STARK v. COKER ET AL.
This is an appeal from a judgment against appellants for one–half of the principal sum of a promissory note, plus accrued interest and attorney's fees, which note was made payable to Hilda A. Stark and Emil Stark as joint tenants and executed by Southern California Home Building Company. The judgment against John B. Coker and Regina W. Coker is based on the theory that the corporation was their alter ego.
The Southern California Home Building Company (hereinafter referred to as the corporation) was incorporated on October 2, 1923. Its permit to issue stock was received about October 25, 1923. A detailed statement of its original issue of stock and subsequent transfers, offered in evidence by appellants, was erroneously excluded by the trial judge on objections of plaintiff. However, the prejudice resulting from this ruling was to a certain extent reduced by the introduction in evidence of an incomplete statement of stock issued and transferred, which evidence was received without objection during the early days of the trial.
This evidence shows that the corporation originally issued 150 shares of its capital stock of an undisclosed par value. Ten shares of stock were issued to John B. Coker and ten shares to M. B. Thornton on October 30, 1923. Twenty shares were issued to J. B. Coker on April 26, 1924. Thirty–two shares were issued to J. B. Coker on April 26, 1924. The record contains the following as to other stock issues and transfers: “Two shares issued to J. B. Coker on the 26th of April, 1924. One share issued to J. B. Coker on the 20th day of August, 1924. One share issued to Regina W. Coker, transferred from J. B. Coker to Regina W. Coker, on October 4, 1924. Seventy–three shares issued to J. B. Coker, transferred from R. D. Shepard to Hilda A. Henderson and transferred from Hilda A. Henderson to J. B. Coker on June 3, 1927.”
The record shows that for a time Hilda A. Stark's name was Hilda A. Henderson; that she married plaintiff either in the latter part of 1924 or in 1925. It also appears that Mrs. Stark only owned about twenty–two shares of the corporate stock so part of the foregoing testimony is to that extent erroneous. However, it sufficiently appears from the record that Mr. and Mrs. Coker did not own a majority of the stock until June 3, 1927.
It is probable that R. D. Shepard was secretary of the corporation until December 24, 1926, when he resigned and Mrs. Coker was appointed to succeed him. The record on this question is not entirely clear. John B. Coker was at all times president of the corporation. He managed its affairs and kept its books. He first received a salary of $50 per week. This was increased to $75 per week in 1927 and continued through 1932. In 1934 he received about $1,100 salary, which is probably the last year he was paid. He received nothing else from the corporation. Mrs. Coker received a salary of $25 per week as secretary, probably through 1934.
The business of the corporation was that of building and selling houses, lending money, buying and selling notes, mortgages, deeds of trust and other securities. Prior to 1929, it built and sold over two hundred houses, financed the construction of others and did considerable business in securities. In common with many other corporations conducting a like business, the value of its assets commenced to shrink in 1929. Thereafter its business was confined to efforts by Coker to liquidate its affairs. Much of its assets consisted of second incumbrances on properties it had sold and, perhaps, the ownership of residences upon which there were incumbrances held by others. In 1934 it held the record title to various parcels of real property which probably were incumbered. The value of the equities of the corporation in those properties in that year is not disclosed. Later, just when does not appear, these properties were lost so that finally the corporation had no assets at all.
Mrs. Stark, then Mrs. Henderson, had her first financial dealings with the corporation in 1924. She loaned it $8,000, which was evidenced by its note dated July 10, 1924. This note was secured by the pledge of securities. This loan was negotiated on the part of the corporation by Edwin S. Kerr, who was then a stockholder in it. Insofar as the record shows, the only connection Coker had with this loan was to sign the note to Mrs. Henderson (Stark) as president of the corporation.
Mrs. Stark's mother loaned the corporation $4,000 and took its note dated April 30, 1925. She made another loan of $2,200 in October of 1925. The mother died and Mrs. Stark succeeded her as owner of the indebtedness.
