Opinion
Hearing Granted Nov. 15, 1945.
Appeal from Superior Court, Los Angeles County; Robert H. Scott, Judge.
Action by Austin P. Sutter and others against General Petroleum Corporation and others for alleged fraud. From a judgment dismissing plaintiffs’ complaint on ground that it failed to state a cause of action, the plaintiffs appeal.
Judgment affirmed.
Haight, Trippet & Syvertson, of Los Angeles, for appellants.
Martin J. Weil and J. M. Jessen, both of Los Angeles, for respondent General Petroleum Corporation.
Mortimer Kline, of Los Nageles, for respondents J. W. Pauson and Pauson Bros., Inc.
OPINION
McCOMB, Justice.
From a judgment of dismissal predicated upon the sustaining of defendants’ objection to the introduction of evidence on the ground that the complaint as amended failed to state a cause of action, in a suit to recover damages for alleged fraud, plaintiffs appeal.
The complaint contains 27 causes of action seeking damages caused by the alleged fraud of the defendants. Plaintiffs summarize the allegations of the first cause of action in substance as follows:
A corporation known as the Rincon Oil Company had for several years prior to 1942 been the lessee of certain tidelands from the State of California under a lease known as Oil and Gas Lease No. 82. The land leased was submerged in the Pacific Ocean and located in the Rincon Oil Field, Ventura county. in 1932 the Rincon Oil Company constructed a steel island structure and derrick upon the leased property about one-half mile west of the shore line for the purpose of drilling for oil. The island was entirely artificial, and the Rincon Oil Company and the General Petroleum Corporation had certain drilling equipment and tanks located thereon.
In 1938 plaintiff Sutter was interested in developing certain other oil property in the same oil field, and defendants learned of this fact. Pursuant to a common plan to induce Mr. Sutter to take over the adjacent lease and steel island the defendants represented that the island had been constructed according to certain plans and specifications shown to Mr. Sutter. They also represented that the engineers of General Petroleum Corporation had recently made a thorough inspection of the island and that it was in good condition, properly designed and constructed to support the equipment necessary for the drilling of additional wells. They further represented that the lease held by the Rincon Oil Company could be assigned. Defendant General Petroleum Corporation promised that it would rent to a corporation to be organized by Mr. Sutter the drilling equipment located on the island for $25 per day, and that no charge would be made while the equipment was not being used; also that General Petroleum Corporation would purchase all of the oil produced from the property and supply all water which might be necessary to operate the property. It was further represented that General Petroleum Corporation would furnish Mr. Sutter with all available engineering and geological information that it had concerning the oil field. All of these things were essential to the successful operation of the field. This was especially true so far as the renting of the equipment was concerned, because the cost of buying equipment would have been so great as to render the venture impracticable.
The aforementioned representations and promises were relied upon by Mr. Sutter and were made for the express purpose of inducing him to abandon his other project, organize a new corporation to take over the above-mentioned lease and to purchase the steel island structure and equipment owned by Rincon Oil Company. All of the representations were false and the promises were made with no intention of performing them. The island structure was not constructed in accordance with the plans exhibited to Mr. Sutter and was not properly and safely designed; but on the contrary the under-water portion was constructed of short pieces and scraps of steel welded together in an unsafe and unsound manner, which facts defendants knew. In addition, the girders were partially eroded and cut where they entered the occan floor. Mr. Sutter could not with reasonable diligence have discovered the true state of facts for the reason that the under-water portion of the structure was covered with marine growth, and defendants told Mr. Sutter that the marine growth should not be removed. They also stated to him that an examination was unnecessary because one had recently been made by defendant General Petroleum Corporation. Mr. Sutter, who was unfamiliar with the design and construction of steel structures of the type here involved, relied upon the representations of defendants.
Prior to 1939 and unknown to Mr. Sutter a portion of the steel island had collapsed into the ocean and had been reconstructed and restored by defendants. At that time defendants learned that the structure had been weakened but concealed this fact from Mr. Sutter, who did not learn of the prior collapse of the structure until April 15, 1939.
Because of the above representations and promises Mr. Sutter organized a California corporation known as Rincon Development Company for the purpose of taking over the lease above mentioned and purchasing the island and equipment hereinbefore described. Subscriptions were taken for stock in the new corporation, which took possession of the island and commenced drilling operations January 8, 1939. In con Development Company entered into a contract with Rincon Oil Company for the purchase of the island and equipment on January 16, 1939, and a contract was entered into with General Petroleum Corporation for the rental of the drilling equipment on February 1, 1939. Although the defendants had promised to procure the consent of the State of California to the assignment of the aforesaid oil lease, on February 8, 1939, the State refused to consent to such transfer. As a result of this refusal Rincon Development Company was unable to proceed with drilling operations or to issue its capital stock.
