was not in fact deceived. On the other hand, McCoy contended that Bankey and plaintiffs conspired to deceive him and that he had been unaware of the existence of Rankin and Myers as stockholders until late in 1960. The trial court resolved this dispute in favor of defendants (the McCoys).
In late 1960, Rankin and Myers (by this point disenchanted with Bankey) filed a lawsuit against Frebank and Bankey in an effort to be declared shareholders of Frebank. The court found that they were each entitled to one-third of Bankey's shares. This judgment was upheld on appeal in Rankin v. Bankey (1961), 196 Cal.App.2d 554, 16 Cal.Rptr. 721.
Thus, by 1962, following completion of the litigation, Frebank's shares were owned by McCoy (one-half interest), Bankey (one-sixth interest), Rankin (one-sixth interest), and Myers (one-sixth interest). Bankey sold his interest to Tillery in 1966, and McCoy transferred half of his shares to his wife in 1968 by reason of the provisions of an interlocutory decree of divorce.
From its inception, Frebank was engaged in the business of the sale, engineering, research, development, and/or manufacturing of aircraft missile parts and components under contracts with various United States governmental agencies and defense contractors. However, in September 1954, McCoy and Bankey formed Bancoy Corporation for the purpose of carrying out the manufacturing aspects of the business then being conducted by Frebank. The stock of Bancoy was distributed fifty-fifty between McCoy and Bankey. From the perspective of McCoy, the purpose of forming Bancoy was to reduce the tax burden of Frebank. Aside from a tax advantage, he gained no financial advantage from the Bancoy transaction; but since Rankin and Myers owned no stock in Bancoy, the effect of shifting Frebank's manufacturing business to Bancoy was to divert assets in favor of Bankey. Instead of having a one-sixth interest in the manufacturing proceeds (in Frebank), Bankey realized a one-half interest in the manufacturing proceeds (in Bancoy).
Bancoy manufactured Frebank's products until early in 1956, and throughout this period plaintiffs did not know that they were without an interest in Bancoy. In 1958, Rankin and Myers learned that they were not stockholders of Bancoy, but they did not know that McCoy or Bankey had received any benefits from Bancoy. In 1962, plaintiffs' attorney wrote Bankey asking how the stock was held, but received no reply.
Bancoy was finally dissolved in 1966. Over the years Bankey received $27,430.58 in salaries, $2,990 in dividends, and $20,134.99 in retained earnings, including a $14,750 note payable by Frebank, for a total of $50,555.57. McCoy received $6,750 in salaries, $2,990 in dividends, and $20,134.99 in retained earnings, including a $14,750 note payable by Frebank, for a total of $29,875.02.
The note payable by Frebank to McCoy was transferred to Tillery for $5,000 at a time when Tillery was an officer and director of Frebank. The note bears 4% Interest, and Tillery has received interest payments of $2,950, but no payments on the principal.
From 1954 to 1966, Frebank paid to Bankey (who served as president of Frebank throughout this period) a total of $330,884, and to McCoy (who served as vice-president until 1966 and president thereafter) a total of $59,300. Moreover, Frebank furnished automobiles to McCoy and Bankey for their use, provided insurance on the lives of McCoy and Bankey in the amount of $50,000, and established a profit-sharing plan benefiting Bankey in the amount of $5,597, and McCoy, in the amount of $2,549.
In July 1958, Rankin and Myers filed a petition for writ of mandate directed against Bankey, wherein they alleged that they had information and belief that compensation was being paid to Bankey and other officers of Frebank 'in excessive amounts with the sole purpose of depleting the income of respondent company so that these petitioners will not receive their equitable share of dividends.' In that proceeding the court ordered that plaintiffs be permitted to inspect all of the records of Frebank. Although plaintiffs had access to all of the records of Frebank from August 1958 to the present, plaintiffs did not file the instant action until December 4, 1967.
From 1954 to 1967, defendant McCoy, under the name of Sun Machinery, sold or rented machinery to Frebank.
Plaintiffs claimed: (1) that defendants should be forced to account for the secret profits arising out of the Bancoy transaction (i.e., obligations paid by Frebank, cash payments to Bancoy, salaries paid by Bancoy to McCoy and Bankey, Bancoy dividends, Bancoy's use of Frebank facilities, and Bancoy's liquidation assets); (2) that defendants should be forced to pay over to Frebank assets wrongfully diverted to them by their concerted actions and self-dealing with respect to Frebank dividends, bonuses, life insurance, profit sharing, automobiles, and salaries; and (3) that McCoy should be forced to pay over profits arising out of the Sun Machinery transactions.
Rulings of the trial court relevant to this appeal are numerous. The trial court ruled that:
(1) Bankey was obligated to pay to Frebank the money he had received from Bancoy ($50,557.57);
(2) McCoy was obligated to pay Frebank the net benefits received from Bancoy ($20,125.02; this figure takes into account the sale of the Frebank note from McCoy to Tillery);
(3) Tillery was entitled to enforce the obligation of the Frebank note in the face amount of $14,750 only to the extent of $5,000 plus interest thereon at 4% Per annum;
(4) Tillery's right to receive interest was limited to 4% On $5,000 (not 4% On $14,750, which was the face value of the note), and he was therefore obligated to pay Frebank $1,750 (5) Plaintiffs' claims for recovery from defendants McCoy and Bankey of benefits and monies received by them from Frebank arising from facts prior to December 4, 1964 were barred by the statute of limitations;
(6) McCoy and Tillery were to be denied indemnity under Corporations Code section 830 for their reasonable expenses, including attorney fees.
(7) McCoy and Tillery were to be charged with the responsibility of winding up and dissolving Frebank;
(8) McCoy was obligated to pay Frebank $3,000 for attorney fees;
(9) The court retained jurisdiction for supervising the dissolution of Frebank;
(10) Rankin and Myers were entitled to judgment against defendants McCoy and Bankey for their costs of suit, but were not entitled to judgment against any defendant for any other sum whatsoever.
McCoy and Tillery contend that the trial court erred (1) in ordering judgment for Frebank against McCoy; (2) in ordering that Tillery's interest in the note was confined to $5,000; and (3) in denying the application of McCoy and Tillery for attorney fees.
Rankin and Myers contend that the trial court erred (1) in denying their request for special findings; (2) in denying their right to a jury trial; (3) 'in failing and refusing to apply to each and all of defendants' transactions of...
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