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District Court of Appeal, Fourth District, California.


Civ. 4602.

Decided: March 25, 1953

Zeutzius & Steffes, Los Angeles, and Jamison & Jamison, Porterville, for appellant. Burford & Hubler, Porterville, for respondent Juno Oil Co. Harry E. Templeton and Jessie Miller, Los Angeles, for respondent Maurice Henderson. Guy Knupp, Jr., Porterville, Harry E. Templeton and Jessie Miller, Los Angeles, for respondent Violet V. Carpenter.

Plaintiff, as a stockholder of the Juno Oil Co., a corporation, brought this derivative action for specific performance on behalf of the corporation and named the corporation, Maurice Henderson, and Violet V. Carpenter, administratrix of the estate of Scott Carpenter, deceased, as defendants. The action was to compel defendant Herderson and the administratrix to assign to the corporation a certain oil and gas lease denominated the Norris Oil Company lease, valued by plaintiff at one million dollars. A copy of this lease was attached to the complaint and made a part thereof by reference.

The complaint contains three causes of action. In substance, the first cause alleges that shortly prior to the incorporation of the Juno Oil Co., on February 26, 1948, an oral agreement was entered into between the plaintiff and defendant Maurice Henderson, Walter Gerhardt, John Gerhardt, and Scott Carpenter (now deceased) whereby it was agreed that a corporation would be formed for the purpose of acquiring, holding and operating oil and gas leases in Santa Barbara County and San Luis Obispo County, which oil and gas leases plaintiff and defendants were to obtain and assign to said corporation in exchange for its capital stock; that plaintiff obtained two such oil and gas leases known as the ‘Bryan’ and ‘Conklin’ leases; that defendants Henderson and Carpenter, on February 26th, and prior thereto, were negotiating for a lease with Norris Oil Company covering 80 acres in the Cuyama Valley; that pursuant to said agreement a corporation was formed and plaintiff transferred his leases to the corporation; that Henderson and Carpenter and the two Gerhardts agreed that as soon as they received the lease from the Norris Oil Co. for which they were negotiating, they would transfer it to the Juno Oil Co. and, as payment for the transfer of said lease and the leases owned by plaintiff, stock of the Juno Oil Co. would be issued to plaintiff, Carpenter, and the other defendants, but that Henderson and Carpenter never assigned the Norris Oil Company lease to the Juno Oil Co. although numerous demands were made upon them to do so; that a written demand was made on the Board of Directors to compel the transfer of said lease to the Juno Oil Co.; that the defendant directors refused to comply therewith, and in so acting and in failing to act, the defendants conspired to deprive Juno Oil Co. of its property, money and other assets.

The second cause of action adopts substantially the same allegations and alleges that defendants are estopped from refusing to assign the lease. The third cause of action realleges the first cause of action and then alleges that defendants, other than the corporation, had received $75,000 from said lease; that this sum was for the use and benefit of the corporation; that demand was made for its payment to the corporation and that they refused to comply with said demand. It also alleges that Henderson, Carpenter, and the Gerhardts constituted a majority of the Board of Directors of the Juno Oil Co. and conducted its affairs and that they conspired to deprive that company of its proper assets.

On August 17, 1950, defendant Henderson filed a written motion, under the provisions of section 834 of the California Corporations Code, to require plaintiff to furnish security for the reasonable expenses, including attorneys' fees which might be incurred by him in this action, upon the grounds therein stated, i. e., (1) that there is no reasonable probability that the prosecution of the cause of action alleged in the complaint against this defendant would benefit the corporation or its shareholders; and (2) that this defendant did not participate in the transaction complained of in any capacity. Similar motions were made on behalf of the other defendants, including the Juno Oil Co. Supporting affidavits were filed in which the defendants alleged generally that Beyerbach represented to them that he had acquired two oil leases; that the cost of their acquisition was the sum of $900; that Carpenter and the Gerhardts would pay him two-thirds of the cost of their acquisition, if he would hold the leases as trustee for them and would assign the leases to a corporation to be thereafter organized; that for this consideration plaintiff was to be issued one-third of the stock and the remainder would be apportioned among the other individual defendants in the proportion that each of them would contribute to the cost of the acquisition of the leases; that this was done and after the formation of the corporation 60,000 shares were issued, 20,000 to Beyerbach, and 10,000 to the remaining individual defendants. A copy of the minutes of the first meeting of the incorporators was made a part of the affidavit so indicating. It is then alleged that the individual defendants never, at any time, agreed with plaintiff or anyone else to assign or transfer any interest in any lease which they then owned or possessed to the plaintiff or to the Juno Oil Co. It was indicated therein that defendant Henderson and Scott Carpenter did then each own a one-half interest in the Norris Oil Company lease, but it is alleged that at no time did they agree to transfer it or any interest therein to the plaintiff or to the Juno Oil Co., and it is specifically alleged that Carpenter was at no time agent for any of the individual defendants, and that the Gerhardts had no interest in the Norris Oil Company lease whatsoever.