Since Rincon Development Company did not have a lease, defendants promised to and did deliver to Mr. Sutter all of the stock of the Rincon Oil Company and agreed with him that this stock should be reissued to the subscribers to stock of the Rincon Development Company and to the general public. Certain assets of the Rincon Oil Company were then transferred to defendants Pauson Bros., Inc., and resold to Rincon Oil Company. General Petroleum Corporation promised that it would enter into the same contractual relations with Rincon Oil Company as it had theretofore promised to enter into with Rincon Development Company. Thereafter the stock of Rincon Oil Company was reissued to the subscribers for stock in Rincon Development Company and to the general public. New officers and directors were elected by the Rincon Oil Company and drilling operations were continued on the lease. On April 9, 1939, an oil well was brought in and placed on production. Prior to this date and during the drilling of such well Rincon Oil Company called upon the General Petroleum Corporation to furnish the engineering and geological assistance which it had promised, but the latter failed so to do. Also, during said period Rincon Oil Company requested General Petroleum Corporation to enter into agreements for the rental of drilling equipment, furnishing of water and the purchase of oil, but corporation refused to enter into any of said agreements, as it had promised.
On May 5, 1939, Geneal Petroleum Corporation offered to purchase oil on a day-to-day basis, and because of the location of the steel island Rincon Oil Company was unable to dispose of its oil other than through defendant General Petroleum Corporation. On May 16, 1939, General Petroleum Corporation in violation of its promises, gave notice that its drilling equipment would be removed from the island unless purchased by Rincon Oil Company. Since Rincon Oil Company was financially unable to purchase other equipment it was compelled to and did purchase the equipment on May 18, 1939. On May 16, 1939, General Petroleum Corporation canceled and repudiated its contract to purchase oil and thereafter refused to purchase any oil from or supply any water to Rincon Oil Company.
On January 8, 1940, because of its defective condition as described above, the steel structure together with the derrick, tanks, machinery and equipment collapsed into the ocean and became a total loss. Rincon Oil Company employed salvage crews and divers to remove the wreckage from the ocean floor, at which time Mr. Sutter first learned that the structure was not properly and safely designed and constructed, as represented by defendants, but was in fact constructed in an inferior and unsound manner. Because of the collapse of the steel structure Rincon Oil Company was prevented from fulfilling the terms of Oil and Gas Lease No. 82 and the same was terminated by the State of California on January 14, 1942.
The steel structure had at all times appeared to be stable, sound and safe, and Mr. Suttler in reliance upon the representations and promises of the defendants devoted all of his time to the development of the property for a period of eighteen months from and after January 8, 1939. The reasonable value of Mr. Sutter’s services is the sum of $500 per month, and he expected to be compensated therefor out of the profits of the Rincon Oil Company; but by reason of the alleged fraud of defendants Mr. Sutter was prevented from obtaining any compensation whatever, to his damage in the sum of $9,000. At all times above mentioned defendants J. W. Pauson and Pauson Bros., Inc., were stockholders in the Rincon Oil Company. Each plaintiff in the other 26 causes of action was an investor in the Rincon Oil Company. It was also alleged in each of the other causes of action that the defendants entered into a plan and conspiracy to induce each plaintiff by fraudulent means to purchase stock in a corporation to be organized by Mr. Sutter, which corporation was to be organized for the purpose of purchasing the oil and gas lease, the structure, derick, machinery and equipment described in Count 1 of the complaint. Also, that plaintiffs relied upon the fraudulent representations, statements and promises mad by defendants and were induced to and did invest in the stock of Rincon Oil Company because of such representations; and that by reason of the collapse of the structure and the cancellation of the lease the investment of each plaintiff was rendered worthless and of no value, all to the damage of each in the amount he had invested.
There are two questions presented for our determination which will be stated and answered hereunder seriatim:
First: Was the allegation in the complaint that plaintiff Sutter received no compensation for his services ‘but expected and intended to be compensated therefor out of profits’ of the corporation which profits were to be brought about by his efforts a sufficient allegation of damages to permit him to recover?