Various payments were made on these indebtednesses and other loans were made by Mrs. Stark, the last of which was $350, on June 1, 1928. The net result of these transactions left the corporation indebted to Mrs. Stark in the sum of $12,000. From evidence in the record we believe we are safe in assuming that the notes evidencing this indebtedness were secured by a deed of trust. All of this money went into the treasury of the corporation and was used by it in its business. Mr. and Mrs. Coker received none of it. Insofar as the record shows, these transactions were made in good faith, in the ordinary course of business, without any suggestion of fraud or deceit on the part of anyone. The corporation was then doing a rather considerable business and there is nothing in the record to suggest its future insolvency when the last loan was made on June 1, 1928. Of course, had the parties then had knowledge of the small value to be given second encumbrances after 1929, no one could have regarded the corporation a good credit risk. This lack of foresight on the part of Mrs. Stark and the officers of the corporation was common, not only to them, but to many other citizens of this country.
It is admitted that no stockholders' or directors' meetings were held after (probably) 1930; that thereafter no board of directors was elected or functioned; that thereafter there were no minutes of meetings of stockholders or directors; that thereafter the affairs of the corporation and their liquidation were controlled by and in the hands of Coker.
Interest on the indebtedness was regularly paid to Mrs. Stark monthly until at least the latter part of 1933, though at progressively reduced rates, which Mrs. Stark testified she agreed to.
The foregoing summary is taken largely from the testimony of Coker, both while under cross–examination by plaintiff under the provisions of section 2055 of the Code of Civil Procedure, and while he was a witness on his own behalf. There is no other evidence concerning the structure of the corporation and the ownership of its stock with the exception of the evidence of Mrs. Stark that at one time she was a stockholder. Her description of her dealings with the corporation is very meager. Of course, plaintiff is not bound by the evidence given by Coker but as this is the only evidence in the record on these important questions plaintiff must rely upon it to support his judgment against Mr. and Mrs. Coker upon the ground that the corporation was their alter ego.
Under date of January 29, 1934, the corporation executed its promissory note in the principal sum of $12,000, due January 1, 1936, payable to Emil Stark and Hilda A. Stark as joint tenants with full rights of survivorship. On the bottom of the note, under the signature, appears the following: “This is a renewal of a Trust Deed Note recorded in Book 225 at page 355.” This is the first time Emil Stark's name appears in the transaction. He testified that he advanced Mrs. Stark, then Mrs. Henderson, $4,500 to make up the amount of her original loan to the corporation. He had no dealings with the corporation or Mr. or Mrs. Coker concerning the several loans and the deed of trust of January 29, 1934, and no claim is made that either Mr. or Mrs. Coker, or any one else, connected with the corporation other than Mrs. Stark, knew that he had any financial interest in any of the transactions prior to January 29, 1934. The note was secured by a trust deed of even date which was duly recorded, in which the Southern California Home Building Company was trustor, Hilda A. Stark was trustee, and Emil and Hilda A. Stark were beneficiaries. It is undisputed that this note and deed of trust were given to renew the indebtedness of the corporation to Mrs. Stark and that there was no other consideration for their execution.
The next document of particular interest is a reconveyance of the property described in the deed of trust of January 29, 1934. It bears the signature “Hilda A. Stark” and an acknowledgment before a notary public. It is dated March 14, 1936. It was recorded on March 23, 1936. This reconveyance was purportedly executed by Hilda A. Stark, trustee, under the deed of trust.
Probably it was during the last of August, 1937, that Hilda A. Stark, as trustee, Hilda A. and Emil Stark instituted suit against Southern California Home Building Company to cancel the reconveyance on the ground of lack of consideration and that Hilda A. Stark never “executed or acknowledged the same.”
The findings in that case contain the following:
“IV. That it is true that plaintiff, Hilda A. Stark, as Trustee, did on March 14, 1936, execute, acknowledge and deliver to defendant said full reconveyance.
“V. That it is true that on the 23rd day of March, 1936, there was recorded in Book 491, at page 87, of Official Records of the County of San Diego, State of California, a full reconveyance of the property mentioned in said deed of trust, which said reconveyance was executed, acknowledged and delivered by plaintiff, Hilda A. Stark, as Trustee, on or about March 14, 1936.
