Opinion
Rehearing Denied Nov. 1, 1943.
Hearing Granted Dec. 7, 1943.
Appeal from Superior Court, Los Angeles County; Ruben S. Schmidt, Judge.
Action by Edith S. Wulfjen against O. L. Dolton, Jr., Lindley W. Potts, Helen King, and Concrete Homes Corporation for judicial decree that defendants were holding money for use and benefit of the defendant corporation as well as for plaintiff and other creditors, and that a receivership be appointed, wherein third named defendant filed a cross–demand against the defendant corporation. From an order granting a nonsuit, plaintiff appeals.
Affirmed.
See, also, Cal.App., 141 P.2d 927. COUNSEL
Thomas F. McCue and Mildred L. Zingals, both of Los Angeles, for appellant.
Daily & Gallaudet and Edward Gallaudet, all of Glendale, for respondents Dolton and Potts.
Paul Angelillo, of Los Angeles, for respondent King.
OPINION
WHITE, Justice.
This is an appeal from an order granting a non-suit, duly entered in the minutes of the court. Such an appeal is authorized because the order granting the non-suit, in its legal effect, is the equivalent of a judgment of non-suit. Lewis v. Hammond Lumber Co., 114 Cal.App. 390, 391, 300 P. 49.
The record reveals that on January 21, 1938, the defendants Dolton, Potts and King executed and delivered to the American National Bank of Santa Monica their promissory note in the sum of $5,000. On January 27, 1938, Concrete Homes Corporation was organized. The aforesaid defendants, who signed the promissory note, were officers and directors of the newly formed corporation. On March 1, 1938, the defendants Dolton, King and Potts addressed a letter to the corporation, which included among other things, an offer to the corporation for the transfer of certain assets from them to the corporation in exchange for certain of the capital stock as in such letter provided. The portion of the letter herein applicable read as follows: "The undersigned, Lindley W. Potts and Oliver L. Dolton, Jr., have advanced, and may hereafter advance, for working capital and the general purposes of the business, such sum of money, as may be necessary for such purposes, not in excess of Fifteen Thousand Dollars ($15,000), including advances made after December 31, 1937, and before acquisition of the business by you, and it is understood that such advances will be repaid by you to the undersigned out of your first net earnings. You will, as such advances are made, evidence the obligation to repay them to said undersigned persons by your promissory note or notes bearing interest at six per cent (6%) per annum, payable out of net earnings. It is understood that you will not assume any advances made by any of the undersigned for the benefit of the business, prior to December 31, 1937. * * * Signed: O. L. Dolton, Jr., Helen King, Lindley W. Potts."
The offer contained in said letter was accepted by the corporation and thereupon application was made to the Commissioner of Corporations of the State of California for permission to issue stock in accordance with the terms of the aforesaid offer. The permit was granted and the stock issued in escrow.
On June 20, 1938, defendants Dolton, Potts and King constituted the entire board of directors of the corporation and on that date executed a consent to hold and waiver of notice of a special meeting of the board of directors, and convened such special meeting. There were other holders of stock and neither the vote nor written consent of any stockholder, other than the three above named defendants, was ever obtained to the holding of such meeting or to any of the actions taken thereat.
Pursuant to a resolution which the board of directors adopted at such meeting, the bank made a loan to the corporation in the sum of $8,500, out of which $5,025 was used to pay the aforesaid note of the three defendants above referred to and executed prior to the incorporation of Concrete Homes Corporation, plus accrued interest, and a further sum of $1,275 was utilized to repay an advance made to the corporation by defendant Dolton. At the time of the aforesaid director’s meeting, the adoption of the resolution, receipt of the loan and payments of the $5,025 and $1,275 items were made, the corporation had not earned any income, either net or gross. It may fairly be stated that at no time here material did the corporation have any net income.
