Opinion
Rehearing Denied March 12, 1929
Hearing Granted by Supreme Court April 11, 1929
Appeal from Superior Court, City and County of San Francisco; Frank J. Murasky, Judge.
Action by Herman C. Eggers and others against the National Radio Company, in which Alma Anfinger and others, claiming to be stockholders of defendant company, sought to intervene. From the judgment, and certain orders, Alma Anfinger and others appeal. Affirmed. COUNSEL
Geo. M. Naus, Eugene F. Conlin, and Grant & Zimdars, all of San Francisco, for appellants.
James H. Boyer, of Oakland, and Milton Shepardson, of San Francisco, for respondents.
R.M.F. Soto and J. Clark Benson, both of San Francisco, for respondent National Radio Co.
OPINION
NOURSE, J.
Five separate appeals are herein presented by stipulation upon one transcript, an appeal from the final judgment, an appeal from an order denying the appellants’ motion to reinstate the cause for a new trial, an appeal from an order denying the application of appellants to file a complaint in intervention, and an appeal from an order that a former judgment heretofore rendered in the cause, and annulled by order of the court, be again entered as the judgment in the case.
The action was commenced by five stockholders of the National Radio Company, an Arizona corporation, which was named as the sole defendant. The complaint alleged that this corporation was operating in violation of law and without a permit to do business from the corporate commission of Arizona; that it was dominated by one Golden, who caused the organization of the corporation in May, 1916; that no stockholders’ meeting had ever been held, but that directors had been chosen subservient to him; that he had continuously speculated in the stock of said corporation on the market; that he had caused nine separate assessments to be levied upon the outstanding stock of the corporation through false representations as to the business which the corporation was doing and the assets which it had acquired; that the plaintiffs herein had paid their proportionate shares of each of said assessments; that the money derived therefrom had been dissipated by Golden and those subservient to him; that they had caused to be erected from said moneys a building in the city and county of San Francisco at a cost to the corporation of $84,000, save and except the sum of $8,000 paid therefor with the stock of said corporation; that said building was erected and acquired on the pretense that it was needed as a laboratory for the business of the corporation, whereas, in fact it was merely a garage and used as such; that it was acquired through the fraud and deceit of said Golden and at a large financial gain to him against the interests of the corporation; that the construction of said pretended laboratory was widely advertised as a valuable asset of the corporation wherein valuable wireless telephone instruments would be manufactured, to the great profit of the corporation; that because of these false claims on the part of the corporation said Golden was enabled to and did speculate in the stock of the said corporation upon the market, and, through the directors subservient to him, was enabled to and did levy and collect nine separate assessments upon the stock of said corporation amounting to $20,000 each; that on June 13, 1921, said Golden and said directors levied assessment No. 10, which assessment said plaintiffs have refused to pay; that on May 10, 1919, said directors sold to one Barker 279,742 shares of said corporation at 2.6 cents a share, though there was then a market for said shares at 14 cents, and in September, 1919, said Golden sold to said corporation 20,000 shares of said stock at 30 cents a share; that neither of said sales was made with permission of the commissioner of corporations of the state of California; that on January 31, 1921, said corporation was $80,000 in debt, having as its only available asset the lot and building hereinbefore mentioned, which was valued at about $70,000; that said corporation is and always has been insolvent.
Upon these allegations the plaintiffs prayed for a perpetual injunction restraining the corporation and its agents from selling or attempting to sell any of the stock of the plaintiffs and enjoining the said corporation from doing any business until it shall have first secured from the corporation commission of the state of Arizona a permit to do so, and enjoining said corporation from receiving or collecting any moneys under assessment No. 10 or from levying any further assessments upon the stock of said corporation, that a decree be entered against the corporation and in favor of plaintiffs for and in behalf of themselves and the other stockholders of said company for the sum of $180,000, the proceeds of such illegal assessments, and that all shares of capital stock of said corporation theretofore sold by the company because of nonpayment of any of such illegal assessments be restored to the owners.
After a protracted trial, judgment was entered in favor of the plaintiffs on May 2, 1924, upon findings which substantially followed the allegations of the complaint. In this judgment it was decreed that every certificate of stock issued by the corporation was void; that each and every assessment levied upon said stock by the corporation was void; that the real property located in San Francisco and described in the complaint was owned by the plaintiffs herein and the other holders of certificates of stock issued by the corporation similarly situated and whose moneys were used in the purchase thereof, and that said corporation merely holds the naked record title thereto in trust for such persons, and that a referee be appointed to take an account and ascertain and report the names of the persons who held certificates of stock in said corporation, and who paid one or more of said assessments, the amounts of such payments, and the amounts of moneys expended by the corporation in the purchase of said property. On May 31, 1924, the trial court, on motion of the corporation, granted a new trial.
