IN RE: SECURITY FINANCE COMPANY

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District Court of Appeal, First District, Division 2, California.

IN RE: SECURITY FINANCE COMPANY, a corporation, In the Process of Voluntary Winding Up. Earl R. ROUDA, Petitioner and Respondent, v. George N. CROCKER and Herbert A. Crocker, Respondents and Appellants.*

Civ. 17079.

Decided: March 27, 1957

Brobeck, Phleger & Harrison, San Francisco, for appellant George N. crocker. Long & Levit, San Francisco, for appellant Herbert A. Crocker. Young, Rabinowitz & Chouteau, San Francisco, for respondent.

This is an appeal from an order of the superior court for judicial supervision of winding up proceedings in a voluntary dissolution of a corporation, which order appointed a referee and directed the giving of notice to creditors. The order was entered after a hearing on an order to show cause issued pursuant to a shareholder's petition under the provisions of section 4607 of the Corporations Code.

The business of Security Finance Company and its six subsidiaries is making personal loans to individuals and buying conditional sale contracts from dealers. In general, the lending activities are carried on by the subsidiaries, while the parent corporation, in what is called the ‘contract department’ purchases conditional sale contracts from dealers in furniture, appliances and the like. The 6,000 common shares of the corporation were issued 3,000 to respondent Rouda and 1,500 to each of the Crockers, the appellants. There never have been any other common shareholders. The board of directors of Security Finance Company consists of Rouda and the two Crockers. Its Articles, as well as its By-Laws, provide that no corporate action can be taken without unanimous consent of the directors.

The present business began in 1940 as a partnership on a fifty-fifty basis of Rouda and the two Crockers. Appellants put up $20,000 and use of their credit and respondent put up his knowledge and ability and active working management. In 1946 the three partners incorporated, and continued their operations in the finance business in much the same manner as before except to get bigger and more prosperous. In 1952 a proceeding to dissolve the corporation was begun by appellants; but shortly thereafter it was dropped. In settlement of a declaratory relief action begun in 1952 by respondent, a settlement agreement was worked out among them in 1954 by the terms of which Rouda continued active management of the company and agreed to pay to the corporation $45,000, and $15,000 to the Crockers. Payment was secured by pledge of all of Rouda's stock at the Crocker-Anglo Bank. Without letting the Crockers know anything about it, Rouda borrowed about $60,000 from the First Western Bank, paid off the amounts he had promised to pay, and put up the same stock with the First Western Bank to secure payment of his loan to that bank.

For the most of the last fifteen years, Rouda and the Crockers have disagreed on amount of his (manager's) salary and amounts to be declared as dividends. Further major disagreement in the last few years centered around his desire to sell the company and their refusal to do so, or for that matter to even consider offers for its sale. Generally speaking Rouda operated the business with little or no interference from the Crockers. Presently Rouda receives a salary of $1,456 per month and each of the Crockers gets $500 per month, although they do little more active work in the business than to attend directors' meetings. Net profits from 1949 to 1954, inclusive, was $258,395 and dividends for the same period was $36,420. (No dividends were paid in 1953 as there was a loss for that year.) The first seven months of 1955 showed profits of $50,000 and dividends for the same period $4,200.

The only active business of the parent company, whose dissolution is sought, just before the petition was filed, was a contract department, which was shut down by Rouda without consent or knowledge of the Crockers shortly before such filing. Petitioner offered at a meeting of the Board of Directors, held after hearing on the order to show cause began but before conclusion of testimony thereon, to reopen the contract department but only pursuant to the provisions of Corporations Code, section 4801. The directors couldn't agree on this point so the department remained closed.

The 1954 settlement agreement in paragraph 13 thereof set forth: ‘Future dissolution. If at any time hereafter the parties become unable to reach unanimous consent with respect to the operations of the Security corporation, this shall entitle Rouda or either of the Crockers, if so advised, to require a dissolution or winding up of the affairs of said corporation * * * pursuant to the provisions of California law * * *’

On July 12, 1955, Rouda executed a written consent, Corporations Code, § 4600, to the dissolution of the company and three days later filed it with the corporation. He then executed and filed a Certificate of Election to Wind Up and Dissolve. There had been no meeting of shareholders at which the subject of dissolution was discussed, nor has any resolution been adopted by the shareholders to wind up and dissolve; no notice has ever been given to the shareholders of any meeting at which the subject of winding up and dissolution would be discussed. On the same day that Rouda filed in the County Clerk's office a certified copy of the Certificate of Election to Wind Up and Dissolve, he filed the petition for judicial supervision. Corporations Code, § 4607.