The motions were heard before Judge Eymann, assigned. Oral evidence was also introduced. Plaintiff testified to a certain claimed conversation with Carpenter and Henderson before they went to Nevada and stated that they then agreed to assign the Norris lease to the corporation to be formed; that relying upon this agreement he turned in his leases to the corporation.

Henderson testified he only said to Beyerbach, ‘I don't think I will put my half in there’ and that Carpenter said ‘he wanted a little more time to think it over.’

It does appear from plaintiff's showing that when defendant Juno Oil Co. was organized in Nevada, plaintiff and Carpenter availed themselves of the services of one Sampson, who was one of the organizers and first directors of the corporation and, by resolution at the first meeting of the incorporators a transfer syndicate was designated the statutory resident agent of the Juno Oil Co. of Nevada. Attached to plaintiff's affidavit is a letter from plaintiff to Sampson dated July 23, 1949, in which he asks Sampson if he remembered that all of his leases and the lease owned by Carpenter and Henderson were to be assigned to the corporation. A letter in answer to plaintiff's letter was received in evidence indicating that the minutes of the company showed that Carpenter was to turn in to the company a certain lease; that he did not have it with him; that he was to have it properly executed and recorded and return it to the corporation in Nevada, together with the minutes of a meeting to be held in California regarding it.

After reviewing the evidence the court took the motions under submission, and on August 27, entered a minute order that ‘Beyerbach deposit in court, either in the form of cash or a bond or bonds of a surety company authorized to issue such bond’, for the purpose indicated, security in the sum of $5,000 each as to Henderson and Carpenter, and $1,000 each as to the remaining defendants, including the Juno Oil Co. The court ordered that plaintiff comply with the order within thirty days from August 28, or the action would be ‘dismissed as to any or all defendants for whom she security has not been given’. There was no compliance within that time and on September 24, 1951, plaintiff secured an ex parte order granting 30 additional days within which to make such deposit. On October 22, another judge granted an additional 30 days from October 22, 1951. On October 26, plaintiff filed a ‘motion for order changing the amount and form of security required to be deposited’ by him in which he requested that the amount of security be decreased to $2,000 each for Henderson and Carpenter, and $400 each for the remaining defendants, including the Juno Oil Co. A further request was made that he be permitted to file an undertaking executed by two or more persons, as required by section 1030 of the Code of Civil Procedure and in the form provided by sections 1041 and 1057 thereof, and that such security might be furnished on or before December 1, 1951. An affidavit was made in support of this motion. On October 30, 1951, the individual defendants filed a notice of motion to dismiss plaintiff's action on the ground that the plaintiff failed to deposit with the clerk the security required by the order of the court dated August 27, 1951, within the time allowed by law, and upon the further ground that the purported order of October 22, 1951, extending the time of said plaintiff to any date beyond the 26th day of October, 1951, was beyond and in excess of the jurisdiction of the court. Both of these motions were continued for hearing to November 19, 1951, and were at that time taken under submission. On November 27, 1951, the defendants filed a notice of motion to dismiss the action upon the ground that plaintiff had failed to deposit with the clerk of the court the security required by the order dated August 27, within the time allowed by law. On December 14, 1951, a minute order was entered, granting the motion of defendants to dismiss the action on the ground that plaintiff had failed to deposit security for costs and attorneys' fees within the time as expressly extended by the court. On December 19, the court denied plaintiff's motion to change the amount and form of security and the previous motions of defendants, dated October 30, were denied by the trial court on December 19, 1951, and on that same day judgment of dismissal was entered as to all defendants, including the Juno Oil Co. This appeal is from the judgment of dismissal.

