Starbird v. Lane

• Decision Date: 04 May 1962
• Court: California Court of Appeals Court of Appeals
• Parties: George A. STARBIRD, Ruth Starbird, Robert M. Robertson, Charles H. Williams, Louise Williams, Walter M. Scott, Mary A. Scott, Fred Bickie, J. L. Chasson, Eleanor L. Chasson, Gladys S. Hodge, Janice M. Boon Hartsinck, Louise Wilbur Hadley, Robert D. McLaughlin, Calvin E. Peterson, Plaintiffs and Appellants, v. Jack LANE, Anthony Coldewey, Jr., Walter P. Johnson, Walter Reid, Watson G. Tapping, Anson C. Depue, Clyde Campbell, Whitsed Laming, Dan Waldschmidt, L. D. Ingham, Leonard Dotson, C. C. Woods, Edward Chandler, Kenneth D. Smith, Gilman R. McHaffie, Arthur Edeson and Mallbou Lake Mountain Club, Ltd., a California corporation, Respondents, Malibou Lake Mountain Club, Ltd., a California Corporation, et al., Defendants. Civ. 25536.

Page 280

21 Cal.Rptr. 280

203 Cal.App.2d 247

George A. STARBIRD, Ruth Starbird, Robert M. Robertson, Charles H. Williams, Louise Williams, Walter M. Scott, Mary A. Scott, Fred Bickie, J. L. Chasson, Eleanor L. Chasson, Gladys S. Hodge, Janice M. Boon Hartsinck, Louise Wilbur Hadley, Robert D. McLaughlin, Calvin E. Peterson, Plaintiffs and Appellants, v. Jack LANE, Anthony Coldewey, Jr., Walter P. Johnson, Walter Reid, Watson G. Tapping, Anson C. Depue, Clyde Campbell, Whitsed Laming, Dan Waldschmidt, L. D. Ingham, Leonard Dotson, C. C. Woods, Edward Chandler, Kenneth D. Smith, Gilman R. McHaffie, Arthur Edeson and Mallbou Lake Mountain Club, Ltd., a California corporation, Respondents Malibou Lake Mountain Club, Ltd., a California Corporation, et al., Defendants.

Civ. 25536.

District Court of Appeal, Second District, Division 2, California.

May 4, 1962.

Rehearing Denied May 29, 1962.

Hearing Denied June 27, 1962.

Francis M. Reiter, Ellis D. Reiter and Robert J. Sullivan, Los Angeles, for appellants.

Gold, Sturman & Gold, Beverly Hills, for respondents.

HERNDON, Justice.

Plaintiffs appeal (1) from a judgment entered in favor of thirteen defendants after their general demurrer to a fifth amended and supplemental complaint had been sustained without leave to amend and (2) from an order dismissing the action as to defendant Malibou Lake Mountain Club, Ltd., a corporation, and three other defendants, after the demurrer of the three individual defendants to the fifth amended and supplementary complaint had been sustained with leave to amend and plaintiffs failed to amend within the time allowed.

The action was commenced on November 19, 1959, by fifteen stockholders and members of the defendant club who filed a complaint seeking declaratory relief, the appointment of a receiver, removal of directors, and an injunction. It named the club and twenty-two individuals as defendants. On November 30, 1959, and prior to service of summons on any of the defendants, the same plaintiffs filed a first amended complaint for the same relief against the same defendants. On the same date plaintiffs also caused to be issued an order directed to defendant Malibou Lake Mountain Club, Ltd., (hereinafter generally referred to as 'the club') to show cause why a receiver should not be appointed to take possession and operate its corporate assets.

Demurrers of the individual defendants to the first, second, third and fourth amended and supplemental complaints were sustained with leave to amend. The club filed its answer to the fourth amended and supplemental complaint, controverting the allegations thereof. Plaintiffs' application for the appointment of a receiver pendente lite was heard and denied at the time the demurrers of the individual defendants to the fourth amended and supplemental complaint were sustained.

On October 26, 1960, eleven of the remaining plaintiffs filed their fifth amended and supplemental complaint seeking the removal of directors and the appointment of a receiver. Ths pleading was substantially the same in form and content as the previous complaint. Since the filing of the original complaint, three of the plaintiffs have withdrawn from the action and one has died without substitution of a representative. Only seventeen of the individual defendants are named in the last complaint. It appears to be undisputed that Fred C. Sammons, one of those named therein, died prior to the filing of the fifth amended and supplemental complaint.