This question must be answered in the negative. There is not any allegation in the complaint that plaintiff Sutter (1) was a stockholder in Rincon Oil Company or (2) had any contract or agreement with the company to compensate him for his services. Hence the allegation relative to his alleged loss is entirely speculative, indefinite and uncertain and insufficient to support a judgment for damages. (See Ramsey v. Penry, 53 Cal.App.2d 773, 128 P.2d 399, 401.) In Ramsey v. Penry, supra, an action was brought for fraud growing out of an attempt to sell stock of a corporation which plaintiff had caused to be organized and to which he had assigned a contract giving him the exclusive right to purchase and operate certain soil renovators. The trial court originally awarded damages in favor of the plaintiff amounting to $7500 on the theory that defendant’s fraud had destroyed the value of plaintiff’s interest in the corporation. A motion for new trial was made, whereupon new findings were entered by the court which completely changed plaintiff’s theory of the case. The trial judge, in an opinion on the motion for a new trial, stated: ‘Damages were allowed at the original trial upon the theory that plaintiff had been deprived of 7,500 shares of stock of the part value of $1.00 a share, and was damaged accordingly * * *. However, upon further consideration, on the motion for new trial herein, we are of the opinion that plaintiff’s damage is more properly measured by his loss of time and money in his efforts to promote the enterprise, which the acts of the defendant have cut off. What profits plaintiff might have made are speculative and uncertain. The loss of time and money is both definite and certain, and we have found it to be $3,750.00.’ In reversing the decision of the trial court Mr. Justice Marks said, 53 Cal.App.2d at page 778, 128 P.2d at page 402:
‘In considering the measure of damages applied here we must observe that plaintiff had no agreement with any one for repayment of any money spent by him in organization expenses or promotion of sales of stock in the corporation. Nor was he to be compensated for time spent in those activities by payment of anything for those services. The only way in which plaintiff could have been compensated for those expenditures of time and money was by receiving the stock placed in escrow for him under the permit of the Commissioner of Corporations.
‘The hope of plaintiff to derive any profit from the venture is dependent on the happening of three major contingencies: (1) The sale of sufficient stock to cash purchasers so that ‘15,000 in cash could be deposited from such sales with the escrow holder. Before the deposit of such sum in escrow no money could be released to the corporation. (2) The successful operation of the soil renovators. (3) Sufficient contracts with agriculturalists for renovation of soil at prices that would return a profit to the corporation.’
There is no allegation in the complaint to show that plaintiff Sutter was a ‘servant’ or Rincon Oil Company, and therefore section 3002 of the Labor Code St.1937, p. 262, is not applicable to the present case.
Second: Did the complaint or any count thereof state a cause of action in favor of any or all of the plaintiffs? This question must likewise be answered in the negative and is governed by this general principle of law: If a wrong is primarily against a corporation redress must be sought by the corporation, and a stockholder or body of stockholders cannot sue as an individual or individuals in their own names. This rule applies although the injury to the corporation may incidentally result in the destruction or depreciation of the value of the stock of the corporation. There is an exception to the general rule where a derivative action by a stockholder is allowable. (Anderson v. Derrick, 220 Cal. 770, 774, 32 P.2d 1078; Difani v. Riverside County Oil Co., 201 Cal. 210, 215, 256 P. 210; Nighbert v. First National Bank of Bakersfield, 26 Cal.App.2d 624, 631, 79 P.2d 1105; American Trust Co. v. California, etc., Ins. Co., 15 Cal.2d 42, 66, 98 P.2d 497. See also 13 Fletcher Cyclopedia Corporations [1943], p. 268 et seq., sec. 5911, and 18 C.J.S. (1939) Corporations, p. 1272, § 559.)
Applying the foregoing rule to the facts in the present case, the only injuries alleged in the complaint may be summarized as follows:
1) Defendant General Petroleum Corporation refused to (a) furnish to Rincon Oil Company engineering and geological assistance, information and advice; (b) enter into an agreement for the rental of drilling machinery to Rincon Oil Company; (c) furnish Rincon Oil Company with all the water required for its operations; (d) purchase all oil produced by Rincon Oil Company, except on a day-to-day basis; (e) purchase after May 16, 1939, any oil from Rincon Oil Company;
2) Threatened to remove its drilling equipment from the lease unless the same was purchased by Rincon Oil Company; and
3) The steel structure, because of its unsound condition, collapsed on or about January 8, 1940, which resulted in the Rincon Oil Company being unable to perform the obligations of its drilling lease, with the consequent termination of same on January 14, 1942.
It is clear that the gravamen of the alleged injuries was an injury to the corporation and not to any individuals or individual stockholder. Therefore, under the general rule stated above the cause of action, if any, was in the corporation and must be instituted by the corporation and in its name, and not by individual stockholders.
Plaintiffs concede that this is not a derivative action. Therefore it is not one that falls within any exception to the general rule.
Neither Pourroy v. Gardner, 122 Cal.App. 521, 10 P.2d 815, Whitten v. Dabney, 171 Cal. 621, 622, 154 P. 312, Turner v. Markham, 155 Cal. 562, 102 P. 272, nor James v. P. B. Steifer Mining Co., 35 Cal.App. 778, 171 P. 117, are applicable to the facts of the present case. In each of the cited cases the injury was one to the stockholder and not to the corporation; hence the stockholder was permitted to maintain the action.
For the foregoing reasons the judgment is affirmed.
MOORE, P. J., concurs.