“VI. That it is true that the plaintiff. Emil Stark, had no notice or knowledge of the execution, acknowledgment and delivery of said full reconveyance by the plaintiff, Hilda A. Stark, as Trustee.”
The trial court drew the following conclusions of law from those findings:
“I. That said full reconveyance so executed and delivered was a valid and effectual reconveyance and binding upon the plaintiff, Hilda A. Stark.
“II. That the plaintiff, Hilda A. Stark, is entitled to take nothing by reason of her said complaint, and that the defendant, Southern California Home Building Company, a corporation, is entitled to a judgment against the said plaintiff for its costs herein incurred.
“III. That by reason of the facts set forth in finding number VI the judgment herein should be without prejudice to the right of the plaintiff, Emil Stark, to establish or determine his rights, if any, in and to the real estate covered by said trust deed, in another section.”
Judgment was entered on November 30, 1938, that Hilda A. Stark take nothing by the action, but “that this judgment shall be without prejudice to the right of the plaintiff, Emil Stark, to establish his right, if any, in and to the real estate covered by the trust deed involved herein in another action. * * *”
The present action was filed on September 5, 1939. It sought foreclosure of the deed of trust, judgment against the corporation and Mr. and Mrs. Coker in the sum of $6,000, plus interest from January 1, 1937, and attorneys' fees, for sale of the property described in the deed of trust and for a deficiency judgment against the three named defendants.
The answer of appellants admitted the corporate existence of the corporation and its execution of the note and deed of trust of January 29, 1934, and placed in issue the other material allegations of the complaint. It also pleaded the judgment of November 30, 1938, as a bar to the action.
During the trial plaintiff filed an amendment to his complaint, in which he alleged that the security described in the deed of trust had been lost and was valueless. He also amended the prayer of his complaint by omitting the portion seeking foreclosure of the deed of trust. Thereafter the action proceeded in the trial court upon the theory that it was an action to obtain a money judgment on a promissory note though the allegations which supported the original prayer for foreclosure remained in the complaint as amended.
Appellants amended their answer by alleging an accord and satisfaction entered into between J. B. Coker and Hilda A. Stark whereby the debt was satisfied and the reconveyance of the security was accomplished. They filed a further answer to the amendment to the complaint wherein they pleaded the bar of the statute of limitations to the portion of the action seeking judgment on the note without foreclosure.
The trial court found in favor of plaintiff and rendered the judgment we have outlined. The judgment against Mr. and Mrs. Coker was rendered on the theory that the corporation was their alter ego and the conduit through which they conducted their business. There is no other ground on which this portion of the judgment can be sustained.
Appellants rely upon the defense of an accord and satisfaction which they maintain was negotiated with Mrs. Stark and was consummated by the reconveyance dated March 14, 1936, and various payments made to her both before and after that date.
Coker testified that in 1935 he negotiated the accord and satisfaction with Mrs. Stark; that by its terms he agreed to pay or be responsible for the payment of $3,000 in full satisfaction of the indebtedness evidenced by the trust deed note; that $1,537.56 was paid on account of the $3,000, leaving a balance which he owed of $1,464.44; (the sum total of these amounts is $3,002); that the reconveyance was given in carrying out this agreement; that he was to give a note for $3,000. but that he delayed its execution until their delivery of the corporation note and deed of trust; that the last payment was made on November 10, 1937; that payments were suspended because of the suit to cancel the reconveyance, but that he still recognized the indebtedness. He produced a number of checks drawn by the corporation payable to Mrs. Stark, which he testified represented payments made on the $3,000. On some of these checks the words “To apply on Principal,” and other words to the same effect, appear over the signature of Mrs. Stark.
Mrs. Stark testified that there had been no agreement to compromise the indebtedness; that her name signed to the reconveyance was a forgery; that she had neither signed nor acknowledged that instrument. She further testified that the $1,537.56 was paid to her as interest on the $12,000 note; that the words “To apply on Principal,” and other words of similar import appearing over her signature on the backs of some of the checks, were not on the checks when she endorsed and cashed them.