Plaintiff herein is a judgment creditor of defendant Concrete Homes Corporation, Inc., having on November 14, 1940, recovered a judgment against such corporation in the principal sum of $6,950 with accrued costs in the additional sum of $515.10. Said judgment at the time of the commencement of this action had become final. Pursuant to said judgment, a writ of execution issued out of the superior court on January 16, 1941, and it is conceded that the same was served upon defendants Dolton and King on the dates alleged in the complaint and that no service thereof was made upon defendant Potts. The complaint discloses that the writ was served on defendant King on January 18, 1941, and on defendant Dolton on January 20, 1941. The writ of execution was returned by the sheriff wholly unsatisfied. On February 7, 1941, defendants Dolton and King were examined in supplementary proceedings at which time each denied any debt or obligation to Concrete Homes Corporation and each claimed an interest in the property of such corporate judgment debtor adverse to it. Following the refusal of defendants Dolton and King as officers of the corporation to commence an action on behalf of the corporation against themselves as individual debtors of said corporate judgment debtor to collect moneys claimed by plaintiff herein as judgment creditor to be due from defendants Dolton, Potts and King, this action was commenced by plaintiff wherein she seeks a judicial decree that the defendants are holding the sum of $6,300 for the use and benefit of defendant corporation as well as for plaintiff and other creditors of such corporation; that a receiver be appointed for the purpose of collecting and receiving from defendants Dolton, Potts and King the aforesaid sum. In general plaintiff’s complaint may be said to be based on the hereinbefore quoted letter written by defendants Dolton, Potts and King to the corporation under date of March 1, 1938, it being plaintiff’s contention that because of the provisions of such letter the named defendants were not entitled to receive for themselves the proceeds or any of the proceeds of the aforesaid loan made from the bank.
Defendants King and Potts answered by way of general denial and each urged as a separate and affirmative defense that plaintiff’s complaint did not state a cause of action against them, while defendant Dolton’s answer set up a general denial and by way of affirmative defense alleged a cross-demand against defendant corporation in the sum of $18,990 and further that plaintiff’s complaint did not state facts sufficient to constitute a cause of action against him.
After having been duly served with summons and complaint, the defendant corporation failed to answer and at the trial its default was entered and judgment as prayed ordered against it. The cause then proceeded to trial as to the individual defendants. After plaintiff had presented her evidence and rested her case, the motion for a non-suit, from which this appeal is taken, was granted in favor of all three defendants.
Appellant first contends that the letter of March 1, 1938, written by respondents Dolton, Potts and King, constituted a valid and binding contract between them and defendant corporation, under the terms of which any moneys advanced by respondents to the corporation after December 31, 1937, not in excess of $15,000, could only be repaid to respondents out of net earnings; that therefore respondents were not entitled to be repaid any of such advancements because the corporation had no net earnings. The minutes of the first meeting of the board of directors of defendant corporation on March 2, 1938, which were introduced into evidence, show that respondents herein addressed a letter to the corporation whereby they agreed to transfer to the latter all of their rights under certain licenses relating to certain United States Letters Patent covering processes used in and relating to the construction of concrete or part-concrete buildings, in consideration of the corporation delivering to respondents all of its capital stock consisting of 2,500 shares. In the aforesaid letter of March 1, 1938, there also appears the following: "By your acceptance of this offer you will undertake to assume all of the liabilities and obligations of the business incurred after December 31, 1937 (provided that liability for advances shall be payable only out of net earnings as above set out)".
It seems clear to us that any amounts advanced to the corporation by respondents after December 31, 1937, up to the amount of $15,000 were not to be repaid under the agreement except from net earnings of the corporation. The record conclusively shows that the $5,000 obtained by respondents on their note and used in furtherance of the business was obtained by them on January 21, 1938, at which time the corporation was not yet in existence. Manifestly the advancement was one contemplated by respondents’ letter of March 1, 1938, and was to be repaid only out of net earnings of the corporation. Respondents contend that the words in the letter "and before acquisition of the business by you", authorize them to be repaid, not exclusively from net earnings for any moneys advanced after the acquisition of the concrete construction business from respondents by acceptance of the same on March 2, 1938. We are not in accord with such contention because respondents’ letter of March 1st definitely states that they not only advanced but "may hereafter advance, for working capital and the general purposes of the business * * *". This would seem to clearly indicate that not only the advancements made prior to March 1st, but subsequent advancements to be made by respondents were to be repaid only out of net earnings of the corporation.