Appellants' position is disclosed in their opening brief under the heading ‘Nature of This Proceeding: The proceeding permitted by § 4607 requires that the corporation be ‘in the process of winding up,’ and that * * * the petition must be filed in good faith, and requires a showing that as to certain matters connected with the business of the corporation there is need for judicial supervision * * *'

Respondent claims, as a shareholder having 50 percent of the voting power, an absolute right to dissolve the corporation, in the absence of fraud, by reason of section 4600 of the Corporations Code, provided of course that he has complied with the procedure set down in the sections that follow. The procedural steps were all properly taken although appellants maintain that petitioner had no legal right to take them.

‘Any corporation may elect to wind up its affairs and voluntarily dissolve by the vote or written consent of shareholders or members representing 50 percent or more of the voting power.’ Corporations Code, § 4600.

‘If a corporation is in the process of voluntary winding up, the superior court of the county in which the principal office of the corporation is located, upon petition of * * * (b) the holders of 5 percent or more of the number of outstanding shares * * * and upon such notice to the corporation and to other persons interested in the corporation as shareholders or creditors as the court may order, may make orders and adjudge as to any and all matters concerning the winding up of the affairs of the corporation.’ Corporations Code, § 4607.

Appellant first claims the court erred in assuming jurisdiction after a hearing on an order to show cause, issued pursuant to section 4607, in that the section being permissive, there is no evidence of any conflict in operation of the business and therefore no need for judicial supervision. They call attention to the fact that since the 1954 settlement agreement there has been no occasion when the parties were unable to reach unanimous consent with respect to the operations of the business and that the differences among the three at most extended only to dividend and salary policy and to matters pertaining to a sale of the entire business, which are purely personal matters having nothing to do with the operation of the business. The first point is meaningless for under the By-Laws the directors could act only by unanimous agreement. There were many arguments and disputes about salaries and dividends which never were settled by corporate action because all had to first agree. Assuming it be necessary to show disputes affecting operation of the business, before the court could make the orders from which this appeal is taken, there is ample evidence in the record to support such an implied finding. Even though Rouda may have on one occasion referred to the deadlock as being of a personal rather than a business relationship, the basic differences are in matters obviously affecting the conduct of the business as is disclosed in the extended examination of Rouda at the hearing. The trial judge observed ‘that there is an institution that is in such a state of friction that it needs superintendence in order to dissolve itself and should be dissolved. That is the whole feature.’

Appellant next contends that the court should not have ordered judicial supervision, for Rouda was not acting in good faith; that before he can get an order under section 4607 there must be ‘a showing of good faith on his part.’ Nowhere in the long transcript do we find any definition of what appellants claim amounts to bad faith, but we are certain they do mean something less than actual fraud. The bad faith, which appellants say exists, evidently consists of his desire to sell the corporation even though a sale may be unwise and detrimental to the interest of the stockholders; that his desire to sell is prompted by the necessity of repaying a personal loan and because he does not want to do business with the Crockers any more.

Appellants read into the sections 4600 and 4607 something that just is not there, namely: personal motives of or presence or absence of bad faith on the part of shareholders representing 50 percent of the voting power.

‘Where a statute expressly authorizes a majority, or a certain per cent of the stock over one-half, to voluntarily dissolve the corporation, the question arises as to whether this power is absolute as against minority stockholders * * * The general rule is that where a statute confers power on a majority, or a certain per cent, of the stockholders to dissolve, the right is absolute, so far as the motives of the majority are concerned, in the absence of actual fraud, and not subject to judicial review * * *’ (Fletcher, Cyclopedia Corporations, Vol. 16, p. 735.)