It should be observed that Mrs. Stark appeared in the deed of trust in two capacities. She was trustee and also one of the beneficiaries.
We find nothing in the deed of trust empowering the trustee to compromise the indebtedness nor to execute a reconveyance except “upon payment of all sums secured hereby and (the) surrender to Trustee, for cancellation, of this Deed of Trust and the note secured hereby,” and “upon receipt from beneficiary of a written request reciting the fact of such payment and surrender.” We therefore conclude that Mrs. Stark, as trustee, had no authority to reconvey the security without payment of the obligation and a request from the beneficiaries. Of course, if Coker's evidence be accepted as true, Mrs. Stark might be estopped from disputing the validity of the reconveyance, and her consent to it in her capacity as beneficiary might be presumed. However, this question is not presented as she did not seek or recover any judgment against appellants. There is no basis for invoking an estoppel against plaintiff as he testified he was in total ignorance of any negotiations conducted by Mrs. Stark, received no part of the payments, and did not know of the reconveyance until some time after it had been recorded.
The next question is the authority of one co–tenant to enter into an accord and satisfaction and compromise a debt without the knowledge and consent of the other.
The right of one joint tenant to dispose of a specific portion of the co–tenancy property was considered in Swartzbaugh v. Sampson, 11 Cal.App.2d 451, 54 P.2d 73, 75, where it is said:
“The case of Stark v. Barrett, 15 Cal. 361, discusses the rights of a grantee of one cotenant of a specific parcel of property. It is there said: ‘The case has been argued as though the question presented was to be determined by the rules of the common law, and in that view we have examined it. For its determination, considered by the common law, it is immaterial whether the grantees took the land embraced in their grant as joint tenants or as tenants in common. During the lives of the tenants, the rules regulating the transfer of their interest are substantially the same, whether they hold in joint tenancy or in common. Neither a joint tenant nor a tenant in common can do any act to the prejudice of his cotenants in their estate. This is the settled law, and hence a conveyance by one tenant of a parcel of a general tract, owned by several, is inoperative to impair any of the rights of his cotenants. The conveyance must be subject to the ultimate determination of their rights, and upon obvious grounds. One tenant cannot appropriate to himself any particular parcel of the general tract; as, upon a partition, which may be claimed by the cotenants at any time, the parcel may be entirely set apart in severalty to a cotenant. He cannot defeat this possible result whilst retaining his interest, nor can he defeat it by the transfer of his interest. He cannot, of course, invest his grantee with rights greater than he possesses. The grantee must take, therefore, subject to the contingency of the loss of the premises, if, upon the partition of the general tract, they should not be allotted to the grantor. Subject to this contingency, the conveyance is valid, and passes the interest of the grantor. And, this we consider the result of the several cases cited by the counsel of the appellants. They go to the extent that the conveyance can have no legal effect to the prejudice of the cotenant, not that it is absolutely void, that it is ineffectual against the assertion of his interest in a suit for partition of the general tract, but is good against all others. Until such partition, the grantee will be entitled to the use and possession as cotenant, in the parcel conveyed, with the other owners. (Bartlet v. Harlow, 12 Mass. 348, 7 Am.Dec. 76; Varnum v. Abbot et al., 12 Mass. 474, 7 Am.Dec. 87; Nichols v. Smith, 22 Pick. (Mass.) 316.) * * *’
“It is a general rule that the act of one joint tenant without express or implied authority from or the consent of his cotenant cannot bind or prejudicially affect the rights of the latter. Simpson v. Bergmann, 125 Cal.App. 1, 13 P.2d 531; Oberwise v. Poulos, 124 Cal.App. 247, 12 P.2d 156; Sumner v. Vinson, 211 Ky. 571, 277 S.W. 849; Lawrence v. Fielder, 186 Ky. 324, 216 S.W. 1068.”
