Skip to main content

LYNCH v. SPILMAN (1967)

Reset A A Font size: Print

Court of Appeal, Second District, Division 4, California.

Thomas C. LYNCH, Attorney General of the State of California, Plaintiff, Appellant, and Cross-Respondent, v. Lyle A. SPILMAN, Ethel Spilman, Lyle A. Spilman, Jr., Carl C. Herold, Ann T. Herold, and Carlos Gonzales, Defendants, Respondents, and Cross-Appellants.

Civ. 29747.

Decided: February 08, 1967

Thomas C. Lynch, Atty. Gen. and Carl Boronkay, Deputy Atty. Gen., for plaintiff, appellant and cross-respondent. Hanrahan & Kippen, John P. Hanrahan, Harold Kippen and Robert W. Stanley, Los Angeles , for defendants, respondents and cross-appellants.

An organization known as Medicine Lodge was duly incorporated under the laws of California as a nonprofit corporation. During its corporate existence, it acquired certain real property which it devoted to its corporate purposes. The membership having declined, and the remaining members having concluded that the corporate structure no longed server any purpose, the corporation was dissolved and the real property was divided among the defendants, as the surviving members. They now propose to sell that property and treat the proceeds of sale as their own property. The Attorney General, acting pursuant to his powers as protector of charitable trusts, brought the present action, contending that the real property was impressed with a charitable trust and seeking a declaration to that effect, quieting title against the defendants, and asking that the deed to them be cancelled or, in the alternative, that defendants be declared to hold the real property as trustees for the alleged charitable purpose and that a successor trustee be appointed. After proceedings to settle the pleadings had been concluded, the Attorney General moved for summary judgment, supporting his motion by sundry declarations. No counter showing was filed1 and no appearance in opposition was made. The summary judgment was granted, declaring that the distribution to defendants of the assets of the corporation was improper; holding void the deeds conveying that property to the defendants; quieting title against defendants; and holding that the property was impressed with a charitable trust. The judgment reserved jurisdiction to appoint a successor trustee.

Thereafter defendants, through new counsel, filed a motion (under section 473 of the Code of Civil Procedure) to vacate the summary judgment. After a hearing, that motion was granted. The Attorney General has appealed from the order vacating the summary judgment and the defendants have cross-appealed from the judgment itself.

The Attorney General urges several grounds for reversal of the order vacating judgment. Since we conclude that that order was erroneous for the reason that defendants failed to show that they had a meritorious defense to the motion for summary judgment, we need not consider the procedural objections urged. In our consideration, we evaluate the summary judgment in the light of all declarations that were before the court at the time the motion to vacate was considered.

I

It must be remembered that the issue in this case is whether or not the real property involved is the corpus of a charitable trust. The status of Medicine Lodge as a ‘charitable corporation’ is important only insofar as the status of the corporation sheds light on the status of the property which defendants claim and of which the Attorney General seeks to dispossess them.2

If property is held by a corporation, and if the sole corporate purpose of that corporation is charitable in nature, it would necessarily follow that the property was impressed with a trust for the charitable purposes of the corporation, since the corporation could not lawfully hold property on any other basis.3 But property may be held on a charitable trust by a corporation which is not itself charitable. Where the articles of incorporation do not exclude the possibility that property was held in a noncharitable status, the courts must resort to evidence de hors the articles to determine the existence or nonexistence of a trust.4

Since articles of incorporation rarely express a single purpose, a preliminary problem is the interpretation of that document. As the Attorney General points out, the mere inclusion of matters common to all corporations—such as the power to buy, sell, mortgage, lease, and otherwise deal with real and personal property—are of little if any significance.5 But where the articles, on their face disclose that the corporation has been formed for two or more purposes, some of which are noncharitable, it becomes important to decide which, if any, are dominant purposes and which, if any, are subordinate and incidental. While a reading of the articles themselves may answer this question, it is more likely that resort must here, also, be had to evidence outside the articles. Again, if the articles, as illuminated by this other evidence, disclose that the corporation exists primarily for charitable purposes, the inference that its property was held on a trust for that purpose follows quite naturally. If the articles, so illuminated, disclose that any charitable purpose was minor and quite incidental to the noncharitable purposes, the opposite inference follows. And if the conclusion is reached that the corporation existed for charitable and noncharitable purposes in substantially equal degree, no inference in either direction follows and, unless evidence sufficient to show a trust on the part of a purely noncharitable corporation can be adduced, a litigant seeking to impress a trust will naturally fail.6

II

With these principles in mind, we turn to examine the evidence before the trial court and which would be before it if the order vacating the judgment stands and the Attorney General's motion for summary judgment is again brought on for hearing.7 We approach this evidence remembering that, as indicated in footnote number 7, the issue before the trial court, and before us, is not whether, after weighing opposing evidence and opposing inferences, the Attorney General should prevail, but whether the evidence, and the only possible inferences, point in a single direction, i. e., towards a conclusion favorable to his position.

