Opinion
Page __
__ Cal.App.2d __ 229 P.2d 432 HOGAN v. INGOLD et al. Civ. 18306. California Court of Appeals, Second District, Second Division April 5, 1951.Subsequent opinion 243 P.2d 1.
Rehearing Denied April 16, 1951.
McLaughlin & Casey, Los Angeles, by James A. McLaughlin, Los Angeles, for appellant.
Flint & MacKay, William R. Flint, and Roscoe C. Andrews, all of Los Angeles, for respondent R. F. Ingold.
J. D. Willard, Los Angeles, for respondents, Neal A. Shoor, Herbert E. Tanner, Otto N. Powell and James M. Hunt.
Hunter & Liljestrom, Los Angeles, for respondent R. B. Jenkins.
McCOMB, Justice.
This is an appeal from an order dismissing as to six defendants a stockholder's derivative suit which was filed in behalf of Washington Holding Company, a California corporation. The six defendants, as to whom the dismissal was ordered, were officers and directors of that corporation who were alleged to have participated in the acts of mismanagement and fraud as charged in the complaint.
The action was filed on December 9, 1949, by appellant's husband, Clarence C. Hogan, who died on January 26, 1950. Thereafter on March 10, 1950, appellant as executrix of plaintiff's estate was substituted as plaintiff.
In the meantime respondents had filed motions that plaintiff be required to furnish security as a condition to the maintenance of the action in accordance with the provisions of section 834 of the Corporations [229 P.2d 433] Code which provides in substance as follows:
1. It requires that such stockholder allege that he was a shareholder at the time of the occurrence of the wrongs complained of. This in effect precludes a shareholder from suing for wrongs occurring before he became such shareholder. (Sec. 834(a)(1).)
2. It requires the shareholder to allege his efforts to secure action by the board of directors on account of such wrongs. This is substantially the same as the case law existing prior to the enactment of such statute, except that it requires that such directors be given a copy of the proposed complaint before it is filed, or that the pleadings explain why this was not done. (Sec. 834(a)(2).)
3. After the complaint is filed, it permits the defendants to move for security as a condition to proceeding with the action, and it provides that if the hearing on such motion indicates that there is no reasonable probability of the action's benefiting the corporation, then the plaintiff shareholder shall be required to provide security to reimburse such defendants for their cost and attorneys' fees in defending the action. (Sec. 834(b).) If the security is not furnished as required by the court, the action shall be dismissed. (Sec. 834(b).)
It also provides that when a motion for security is filed all other proceedings shall be stayed until the motion is determined.
This section had become effective slightly more than a month prior to the filing of the present action and after the acts of alleged fraud had taken place.
The trial court granted the motion ordering plaintiff to furnish security and upon failure of plaintiff to do so dismissed the action.
Question: Do the provisions of section 834 of the Corporations Code, requiring appellant to provide security to reimburse respondents for their costs and attorney's fees in defending this stockholders' derivative action, apply to appellant?
Yes. Appellant contends that to construe section 834 of the Corporations Code retroactively would constitute a violation of her constitutional rights in that it transgresses the due process clause and contract clause of the Constitution of the United States. Const. art. 1, § 10; Amend. 14.
Such contention is devoid of merit in view of the decision of the United States Supreme Court in Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528, wherein such court held a similar statute of the State of New Jersey valid and not subject to the constitutional objections which appellant makes. Mr. Justice Jackson, speaking for the Supreme Court, 337 U.S. at page 551, et seq., 69 S.Ct. at pages 1228, 1229, says:
'It is said that this statute transgresses the Due Process Clause, Amend. 14, by being 'arbitrary, capricious and unreasonable; the Equal Protection Clause by singling out small stockholders to burden most heavily; that it violates the Contract Clause, art. 1, § 10, cl. 1, and that its application to pending litigation renders it unconstitutionally retroactive.
'The contention that this statute violates the Contract Clause of the Constitution is one in which we see not the slightest merit. Plaintiff's suit is entertained by equity largely because he had no contract rights on which to base an action at law, and hence none which is impaired by this legislation.
'In considering whether the statute offends the Due Process Clause we can judge it only by its own terms, for it has had no interpretation or application as yet. It imposes liability and requires security for 'the reasonable expenses, including counsel fees which may be incurred' (emphasis supplied) by the corporation and by other parties defendant. The amount of security is subject to increase if the progress of the litigation reveals that it is inadequate or to decrease if it is proved to be excessive. A state may set the terms on which it will permit litigations in its courts. No type of litigation is more susceptible of regulation than that of a fiduciary nature. And it cannot seriously be said that a state makes such [229 P.2d 434] unreasonable use of its power as to violate the Constitution when it provides liability and security for payment of reasonable expenses if a litigation of this character is adjudged to be unsustainable. It is urged that such a requirement will foreclose resort by most stockholders to the only available judicial remedy for the protection of their rights. Of course, to require security for the payment of any kind of costs or the necessity for bearing any kind of expense of litigation has a deterring effect. But we deal with power, not wisdom; and we think, notwithstanding this tendency, it is within the power of a state to close its courts to this type of litigation if the condition of reasonable security is not met. * * *
'The contention also is made that the provision which applies this statute to actions pending upon its enactment, in which no final judgment has been entered, renders it void under the Due Process Clause for retroactivity. While by its terms the statute applies to pending cases, it does not provide the manner of application; nor do the New Jersey courts appear to have settled what its effect is to be. Its terms do not appear to require an interpretation that it creates new liability against the plaintiff for expenses incurred by the defense previous to its enactment. The statute would admit of a construction that plaintiff's liability begins only from the time when the Act was passed or perhaps when the corporation's application for security is granted and that security for expenses and counsel fees which 'may be incurred' does not include those which have been incurred before one or the other of these periods. We would not, for the purpose of considering constitutionality, construe the statute in absence of a state decision to impose liability for events before its enactment. On this basis its alleged retroactivity amounts only to a stay of further proceedings unless and until security is furnished for expense incurred in the future, and does not extend either to destruction of an existing cause of action or to creation of a new liability for past events.
'The mere fact that a statute applies to a civil action retrospectively does not render it unconstitutional. Blount v. Windley, 95 U.S. 173, 180, 24 L.Ed. 424 ; Western Union Tel. Co. v. Louisville & N. R. Co., 258 U.S. 13, 42 S.Ct. 258, 66 L.Ed. 437; Chase Securities Corp. v. Donaldson, 325 U.S. 304, 65 S.Ct. 1137, 89 L.Ed. 1628. Looking upon the statute as we have indicated, its retroactive effect, if any, is certainly less drastic and prejudicial than that held not to be unconstitutional in these decisions. We do not find in the bare statute any such retroactive effect as renders it unconstitutional under the Due Process Clause, and of course we express no opinion as to the effect of an application other than we have indicated.'
In view of the foregoing opinion the trial judge was correct in requiring security pursuant to the provisions of section 834 of the Corporations Code.
Affirmed.
MOORE, P. J., and WILSON, J., concur.