Plaintiff has dismissed his appeal under Rule 19(b) of the Rules on Appeal, as to Arthur Carpenter, Walter Gerhardt and John Gerhardt, who were sued as directors of the oil company, and is proceeding against the Juno Oil Co., Maurice Henderson individually and Violet V. Carpenter, as executrix of the last will and testament of Scott Carpenter, deceased.

It is plaintiff's first contention that section 834 of the Corporations Code is unconstitutional as being discriminatory, insofar as it requires a plaintiff, in a derivative action, to furnish security for costs and attorneys' fees to a third person who holds money or property rightfully belonging to a corporation and who wrongfully refuses to turn such money or property over to the corporation. Secondly, that the court erred and abused its discretion in ordering that plaintiff furnish to each of the defendants Henderson and Carpenter security for costs and attorneys' fees in the sum of $5,000. Third, that it abused its discretion in ordering that plaintiff furnish to defendant Juno Oil Co. security for costs and attorneys' fees in the sum of $1,000. Fourth, that it abused its discretion in requiring, by the terms of said order, that security be furnished ‘in the form of cash or a bond or bonds issued by a surety company authorized to issue such bonds', and that it likewise erred in denying plaintiff's motion for an order changing the amount and form of the security to be deposited by plaintiff. Fifth, that it erred and abused its discretion in granting the motion of defendants Henderson, Carpenter, and the Juno Oil Co. to dismiss plaintiff's action, and in dismissing it on the ground that appellant had not timely furnished security in the amount and form prescribed in the original order, when plaintiff's motion to change the amount and the form of such security was still pending.

It is apparent that plaintiff failed to comply with the court's order in depositing the required security of $1,000, insofar as the Juno Oil Company, a corporation, was concerned, to prevent a dismissal of the action as to it. If a dismissal of the action as to the corporation was proper and was justified under the facts related, then there is no necessity of determining the constitutionality of that section and the merits of the trial court's action in reference to the individual third party defendants since the corporation would no longer be a party to the action.

Under the decisions it has been universally held that in order to enable a stockholder to sue for the corporation or his associate stockholders, where the rights of the corporation are involved, he must allege that the directors declined to sue or refused to permit him to sue in the name of the corporation, and the corporation must be a party (plaintiff or defendant); that the failure to make the corporation a party is not a mere defect of parties but leaves the stockholder without a cause of action, the party entitled to the relief not being before the court; and that if the plaintiff fails to do so, his action should be dismissed absolutely. Shawhan v. Zinn, 79 Ky. 300; White v. First National Bank, 252 Pa. 205, 97 A. 403; Bruschke v. Der Nord Chicago Schuetzen Verein, 145 Ill. 433, 34 N.E. 417; Cullum v. General Motors Acceptance Corporation, Tex.Civ.App., 115 S.W.2d 1196; Starr v. Heald, 28 Okl. 792, 116 P. 188; Pourroy v. Gardner, 122 Cal.App. 521, 10 P.2d 815; Wickersham v. Crittenden, 93 Cal. 17, 28 P. 788; Gorham v. Gilson, 28 Cal. 479; Shenberg v. DeGarmo, 61 Cal.App.2d 326, 143 P.2d 74; 13 Am.Jur. p. 496, et seq., Secs. 450–459, 461. See, also, 6A Cal.Jur. pp. 819, 820, sec. 464, where it is said:

‘Since an action by a stockholder is entertained only on behalf of the corporation and on a corporate cause of action, and plaintiff stockholder must allege the refusal of the corporation to commence the action, the corporation should be made a party defendant, although relief is asked against individual defendants only and no complaint is made as against the corporation.’

In 18 C.J.S., Corporations, § 570–b, p. 1293, it is said:

‘The corporation is a proper and indispensable party to a suit brought by one or more stockholders for its benefit. A failure to make it a party is not a mere defect of parties; it leaves the stockholder without a cause of action and the court without jurisdiction. In such case the suit should be dismissed, or if a decree is rendered it may be set aside.’

In Beach v. Cooper, 72 Cal. 99, 13 P. 161, it was stated that at no stage of the proceedings can the corporation defendant be dismissed from the case without working a discontinuance.

The question of whether the provisions of section 834 of the Corporations Code were intended to apply to third party defendants insofar as security may be demanded of a derivative stockholder plaintiff, is not raised in this action and it will not be necessary to determine that question. (See discussion thereof in 37 Cal.Law Review, p. 399.)