The articles of incorporation, so far as herein pertinent, provide as follows:

‘SECOND: The purposes for which said corporation is formed are:

‘1. To promote, foster, encourage and sponsor activities for the character building of boys and to advance the educational, vocational, recreational, civic, social, commercial and economical interest in and about El Monte, California, and surrounding areas in the County of Los Angeles, State of California.

‘2. To promote sociability and friendship amongst its members and others. To manage and conduct entertainments, excursions, social meetings and such activities as hiking, swimming, crafts, camp-outs and nature lore.

‘3. To promote the theory and practice of the principles of good government and good citizenship.

‘4. To unite the members in the bonds of friendship, good fellowship and mutual understanding.

‘5. To provide a forum for the full and free discussion of all matters of public interest, partisan politics and sectarian religion alone excepted.

‘6. To encourage efficiency and promote high ethical standards in business and professions.

‘7. To hold, lease, buy, own, develop and sell property, real and personal, to borrow money and issue bonds or other evidences of indebtedness, and to execute mortgages or deeds of trust to secure same.

‘8. To render such benevolent aid and comfort to its members as may be provided by its by-laws.

‘9. To encourage and assist in public improvements of all kinds therein, including streets, highways, sewers, public buildings, and any and all things which are for public good; to locate schools in the location, and development therein of factories, manufactures and other industries.

‘10. To promote integrity and good faith, just and equitable principles in business and professional activity and uniformity in commercial usages, and to acquire, preserve and distribute educational, civic, social, commercial and economic statistics and information of value; to discover and correct abuses; to prevent or adjust controversies; to have a part as representing this district in the consideration and decision of public policy and municipal, county, state and national affairs.

‘11. To organize and conduct any other bureau or bureaus, or exchanges, which the board of directors may decide shall be beneficial or necessary in the building up of said district and for the best interests thereof and of this organization.

‘12. To do and exercise all powers necessary, suitable or proper for the accomplishment or attainment of any or all of the objects hereinbefore enumerated, or which at any time appear conducive to, or expedient for the carrying out of the objects and purposes of fostering and promoting the commercial, industrial, social, physical, and moral development, of the community hereinbefore mentioned, and for the protection or benefit of this corporation.’

We may lay to one side the provisions of paragraphs 7 and 11, and the opening portions of paragraph 12, as being of the sort of general provision to which we have referred in footnote 5 and which shed no light on the charitable or noncharitable nature of the corporation. The provisions of paragraphs 1, 3, 5, 6, 9 and 10, clearly indicate a charitable purpose. (Estate of Henderson (1941) 17 Cal.2d 853, 857, 112 P.2d 605; Young v. Boy Scouts of America (1935) 9 Cal.App.2d 760, 51 P.2d 191.) On the other hand, paragraphs 2, 4 and 8, with their emphasis on social and benevolent activities point to a corporation organized for noncharitable purposes. Since the articles, thus, permit two conflicting inferences as to the charitable or noncharitable nature of the corporation, neither the trial court nor this court may, in this summary judgment proceeding, attempt to characterize the corporation, nor even to decide that the noncharitable powers and purposes were, as above discussed, ‘dominant’ or ‘incidental.’

Because the articles tell us no more than that the corporation may or may not have been exclusively charitable in nature, we turn to examine the evidence of its conduct thereunder, as disclosed by the several declarations presented to the trial court.

The declarations filed on behalf of the Attorney General disclose the following:

(1) On September 29, 1943, the corporation, by an application executed and acknowledged by Lyle Spilman, applied for permission to file its articles of incorporation without payment of a franchise tax. The application, thus executed and acknowledged, read as follows:

‘Comes now Medicine Lodge and sinultaneously [sic] with the filing of its Articles of Incorporation with the Secretary of State of the State of California, files this, its application to the Franchise Tax Commissioner of the State of California for exemption from the prepayment and/or payment of a Franchise tax, and alleges as follows:

‘I.

‘That Medicine Lodge is an association of individuals as a Corporation for the purposes, solely of promoting the character building of boys and to advance the educational, vocational, recreational, civic, social, commercial and economical interests in and about the City of El Monte, California, and Surrounding areas in the County of Los Angeles, State of California.