Corporations Code, sections 4607–4619, are a reenactment of former Civil Code, section 403. Speaking of former Civil Code, section 403, the court in In re San Joaquin Light & Power Corp., 52 Cal.App.2d 814, 824, 127 P.2d 29, 36, stated: ‘A petition was filed as authorized by section 403 of the Civil Code and the superior court then had ‘power to order and adjudge as to any or all matters in and for the winding up of the affairs of the corporation,’ including ‘(3) the determination of the rights of shareholders * * * in and to the assets of the corporation.’ An absolute right to petition for such supervision and direction is impliedly given and we think it follows that the court not only has the power to order and adjudge as to all matters thus presented, but that the duty of so doing is imposed upon the court.' In re Mayellen Apartments, 134 Cal.App.2d 298, 285 P.2d 943. Appellants' observation about the last two cited cases is as follows: ‘We submit, however, that in both cases what was said was mere dictum, and not binding on this Court; that the dictum in the Mayellen case is clearly wrong; and that the dictum in the San Joaquin case, whether right or wrong, is of no value here since the adoption of the Corporations Code.

‘In the Mayellen case, an order taking jurisdiction over winding-up proceedings became final * * * The quotation from the San Joaquin case was merely made in the course of a review of the authorities, and had no bearing on the problem before the court.’

Appellants are correct that what was said in the Mayellen case on this problem is dictum, but not so in the San Joaquin case, which is the one from which the quotation is actually taken. In the latter case, a petition for judicial supervision was denied on an order sustaining a demurrer to the petition on the grounds that no cause of action was stated. The court there went on to say:

‘We think, however, the trial court was in error in dismissing this proceeding * * * without hearing or determining the matters authorized and permitted to be raised in such a proceeding * * * In any event, a hearing on the merits was called for and the matter could not be disposed of by sustaining demurrers and denying all relief to the petitioner.’

It isn't that petitioner has an absolute right to judicial supervision by merely following procedural steps. He has an absolute right in that case to such supervision if, after a hearing on an order to show cause, it appears to the court, in exercise of its legal discretion, it believes such supervision to be warranted. The court found that judicial supervision was appropriate after a protracted four-day hearing.

The court was not in error in sustaining an objection on the subject of bad faith because of known harm to the corporation. It is not contended that the ‘bad faith’ referred to constituted fraud of any kind or that Rouda was intentionally destroying or lessening the value of the corporation stock without regard to his own best interest; but only that Rouda knew that his action would depreciate the value of the stock, the corporation would suffer loss during dissolution, and that Rouda was concerned only with his own private desires even though they might be contrary to the best interest of the corporation or other stockholders. There is a difference between intentional destruction of the rights of other shareholders, and the loss of those rights as an incident to the exercise of statutory rights by the petitioner. Despite the court's ruling in the one instance, the entire field of Rouda's conduct and state of mind was repetitiously explored in more than 170 pages of cross-examination. There was no offer of proof of anything beyond the foregoing summarization of what appellants claim is bad faith.

Finally appellants claim the court to be without jurisdiction because the corporation is not ‘in the process of voluntary dissolution.’ As they recognize, there are two ways provided in Corporations Code, §§ 4600, and defined in 4604, for a corporation to be in the process of voluntary winding up—the one by resolution of shareholders or directors, the other by written consent of shareholders owning 50 percent or more of the voting power. We are here concerned only with the latter method. Appellants assert that where reliance is placed on written consent, it must not only be executed in accordance with section 4600 but must comply with section 2201(e) (special notice of a meeting of shareholders) and section 2239 (requiring approval of all shareholders in lieu of a formal meeting). These two sections are applicable to the first of the two methods for voluntary dissolution provided in section 4600, but have nothing to do with the second (consent of 50 percent) method. The record amply discloses that all procedural steps required by the Corporations Code were properly taken before the court made its order for judicial supervision.

The fact that Rouda paid off his obligations of $45,000 to the corporation and $15,000 to the Crockers required by the settlement agreement of 1954, without letting appellants know that he borrowed from the First Western Bank by pledging all his stock to make the payments, can in no way affect the validity of the order of judicial supervision.

The petitioner-respondent acting for his own best interests, without fraud and without any wilful intention or desire to destroy the rights of other shareholders, has exercised the rights clearly given him by the applicable sections of the Corporations Code.

Order affirmed.

ANTHONY BRAZIL, Justice pro tem.

KAUFMAN, P. J., and DOOLING, J., concur.