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District Court of Appeal, Third District, California.

S. H. RIDDLE, on behalf of himself and all others similarly situated, Plaintiffs and Respondents, v. YOSEMITE CREEK COMPANY, a corporation, Kadota Creek Company, a corporation, Richard C. Leuschner, Richard D. Leuschner, Jr., Elizabeth F. Leuschner, et al., Defendants and Appellants.*

Civ. 9149.

Decided: March 12, 1958

Sutter & Carter, Modesto, for appellants. Mellis & Stockton, Modesto, for respondents.

This action was brought by plaintiff-respondent Riddle, claiming to act for himself and others similarly situated, against two corporations and various individual defendants. During the course of the trial a number of individuals were permitted to join as plaintiffs and they appear herein as respondents. They, along with Riddle, were creditors of Yosemite Creek Company, a corporation, hereinafter called Yosemite. They sought to hold the individual defendants responsible for the corporate debts of Yosemite and they likewise sought to hold Kadota Creek Company, a corporation, hereinafter called Kadota, responsible for the same debts. A number of individual defendants who were originally parties to the action were dismissed upon their motion without opposition from plaintiffs. Judgment was rendered in favor of plaintiffs against both Yosemite and Kadota and against three individuals, appellants herein, namely, Richard D. Leuschner, Richard D. Leuschner, Jr., and Elizabeth F. Leuschner. They are the sole appellants herein. The two corporations also appealed, but their appeals were heretofore dismissed.

The judgment applies the doctrine that under certain circumstances in a particular case the obligations of a corporation may be fastened upon certain individuals. Our own courts have frequently applied the doctrine and have stated the conditions under which its application is appropriate. In Erkenbrecher v. Grant, 187 Cal. 7, 11, 200 P. 641, 642, the court said:

‘* * * 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 Minifie v. Rowley, 187 Cal. 481, 487, 202 P. 673, 676, it was said:

‘Before the acts and obligations of a corporation can be legally recognized as those of a particular person, and vice versa, the following combination of circumstances must be made to appear: First, that the corporation is not only influenced and governed by that person, but that there is such a unity of interest and ownership that the individuality, or separateness, of the said person and corporation has ceased; second, that the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, stances, sanction a fraud or promote injustice.’

In Gordon v. Aztec Brewing Company, 33 Cal.2d 514, 522, 203 P.2d 522, 527, it is said:

‘* * * [W]here the recognition of the fiction of separate corporate existence would foster an injustice or further a fraud the courts will refuse to recognize it. Stark v. Coker, 20 Cal.2d 839, 846, 129 P.2d 390; Puccetti v. Girola, 20 Cal.2d 574, 578, 128 P.2d 13; Shea v. Leonis, 14 Cal.2d 666, 669, 96 P.2d 332. It is not necessary that the plaintiff prove actual fraud. It is enough if the recognition of the two entities as separate would result in an injustice. Wenban Estate, Inc., v. Hewlett, 193 Cal. 675, 698, 227 P. 723 * * *’

In Stark v. Coker, 20 Cal.2d 839, 129 P.2d 390, John B. Coker and his wife Regina were held liable on a promissory note executed by a corporation. The court stated, 20 Cal.2d at page 846, 129 P.2d at page 394:

‘* * * The conditions under which the corporate entity may be disregarded, or the corporation be regarded as the alter ego of the stockholders, necessarily vary according to the circumstances in each case inasmuch as the doctrine is essentially an equitable one and for that reason is particularly within the province of the trial court. Only general rules may be laid down for guidance.’

In Automotriz Del Golfo De California, etc. v. Resnick, 47 Cal.2d 792, 796, 306 P.2d 1, 4, the court said:

‘Another factor to be considered in determining whether individuals dealing through a corporation should be held personally responsible for the corporate obligations is whether there was an attempt to provide adequate capitalization for the corporation. In Ballantine on Corporations (rev. ed. 1946), at pages 302–303, it is stated: ‘If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of the law that shareholders should in good faith put at the risk of the business unincumbered capital reasonably adequate for its prospective liabilities. If the capital is illusory or trifling compared with the business to be done and the risks of loss, this is a ground for denying the separate entity privilege.’