While the rule last quoted is subject to certain exceptions, it must be held to cover the question we have before us here. Therefore, it must be held that Mrs. Stark had no power or authority growing out of the relation of the joint tenancy with her husband to compromise or reduce his portion of the joint debt without authority from him either express or implied. It follows that the accord and satisfaction between Mrs. Stark and Mr. Coker could not bind plaintiff.
It is not disputed that all co-tenants or any number less than all may bring an action to protect or enforce the rights of such person or persons in the co–tenancy property. Sec. 384, Code Civ.Proc. This is especially true where, as here, the plaintiff joined his co–tenant as party defendant.
Appellants urge that the judgment of November 30, 1938, is a bar to this action as plaintiff cannot split his demand into separate actions.
Of course, it is generally true, as said in Re Estate of Bell, 153 Cal. 331, 95 P. 372, 376, that:
“The general rule as to res adjudicata is that: ‘Matters which have been judicially determined cannot be again drawn into controversy between the same parties.
“ ‘The judgment of a court having jurisdiction directly upon the point in controversy is, as a plea, a bar; and, as evidence, competent and conclusive as between the same parties and their privies; not only where the subject–matter is in all respects the same, but where the point comes incidentally in question in relation to a different matter.’ Garwood v. Garwood, 29 Cal. 514; Green v. Thornton, 130 Cal. 482, 62 P. 750.
“ ‘An adjudication is final and conclusive not only as to the matter actually determined, but as to every other matter which the parties might have litigated and have had decided as incident to, or essentially connected with, the subject–matter of the litigation, and every matter coming within the legitimate purview of the original action, both in respect to matters of claim and defense.’ Harris v. Harris, 36 Barb., N. Y., 88; Gray v. Dougherty, 25 Cal. 266.”
We need not consider the question of the bar of the judgment as it affects Mrs. Stark as she neither sought nor recovered any judgment in this action. Its effect on the claim of Emil Stark is the only question open for argument.
It is admitted by all counsel that a trial court may withdraw from consideration and withhold from adjudication issues presented in the trial of a case; that such matters may be reserved for further consideration in another proceeding. 15 Cal.Jur. 150. It is rather clear from the findings and judgment in the first action that the trial court intended to withhold from adjudication and reserve for further consideration in another action the question of the effect of the reconveyance on the interest of plaintiff in the security described in the deed of trust. The only question at issue and decided in that action was the fact of the reconveyance. The debt was not an issue. It may be true that the finding and judgment in that case might be conclusive on this plaintiff of the fact that the reconveyance was executed by the trustee, for a fact once adjudicated in an action is binding on the parties and their privies in the same or any other action where the same issue is presented. Shannon v. General Petroleum Corp., 47 Cal.App.2d 651, 118 P.2d 881, and cases there cited. If this rule be given effect here, the only effect of the first judgment is to establish as a fact that the reconveyance was actually executed by the trustee.
It is admitted by all counsel that the release of the security does not necessarily indicate a satisfaction of the debt for which it was given. It will appear from authorities hereafter cited that as the note involved here was a renewal note the original obligation was not extinguished and that the creditors mistook their remedy when they sought to have the reconveyance cancelled, that proceeding being unnecessary.
In United Bank & Trust Co. v. Hunt, 1 Cal.2d 340, 34 P.2d 1001, 1004, it was held that: “As to matters, however, which might have been litigated and decided in a former suit as within the scope of the issues, but which were not actually or expressly in issue and adjudicated, only a presumption is indulged in that they were decided. This presumption is, however, a disputable one * * *.”
In Title Guarantee & Trust Co. v. Monson, 11 Cal.2d 621, 81 P.2d 944, 949, the following rule was announced: “Although it is a general rule that a judgment operates as an estoppel to the maintenance of a subsequent action as between those persons who were parties to the former action, not only as it may affect each issue that actually was raised in such action, but also as to every other issue which properly might have been litigated and determined therein, nevertheless, in each of many jurisdictions, exceptions to that rule have been announced, which include a situation wherein it has appeared that the questioned issue in the subsequent action was neither germane to nor essentially connected with the actual issues that were raised in the former action, even though, with propriety such issues might have been presented therein. 34 C.J. 818, 823. Nor is the rule applicable to rights, claims or demands, although growing out of the same subject matter, but which constitute separate or distinct causes of action, and which were not put in issue in the former action.”
