Opinion
12-27-1954
MEMORIAL HOSPITAL ASSOCIATION OF STANISLAUS COUNTY, a corporation, Plaintiff and Respondent, v. PACIFIC GRAPE PRODUCTS COMPANY and S. F. Triplett, Defendants, * Pacific Grape Products Company, Appellant. Civ. 8501.
Nathan B. McVay, Modesto, for appellant. Vernon F. Gant, Modesto, for respondent.
MEMORIAL HOSPITAL ASSOCIATION OF STANISLAUS COUNTY, a corporation, Plaintiff and Respondent,
v.
PACIFIC GRAPE PRODUCTS COMPANY and S. F. Triplett, Defendants, *
Pacific Grape Products Company, Appellant.
Dec. 27, 1954.
Rehearing Denied Jan. 24, 1955.
Hearing Granted Feb. 24, 1955.
Nathan B. McVay, Modesto, for appellant.
Vernon F. Gant, Modesto, for respondent.
SCHOTTKY, Justice.
Plaintiff corporation, a hospital association, commenced an action against defendant corporation, a canning company, and its president and general manager to recover upon a written subscription pledge of $5,000 which it was alleged that defendant had made to plaintiff for the building of a hospital. Defendants answered separately, defendant Triplett setting up as an affirmative defense that the pledge was signed by him as president and general manager of Pacific Grape Products Company and not in his individual capacity, and defendant corporation setting up as an affirmative defense that defendant Triplett did not have authority to bind the corporation to such an agreement. The case with the issues thus framed was tried before the court sitting without a jury. The trial court found: '* * * that at the time of the making of said subscription agreement the said S. F. Triplett was the president and general manager of Pacific Grape Products Company, a corporation duly incorporated under the laws of the State of California and that said subscription agreement was signed by the said S. F. Triplett as such president and general manager and not in his individual capacity. 'The Court further finds that the said defendant S. F. Triplett at the time that said subscription agreement was signed and delivered, owned approximately 73% of the issued and outstanding stock of the defendant Pacific Grape Products Company and that the said defendant S. F. Triplett had and exercised almost complete control of and over the affairs of said corporation defendant. That the said S. F. Triplett as the president and general manager of said defendant Pacific Grape Products Company, had, at the time said subscription agreement was signed, full power and authority to bind said corporation and that said subscription agreement was and as a valid, binding and sustaining obligation of said corporation.'
In accordance with said findings, judgment was entered in favor of plaintiff against defendant corporation Pacific Grape Products Company, but in favor of defendant Triplett.
Defendant corporation has appealed from the judgment and its sole contention is that the evidence is insufficient to support the judgment. Appellant asserts that there is no evidence to indicate that Triplett had the authority either actual, implied or ostensible to bind the appellant on the agreement, and that, assuming without conceding that the issue was properly before the court, there was insufficient evidence to warrant the court in piercing the corporate veil, thereby making the act of Triplett in fact the act of the corporation.
The record shows that for a considerable period of time prior to November 12, 1947, respondent corporation was actively engaged in the solicitation of pledges of funds for the construction of a general hospital near Nodesto, California. Pursuant to this plan, on three occasions workers in the campaign called at appellant's plant. On the first visit the workers were informed by defendant S. F. Triplett, president and general manager of appellant corporation, that he would have to take the matter up with the Board of Directors. On the second call Triplett told the solicitors for respondent that he had not had an opportunity to discuss it with the board of directors and that they would have to come back again. The third and final visit occurred on November 12, 1947, at which time the workers received a written pledge signed by Triplett, with the donor's name being designated as Pacific Grape Products Company and containing an agreement to pay the sum of $5,000. According to respondent's witness Lawrence Robinson, the written pledge was delivered to Lynn Hodgert and himself upon said third visit. The following appears in the record: 'As I stated, we went down to an ante room or an outer office and sent in word through someone, I can't recall whom, that we were there for the purpose of picking up the pledge. In due course, whoever this party was, came out with the pledge. Q. And you didn't even see Mr. Triplett? A. We didn't see Mr. Triplett.'
The appellant is a canning company which buys, processes and sells canned goods. Defendant Triplett was the president and general manager of appellant corporation since its inception in 1926; he owned 73 per cent of the outstanding shares of stock in the corporation, and the general conduct of the business, including general supervision of the departments, the operation of the factory, in the field and in sales, was placed in his hands. The Board of Directors met at infrequent intervals, all mostly on the call of Triplett. There was testimony that in the history of the appellant donations to the Red Cross and Community Chest were made without express authorization from the Board of Directors.