‘The rule * * * was followed in Shea v. Leonis, 14 Cal.2d 666, 96 P.2d 332, 334, where a lessee attempted to escape liability for rent due under a lease by assigning his interest in the lease to a corporation which was without other assets. The court held that the owners of the corporate stock were liable * * *, pointing out that it is proper to disregard corporate existence ‘where, as in the instant case, the device adopted is * * * an attempt to avoid liability for benefits enjoyed by means of taking the obligation in the name of a specially organized corporation which has no other assets.’ In Carlesimo v. Schwebel, 87 Cal.App.2d 482, 197 P.2d 167, 174, it was recognized that ‘the proper rule is that inadequate financing, where such appears, is a factor, and an important factor, in determining whether to remove the insulation to stockholders normally created by the corporate method of operation.’'

Yosemite was organized as a California corporation in June of 1949. On July 15th following it issued 510 shares of stock to Elizabeth F. Leuschner. On August 20, 1951, she transferred 255 shares to Richard D. Leuschner, Jr., and 255 shares to Elizabeth E. Leuschner, retaining one share. The transferees were respectively her stepson and stepdaughter. Apparently, she obtained from some source an additional share which she kept. The stock book of the corporation shows that it was not accurately kept so as to indicate with exactness to whom shares were issued and to whom issued shares were assigned. It does appear that altogether 534 shares of stock were issued and that, during the critical years with which we are here concerned, the stock ownership was as follows: Richard D. Leuschner, Jr., owned 268 shares; Elizabeth F. Leuschner owned one share; Elizabeth E. Leuschner, daughter of Richard, Sr., owned 257 shares, and the remaining shares were owned by various employees, some of whom testified that they purchased them through wage deductions at about $100 per share. During the same critical years, the officers of Yosemite were as follows: Richard D. Leuschner, Sr., president and a director; his wife, Elizabeth F., secretary and a director; Richard D. Leuschner, Jr., vice president, treasurer and a director. It does not appear that Elizabeth E. was an officer. She was not made a party to this action.

Kadota was organized about the same time as Yosemite. During the critical period there were 510 outstanding shares of Kadota and of these Richard D. Leuschner, Jr., owned 170 and the remaining 340 shares were owned by Elizabeth E. The corporation was officered as follows: Richard D. Leuschner, Sr., was assistant secretary and a director; Elizabeth F. Leuschner, his wife, was a director; Richard D. Leuschner, Jr., was president and a director, and the other officers and directors were Elizabeth E. Leuschner and her husband.

Richard D. Leuschner, Sr., although shown to be the dominating figure in carrying on the business of both corporations did not appear as a stockholder of either.

Yosemite operated as a processor of fruits and vegetables under a license from the Bureau of Market Enforcement of the Department of Agriculture of the state. From 1945 until the latter part of 1952 Yosemite operated at Kadota, California, having a lease of the Bear Creek Company processing plant, which plant had been mortgaged by its owner to the Reconstruction Finance Corporation. In the latter part of 1952, the Reconstruction Finance Corporation foreclosed its mortgage and Yosemite then moved its base of operations to Modesto where it operated until the spring of 1953, when its remaining assets were transferred to Kadota. During 1952 and 1953 Yosemite contracted to buy the produce of growers under written contracts executed in its name. To a certain extent it failed to make payment to the growers. Plaintiff, as an unpaid growercreditor, brought this action to recover from Yosemite. He sought to hold the other defendants on the alter ego theory. He claimed in addition that he sued for other creditors of Yosemite who, like himself, were growers who had sold their produce to Yosemite and had not been fully paid.

When Yosemite transferred its assets to Kadota the principal consideration moving to it was Kadota's agreement that it would process the produce purchased by Yosemite, sell the finished products and pay over to Yosemite the gross receipts, less its costs of processing and less 40% of the net profit resulting after the further deduction of Yosemite's expenses. It appears that Kadota kept its agreement with Yosemite but that to enable it to do this certain members of the Leuschner family loaned various sums of money to it, aggregating approximately $100,000. It appears further that as produce was brought in by the growers Kadota paid the greater portion of the moneys due them, with the ultimate result that they received on an average about 80% of the contract price for produce they delivered.