Nevertheless, whatever rights the corporation might have to recover these repaid amounts, appellant’s right to prevail in this lawsuit as a judgment creditor of defendant corporation is dependent upon sections 363 and 366 of the Civil Code, for, as stated by her counsel at the trial, it "grows out of the liability provided by sections 363 and 366 of the Civil Code".
The first mentioned section clearly states that a creditor may maintain the action therein contemplated "if the debt or claim arose prior to the time of such violation". The liability, if any, imposed upon respondents arose on June 20, 1938. The record clearly indicates that appellant’s claim against the corporation arose subsequent to that date. Therefore, appellant, as a judgment creditor of the corporation cannot avail herself of the remedy prescribed by section 363 of the Civil Code against the individual directors of the corporation. Furthermore, respondent Potts, never having been served with the writ of execution, could not have become liable.
The provisions of section 366 of the Civil Code inhibit a corporation from making "any loan of money or property to or guarantee the obligation of" a director, officer or shareholder, save and except when such loan or guarantee is made by the "vote or written consent of the holders of two-thirds of the shares" of all stock, exclusive of the shares held by "the benefited director, officer or shareholder". The section then provides that any director, shareholder or officer benefiting through such inhibited loan or guarantee shall be liable to the corporation for the amount involved therein. While this section has not been construed or interpreted by the courts of this state, appellant relies upon the case of In re Globe Drug Co., Inc., 9 Cir., 104 F.2d 114, 116. The cited case involved a suit instituted by a trustee in bankruptcy against an officer and director of a bankrupt corporation. The case, however, is not analagous to the one at bar because in the cited case the bankrupt corporation co-signed the individual officer and director’s notes but the latter received the proceeds and not the corporation. This point is emphasized by the court in the following language: "The bankrupt received nothing for the payments made by it on the Stelzner note, or for its note to the bank". In the instant case the corporation and the individual respondents jointly signed the $8,500 note as co-makers, but the corporation received the money. The individual directors therefore were in truth the guarantors of the corporation’s obligation. The prohibtion contained in section 366 of the Civil Code declares that the corporation shall not "make any loan of money or property to or guarantee the obligation of" a director, officer or shareholder. Under the circumstances here present it cannot, therefore, be said that Concrete Homes Corporation, Inc., loaned any money to respondents or guaranteed the obligations of any of them. Furthermore, the record herein discloses that respondent Dolton, according to financial statements introduced in evidence, paid to the corporation more money in the aggregate than he received from it, and respondent King, being at the most a guarantor of respondent Dolton’s obligation, she is entitled to the benefit of the offsets claimed by him.
Finally it must be held that assuming as we have heretofore pointed out that respondents may be indebted to the corporation for certain amounts of money under the terms of their contract contained in their letter to the corporation under date of March 1, 1938, appellant has an adequate remedy at law pursuant to the provisions of sections 720 and 544 of the Code of Civil Procedure, subject possibly to the provisions of section 368 of the same code, and no reason exists for equitable intervention. In any event, her equity suit herein being predicated upon sections 363 and 366 of the Civil Code she is, as we have heretofore pointed out, not entitled to the relief provided for in the last mentioned code sections.
Bearing in mind the familiar rules applicable when the court is ruling on a motion for a non-suit, and the limitations upon its powers in that regard, there is nevertheless no evidence in the record authorizing a recovery by appellant in the cause of action with which we are here concerned.
For the foregoing reasons the order granting a non-suit is affirmed.
YORK, P. J., and DORAN, J., concur.