Richardson v. Arizona Fuels Corp.

• Decision Date: 01 May 1980
• Docket Number: No. 15691,15691
• Citation: 614 P.2d 636
• Parties: Donald J. RICHARDSON, Grove L. Cook and Wayne Weaver, Individually and for and on behalf of all similarly situated shareholders of Major Oil Corporation, Plaintiffs and Respondents, v. ARIZONA FUELS CORPORATION, a Utah Corporation, Eugene Dalton, an Individual, Deanna J. Dalton, an Individual, and Major Oil Corporation, a Utah Corporation, Defendants and Appellants.
• Court: Utah Supreme Court

Page 636

614 P.2d 636

Donald J. RICHARDSON, Grove L. Cook and Wayne Weaver Individually and for and on behalf of all similarly situated shareholders of Major Oil Corporation, Plaintiffs and Respondents, v. ARIZONA FUELS CORPORATION, a Utah Corporation, Eugene Dalton, an Individual, Deanna J. Dalton, an Individual, and Major Oil Corporation, a Utah Corporation, Defendants and Appellants.

No. 15691.

Supreme Court of Utah.

May 1, 1980.

LeRoy S. Axland and David R. Olsen, of Suitter, Axland & Armstrong, Salt Lake City, for defendants and appellants.

Paul N. Cotro-Manes, Parker M. Nielson, Salt Lake City, for plaintiffs and respondents.

STEWART, Justice:

We here review on interlocutory appeal an order of the district court of Salt Lake County appointing a receiver for defendant Major Oil Corporation (hereafter "Major") and certifying this case as a class action. All references to rules refer to the Utah Rules of Civil Procedure.

Plaintiffs Donald J. Richardson, Grove L. Cook, and Wayne Weaver are stockholders of Major who brought this action individually and on behalf of all other stockholders of Major. The original complaint named as defendants Arizona Fuels, Inc.; Eugene Dalton; and Deanna J. Dalton. Arizona Fuels is alleged to be the legal or beneficial owner of 47% of the issued and outstanding shares of stock of Major. Eugene Dalton is alleged to be the controlling stockholder, officer and director of Arizona Fuels and the controlling officer and director of Major. Deanna Dalton is alleged to be an officer and director of both Major and Arizona Fuels.

The complaint was subsequently amended, inter alia, to name Major as an involuntary defendant, pursuant to Rule 19(a). The amended complaint describes this action as one brought as a class action pursuant to Rule 23 and as a stockholders' derivative action pursuant to Rule 23.1. Plaintiffs moved for an order certifying this suit as a class action and for appointment of a receiver for Major pursuant to Rule 66. Both motions were granted by the district court.

Defendants attack the order on the grounds (1) that the appointment of a receiver was not justified, (2) that certification of all the claims in the suit as a class action was improper, and (3) alternatively, that the district court erred in not designating under which subsection of Rule 23(b) this action is to proceed. Plaintiffs' motions were granted solely on the basis of the verified amended complaint.

We first consider the propriety of the appointment of a receiver. The ground for appointment, as stated in the amended complaint, is that the defendants' conduct has caused Major to become insolvent or placed Major in imminent danger of becoming insolvent. Rule 66(a)(5) permits appointment of a receiver "(i)n cases where a corporation . . . is insolvent or in imminent danger of insolvency . . . ."

The authorities are generally in agreement that the appointment of a receiver for a corporation is permissible at the request of stockholders of the corporation suing either individually or on behalf of the corporation. 3 Clark on Receivers § 738(d) (3rd ed. 1959); 16 Fletcher, Cyclopedia of the Law of Private Corporations § 7688 (rev. perm. ed. 1979) (hereinafter cited as "Fletcher"); 65 Am.Jur.2d Receivers § 11 (1972); 19 C.J.S. Corporations § 833c. (1940). Defendants attack the appointment on the ground that it is not justified by allegations on information and belief, even though those allegations were stated in a verified complaint. The amended complaint contains numerous allegations based on information and belief of fraudulent and otherwise wrongful conduct on the part of defendants. The allegations specify suspect transactions and state details of alleged fraud. The allegations requesting appointment of a receiver, however, are made without any qualification as to information and belief, and these allegations are not controverted by defendants, either by pleading or affidavit.

In determining whether a receiver should be appointed, the district court should consider the pleadings as a whole. Receivers have historically been appointed in cases where misappropriation of corporate assets by corporate insiders is asserted. Stevens v. South Ogden Land, Bldg. & Improvement Co., 14 Utah 232, 47 P. 81 (1896); Bookout v. Atlas Financial Corp., 395 F.Supp. 1338 (D.Ga.1974). If defendants seriously contend that insolvency is not imminent or that a receivership is not appropriate under the circumstances, they had abundant opportunity to provide factual support for their contention. The record discloses that they did not do so.

The appointment of a receiver is among those discretionary powers subject to review for abuse, but we cannot find abuse where the ground for appointment is stated in the language of the rules and remains uncontroverted through a full hearing with extensive preliminary written memoranda.

The next issue is whether the district court erred in certifying this matter as a class action. It is alleged in the amended complaint that "some" of the causes of action found therein belong to Major, and that as to those causes plaintiffs bring the suit derivatively on behalf of the corporation pursuant to Rule 23.1.

A class action and a derivative action rest upon fundamentally different principles of substantive law; to ignore those differences is not a minor procedural solecism. A derivative action must necessarily be based on a claim for relief which is owned by the stockholders' corporation. Indeed, a prerequisite for filing a derivative action is the failure of the corporation to initiate the action in its own name. The stockholder, as a nominal party, has no right, title or interest whatsoever in the claim itself whether the action is brought by the corporation or by the stockholder on behalf of the corporation.

A class action, on the other hand, is predicated on ownership of the claim for relief sued upon in the representative of the class and all other class members in their capacity as individuals. Shareholders of the corporation may, of course, have claims for relief directly against their corporation because the corporation itself has violated rights possessed by the shareholders, and a class action would be an appropriate means for enforcing their claims. A recovery in a class action is a recovery which belongs directly to the shareholders. However, in a derivative action, the plaintiff shareholder recovers nothing and the judgment runs in favor of the corporation.

The difference in the two procedures and their relationship to underlying substantive law has been stated as follows:

Suits which are said to be derivative, and therefore come within the rule, are those which seek to enforce any right which belongs to the corporation and is not being enforced, such as the liability of corporate officers or majority shareholders for mismanagement, to recover corporate assets and related claims, to enforce rights of the corporation by virtue of its contract with a third person, and to enjoin those in charge of the corporation from causing it to commit an ultra vires act. (Footnotes omitted.) (3B Moore's Federal Practice P 23.1.16(1) (2nd ed. 1980).)

On the other hand,

(i)f the injury is one to the plaintiff as a stockholder and to him individually, and not to the corporation, as where the action is based on a contract to which he is a party, or on a right belonging severally to him, or on a fraud affecting him directly, it is an individual action. (Footnotes omitted.) (13 Fletcher § 5911 (1970).)

It is the duty of the district court to apply carefully the criteria set forth in Rule 23(a) and (b) to the facts of the case to determine whether an action may be maintained as a class action. 3B Moore's Federal Practice P 23.5. If the criteria of Rule 23 are complied with, it is within the sound discretion of the district court to determine whether a suit, or some of the issues in a lawsuit, should proceed as a class action. Id.

In this case, neither the memorandum decision nor the order of the district court does any more than...