It is not clear whether the matter of the pledge was ever discussed with the members of the Board of Directors, although it appears that the assistant secretary may have had some knowledge of it. At any rate, Triplett did not have express authority, either by virtue of the by-laws or by virtue of a resolution of the Board of Directors, to enter into the subscription agreement, nor was there any formal ratification thereof.
The general rule is well expressed in Magnavox Company v. Jones, 105 Cal.App. 98, at page 103, 286 P. 1084, 1086, as follows: 'To properly prove a contract claimed to be binding on a corporation, it should be shown that it was made on its behalf by someone who had authority to act for it. It must be shown that the officer was expressly authorized, or that the act was fairly within the implied powers incidental to his office, or that the corporation is estopped to deny his authority by reason of having accepted the benefit of the contract or otherwise.'
It is clear that Triplett had no express authority to sign the subscription pledge on behalf of appellant corporation. Indeed respondent concedes this and states that it does not contend that there was any showing during the trial of express actual authority on the part of S. F. Triplett to bind the corporation by virtue of the charter, the by-laws or any resolutions of the directors at directors' meetings. However, respondent argues 'that the evidence is sufficient to show his authority to bind the corporation at the time he entered into the pledge agreement on behalf of the corporation, both by virtue of the general authority of his office as general manager and president to supervise and manage the business and by virtue of the implied acquiescence on the part of the board of directors. These authorities are in their nature implied rather than expressed but nevertheless are deemed to be actual authority.'
Although the authority and power of the president of a corporation to act on its behalf is broader when he is also designated its general manager, the authority of such corporate agent is not entirely unlimited. As is said in 2 Fletcher Cyclopedia Corporations, at page 669 et seq.: '* * * where the president of a corporation is, by the by-laws of such corporation, given power as a general manager to superintend and conduct the business of the company, subject to the control of the board of directors and executive committee, he has prima facie power to make any contract or do any act which the board of directors could authorize or ratify in the absence of a showing of restriction on such power by the board of directors or executive committee. But his authority does not extend to contracts or other acts which are not incident to the ordinary business. If the transactions are not within the scope of the business which either a president or a general manager is, by virtue of his office, qualified to transact for the corporation, the company will not be bound thereby.'
And at page 876: '* * * whether a particular contract made by a general manager is within his implied power depends on whether its execution is reasonably necessary to, and customary and usual in, the performance of the duties to be discharged by managers.'
See also 6 A Cal.Jur., p. 1156, and 29 Cal.L.Rev. 422.
In support of its contention that the subscription agreement here in controversy was within the implied authority vested in Triplett as president and general manager of appellant corporation respondent cites a number of authorities. However, it is apparent from these authorities, as well as many others that we have read relating to the subject of corporate liability based on the implied authority of an agent or officer, that courts impose such liability only after a determination that the act performed or the contract executed is incident to the ordinary business of the corporation and within the scope of such business. We have been cited to no cases, and have found none, which are authority for the proposition that a subscription for the building of a hospital in a community is impliedly within the scope of the duties to be discharged by the president and general manager of a canning corporation.
Respondent quotes the following from Ballantine on Corporations, at page 144: 'When an officer or agent of a corporation is intrusted by the shareholders or directors with the general charge and management of the business of the corporation, the general rule is that, he has implied authority to make any contract or do any other act appropriate in the ordinary business of the corporation.'
Respondent also cites Freeman v. River Farms Co., 5 Cal.2d 431, 55 P.2d 199, in support of its position. In the Freeman case, which involved an action by a contractor on warrants drawn by a levee district and guaranteed by virtue of an agreement to that effect entered into with the president of the defendant corporation for and on behalf of the corporation, the court held, 5 Cal.2d at page 435, 55 P.2d at page 200: 'Finally, with respect to the argument that the president of the company was not authorized to bind the company by either actual or ostensible authority, it must be said that appellant cannot prevail. The by-laws of appellant discloses that the president was given the power to 'make and sign agreements in the name and behalf of the company,' and also 'the general and active management of the business and affairs of the company.' It cannot be successfully contended that under this provision the president would not have been authorized to take action to prevent the flooding of appellant's land. See Western Lithograph Co. v. Vanomar Producers, 185 Cal. 366, 197 P. 103, and cases there cited. The fact that the contract took a form different from the one we might ordinarily expect to find should make no difference. In truth, apt language is found in Woods Lbr. Co. v. Moore, 183 Cal. 497, 502, 191 P. 905, 907, 11 A.L.R. 549, as follows: 'With respect to the means which the corporation may adopt to further its objects and promote its business its managers 'are not limited in law to the use of such means as are usual or necessary to the objects contemplated by their organization, but, where not restricted by law, may choose such means as are convenient and adapted to the end, though that be neither the usual means, nor absolutely necessary' for the purpose intended. Winterfield v. Cream City B. Co., 96 Wis. 239, 71 N.W. 101.''