‘II.

‘That the said Corporation is organized as a non-profit corporation and is not formed for pecuniary gain, or profit, either directly or indirectly for any of its members and the Corporation shall have no capital stock, and that there are no shares of stock.

‘WHEREFORE, petitioner prays that it be permitted to file its articles of Incorporation without the payment of a Franchise Tax.’

This application was duly granted and the exemption thus accorded was never removed.

(2) In 1946, the corporation applied to Hollywood Turf Club Associated Charities, Inc., for a donation from that body. The policy of that donor limited its gifts to corporations exclusively charitable in nature and the application made on behalf of Medicine Lodge represented that it was of that character. The application was successful and a donation was received.

(3) In connection with the application to Hollywood Turf Club Associated Charities, Inc., the then attorney for Medicine Lodge procured official letters from the Commissioner of Internal Revenue and from the Franchise Tax Commissioner, both of which contained findings that Medicine Lodge was exclusively charitable.8 These letters were transmitted to Hollywood Turf Club Associated Charities, Inc., in support of the request for a donation above mentioned.

(4) The membership application used by the corporation stated that it was a ‘charitable, nonprofit, fraternal organization, founded to serve youth.’ Brochures distributed to the public carried the motto ‘Service to Youth.’ A postcard sent to members announcing a meeting reads: ‘REMEMBER WE ARE STRIVING TO SERVE THE YOUTH OF OUR COMMUNITY AND GIVE THEM A PLACE TO HELP THEIR LEADERS BUILD CHARACTER.’ Bank checks also had the motto ‘Service to Youth,’ and a letter addressed to the membership seeking dues stresses providing facilities for youth.

The declarations of Mr. Spilman set forth the following:

(1) That he was the originator of the concept of Medicine Lodge; and that his purpose was ‘to provide an organization or club for family social activities'; that ‘as an incident to the club operation, it was intended that the organization would be able to permit its facilities to be used by youth groups such as the Boy Scouts and by church groups'; and that ‘during the time that the club was active, the activities of the club included regular monthly family social activities at the club property, where entertainment would be had, games would be played, and crafts would be studied such as metal work and the making of Indian artifacts. There were family campouts and hiking before the area became built up with homes. Family meetings were usually potluck and were held at least monthly. The club had an annual Christmas party. In addition, * * * the club had entries in local parades and in the Pomona County Fair. One member * * * frequently entertained the members with an Indian show and also conducted classes on Indian Lore for members.’

(2) That, except for one year, he was a member of the ‘Board of Control’ of the corporation and that, during his membership on the Board, the corporation had not solicited contributions from any ‘organized charities or other groups'; and that the corporation had been asked to become a member of the Community Chest but had refused.

(3) That ‘From the inception of Medicine Lodge, we did allow various youth organizations to use our property. Our main purpose in organizing Medicine Lodge was to benefit those who became members and their families, and as I previously declared we did use it for said purposes. Also, as a project of the organization and one of its aims was to benefit the youth of the community. At no time did I believe that Medicine Lodge was other than a social organization for the benefit of its members which organization had as one of its aims the assisting of youth organizations with their programs.’

Since the statute requires that affidavits in opposition to a motion for summary judgment set forth facts, and not opinions nor conclusions,9 we lay aside the portion of the two Spilman declarations which are purely conclusionary and those which go only to his subjective feelings and ideas as an individual. There remain, however, sufficient statements of fact, purportedly as to matters within the declarant's own knowledge, to show that there had been substantial use of the property for uses which, on a trial, might well have been found to be purely social and not charitable. But the declarations offered by defendants, taken together, nowhere deny the specific facts set forth in the declarations presented by the Attorney General.10 For reasons set forth below, we conclude that, accepting as true all of the factual allegations contained in defendants' declarations, the uncontradicted facts show, as a matter of law, that the property herein involved had been dedicated to a charitable use, whether or not the corporation itself was exclusively charitable in nature.

We agree with counsel for defendants that the application for exemption from the state franchise tax, above quoted, was general in from; that it did not, in terms, expressly seek an exemption under section 23701d of the Revenue and Taxation Code; and that, as presented, an exemption could have been granted under section 23701g. However, the corporation accepted the tendered exemption as a charitable corporation under section 23701d, it sought and obtained an exemption from the federal income tax as a corporation exclusively charitable, and it utilized the exemptions thus granted in order to secure the donation from the Hollywood charity. The exemptions thus secured not only relieved the corporation from its own taxes, but they made contributions to it deductible on the tax returns of any of its donors.