Since the constitutionality of section 834 as applied to the corporation is not raised we will merely refer to Cohen v. Beneficial Industrial Loan Corporation, 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528, as upholding its constitutionality insofar as it pertains to the contract clause and due process clause of the Federal Constitution. But see, dissenting opinion of Mr. Justice Carter in Hogan v. Ingold, 38 Cal.2d 802, 824, 243 P.2d 1, as to its constitutionality involving the equal protection of the law clause.

The argument that the court abused its discretion in requiring the plaintiff to furnish security in the sum of $1000 as to the corporation, because it was only a nominal party to the action, and the argument that the litigation required nothing to be done by it in addition to what would be required to be done by the other defendants are without foundation. The corporation would be obliged to protect its interests in the case and see that an improper judgment was not rendered against it. Section 830, Corporations Code. It was not only a proper party but a necessary party to the action and the court had no jurisdiction to proceed to trial and enter judgment, either for or against it, without it being made a party to that action. The difference in the sum of $400 suggested by plaintiff and the $1000 fixed by the court, cannot be said to be unreasonable or an abuse of discretion in view of the fact that the trial judge may consider the extent and nature of the trial and amount of the prospective attorneys' fees and costs, and use his own experience in fixing that value. County of Riverside v. Brown, 30 Cal.App.2d 747, 749, 87 P.2d 60; Wood v. Gordon, 112 Cal.App.2d 374, 376, 246 P.2d 84.

As to plaintiff's fourth claim it is argued that the court erred in requiring a cash bond or a bond issued by a surety company, when plaintiff was able and willing to post an undertaking executed by personal sureties. Section 1057 of the Code of Civil Procedure does provide generally that in any case where an undertaking or bond is authorized or required by any law of this state, the officer taking the same must require the surety to do certain things. Section 1041 of the Code of Civil Procedure prescribes the form and sufficiency of such undertakings where a party desires to give an undertaking and where the statute of this state provides that one may be given. It is accordingly argued by plaintiff that since there is no statute which deprives a person of the right to furnish a bond or undertaking executed by personal sureties, the court erred in not allowing plaintiff to do so in this case.

Section 834 of the Corporations Code provides that:

‘If the court determines, after hearing the evidence adduced by the parties at the hearing, that the moving party has established a probability in support of any of the grounds upon which the motion is based, the court shall fix the nature and amount of security to be furnished by the plaintiff * * *.’ (Italics ours.)

The court did determine that it should be ‘in the form of cash or a bond or bonds issued by a surety company authorized to issue such bonds.’ The court did not authorize the giving of an undertaking by personal sureties and plaintiff offered no such undertaking for approval. Section 834 is a special act pertaining to the prescribed subject matter. Our codes are full of provisions making special rules applicable to different classes of cases and it has never been supposed that such provisions are invalid merely because the procedure in each case is not in all particulars exactly the same as in every other case. Title & Document Restoration Co. v. Kerrigan, 150 Cal. 289, 88 P. 356, 8 L.R.A.,N.S., 682. Any criticism as to the wisdom or folly of that part of section 834 of the Corporations Code giving the court the right to determine the nature of the security should be addressed to the legislature and not be made the subject of judicial legislation.

As to point five, whether plaintiff failed to furnish security within the time prescribed by law or within the time prescribed by the original order, it appears that plaintiff secured two orders extending his time in which to deposit security as ordered on August 27. The first one, on September 24, gave plaintiff 30 days additional time, and the second one, signed on October 22, gave him 30 days from that date or, to November 21, in which to comply. No further application was made and no order was granted extending the time beyond that date. On November 26, five days after the expiration date, defendants moved to dismiss, for noncompliance, and on December 19, a judgment of dismissal was entered. It is true that an application for reduction in amount and as to form of the undertaking was pending during this latter period, but no request was therein made for further extension of time to comply with the original order. Therefore, the court's order dismissing the action, particularly as to defendant Juno Oil Co., a corporation, was proper. Since such order was authorized and said corporation was thereafter and is now on longer a party thereto, plaintiff is not authorized, in behalf of the corporation as alleged, to proceed in his own name against the other defendants. The trial court would have no jurisdiction to proceed, and the action against the other defendants should be dismissed. 18 C.J.S., Corporations, § 570, p. 1293, and cases heretofore cited. It therefore becomes unnecessary to consider the other points raised.

Judgment affirmed.

GRIFFIN, Justice.

BARNARD, P. J., and MUSSELL, J., concur.

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