Yosemite and Kadota during their entire existence appear to have failed in many instances to conform to standard corporate procedure. Few meetings of shareholders were held. Few regular meetings of directors were held. They entered into transactions with shareholders and officers and resolutions approving these do not appear to have been regularly passed. Stockholders and directors alike dealt directly with both corporations without the execution of written documents precisely describing the transactions. When such documents were executed they were sometimes executed by the member of the family involved acting both as an individual and in his capacity as an officer of the corporation. Such transactions included borrowing of corporate funds for personal use, loaning of personal funds to a corporation at interest, purchase of corporate equipment followed by leasing the equipment back to the corporation for rental, personal guarantee of corporate obligations, payment of corporate obligations out of personal funds.

When Kadota was organized in mid 1949 it engaged in farming operations through 1950 after which it ceased business operations and remained inactive until the early part of 1953 when it was reactivated to enter into the agreements heretofore related with Yosemite.

The business conducted by the corporations was extensive. The gross sales price of the products, first of Yosemite, and thereafter under the agreement of Kadota, amounted to nearly two million dollars a year. The price paid growers for the raw products grossed around eight to nine hundred thousand dollars a year.

Leuschner, Sr., testified that, though he was under contract to receive a salary and some commissions in exchange for his management of the corporation's affairs, he was never paid except to the extent of a few hundred dollars and that over the years he loaned to the corporations far more than they ever paid him, which loans were never repaid. The only other person who is asserted, through testimony, to have been active in managing the two corporations was Richard, Jr., and he apparently had little to do therewith until the last year or two, during which time Kadota was processing the products purchased by Yosemite from the growers. During that period he was asserted to be a buyer of processing materials and of processing equipment and general overseer of packing and processing operations. There is no testimonial assertion, however, that he supplanted the overriding management of his father. There is testimonial assertion that Mrs. Leuschner, Sr., was never any other than a dummy stockholder and officer. Leuschner, Sr., testified that, speaking generally, she did what she was told in the way of executing documents and was unfamiliar with the affairs of either corporation. These matters, however, left the trial court to speculate as to what the real interest of the family members was as existing among themselves. The dominance in the corporation affairs and the unpaid but extensive managerial activities of Leuschner, Sr., during the time when the stock of these corporations was held by members of his family warranted the trial court in not only disbelieving the testimonial assertions as to the status of Mrs. Leuschner in the corporate affairs and the limited activities of Leuschner, Jr., during the last year or two of corporate activities, but also in determining that there were unexplained interests and relationships among the family group justifying the court's concluding that the three members of the family held liable for Yosemite's debts constituted a unified and equally interested family group who would all have benefited from a successful conduct of the corporate affairs and who ought to be held as being the persons to be jointly and severally held liable for the debts of Yosemite if other conditions existed justifying disregard of the corporation.

Leuschner, Sr., testified that in the latter part of 1952 it had become impossible for Yosemite to conduct its business openly in its own name because it was continually hindered and harassed by the Reconstruction Finance Corporation, hereinafter called RFC, which held chattel mortgages on most of the equipment Yosemite was using and claimed chattel mortgage liens against other equipment. RFC, said Leuschner, Sr., was continuously litigating its claims against Yosemite, issuing attachments in the actions it brought and so impeding operations that it was concluded Yosemite could no longer continue in its own name to operate its business. For that reason it was decided to reactivate the dormat Kadota, which, though it had no assets, owed no debts. Yosemite had contracted with numerous growers for produce not yet matured which would be delivered. Leuschner, Sr., said it was believed that by turning over Yosemite's equipment to Kadota, that corporation could conduct the processing activities necessary to take care of the crops contracted for and could finance its operation through advances from brokers and others who would buy the processed crops, and through money furnished by members of the family. (Apparently no thought was given to capitalizing Kadota, or Yosemite, in the usual way of stock issuance for money received.) In the meantime Kadota would be free from harassing claims of RFC, and of other creditors of Yosemite. Leuschner, Sr., testified also that these plans would have been brought to fruition and would have been successful, and that profits would have been made and all debts would have been paid, had not the prices of finished products fallen disastrously.

From the foregoing the trial court could hold that the existence of Kadota as a corporation was seized upon as a device whereby Yosemite's business could be operated behind the protection of Kadota's corporate identity. We think it apparent that its participation in the whole of the activities here involved was only that of a closely held and controlled corporation compelled to engage in activities for the benefit of Yosemite and ultimately of the family group which owned both corporations.

