Sheppard v. Wilcox
| Decision Date | 21 November 1962 |
| Parties | Frank M. SHEPPARD, V. A. Sheppard, Sidney Knable, Lawrence H. Slote, Ida R. Elmquist, George Elmquist, Irene Elmquist and Laura May Kimbrel, Plaintiffs and Respondents, v. Ray A. WILCOX, Dora I. Wilcox, R. N. Sheffler, Dorothy K. Sheffler, individually and as Guardian of George J. Sheffler, William J. Sheffler and John J. Sheffler, Minors, Henry W. Witman, Ruth Maxine Witman, E. James Osborne, Leo J. Meis, Dorothy E. Meis, Herald Stendel, John A. Thill, A. B. Veteto, Nelson Eddy, Dale Evans Rogers, Lula W. Hyman, E. James Osborne as Executor of the Last Will of Ruth Helms Franklin, Deceased, Substituted as Defendant in place of Ruth Helms Franklin, Deceased, and Crestlawn Memorial Park Association, Defendants and Appellants. Civ. 26099. |
| Court | California Court of Appeals Court of Appeals |
R. D. Sweeney and Cameron W. Cecil, Los Angeles, for defendants and appellants.
Sidney Knable and Hill, Farrer & Burrill, by William S. Scully and Sidney Knable, Los Angeles, for plaintiffs and respondents.
The brief but tempestuous corporate existence of Crestlawn Memorial Park Association (Crestlawn) has been marred by a bitter struggle between two groups of stockholders seeking to wrest control of the corporation from one another. In a complaint filed on January 20, 1958, plaintiffs' group sought to recover its controlling interest in the common stock of Crestlawn which was shifted to defendants' 1 group when the latter, acting as the board of directors, caused the corporation to issue sufficient common stock to themselves to divest plaintiffs of voting control. The court below gave judgment for plaintiffs and declared defendants constructive trustees of the improperly issued stock for the benefit of plaintiffs and also enjoined defendants from disposing of such stock or from taking any other action detrimental to plaintiffs with respect thereto. Defendants, including Crestlawn, have appealed from the judgment.
Crestlawn is a corporation engaged in the operation of an endowment care cemetery located in Riverside County. It was originally incorporated on March 20, 1952, and on November 10, 1952, the Corporations Commissioner issued his first permit to the corporation to sell and issue its securities. Under this permit Crestlawn was authorized to sell and issue: (1) to Atlas Cemetery Sales Company, Inc. (Atlas) an aggregate of not to exceed 55 shares of its preferred stock and 55 common in units of one preferred and one common as consideration for funds advanced or expended on behalf of the corporate entity; (2) to Sidney Knable an aggregate of not to exceed 20 preferred and 20 common in units of one and one as consideration for legal services rendered by him to appellants; (3) an aggregate of not to exceed 2,000 of each of its preferred and common shares similarly in units of one and one at and for the price of $100 per unit; and (4) as often as a common share or shares are sold under paragraph 3 to issue a certificate evidencing a like number of its common shares to Atlas but not to exceed in the aggregate 2,000 of its common shares as consideration for promotional services rendered by it to applicant. Preferred stock had a par value of $95 per share and carried a 6 per cent per annum cumulative dividend. The common stock had a $5 par value.
The shares issued under paragraphs 1, 2 and 4, herein termed 'promotional shares,' were required to be escrowed but not the shares issued under paragraph 3, termed 'investment shares.'
By virtue of assignments subsequent to the original issuance of shares in units, the investment group became and are the holders of a majority of the non-voting preferred shares and the promoters similarly held a majority of the voting common stock. As a result, the promoters became the controlling group with respect to voting power in the corporation. However, the exclusive voting right of the common shares remains unimpaired only so long as preferred dividends are not allowed to accumulate unpaid for a period greater than two years. When the latter occurs the right to elect a majority of the board of directors shifts to holders of the preferred shares.
The dividends on preferred stock were two years in default on September 1, 1956. Thereafter, pursuant to the provisions of their contract, the preferred shareholders held a meeting on February 13, 1957, and elected a majority of directors composed principally of defendants herein, but the promoters refused to recognize the directors thus elected. Plaintiffs, or their predecessors, the original promoters, wrongfully resisted defendants' efforts to obtain actual control of the books, records, and affairs of the corporation from and after February 13, 1957, until a series of suits litigated in the Riverside County Superior Court culminated in issuance of a mandatory injunction on October 4, 1957, which compelled plaintiffs to relinquish control. Defendants were thereby enabled to take over management of corporate affairs.
