Smith v. Walter E. Heller & Co.

• Citation: 82 Cal.App.3d 259,147 Cal.Rptr. 1
• Court: California Court of Appeals Court of Appeals
• Decision Date: 13 June 1978
• Parties: C. R. E. SMITH, as Trustee in Bankruptcy, etc., et al., Plaintiffs and Appellants, v. WALTER E. HELLER & COMPANY, INC., et al., Defendants and Respondents. Civ. 40797.

Page 1

147 Cal.Rptr. 1

82 Cal.App.3d 259

C. R. E. SMITH, as Trustee in Bankruptcy, etc., et al., Plaintiffs and Appellants, v. WALTER E. HELLER & COMPANY, INC., et al., Defendants and Respondents.

Civ. 40797.

Court of Appeal, First District, Division 1, California.

June 13, 1978.

Atchison, Haile & Haight, Santa Cruz, for plaintiffs and appellants.

Orr, Wendel & Lawlor, Oakland, Walker, Schroeder, Davis & Brehmer, Monterey, for defendants-respondents.

ELKINGTON, Associate Justice.

Plaintiffs United States Overseas Airlines, Inc., Ocean Air Tradeways, Inc., Ocean Air Tradeways, a partnership, Airpower Overhaul, Inc., Canamex Corporation, C & J Aircraft Leasing, a partnership, and the trustees in bankruptcy of some of them, commenced what we shall term the "California action" against the several defendants to whom, for convenience, we shall refer in the singular, as Heller. ¹ One Dr. Ralph Cox, who otherwise appears to have played a prominent part in that and related litigation, was not named as a plaintiff.

The California action alleged "willful fraud and deceit" and "conspiracy to defraud." By it, the plaintiffs sought to recover from Heller compensatory damages of $130,000,000, and punitive damages of $250,000,000. It was one of many such actions commenced by Dr. Ralph Cox and the instant plaintiffs, or some of them, or affiliated entities or persons, against Heller in relation to a 1962 loan of $1,700,000 made by Heller to plaintiff United States Overseas Airlines, Inc., upon security or guaranties of the other plaintiffs or most of them, and Dr. Ralph Cox. An abbreviated history of those proceedings may be gleaned from the following excerpts from the opinion of Judge Arnold Bauman in Walter E. Heller & Company, Inc. v. Cox (D.C.N.Y.1974) 379 F.Supp. 299, to which opinion general reference is also made:

"USOA ( ² ) defaulted on its obligations from the very outset. The first installment of the loan was only partially paid, and thereafter not one installment was paid in its proper amount or when due. Nonetheless, Heller refrained from declaring a default until July, 1965 at which time it accelerated the entire amount outstanding and began pursuit of collection by, among other things, the sale of collateral. From that point on, Heller became embroiled in one litigation after another, faced time and again 'with the most frivolous challenges, harassments and dilatory maneuverings imaginable designed to frustrate and prevent Heller from recovering the monies owed to it.' To date there have been at least 15 separate major litigations and proceedings in 10 different courts throughout the country." (Pp. 302-303.)

"(The 14th such action was commenced in the) U.S. District Court, Southern District of New York ( ³ ) This action was brought by Heller to recover the deficiency remaining on the USOA indebtedness based on the guarantees of Cox and OAT. I presided over this trial which commenced on January 24, 1972. Cox and OAT defended the action by raising a host of claims including usury, improper sales of collateral, alleged fraud in the inducement and a general massive conspiracy to seize control of USOA. This last claim was so utterly lacking in merit that I rejected it without discussion."

"The fifteenth and most recent litigation, presently pending, deserves a more detailed examination in view of its significance to the case at bar.

"On June 1, 1973 an action was brought in California Superior Court on behalf of OAT, Canamex, C & J and the trustees in bankruptcy of USOA, APO and OAT, Inc. seeking $380,000,000 in damages from Heller, Twentieth Century and others for an alleged conspiracy to seize control of and destroy USOA and its affiliates. (This is the California action of the instant appeal.)

"An examination of the California complaint clearly discloses that its basic thrust is the same as the action litigated before me as well as in numerous other courts throughout the country. It charges a complex theory of conspiracy among the defendants to seize control of USOA 'through a scheme of fraud calculated to force the principal owners of the company to sell their stock to them (the defendants) at a low figure.' "

"It is in response to the filing of this action that Heller has returned to this court to request that I 'protect and effectuate' my prior judgment by granting: (i) An injunction against the further prosecution of the California action against Heller by Cox, OAT and those in active concert or participation with them. (ii) A 'bill of peace' prohibiting the institution of further actions against Heller arising out of 1962 loan transaction and subsequent collection efforts to the extent to which these actions related to matters previously litigated.

