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SHEA et al. v. LEONIS et al.*
Demurrers to the second amended complaint in the present action were sustained without leave to amend as to J.B. Leonis, Sr., J.B. Leonis, Jr., and Adelina F. Leonis, Jr.; the same order was entered as to defendant Boyle Avenue Investment Company, except as to the third cause of action, and as to J.B. Leonis, Inc., except as to the sixth cause of action. Judgment was accordingly entered in favor of defendants, from which plaintiffs appeal.
In the second amended complaint which is under attack it is alleged that in January, 1934, plaintiffs leased certain property in the city of Vernon to O. Nicholas Gabriel for a term of ninety-nine years, at certain specified rentals. Less than a month later the lessee, Gabriel, assigned the lease to J.B. Leonis, Inc., by an assignment in which J.B. Leonis, Inc., expressly assumed and agreed to perform all the terms, conditions and covenants in the lease; that J.B. Leonis, Sr., and J.B. Leonis, Jr., own all of the capital stock of J.B. Leonis, Inc., and are, respectively, the president and secretary of said corporation, which it is alleged is completely controlled and dominated in its corporate acts by J.B. Leonis, Sr., and J.B. Leonis, Jr. That J.B. Leonis, Inc., was organized for the sole purpose of acting as the agency for J.B. Leonis, Sr., and J.B. Leonis, Jr., in the conduct of their business affairs, has acted as such agent, and as a matter of fact is but J.B. Leonis, Sr., and J.B. Leonis, Jr., acting in a corporate capacity.
Further, it is alleged that in 1931, after holding the lease for seven years, J.B. Leonis, Sr., and J.B. Leonis, Jr., who were acting through their corporate agent, J.B. Leonis, Inc., conceived a fraudulent scheme to terminate their liability under the lease. It is then alleged that this scheme was to organize a wholly-owned subsidiary, to-wit, Boyle Avenue Investment Company, an insolvent concern, and to cause J.B. Leonis, Inc., to assign to the newly organized company the leasehold interest, for the express purpose of terminating their own liability and preventing any recovery by the lessors for breach of the lease contract, thereby hindering, delaying and defrauding creditors, to-wit, plaintiffs herein.
The second amended complaint then proceeds to allege that J.B. Leonis, Sr., and J.B. Leonis, Jr., and J.B. Leonis, Inc., and the latter's officers and directors, carried out the alleged fraudulent scheme, as follows: That they caused Boyle Avenue Investment Company to be organized for the sole purpose of acquiring the lessee's interest in the lease; that J.B. Leonis, Sr., and J.B. Leonis, Jr., acting by and through J.B. Leonis, Inc., assigned the lease to Boyle Avenue Investment Company, which last-named corporation, it is alleged, had no other assets, and is insolvent. By the terms of this assignment, it is alleged, Boyle Avenue Investment Company assumed and agreed to perform all of the terms of the lease. It is then set forth that J.B. Leonis, Jr., and Adelina F. Leonis, Jr., own all of the stock of Boyle Avenue Investment Company in trust for J.B. Leonis, Sr., and J.B. Leonis, Jr., and that no other person other than the two last named ever paid any consideration for the stock of Boyle Avenue Investment Company. It is then charged that J.B. Leonis, Jr., is president of Boyle Avenue Investment Company, and that the corporation and its officers are completely controlled and dominated by J.B. Leonis, Sr., and J.B. Leonis, Jr.; that Boyle Avenue Investment Company was organized for the sole purpose of taking over the lease and acting as the agent of J.B. Leonis, Sr., and J.B. Leonis, Jr., in the conduct of their business affairs, has acted as such agent, and, as a matter of fact, is but J.B. Leonis, Sr., and J.B. Leonis, Jr., acting in a corporate capacity. Default in the lease payments on the part of Boyle Avenue Investment Company is then alleged. It is then charged that Boyle Avenue Investment Company is a fraudulently organized corporation created by J.B. Leonis, Sr. and J.B. Leonis, Jr., to take over the lease and thereby defraud the lessors of their rent by substituting an insolvent lessee for a solvent one. The amended complaint here in question then proceeds to allege that J.B. Leonis, Sr., and J.B. Leonis, Jr., through their corporate agent, Boyle Avenue Investment Company, were in default at the time of the commencement of this action in the sum of $16,833.331/313 for unpaid rentals and $5,435 for unpaid taxes.
The demurrers interposed were both general and special, and the order sustaining the demurrer was not limited either to general or special demurrers or to any one of the several grounds therein contained.
Appellants concede that by its terms the lease here in question gave to the lessee, J.B. Leonis, Inc., the right to assign said lease at any time and thereby become released from liability under the instrument. Appellants admit that if the assignment of the lease was a bona fide transaction they would have no cause of action, but contend that their second amended complaint shows a deliberate attempt upon the part of respondents, by means of a corporate screen, to prevent the collection of rents by appellants from the lessee, while at the same time in fact reserving to respondents any benefits that might accrue from said lease. We find ourselves in accord with appellants' claim in this regard. Notwithstanding the right given to the lessee to assign the lease and thereby relieve itself of its obligations thereunder, nevertheless, if the assignment in question was made to an alter ego of the lessee with the sole object of preventing the lessors from collecting rents because of the insolvency of the alter ego assignee, while retaining to the lessee any benefits that might accrue under the lease, such allegations would be sufficient to state a cause of action that the new lessee was only the old one under another name, and that the responsibility of the latter was not impaired by such a merely nominal transfer. Higgins v. California Petroleum, etc., Co., 122 Cal. 373, 55 P. 155.