It appears that Kadota's lack of capital and the insufficiency of its borrowing capacity against its products was recognized by the group as making it necessary that they supply further capital to it. This, however, they did not do by purchasing its stock or in any way furnishing capital assets, but by lending money to it, in this way being in a position to compete with other creditors if, in the outcome, Kadota should be unable to pay its debts. These loans were made and it was testified that they were made from the resources of the individuals making them. Richard Leuschner, Jr., his sister, and Mrs. Leuschner among them loaned approximately $100,000 to enable Kadota to continue processing the produce being purchased by and delivered to Yosemite. We think the record discloses that Kadota was no more than a ‘dummy’ corporation used by the Leuschner family to enable them to continue to carry on the business of Yosemite. The history of the entire venture, as given by Leuschner, Sr., and also by his son, is that of a business which was desperately using every avenue of credit to keep going. Both the Leuschner men testified that the entire venture would have been a success had not the creditors of Yosemite, notably the RFC, continually harassed Yosemite and thus caused damaging delays and had not prices fallen disastrously so that buyers of the finished products refused to receive the produce they had contracted to buy except at reduced prices reflecting the falling market. When the harassment by Yosemite's creditors took the form of attaching vital units of equipment without which the processing could not go on the Leuschners were compelled, according to the testimony, to relieve the situation by making advances to Kadota from their private resources, taking back the corporation's notes. They sometimes redeemed items of equipment from the demands of Yosemite's creditors by paying such demands and taking title to equipment so released in the name of the person who furnished the funds. Then the equipment would be leased to Kadota.

Appellants argue that a gross injusticehas been done the individuals held for the debts of Yosemite and that the true picture is one where, in order to save the growers from loss those individuals advanced large sums of money, aggregating about $100,000, all of which was lost in the final outcome. They point to the lack of any finding by the trial court that in all that they did appellants were guilty of actual fraud, but as has been heretofore stated a finding of actual fraud is never necessary in a case such as this. The test is whether or not the individuals ought in justice to be held or, conversely, whether or not releasing them from the asserted liability would work an injustice on those who dealt with the corporations. As to the advances they made the trial court could conclude that they were not motivated by a personal desire to save the growers from loss, but were made in the hope of profits to come and in order to induce the growers to continue to deliver. In this connection the trial court could consider that it was wrong for the family group to invite delivery of produce to the corporation, which was in itself insolvent, and was being aided and abetted by a second corporation equally insolvent, and that they could not justly continue to do business through the instrumentality of these two corporations without financing them sufficiently to meet their obligations.

When the entire record is considered we have no doubt the trial court's findings and judgment are substantially supported by the record. Many of the factors deemed material in determining that a court should hold individuals for the obligations of a corporation are here present. These corporations were family owned. Corporate records were either not kept or were so poorly kept as to amount to the same thing. There were many dealings between members of the family group and the corporations of such nature as to betoken an attitude and course of conduct on the part of the members of the group of ignoring the corporate entities in their transactions therewith and, finally, there was the doing of a large and risky business without adequately financing the corporations. Upon the record presented the judgment holding the individuals liable for the corporate debts must be affirmed.

Appellants contend that in any event they cannot be held for more than the claims of appellant Riddle for the reason this is not a case wherein he could bring a class action. According to the complaint which alleged that Riddle sued on behalf of himself and all others similarly situated the facts justified a class action, for the allegations asserted in part that the corporations had transferred assets to each other, mingled their assets together, and had transferred their assets to the individuals named as co-defendants with the corporations. A part of the relief demanded was that these assets be made subject to the demands of the creditors of Yosemite and that the individuals be enjoined from disposing thereof. Such allegations justified class actions, these allegations being accompanied by allegations that the parties interested were too numerous to make it practical that all of them be joined as named plaintiffs. The findings and judgment, however, ignored the allegations of fraudulent conveyances and the judgment embraced only money damages in the amount of the debts owing certain named parties, including Riddle. As to these creditors who were thus given money judgments they were specifically joined as plaintiffs during the course of the trial and to their joinder no objection was made. In so far as these individual judgments were concerned, therefore, any claim that they were not proper parties to a class action was waived.

The judgment appealed from is affirmed.

VAN DYKE, Presiding Justice.

PEEK, J., and WARNE, J. pro tem., concur. Hearing granted; CARTER, J., not participating.

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