Reed v. Norman

• Decision Date: 12 April 1957
• Court: California Supreme Court
• Parties: Hoyt REED, Plaintiff and Appellant, v. Carl O. NORMAN et al., Respondents. L. A. 24415.

Page 809

309 P.2d 809

48 Cal.2d 338

Hoyt REED, Plaintiff and Appellant, v. Carl O. NORMAN et al., Respondents.

L. A. 24415.

Supreme Court of California, In Bank.

April 12, 1957.

Hy Schwartz, Beverly Hills, for appellant.

John E. Haskins, in pro. per., and Raymond R. Roberts, Van Nuys, for respondents.

CARTER, Justice.

This litigation has been here before. It is an action commenced in s950 by plaintiff, a stockholder in Norman Decorating Co., Inc., a corporation, against the corporation and Carl Norman, another stockholder, and main defendants, to contest the validity of an election of corporate directors including Norman, to void shares issued to Norman and obtain an accounting of corporate funds alleged to have been dissipated by Norman. Judgments against plaintiff were reversed on appeal, this court stating that the election of directors was illegal, Norman having only 150 shares of the 500 shares whose issue was authorized. The accounting by Norman for corporate assets was left for future determination. Reed v. Norman, 41 Cal.2d 17, 256 P.2d 930; Reed v. Norman, 41 Cal.2d 901, 256 P.2d 933. Since then a further determination has been made. The trial court sustained defendants' objection to the introduction of any evidence on the ground that the complaint, amended complaint and supplemental complaint failed to state a cause of action and judgment was entered that plaintiff recover nothing and defendants 'be discharged.' Plaintiff now appeals from that judgment. On the retrial resulting in the instant judgment, it appears, and no real dispute on the subject seems to exist, that the action is a derivative action by plaintiff, a stockholder of the corporation, Norman Decorating Company, for a wrong to the corporation, the dissipation by defendant directors and officers of the corporate assets. See Gagnon Co., Inc., v. Nevada Desert Inn, 45 Cal.2d 448, 289 P.2d 466; Sutter v. General Petroleum Corp., 28 Cal.2d 525, 170 P.2d 898, 167 A.L.R. 271; Klopstock v. Superior Court, 17 Cal.2d 13, 108 P.2d 906, 135 A.L.R. 318. The theory of the trial court in rendering the judgment now on appeal was that the action being derivative, plaintiff was not entitled to recover because he failed to show compliance with section 834 of the Corporations Code. ¹

Norman has moved to dismiss plaintiff's appeal on the ground that it cannot be maintained because (1) plaintiff no longer owns any stock in the corporation, (2) there is no showing of a compliance by plaintiff with section 834 of the Corporations Code, supra, and (3) on January 4, 1952, the corporation's right to engage in litigation was suspended for failure to pay the state franchise tax under section 23301 of the Revenue & Taxation Code. ²

With reference to plaintiff no longer being the owner of any stock, it is urged that he lost his stock at execution sale after the judgment from which the appeal is taken. The theory is that the question of his right to recover for the corporation is moot because by reason of his no longer holding stock he no longer has any interest in the corporation or any recovery by it. Defendant Norman in his affidavit in support of the motion to dismiss the appeal states that on April 4, 1956, plaintiff Reed's stock was sold under a writ of execution to a Marlow Baar and since then plaintiff has not been a stockholder. He attaches to his notice of motion an exhibit entitled 'Certificate of Sale' by a marshal, but it states therein that all of Norman's stock (rather than plaintiff's) was sold to Baar. Norman has offered to have that certificate corrected. Apparently the writ was issued pending the instant appeal on that part of the judgment on appeal which awarded $3,768.10 costs against plaintiff and in favor of the corporation, Norman, and another defendant. Plaintiff in his notice of appeal filed March 13, 1956, lists the order taxing costs and denying plaintiff's motion to strike costs, but those orders do not appear in the record and plaintiff has made no request to augment the record. Plaintiff in his opposition to the motion to dismiss the appeal claims that the sale was invalid because proper notice was not given the corporation and that he has the rights of Baar, the purchaser at the execution sale. Plaintiff's uncontradicted affidavit states that the bid of Baar, the execution purchaser, was 'for and on account of' plaintiff 'and that any rights or any interest in said shares (sold at execution) by reason of said bid is for the benefit of' plaintiff 'and that he is the beneficial owner of any such interest and rights.' It is thus clear that plaintiff has not lost his title to the stock and hence the motion to dismiss is not sustainable on that ground. For that reason we need not and do not pass upon the validity of the sale or whether, if valid, it would render the appeal moot.

As to the question of failure to comply with section 834 of the Corporations Code, supra, the case falls within the general rule that the merits of a case should not be considered on a motion to dismiss the appeal; it should be determined on the appeal itself. In re Estate of Wunderle, 30 Cal.2d 274, 181 P.2d 874, and cases cited. It is true that section 834 states that no action shall be 'instituted or maintained' unless certain conditions exist and the complaint must show whether or not those conditions exist. A finding that they do not may result in a dismissal of the action, and a judgment based upon such a finding is on the merits of that phase of the case and is reviewable on appeal the same as any other judgment of dismissal. The question is whether the trial court was correct in determining by its judgment that they did not exist.

On the issue of suspension of the corporation for failure to pay franchise tax, it is true that under the corporation law, Rev. & Tax.Code, §§ 23301, 23302, supra, the corporation may not prosecute or defend an action, nor appeal from an adverse judgment in an action while its corporate rights are suspended for failure to pay taxes, Boyle v. Lakeview Creamery Co., 9 Cal.2d 16, 68 P.2d 968; Ocean Park Bath House & Amusement Co. v. Pacific Auto Park Co., 37 Cal.App.2d 158, 98 P.2d 1068; Baker v. Ferrel, 78 Cal.App.2d 578, 177 P.2d 973; Fidelity Metals Corp. v. Risley, 77 Cal.App.2d 377, 175 P.2d 592, and, generally, in a derivative action the wrong is 'to the corporation as such and not the stockholders individually, hence a bar to an action by the corporation would be a bar to an action by the stockholders for the corporation.' Gagnon Co., Inc., v. Nevada Desert Inn, supra, 45 Cal.2d 448, 453, 289 P.2d 466, 471. But here, in a stockholders' derivative action, the corporation is forced to be a party because any recovery goes through the corporate channel and thus enhances the stockholders' interest therein. The corporation is not attempting to exercise its rights as a corporation. It is being used as a necessary channel by the shareholders. The books and records of the corporation are in the hands of the mismanaging officers according to plaintiff's complaints and thus the shareholders are not in a position to make a return or compute the franchise tax. In such a case it is not equitable to permit section 23301 of the Revenue & Taxation Code to stand as a shield for protecting allegedly dishonest corporate officials. The corporation is not enjoying any of the privileges accorded to such entities; it is more analogous to the winding up of the business. In Weinert v. Kinkel, 296 N.Y. 151, 71 N.E.2d 445, 446, the stockholders' derivative action was for breach of fiduciary duty of directors to the corporation. The action was commenced after the corporation had been 'dissolved for nonpayment of taxes,' yet the court held the corporation was not an indispensable party, stating: 'The technical argument made by appellants disregards realities and should not prevail. It has been recognized that the court may dispense with the presence of a defunct corporation in a derivative action, if the circumstances warrant such exercise of its equitable powers. Cohen v....