Coming to a consideration of the aforesaid allegations of the second amended complaint, they would seem to be sufficient as against a general demurrer. Before the acts and obligations of a corporation can be legally recognized as those of a particular person or persons and vice versa, two circumstances must be present: First, that the corporation is not only influenced and governed by that person or persons, but that there is such a unity of interest and ownership that the individuality or separateness of said person or persons and the corporation has ceased; and second, that the facts are such that an adherence to the fiction of the separate existence of the corporation would under the particular circumstances sanction a fraud or promote injustice. Erkenbrecher v. Grant, 187 Cal. 7, 200 P. 641; Llewellyn Iron Works v. Abbott Kinney Co., 172 Cal. 210, 155 P. 986. There is an adequate observance of the first requirement above set forth in the second amended complaint before us, because plaintiffs do not merely aver that Boyle Avenue Investment Company was an instrumentality which was used for the benefit of J.B. Leonis, Inc., and the individual defendants named, but in substance and effect the second amended complaint alleges that the Boyle Avenue Investment Company was but the double or alter ego of J.B. Leonis, Inc., and the individual defendants named. That is to say, facts are alleged showing the virtual identity of both corporations and the individual defendants.
With regard to the second requisite, it may be conceded that the allegations of the second amended complaint are not as definite as might be desired, and the interests of clarity would doubtless be subserved by an amendment in this respect. Nevertheless, the second amended complaint is not fatally defective, the allegations being sufficient to reveal a situation of impending and probable injustice through the deprivation of plaintiffs from collecting their rent while retaining to the lessee through its alter ego any benefits that might flow from the lease. It is not necessary that the complaint allege actual fraud; it is sufficient if the facts set forth disclose that the dealings were in form with Boyle Avenue Investment Company, but in reality with J.B. Leonis, Inc., and the individual defendants constituting such company, and that a refusal to recognize this fact will bring about inequitable results.
If the allegations of the amended complaint are true, then J.B. Leonis, Inc., and the individual defendants owning the capital stock are doubtless liable for the debts of Boyle Avenue Investment Company, for it is well settled that inasmuch as the separate personality or capacity of a corporation is but a statutory privilege, it must not be utilized for fraudulent purposes, such as a cloak or disguise for the evasion of contracts or other obligations.
It is next contended by respondents that this action is barred by the statute of limitations, particularly section 338 of the Code of Civil Procedure, which provides for a three-year limitation upon actions sounding in fraud. This claim cannot be sustained, for it is obvious from the amended complaint that the suit is one upon contract and is not an action ex delicto for fraud. The recovery which is sought by plaintiffs is of a definite sum of money due upon a contract of lease for the payment of rent, and is accordingly governed by the four-year period of limitations upon actions based upon a written instrument. Code Civ.Proc., sec. 337; Stanford Hotel Co. v. M. Schwind Co., 180 Cal. 348, 353, 181 P. 780.
Finally, respondents urge an affirmance of the judgment on the ground that at least some of the grounds of the special demurrers are well taken, and that if a demurrer is well taken on any of the grounds specified therein, the ruling of the trial court must be sustained on appeal. Some of the special grounds of demurrer undoubtedly were well taken so far as uncertainties, ambiguities, and legal conclusions appearing in the pleading are concerned. This being so, respondents argue that the action of the trial court sustaining the demurrer without leave to amend does not constitute reversible error, even if the general demurrers were not well taken, in the absence, as herein, of a request or application by the plaintiffs for permission to amend. Fitzpatrick v. Fidelity & Casualty Co., 7 Cal.2d 230, 60 P.2d 276. However, the instant case is distinguishable from Koster v. Local No. 33, etc., 2 Cal.App.2d 612, 613, 38 P.2d 423, relied upon by respondents, because in the Koster Case it did not appear that plaintiff sought leave to amend his complaint, nor did either side upon appeal present arguments in connection with the special demurrers, and the court refused to reverse the judgment on the ground that leave was not granted, when no such leave was asked; while in the case before us the record discloses a nunc pro tunc order denying plaintiffs' motion for leave to amend. This order, it is true, was subsequently vacated, but in the affidavits filed by plaintiffs' attorney in opposition to the motion to vacate such order it appears that plaintiffs' counsel was under the impression and belief that he had made a motion for leave to amend and that the same was denied. In fairness to respondents, it should be noted that the order sustaining the demurrers without leave to amend was made March 16, 1937, in the presence of appellants' counsel, while the judgment based thereon was not entered until March 23, 1937, a period of some seven days, during which time appellants' counsel had personal notice of the order sustaining the demurrers without leave to amend. The law favors the determination of lawsuits upon their merits rather than upon technicalities, and where, as here, the uncertainties, ambiguities, and legal conclusions appearing in the pleading might be corrected by amendment, the court should allow an opportunity for such amendments to be made. Assuming, as we must from the action of the trial court vacating the order denying plaintiffs leave to amend, that plaintiffs did not request leave to amend, nevertheless, neither did they refuse so to do, nor were they offered or afforded such an opportunity. Viewing the facts of this case as presented by the record before us, we have no hesitancy in saying that the interests of justice dictate that plaintiffs be accorded an opportunity to further amend their complaint if they be so advised.
The purported appeals from the order sustaining the demurrers and denying plaintiffs' application to amend are dismissed.
For the foregoing reasons, the judgment appealed from is reversed and the cause remanded for further proceedings in accordance with the views herein expressed.
WHITE, Justice.
We concur: YORK, P.J.; DORAN, J.
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Docket No: Civ. 11579
Decided: December 15, 1938
Court: District Court of Appeal, Second District, Division 1, California.
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