Thereafter a change in the personnel of the board of directors of the corporation was made and on July 7, 1924, the board passed a resolution discharging the attorneys then representing the corporation and employing as attorneys for the corporation Mr. Benson and Mr. Soto, who were soon thereafter substituted as attorneys for the corporation in these proceedings. On September 26, 1924, these attorneys, acting under the authorization of the board of directors of the corporation, entered into a stipulation with the attorneys for the plaintiffs in this litigation that the order theretofore made on May 31, 1924, granting a new trial, be vacated and set aside. On September 29, 1924, the trial court, acting upon this stipulation, entered its order setting aside and vacating its previous order granting a new trial. On October 16, 1924, 145 persons, claiming to be stockholders of the corporation, appeared in said proceedings and on October 27, 1924, joined with 147 other persons who also claimed to be stockholders in a motion for an order to vacate and set aside the order of September 29 last referred to and for an order setting said cause at large and at issue upon the pleadings and reinstating the same for a new trial, for an order allowing these parties to intervene in said cause, and for an order permitting said parties to assume charge of the defense of said action on the part of the corporation and to vacate the stipulation of the attorneys for said corporation filed September 30, 1924, waiving the corporation’s right of appeal from the judgment entered therein. These motions were supported by an affidavit alleging that the vacation order of September 29, 1924, was illegal, improvident, collusive, would result in a dissolution of the corporation without consent of the stockholders or of a majority, would strip the corporation of its assets and was taken through inadvertence, mistake, surprise, and excusable neglect. The motion to set aside the order of September 29, 1924, was heard upon affidavits and oral testimony and as a result of the hearing the trial court on April 13, 1925, granted the motion to vacate that order, but at the same time denied the appellants’ motion to reinstate the cause for a new trial. The latter part of the order was based upon the stipulation of the attorneys for the corporation that the former judgment might be entered against the corporation as the judgment of the court.
Thereafter and on April 13, 1925, these appellants presented their motion for permission to intervene and tendered a complaint in intervention. On April 27, 1925, the trial court denied their motion for permission to intervene and to file a complaint in intervention. Prior thereto and on April 15, 1925, it was stipulated between the attorneys for the plaintiffs in the litigation and the attorneys for the corporation that judgment should be given in favor of the plaintiffs and against the corporation upon the findings which had theretofore been made and signed. The new judgment in the terms of the former judgment was ordered to be entered by the court on May 7, 1925, and at the same time the trial court ordered that the motion of Golden and others claiming to be stockholders of the corporation that the cause be set at issue for a new trial be denied. On May 22, 1925, a new judgment in the terms of the former judgment was accordingly entered carrying the stipulation and consent of the attorneys for the corporation, and on May 28 the same attorneys filed a stipulation on behalf of the corporation waiving its right to appeal from said judgment.
On this appeal the appellants make five assignments of error, the first four of which may be considered under the single head of the right of the appellants to intervene and take such course as they deem necessary in the defense of the litigation. The fifth assignment is that the judgment is erroneous on the face of the roll.
The respondents insist that the appeal from the judgment should be dismissed upon the grounds that the appellants are not aggrieved parties entitled to appeal under section 938, Code of Civil Procedure. The appellants answer that though they were not parties to the proceedings resulting in the judgment they became parties to the record and as such entitled to appeal from the judgment within the rule announced in Luckenbach v. Laer, 190 Cal. 395, 398, 212 P. 918. The same case, however, points out the weakness of appellants’ position, where, as here, those seeking to make themselves "aggrieved parties" are stockholders in a corporation which was a real party to the litigation and which under the well-accepted rule in Baines v. Babcock, 95 Cal. 581, 592, 27 P. 674, 30 P. 776, 29 Am.St.Rep. 158, and similar cases, is deemed to have full power to represent and bind the stockholders in all litigation to which it is a party (except where the directors of the corporation refuse to act or are guilty of fraud in the maintenance of the defense of the action as pointed out in Difani v. Riverside County Oil Co., 201 Cal. 210, 215, 256 P. 210). Because of the views which we have reached upon the merits of the appeal from the judgment it is not necessary to determine the motion to dismiss that appeal.
The attack upon the judgment is based upon the ground that the attorneys for the corporation were without power to enter into the stipulation with the plaintiffs for setting aside the order granting a new trial and for the entry of a new judgment, first, upon the ground that the directors could not authorize the attorneys for the corporation to make such stipulation; and, secondly, because the attorneys could not exercise the authority under the resolution of the board because the end accomplished was the practical dissolution of the corporation. No facts or evidence of any character are cited in support of the contention made, but on the other hand respondents point out that the judgment appealed from merely directs a sale of the garage premises which the court found did not belong to the corporation; that this property cost the corporation something over $76,000 and was incumbered by mortgages and deeds of trust aggregating $55,000, whereas the appellants in printed circulars and by their answer which they sought to file herein alleged and contended that the corporation possessed assets of a value in excess of $2,000,000. Manifestly, if the corporation had assets of that value we cannot assume that the disposal of the realty mentioned in the complaint would work a dissolution of the entire corporation, and in the absence of pleading or proof that such would be the effect of the judgment, we may not depend upon statements of counsel that this was known to the directors or the attorneys employed by the corporation and that their purpose in consenting to the judgment was to effect a dissolution.