Under the rules thus announced and in view of the reservation in the findings and judgment in the earlier case which presented the sole issue of cancellation of the reconveyance, we must conclude that the judgment in that case is not a bar to this action.
Appellants urge that since the amendment to the complaint seeking judgment on the note without foreclosure was filed more than four years after the due date of the note, that cause of action was barred by the statute of limitations. In support of this argument it is urged that the original action was to foreclose the deed of trust and that the amendment stated a new and distinct cause of action for a money judgment without foreclosure. We cannot agree with this contention. An action to foreclose a deed of trust has as its sole purpose the collection of the debt secured thereby. The action on the note had the same purpose. As the security had been lost and had become of no value it was permissible to sue on the note. As the purpose of the original and amended causes of action was the same no new cause of action was stated.
It follows that the portion of the judgment against the Southern California Home Building Company must be affirmed.
We must next consider the question of the judgment against Mr. and Mrs. Coker. The correctness of that portion of the judgment depends upon the sufficiency of the evidence to support the finding that the corporation was their alter ego. We have already summarized the evidence on that question and will not repeat it.
In order to measure the proper legal effect of this evidence we must bear in mind that the note of January 29, 1934, was given in renewal of a pre–existing indebtedness which had its origin in the note of July 10, 1924, payable to at least one of the payees named in the renewal note.
The effect of a renewal note and mortgage was considered in Craig v. Dinwiddie, 77 Cal.App. 681, 247 P. 516, 519, where the court said: “The giving of the second note in this case, as we have stated, did not change the indebtedness. It only postponed the time when action might be had to foreclose the mortgage given to secure its payment, and in this case, so long as the debt remained alive, if necessary to protect the rights of the mortgagee, equity would set aside the release procured in the manner and under the conditions disclosed by the record and award foreclosure.” It should be observed that the first mortgage and note involved in the above case was not executed to Amanda E. Dinwiddie, but by assignments passed to Amanda E. Dinwiddie and Nellie Dinwiddie as joint tenants and was satisfied of record after the plaintiff Craig had acquired his interest in the mortgaged property. The second note was given and the mortgage securing it (the renewal ran to Nellie Dinwiddie) was recorded after the satisfaction of the first and after Craig took title to the property. It would follow that because the first note in the instant case was made payable to Hilda A. Stark and the renewal note to Hilda A. and Emil Stark as joint tenants, the fact of its being a renewal of a prior indebtedness would not be changed.
Copp v. Millen, 11 Cal.2d 122, 77 P.2d 1093, 1095, was factually similar to Craig v. Dinwiddie, supra, and involved original secured notes which were renewed by another secured note. In deciding the case the Supreme Court quoted the following rule from Tolman v. Smith, 85 Cal. 280, 24 P. 743, where it was said:
“ ‘It is well settled that, in the absence of an agreement to that effect, the payment of one note by another is only conditional, and not absolute, payment. It extends the time for payment until the maturity of the new note, or, as it is said, “suspends” the remedy upon the old note, but does not extinguish it.’ And, 85 Cal. 280, at page 289, 24 P. 743, 746: ‘And so where, as in the case before us, one mortgage is substituted for another, equity will keep the first alive when the interests of justice require it.’
“ ‘By a doctrine closely akin to that of equitable subrogation, and it seems to us one founded in equal equity and reason, the old mortgage, though released, must be substituted for the new and treated as a continuing lien securing the continuing debt.’ American Savings Bank & Trust Co. v. Helgesen, 67 Wash. 572, 122 P. 26, 27, Ann.Cas.1913A, 390.”