The conduct above described was done in the name of the corporation; nowhere do defendants suggest that the acts were not authorized, nor that the corporation ever repudiated them, or that the corporation ever attempted to reject or to surrender the important tax exemption as a charitable corporation which had been given to it.

Under these circumstances, the corporation necessarily must be held to have dedicated to a charitable use, the property which it held when the charitable exemptions were thus utilized; the real property herein involved was within that dedication.

It is unimportant and irrelevant that the corporation may, thereafter, have engaged in noncharitable and purely social activities. It is well settled that the inclusion of incidental social activities do not necessarily derogate from a basic charitable purpose.11 If, in fact, the corporate officers encouraged and permitted social activities to become more than incidental, they cannot now set up that breach of their fiduciary duties to justify a further breach.

Since the declarations tendered by defendants, taken at full value, do not deny or contradict the facts from which, as a matter of law, the dedication of the property herein involved must necessarily be found, defendants have shown no meritorious defense to the motion for summary judgment and, therefore, no grounds for vacating the judgment already entered.

The order appealed from is reversed; the judgment is affirmed.

FOOTNOTES

1.  An earlier motion had been made before a commissioner and denied. A declaration by defendant Spilman had been filed in connection with that motion, was in the file and, although not specifically drawn to the court's attention, presumably was considered by it.

2.  It follows that cases in which the sole issue was whether or not a particular corporation was exempt from franchise or income taxes are not necessarily controlling here. As explained below, a holding in favor of exemption is significant, a contrary holding merely requires further inquiry into other facts.On the other hand, cases dealing with the issue of whether or not any corporate asset has been ‘irrevocably dedicated’ to a charitable purpose, so as to invoke the so-called ‘welfare exemption’ from real property taxes, are in point, subject to the fact that, since that exemption extends only to certain, and not all, ‘charitable’ uses of property, the exemption has been denied in cases where the dedication was not to the particular charitable use contemplated by the constitutional provision invoked.

3.  ‘Similarly, all the assets of a corporation organized solely for charitable purposes must be deemed to be impressed with a charitable trust by virtue of the express declaration of the corporation's purposes, and notwithstanding the absence of any express declaration by those who contribute such assets as to the purpose for which the contributions are made. In other words, the acceptance of such assets under these circumstances establishes a charitable trust for the declared corporate purposes as effectively as though the assets had been accepted from a donor who had expressly provided in the instrument evidencing the gift that it was to be held in trust solely for such charitable purposes.’ (Pacific Home v. County of Los Angeles (1953) 41 Cal.2d 844, 852, 264 P.2d 539, 543.)As pointed out in footnote number 2, supra, the ‘welfare exemption’ did not apply to all charitable orgnizations. Hence, in such cases as Pasadena Hospital Assn. v. County of Los Angeles (1950) 35 Cal.2d 779, 221 P.2d 62, and other cases cited in footnote number 6, infra, the corporations had purposes which were not within the limited group of ‘charities' to which the tax exemption claimed applied and, therefore, were not exclusively ‘charitable’ for the purpose of those cases, although it probably was ‘charitable’ within the concept herein involved.

4.  The most common evidence of this sort would be evidence that the property involved, or the fund used for its purchase, was given to the corporation on an express trust for a charitable purpose. Since an owner may declare itself a trustee, there may be evidence that the corporation's own acts amounted to such a dedication.

5.  ‘The further enumerated powers of plaintiff to buy and sell property, to make contracts, to receive devises and bequests, to borrow money, to contract debts and to do ‘all other acts necessary or expedient for the administration of the affairs and attainment of the purposes of the corporation’ are all powers which a nonprofit corporation has by statute, Corporations Code, § 9501, and which plaintiff would possess without their recital in its articles. Davis v. Pacific Studios Corp., 84 Cal.App. 611, 615, 258 P. 440. The statement in the articles that the ‘enumeration of specific powers shall not be held to limit or restrict in any manner the powers of this corporation’ does not purport to be a general grant of power. Rather it appears to be a precautionary clause to signify that the incidental powers reasonably necessary to effectuate plaintiff's main purposes shall not be limited by their specific enumeration. See 7 Fletcher Cyclopedia Corporations, Perm. Ed., ch. 42, § 3648, p. 780. It does not give plaintiff any powers except such as are specifically conferred by the articles and those given by statute. Such powers are not unlimited powers, but are subordinate to plaintiff's main objects and purposes, which are wholly charitable.' (Pacific Home v. County of Los Angeles (1953) 41 Cal.2d 844, 850, 851, 264 P.2d 539, 542.)