The authority of the directors of a corporation to control the litigation in which the corporation is engaged has been determined by an unbroken line of decisions (Baines v. Babcock, 95 Cal. 581, 592, 27 P. 674, 30 P. 776, 29 Am.St.Rep. 158; Luckenbach v. Laer, supra; Difani v. Riverside County Oil Co., supra), while the authority of counsel to stipulate and consent to the entry of judgment is found in section 283, Code of Civil Procedure.
The directors of the corporation having the full control over the conduct of the litigation, and the attorneys, by reason of their employment as such, having the authority to stipulate and consent to the judgment, the only course of a stockholder is to appear and show either that the directors have refused to act in behalf of the interests of the corporation or that they were guilty of fraud in the defense of the action. See cases just cited. But a stockholder cannot assume to act on behalf of the corporation until he has exhausted the means within his reach to obtain redress from the directors. Difani v. Riverside County Oil Co., supra. When this has not been done, and when fraud on the part of the directors has not been alleged or shown, it is manifest that a stockholder will not be permitted, by appeal or by motion, to attack or delay the enforcement of a judgment entered against a corporation in any legal proceeding unless it be by a direct attack upon the judgment on the equity side of the court after demand upon the directors and refusal by them in bad faith to follow the necessary proceedings.
This question, however, does not arise here. The sole question on this branch of the case is whether a member or stockholder may by motion inject himself into a case against the corporation which is defended by the duly elected directors thereof, without a showing that he first sought to obtain redress from them or that they are acting fraudulently or in bad faith. Here the appellants have not attempted to show that the directors acted fraudulently or in bad faith in permitting the recovery of the judgment against the corporation. They have made no attempt to show that the recovery of the judgment was not for the best interests of the corporation or for the best interests of its stockholders. They do allege that the stipulations made by the attorneys of the corporation were collusive, inadvertent, and made through mistake or excusable neglect. They did not, however, attempt to prove any of these statements and the trial court impliedly found them to be untrue. In view of the cases just cited the trial court properly denied the various motions of appellants to intervene and to participate in the proceedings of the trial.
The rule is frequently stated as we find it in the Difani Case at page 215 of 201 Cal. (256 P. 212), where it is said: "With the right of the corporation to sue and be sued concerning corporate rights or liabilities the stockholders cannot interfere, except when the governing directors or trustees refuse to act or are guilty of fraud in the maintenance or defense of an action." The appellants take comfort from that part of the statement which gives a stockholder a right to interfere when the directors "refuse to act." They urge that the consent to the judgment in this case was such a refusal to act as would permit a stockholder to intervene. But the language does not refer to every refusal of the directors to act in the manner which each stockholder believes they should act. What is meant is a refusal to act legally and in a manner which is fair and right in the interests of the corporation. This is made clear by a restatement of the rule which follows this language in the Difani Case: "It is the general rule that where a corporation defendant refuses to defend an action, or, having begun a defense, it is made to appear that the corporation will not press it in good faith, a stockholder may, upon a proper application showing the facts, be allowed to become a party and defend on behalf of the corporation, but he must show that he cannot induce those in control to do that which is fair and right."
Thus, before a stockholder can inject himself into a proceeding in which the corporation is a party, either plaintiff or defendant, he must, upon proper application, show that the managing body failed to take the necessary and proper steps or will not press the litigation in good faith, and he must also show that he has endeavored to induce the directors to take the proper steps and that they refuse to do what is fair and right in the premises. Where, therefore, the corporation is a party defendant the stockholder must show that the corporation has a good and valid defense, which the directors wrongfully or fraudulently refuse to make.
On the appeal from the judgment the appellants are confronted with these well-settled rules. A corporation, like any individual party defendant, may stipulate to waive trial of the issues of any cause pending against it and may also stipulate to the entry of a judgment against it. When a judgment is thus entered with consent of the parties there is no appeal (Reed v. Murphy, 196 Cal. 395, 399, 238 P. 78), and when the consent is given by the duly acting attorney for the party it will be presumed that he had authority to do so (Strand Improvement Co. v. Long Beach, 173 Cal. 765, 799, 161 P. 975). Irrespective of any question as to the time when the application to intervene was made, the record unmistakably discloses that the appellants wholly failed to make any showing which would entitle them to intervene. There is no showing of fraud or bad faith on the part of the directors that the action taken by them was not taken in good faith and for the best interests of the corporation, or that the interests of the corporation or of the stockholders were injuriously affected thereby. These were all questions of fact which the trial court was required to determine upon the application made by the stockholders. The determination was adverse to them, and the burden is upon them in this appeal to show that the trial court committed error in this respect.
If we may assume, because the point has not been raised by either party, that the four orders appealed from are appealable orders, then for the reasons heretofore given such orders must be affirmed. If, however, they are not appealable orders because not mentioned in section 963, Code of Civil Procedure, but are reviewable upon the appeal from the judgment only as provided in section 956, Code of Civil Procedure, the same result follows because the judgment appealed from must be affirmed. Having determined that the appellants failed to show error in the ruling of the trial court in refusing them permission to inject themselves into the litigation, all the other questions raised on this appeal become unimportant and do not require discussion.
Judgment and orders are affirmed.
We concur: KOFORD, P.J.; STURTEVANT, J.