Respondent argues that it is clear from the above quotation that the court felt that since the action of the president was beneficial to the corporation it must be held to have been within the general authority of the president and general manager even though it was not absolutely necessary nor the usual type of thing done by the corporation. However, as pointed out by appellant, the distinction between the cited case and the instant case lies in the fact that in the Freeman case the act sought to be accomplished was the protection of the valuable farming property of the corporation from damage by flood waters, while in the instant case it is difficult to understand how it could be held that a pledge of corporate funds for the building of a memorial hospital is impliedly within the scope of the duties to be performed by the president and general manager of the respondent canning corporation.
Respondent states: 'It is a matter of common knowledge that the trend on the part of prosperous business concerns is steadily in the direction of making larger and more numerous charitable contributions in the communities in which they do business * * * as a means of increasing its business, promoting patronage, and increasing its good-will.' While this observation of respondent may be true, it cannot change the rule that the board of directors is the governing body of a corporation and that other officers and agents exercise representative authority which they derive from the directors or from the by-laws. 13 Cal.Jur.2d sec. 308, page 76. To sustain respondent's contention in the instant case would undermine the essential protection afforded to stockholders by the corporate structure because it would make it possible for a philanthropically inclined president and general manager, without authority of the directors, to bankrupt the corporation by making large pledges to worthy charitable enterprises.
We do not believe that it can be held that Triplett had ostensible authority to bind the appellant corporation.
Ostensible authority is defined by Civil Code, section 2317, as follows: 'Ostensible authority is such as a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent or possess.'
'There are two essential features of ostensible authority, viz., the third person must believe that the agent had authority and such belief must be generated by some act or neglect of the person to be held.' Walsh v. American Trust Co., 7 Cal.App.2d 654, 660, 47 P.2d 323, 325.
The evidence clearly establishes that respondent was charged with notice that Triplett needed prior authorization from the board of directors and precludes the imposition of liability on the theory of ostensible authority. See Smith v. Sleepy Hollow Inv. Co, 65 Cal.App.2d 75, 149 P.2d 754. Nor does the evidence establish, as respondent asserts, 'that there was a long course of acquiescence on the part of the board of directors, holding out Mr. Triplett to the public and to those dealing with the corporation as having practically unlimited authority in carrying on the business of the corporation, including the discretionary matter of making contributions and donations.' Although the testimony would indicate that donations to other charitable organizations had been made in the past without special action being taken by the board of directors, the character and manner of making such contributions is not so like the execution of a subscription agreement as to be deemed evidence of corporate acquiescence in a similar course of dealing, and this should be true even though the objects of both are comparable. See Black v. Harrison Home Co., 155 Cal. 121, 99 P. 494.
Respondent makes the further contention that the circumstances of the instant case were such that the court was warranted in piercing the corporate veil so as to make the act of S. F. Triplett the act of the corporation.
We are unable to agree with this contention. As stated in 12 Cal.Jur.2d, at page 604: 'A corporation is a distinct legal entity separate and apart from its members or stockholders and from its directors or officers. * * * 'There are circumstances in which the corporate entity will be disregarded and the corporation will be considered in law as the alter ego of the persons composing it, as for instance when the corporation is but the instrumentality through which an individual, the sole owner of the capital stock, for convenience transacts his business, and fraud or injustice to third persons results from the double relationship. In order to cast aside the legal fiction of distinct corporate existence, it is not enough that the company is organized and controlled and its affairs so managed as to make it merely an instrumentality, conduit, or adjunct of its stockholders, but it must further appear that one is the business conduit and the alter ego of the other, and that to recognize their separate entities would aid the consummation of a wrong.'
No allegation appears in the complaint from which it may be drawn that the corporate veil should be pierced, and it is clear that the case was not tried upon that theory. In his opening statement to the trial court counsel for respondent stated: 'Mr. Gant: * * * The only issues, as I understand it from the pleadings and in my conversations with Mr. McVay, are these: (1) Was Mr. Triplett at the time he signed the pledge on behalf of the Pacific Grape Products Company Association authorized to do so expressly or by implication. Secondly, if not and if he didn't bind the corporation, did he create any personal liability on his part by reason of his signing the authority; in other words, for signing the pledge. Putting it another way, is the corporation liable, is Mr. Triplett personally liable or is nobody liable. Now, that is the question that we present to the court. 'Mr. McVay: That's correct.'