6.  In Pasadena Hospital Assn. v. County of L.A. (1950) 35 Cal.2d 779, 221 P.2d 62; Goodwill Industries v. County of L.A. (1953) 117 Cal.App.2d 19, 254 P.2d 877; and Moody Institute of Science v. County of L.A. (1951) 105 Cal.App.2d 107, 233 P.2d 51, the articles of incorporation disclosed purposes which were partly within the tax exemption statute and partly without. There was no showing that any act of dedication, other than by the articles, had taken place. The statute and constitutional provision required both ‘use’ and ‘dedication’ to an exempt purpose. Under these circumstances, the cases held that, no extrinsic evidence of ‘dedication’ being offered, the court could look only to the articles and that they did not show that any particular property was ‘irrevocably’ dedicated to an exempt purpose. These cases are not, therefore, helpful here where evidence is offered to show a dedication by acts de hors the articles.

7.  ‘Before the trial court can be called upon to exercise its discretion in relieving from a default judgment, however, the party in default must show not only a good excuse for his default, but also, that he has a meritorious defense to the action.’ (Beard v. Beard (1940) 16 Cal.2d 645, 648, 107 P.2d 385, 387.) In the instant case, of course, the defendants were not required to show that they would prevail on a trial but only to show that there was an actual issue of fact to be tried—i. e. the burden was to show that they had a meritorious defense to the motion for summary judgment. And, in that connection, we bear in mind the rule that the declarations of the party moving for summary judgment are to be construed strictly and those of the party opposing a summary judgment are to be construed liberally. (Stationers Corp. v. Dun & Bradstreet, Inc. (1965) 62 Cal.2d 412, 42 Cal.Rptr. 449, 398, P.2d 785.)However, unless the party seeking to vacate a default summary judgment can show that, on rehearing of the motion for summary judgment, a different result could reasonably be expected to follow, it would be a useless act to vacate the judgment already entered merely to enter the same judgment after the rehearing. Consequently, it was the duty of defendants here, in pressing their motion for relief from the default judgment, to tender to the trial court whatever declarations they could procure which would show that, if the judgment were reopened, the motion for summary judgment could have been defeated. (Zancaner v. Louisville & N. R. Co. (1963) 220 Cal.App.2d 836, 839, 34 Cal.Rptr. 143.)

8.  The Commissioner of Internal Revenue found that Medicine Lodge, Inc., was exempt from federal income tax under section 101(6) of the Internal Revenue Code of 1939 (corresponding to section 501(c)(3) of the 1954 Code), and that contributions to the corporation would be deductible by the donors under sections 23(o) and 23(q) of the 1939 Code (corresponding to section 170(a) of the 1954 Code).The Franchise Tax Commissioner had ruled that the corporation was exempt from franchise tax under the forerunner of what is now section 23701d of the Revenue and Taxation Code, and that contributions to it were deductible under what were then section 8(i) of the Bank and Corporation Franchise Tax Act, section 7(1) of the Corporation Income Tax Act, and sections 17315 et seq., of the Revenue and Taxation Code (now § 17214, subd (b), and § 24357, subd. (b), Revenue and Taxation Code.)

9.  ‘* * * affidavits in opposition to said motion * * * shall set forth facts showing that the party has a good and substantial defense * * *’ (Code Civ.Proc. § 437c)

10.  The allegations concerning the application for and receipt of a charitable tax exemption is nowhere denied. The allegation concerning the application to, and receipt of a grant from, the Hollywood Turf Club Associated Charities is denied only to the extent that Spilman denies that it was made during any year he was on the Board of Control; that it was made during some other year is not denied.The declarations show that the property was purchased out of dues paid by the members, from contributions made by members, and from prizes won by its members at the County Fair. This proves no more, and no less, than that the property was purchased out of funds dedicated to the purposes of the corporation, whatever those purposes were.

11.  ‘* * * members of a charitable organization often participate in its activities with the object of making new friends and participating in pleasurable group activities in the course of carrying out the charitable purposes of the organization, * * *.’ (In re Los Angeles County Pioneer Society (1953) 40 Cal.2d 852, 860, 257 P.2d 1, 6.)

KINGSLEY, Associate Justice.

FILES, P. J., and JEFFERSON, J., concur. Hearing granted; MOSK, J., not participating.

Copied to clipboard