Upon the filing of the fifth amended and supplemental complaint, thirteen of the defendants (twelve of whom are alleged to be prior directors of the club, and one Reid, who is identified merely as the agent of eleven of the prior directors) demurred generally. Their demurrer was sustained without leave to amend and judgment was entered in their favor on December 9, 1960. Defendants Smith, McHaffie and Edeson, alleged to be directors at the time the fifth amended and supplemental complaint was filed, demurred both generally and specially. Their general demurrer was sustained with leave to amend. Upon motion, after failure of plaintiffs to amend within the time allowed, the action was dismissed in respect to these defendants and the club on December 14, 1960. Plaintiffs appeal from the judgment and from the order of dismissal. They also purport to appeal from the order sustaining the demurrer of the thirteen defendants without leave to amend, which order is not appealable.

Question Presented

The question presented on this appeal is whether or not the fifth amended and supplemental complaint states a cause of action against any of the named defendants, and whether the court erred in sustaining the general demurrer of thirteen of them without leave to amend. Plaintiffs characterize their action as derivative in that they assert that its purpose is to seek redress for wrongs alleged to have been perpetrated against the corporation and its stockholders by certain former directors and by the individual defendants who are alleged to be acting in concert.

It is elementary law that in determining the sufficiency of the complaint we must assume the truth of the facts therein stated, and construe its averments liberally with a view to substantial justice between the parties. (Code Civ.Proc. § 452.) Appellants, in their opening brief, make a recital of facts under the heading 'Factual Background', a substantial portion of which recital we do not find set forth in the complaint or supported by the record. The essential allegations of the fifth amended and supplemental complaint are as follows:

Allegations of Complaint

The defendant club is and has been a corporation operating a country club, club house and club facilities in Los Angeles County. For many years it has been the owner of about 255 acres of real property. There are 1348 shares of capital stock issued and outstanding. Plaintiffs own a total of 156 shares.

At the time the original complaint was filed, the defendants Jack Lane, Anthony Coldewey, Jr., Edward Chandler and Walter P. Johnson were directors of the club. On March 19, 1960, defendants Kenneth D. Smith, Gilman R. McHaffie, Arthur Edeson and Edward Chandler were elected as members of the board to directors 'by reason of a purported election * * * which was supervised, controlled, directed, manipulated and accomplished at a purported annual meeting of the stockholders of the said corporation, by and under the direction of the defendant Kenneth D. Smith, and in concert with the other defendants named herein.' The purpose of this purported meeting and election was to avoid the effect of this action. Edward Chandler thereafter resigned and defendants Smith, McHaffie and Edeson 'caused to be appointed John Taft and George Fitzhugh'. ¹ Taft and Fitzhugh 'are under the control and domination of the defendant Smith'.

'That all of the defendants named herein as directors, and each of them, have been guilty of fraudulent and dishonest acts and gross abuse of authority and discretion with reference to the conduct of the affairs of the club as more particularly set forth herein.'

From 1953 to the filing of this action, 'the records and books of account of the club were negligently and fraudulently kept by the defendants, and each of them, as directors and officers in that the said records did not correctly reflect the true financial condition of the corporation, the correct stock issuances and correct minutes and by-laws in the following particulars, among others:'

(1) The records, if correctly audited, will show current liabilities in excess of $50,000.00, which is in violation of the by-laws and places the club in a dangerous financial position; (2) the records, if correctly audited, will show that through manipulation of the accounts and books by its directors, the club has been operating at a loss rather than at a small profit as reported to stockholders; (3) between 1953 and 1959 obligations were incurred by the club to stockholders, members and licensees which are not shown in the account and books because, 'as plaintiffs are informed and believe', they would show an increase in liabilities and inability of the club to pay; (4) the stock records show only 1348 shares outstanding as of October 14, 1959; it appears from 'legends' in the corporate records that there is a 'great probability' that there is more stock issued and outstanding than the mentioned 1348 shares; and 'as plaintiffs are informed and believe' the defendants know the whereabouts thereof, but conceal it in order to protect their majority control of stockholders meetings; (5) because the corporation does not maintain copies of its minutes and bylaws in its principal office, it cannot be ascertained, with certainty, who are members, stockholders or officers of the club, or the extent of their authority. (6) 'Shortly after the present directors were installed in office, resolutions were passed, or fraudulently caused to be passed by the stockholders, ratifying, condoning and approving the aforementioned abuses, negligence and fraud of their predecessors in office'.

All of the defendants, and each of them, had direct and intimate knowledge of the deficient condition of the records and matters stated in the complaint, and each knew that notices of such conditions were given and a demand to correct the same was made. Further notices would be futile and of no avail.

Despite notice to the corporation, its board and its officers, the matters hereinafter alleged were allowed to persist to the detriment of plaintiffs and stockholders in like situation. When the defendants Smith, McHaffie, Edeson and Chandler were elected to the board of directors, they knew that demands that been made by plaintiffs upon them and their predecessors in office to ascertain the true financial condition of the corporation, to obtain true and correct books and records and to correct the books and records. Despite the request...