At about the same time, plaintiffs herein acquired their majority holdings of common stock. On September 30, 1957, Frank M. Sheppard and V. A. Sheppard (Sheppards) as pledgees, succeeded to the promoters' interests when they obtained the Atlas shares in return for cancellation of indebtedness underlying the pledge. Sheppards acquired other shares of common and preferred by cash purchase.
At a meeting of the new board of directors composed of defendants on December 3, 1957, it was resolved to borrow $50,000 from R. N. Sheffler, a member of the new board, with an option of taking repayment in common stock on the basis of $10.00 per share. Purportedly this was for the purpose of acquiring funds to pay certain debts of the corporation, including attorney fees incurred in the litigation leading to the injunction of October 4. The resolution also authorized issuance to attorneys Cecil & Sweeney of 2000 shares of common as payment to each for attorneys' fees in the amount of $5,000. Additional resolutions were passed to (1) amend the articles of incorporation by increasing authorized common stock from 24,000 to 100,000 shares, and (2) make preferred shares convertible to common at the rate of 19 to 1 (par ratio) plus one share for each $5 of accumulated unpaid preferred dividends.
The Sheffler loan and the mode of payment to attorneys were rejected by the Corporations Commissioner, but a deputy in that office suggested an alternate plan, viz.: to issue 10,000 shares of common stock on a pro rata basis to the holders of then outstanding paragraph 3 common stock. This plan was accepted by the new board, a permit was issued by the commissioner on December 18, 1957, and 8,400 of the new common shares were sold to the investor group pursuant to this permit. Plaintiffs and the original promoters were not advised of these actions.
The effect of limiting sale of the new issue to investors only was to shift common stock voting control from plaintiffs' group to defendants' group. This was unacceptable to the former who first sought redress through the office of the commissioner.
On January 6, 1958, an accusation was filed by plaintiffs and others with the Corporations Commissioner protesting the issuance of the 1957 permit in that the permit excluded purchase by holders of common shares except those holders who had purchased under paragraph 3 of the original permit of November 10, 1952. The accusers further charged that the 1957 permit would prevent the holders of a majority of the common stock from retaining their positions as majority stockholders and would change the voting control of the corporation. On January 7, 1958, the 1957 permit was summarily suspended by the commissioner and notice of hearing given.
After certain hearings and rehearings before the commissioner, he rendered his decision on February 29, 1960. This decision was based on findings of fraud and concealment on the part of defendants which in several instances have but questionable support in the record. However, the commissioner made salient findings of fact as follows: (1) by virtue of the purchase of the 8,400 common shares under the 1957 permit, the defendants increased their percentage holdings of common stock voting power in Crestlawn from 42.3 per cent to 81.5 per cent and reduced the holdings of the voting power of the plaintiffs from 57.6 per cent to 18.8 per cent; (2) those persons associated with and controlled by defendants planned and agreed to perpetuate themselves in control of the board of directors of Crestlawn and its business affairs and management and sought the permit of December 18, 1957, with that in mind.
Thereupon, the commissioner determined that the permit of December 18, 1957, was neither fair, just nor equitable and caused it to be amended to require pro rata distribution of the new issue to all holders of common shares, investors and promoters alike. This decision, however, was not given retroactive effect; consequently the 8,400 issued shares remained outstanding.
With respect to the commissioner's decision to amend the permit in the particulars noted above, two mandate actions, identified by appeal numbers 26091 and 26092, Crestlawn Memorial Park Association v. Sobieski, 26 Cal.Rptr. 421 were instituted in the superior court by Crestlawn and defendants R. N. Sheffler and Ray N. Wilcox. One attacked a decision of the commissioner determining that the 1957 permit should be amended. On April 27, 1960, a second mandate action was filed attacking the validity of the final decision of the commissioner rendered February 29, 1960. The issue presented by the first writ of mandate was held to be moot by the trial court since the order complained of had been vacated by the commissioner subsequent to its issuance and the second writ of mandate was denied. ...
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