And at the close of the testimony: 'The Court: The question is did Mr. Triplett, or was Mr. Triplett ostensibly an agent to bind the corporation without the action of the Board of directors. Ordinarily we know that the corporation can't act without or through the Board of Directors unless the party acting has ostensible power.' Respondent's counsel replied: 'Mr. Gant: That's the only point so far as he is concerned; secondly, if he attempted to act and didn't have the authority is he personally liable. 'The Court: Yes, those are the two points. * * *'
In H. Moffat Co. v. Rosasco, 119 Cal.App.2d 432, at page 439, 260 P.2d 126, 131, this court said: 'In MacKenzie v. Angle, 82 Cal.App.2d 254 at page 263, 186 P.2d 30, 35, this court said: 'A rule, early established and long adhered to in the courts of this state, is that questions not raised in a lower court will not be considered on appeal. (Citing cases.)' As stated in 3 Cal.Jur.2d, Appeal and Error, section 140: 'The rule is founded upon considerations of practical necessity in the orderly administration of the law and of fairness to the court and the opposite party, and upon the principles underlying the doctrines of waiver and estoppel.' 'And as this court said in Munfrey v. Cleary, 75 Cal.App.2d 779, at page 785, 171 P.2d 750, at page 753: 'Also as a general rule where a case has been tried upon one theory that theory must be adhered to on appeal, and a party who has tried his case wholly or in part on a certain theory, which theory was acted upon by the trial court, cannot, on appeal, change his position and adopt a different theory, since to do so would be unfair to the trial court and to opposing counsel. (Citing cases.)''
We are, therefore, of the opinion that the question of liability through a disregard of the corporate entity was not raised by the pleadings, and also that the case was not tried upon that theory, and that, this being so, the issue may not properly be considered by this court upon this appeal.
But even assuming that the issue is properly before this court on this appeal, there is no substantial evidence upon which a finding that the corporate veil was pierced could be sustained. As hereinbefore pointed out, the evidence shows that Triplett was president-general manager, owned 73 per cent of the outstanding shares of stock, and meetings of the board of directors were held as often as twelve to fifteen times per year, usually upon call of Triplett. These facts are not sufficient to support a judgment based upon a piercing of the corporate veil. The only factor not present in most corporations is the ownership of 73 per cent of the capital stock by Triplett.
The statement contained in respondent's brief to the effect that 'Triplett for all intents and purposes exercised with the acquiescence and blessings of the board of directors practically all of the power which the corporation itself possessed' finds no support in the evidence. Giving to the testimony quoted by respondent every inference favorable to the respondent, it merely shows that Triplett exercised the duties of a president and general manager and that he called all of the meetings of the board of directors.
However, more than control is required before a court is authorized to disregard the corporate identity. The rule is clearly expressed in the leading case of Erkenbrecher v. Grant, 187 Cal. 7, at page 11, 200 P. 641, at page 642: 'In order to cast aside the legal fiction of distinct corporate existence as distinguished from those who own its capital stock, it is not enough that it is so organized and controlled and its affairs so managed as to make it 'merely an instrumentality, conduit or adjunct' of its stockholders, but it must further appear that they are the 'business conduits and alter ego of one another,' and that to recognize their separate entities would aid the consummation of a wrong. Divested of the essentials which we have enumerated, the mere circumstance that all the capital stock of a corporation is owned or controlled by one or more persons does not, and should not, destroy its separate existence; were it otherwise, few private corporations could preserve their distinct identity, which would mean the complete destruction of the primary object of their organization.'
See also Hollywood Cleaning & Pressing Co. v. Hollywood Laundry Service, Incorporated, 217 Cal. 124, 17 P.2d 709; Dos Pueblos Ranch & Improvement Company v. Ellis, 8 Cal.2d 617, 67 P.2d 340, and Wood Estate Co. v. Chanslor, 209 Cal. 241, 286 P. 1001.
There was no testimony to the effect that the affairs of the corporation and those of Triplett were confused. There is nothing to show that the individuality of both has ceased.
There is no evidence to indicate that Triplett and appellant corporation were one and the same, and as stated in Consolidated Photographic Industries, Inc. v. Marks, 109 Cal.App.2d 310, 240 P.2d 718, 721, 'the existence of a corporation * * * cannot be destroyed upon mere suspicion or surmise.'
It must be borne in mind that the trial court found that the subscription agreement was signed by Triplett as president and general manager and not in his individual capacity and that judgment was rendered against respondent corporation but in favor of defendant Triplett. It may be that the acts of Triplett may have justified a judgment against him individually, but the court did not so hold and respondent has not appealed from the judgment in favor of Triplett.
In view of the foregoing we conclude that the judgment against appellant corporation is not supported by the evidence.
The judgment is reversed.
VAN DYKE, P. J., and PEEK, J., concur. --------------- * Opinion vacated 290 P.2d 481.