"I have concluded that both requests should be granted." (Pp. 305-306.)

"It seems utterly clear that no issues have been raised in the California litigation not previously raised, argued and adjudicated in the previous litigation in this court." (P. 308.)

"As discussed previously, Heller has been subjected, over a nine year period, to at least fifteen different litigations designed to prevent its recovery of the loan to USOA. I find, without reservation or equivocation, that Cox instituted each and every one of them in bad faith. He has added an unusual talent for lying to his contempt for the judicial process. His imagination in exploiting the courts as a means of harassing, intimidating and impeding Heller in the collection of its money is truly spectacular. Over and over, Cox has ignored orders of this court to appear for depositions in aid of judgment as well as various conferences and hearings. Having asked his lawyer to communicate my warnings no less than five times, I finally adjudged Cox in contempt of court on April 2, 1974. Even this has not induced him to come forward." (P. 309.) (Fns. omitted.)

Contemporaneously with the foregoing opinion Judge Bauman made and entered his injunctive decree as follows:

"Ordered, Adjudged And Decreed, that Ralph Cox, Jr. and Ocean Air Tradeways and their, officers, agents, servants, employees and attorneys, and those in active concert or participation with them to whom notice of such injunction shall come (our emphasis), be and they hereby are permanently enjoined and prohibited from: (1) instituting, maintaining or prosecuting any action or claim, either directly or indirectly, at law or in equity, against Walter E. Heller & Company, Inc. or any of its affiliates, officers, directors, agents, employees or attorneys: (a) arising from or with respect to a certain 1962 loan transaction between Heller and United States Overseas Airlines, Inc., or (b) arising from or with respect to any collection efforts heretofore pursued by Heller in connection with said loan transaction; including, without limitation of (a) and (b), that certain action pending in the Superior Court of the State of California, County of Monterey, entitled C. R. E. Smith, Trustee in Bankruptcy of the Estate of Airpower Overhaul, Inc., et al. v. Walter E. Heller & Company, Inc., et al. (emphasis in original); and (2) from instituting, maintaining or prosecuting any other litigation similar to the action heretofore adjudicated herein or taking any other further similar or different action designed or intended to deprive Heller of sums and amounts due it under the Final Judgment entered herein on June 5, 1972." ⁴

The foregoing decree is now final, and no contention is made that it is invalid or ineffective in any way. ⁵ The only dispute, as will hereafter appear, is whether the plaintiffs of the California action are among those enjoined thereby. Nor is any contention made that the trustees in bankruptcy of some of the plaintiffs stand in a more favorable, or different, position than would those plaintiffs alone.

Heller had appeared in the California action, and upon entry of the federal court's injunctive decree, had communicated with the plaintiffs as follows: "Inasmuch as it is quite clear that all of the plaintiffs in Smith v. Heller (the California action) are in privity with Ralph Cox, Jr. and co-plaintiff Ocean Air Tradeways partnership, are acting in active concert and participation with them, and are thus enjoined from prosecuting the Smith v. Heller action, we are refraining from serving any answer therein on the assumption that the action will be discontinued as against Walter E. Heller & Company, Inc., Walter E. Heller Factors, Inc., Walter E. Heller & Company of California, Inc., and Edmund M. Duncan. If you have any contrary intent, please advise us forthwith." (Emphasis added.) The letter went unanswered.

As contended by Heller in the superior court, and here: "For two full years thereafter, no response or other communication of any nature whatsoever was received by any representative of the Heller defendants from plaintiffs' counsel or from anyone else representing plaintiffs, until a copy of a Request for the Entry of a Default was received by Heller's New York counsel on July 7, 1976, only two days prior to the actual entry of the default herein against Heller and Heller California . . . . Plaintiffs did not serve Heller's California counsel with the Request for Entry of Default . . . despite their prior appearance in the case . . . and despite the requirements of Code Civ.Pro. § 587." (Fn. omitted.) It was, and is, also contended that such irregular notice made it impossible for Heller to take steps to prevent the default's entry.

The record further discloses that contemporaneously with plaintiffs' request for entry of Heller's default, plaintiff Ocean Air Tradeways, a partnership, expressly named in the federal injunctive decree as a party, voluntarily withdrew by "dismissing" itself from the action.

Thereafter Heller moved, according to Code of Civil Procedure sections 473 and 581a, respectively, to set aside the default and to dismiss the California action. During the proceedings on the motions...