Much the same legal situation is found in White v. Stevenson, 144 Cal. 104, 77 P. 828, 831, involving a mortgage given in 1890, and which had been satisfied upon giving a renewal note and mortgage in 1895. The Supreme Court there said: “Upon the facts before the court it should have rendered a decree for the foreclosure of the mortgage of 1890, as prayed by the plaintiff. It was not necessary for him to obtain a decree directing a cancellation of the discharge which he had entered of record in 1895 before commencing an action for its foreclosure (Chester v. Hill, 66 Cal. 480, 6 P. 132); nor was it necessary that a formal direction for canceling the discharge should be entered by the court before rendering the decree of foreclosure.”
As the note of January 29, 1934, was a renewal of a prior note or notes and was thus an extension of the due dates of the earlier debts, we must devote our attention principally to the corporate structure, business and management of the corporation between July 10, 1924, and June 1, 1928, the period covered by the original financial transactions between Mrs. Stark and her mother and the corporation. This is because this indebtedness was not extinguished by the renewal note. It should be borne in mind that the loan by Mrs. Stark of $8,000 on July 10, 1924, and by her mother of $4,000 on April 20, 1925, equalled the total of the unpaid indebtedness on January 29, 1934. The question of the corporation being the alter ego of Mr. and Mrs. Coker, to a large extent, must be determined from the facts disclosing their relation to the corporation during the period of the creation of the original indebtedness which was on and prior to June 1, 1928, more than on January 29, 1934, when the renewal note was executed.
The facts that must be established to justify the conclusion that a corporation was the alter ego of one or more of its stockholders are set forth in Hollywood Cleaning & Pressing Co. v. Hollywood Laundry Service, Inc., 217 Cal. 124, 17 P.2d 709, 711, as follows:
“Whatever may be the rule in other jurisdictions, the rule is well settled in this state that the mere fact one or two individuals or corporations own all of the stock of another corporation is not of itself sufficient to cause the courts to disregard the corporate entity of the last corporation and to treat it as the alter ego of the individual or corporation that owns its stock. In addition it must be shown that there is such a unity of interest and ownership that the individuality of such corporation and the owner or owners of its stock has ceased; and it must further appear that the observance of the fiction of separate existence would, under the circumstances, sanction a fraud or promote injustice. Bad faith in one form or another must be shown before the court may disregard the fiction of separate corporate existence.
“In the leading case of Erkenbrecher v. Grant, 187 Cal. 7, 11, 200 P. 641, 642, the rule is stated as follows:
“ ‘The finding of the trial court that the company acquired the notes because the then holder of them was pressing plaintiff in his capacity as indorser for payment does not negative the separate entity of the company. In the absence of any dishonest motive or intention to accomplish a wrong, and as we have said, none was proven, we fail to discover any objection whatever to plaintiff directing the company to purchase the notes. If it be assumed that he caused their purchase for the reason that it was not then convenient for him to meet his obligations as indorser, there would still be wanting the elements to which we have referred, and the presence of which we hold is essential to justify treating plaintiff and the company as identical––as a unit. 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.’
“In Wood Estate Co. v. Chanslor, 209 Cal. 241, 245, 286 P. 1001, 1002, it is stated: ‘The law is well settled that, in order to cast aside the legal fiction of a distinct corporate existence, it must appear that the corporation is the business conduit and alter ego of its stockholders, and that to recognize it as a separate entity would aid in the consummation of a wrong. In other words, not only must it appear that one man or two men own the stock and control the policies, but it must also be shown that there is such a unity of interest and ownership that the individuality of such corporation and such person or persons has ceased; and it must further appear from the facts that the observance of the fiction of separate existence would, under the circumstances, sanction a fraud or promote injustice.’ See, also, D. N. & E. Walter & Co. v. Zuckerman, 214 Cal. 418, 6 P.2d 251, 79 A.L.R. 329; Minifie v. Rowley, 187 Cal. 481, 202 P. 673; Llewellyn Iron Works v. Abbott Kinney Co., 172 Cal. 210, 155 P. 986; Wenban Estate, Inc., v. Hewlett, 193 Cal. 675, 227 P. 723; Ellet v. Los Altos Country Club Properties, 88 Cal.App. 740, 264 P. 270.” See, also, Davis v. Perry, 120 Cal.App. 670, 8 P.2d 514; In re Estate of Greenwald, 19 Cal.App.2d 291, 65 P.2d 70.
When measured by the foregoing rules the evidence is entirely insufficient to support the finding that the corporation was the alter ego of Mr. and Mrs. Coker. The first loan was not negotiated by Mr. Coker. At that time he was a minority stockholder in the corporation and Mrs. Coker was not then a stockholder and never owned more than one share of stock. Mr. Coker did not become a majority stockholder until June 3, 1927, when more than $12,000 had been loaned to the corporation by Mrs. Stark and her mother. All of the money loaned went into the treasury of the corporation and was used by it in its business and not in the business of Mr. and Mrs. Coker. Of course, Mr. Coker was president of the corporation and managed its business but it was the business of the corporation and not the personal business of any of its stockholders.
There is no intimation of fraud, wrong or unfair dealing in any of these original transactions. The only error made at that time was a mistake of judgment common to many investors both corporate and individual in not realizing that second incumbrances could not retain their value in a serious financial depression.
Nor can we see any fraud or wrong in the renewal transaction of January 29, 1934. Mrs. Stark held the secured note of the corporation with the value of the securities greatly depreciated, if they had any substantial value. She was given the note of the corporation which was just what she had held before. This note was secured by a deed of trust on assets of the corporation of questionable and undisclosed value in exchange for the former security which also was of questionable and undisclosed value. The transaction appears to be one of refinancing a bad but secured debt by another equally bad but secured debt which finally proved uncollectible and the security worthless.
Of course, the corporation had suspended its building and financing operations and dealing in securities by 1931. Thereafter it held no stockholders nor directors meetings and its principal place of business was in the residence of Mr. and Mrs. Coker. Its affairs were entirely in the hands of Mr. Coker, but they still remained the affairs of the corporation. Apparently they were confined to salvaging operations and an endeavor to save something from the wreck. That these operations were unsuccessful, that there was no salvage, and that the wreck subsequently became total does not establish fraud or wrong dealings in the prior transactions or even in the giving of the renewal note and deed of trust.
Plaintiff stresses testimony pointing to the bad reputation of Mr. Coker for honesty and integrity. There is evidence to the contrary from other witnesses. He also points to the evidence of one witness that three or four years prior to the trial (June 10, 1940), Coker stated to this witness, in effect, that Mr. and Mrs. Stark were not good business people and that he intended to beat them out of their money. Coker denied making such statement.
If we should assume that Coker was proved to be an unreliable witness and a man without business honesty or integrity still we could not change our conclusion on the question of the corporation being the alter ego of Mr. and Mrs. Coker.
As we have observed, the only evidence even remotely bearing on the question of the alter ego comes from Coker. Of course, plaintiff is not bound by that evidence, but if he chooses to reject it he is faced with an entire lack of any evidence bearing on that question. The burden of proof is on him so he must accept any evidence the record contains on that question in order to make it even debatable.
Because Mr. Coker told a witness in 1936 or 1937 that he was going to beat Mr. and Mrs. Stark out of their money can have little bearing on the question of the corporation being his alter ego on and prior to January 29, 1934. Without other evidence to prove that fact his lack of character and his bad intentions in 1936 cannot establish it.
Plaintiff points to the fact that both Mr. and Mrs. Coker continued to draw salaries from the company after it was insolvent and without Mrs. Coker rendering adequate consideration for the salary she received; that these salaries tended to exhaust the already depleted assets of the corporation and to deprive plaintiff of the value of his security. If Mr. or Mrs. Coker wrongfully depleted the assets of the corporation, its creditors had their remedy available in a proper action against them. That issue is not presented in this action.
Other questions are argued in the briefs, but from the view we take of the case it is unnecessary to give them detailed consideration as they cannot affect the conclusions we have reached.
The portion of the judgment against Southern California Home Building Company, a corporation, is affirmed.
The portion of the judgment against John B. Coker and Regina W. Coker is reversed.
BARNARD, P. J., and GRIFFIN, J., concurred.