GREEN GABLES HOME OWNERS ASS v. SUNLITE HOMES (1949)

Appellant Association sued to enjoin the construction by respondent Sunlite Homes, Inc., of a group of dwellings located in Tract No. 66, Green Gables, a subdivision in Palo Alto, and for other relief. A temporary injunction was granted, but the trial resulted in the denial of a permanent injunction, whereupon this appeal was taken.

In February, 1938 San Jose Abstract and Title Insurance Co., while sole owner of this tract containing 184 lots, recorded a “declaration of conditions, restrictions, covenants and charges” covering the subdivision. In April, 1938 the Title Company recorded an amended declaration superseding the first one.

This instrument recites that it is made for the direct benefit of all the property, shall run with the land, and continue until January 1, 1962. It restricts the buildings to single family dwellings and garages, except for a few stores, and prescribes a minimum floor area of 1,000 square feet for each dwelling. It provides for front and side set-back lines, and contains numerous other provisions usually found in such declarations.

Clause 4 provides: “Approval of Plans. That no building or structure shall be erected, placed or maintained upon such property until the plans therefor shall have been submitted to and approved in writing by declarants, their successors or assigns, or by their agents or the corporation hereinafter mentioned and authorized to be formed.”

Such corporation is provided for in clause 7 as follows: “Formation of Corporation To Enforce Conditions. That the majority of the property owners within said subdivision may at any time while these restrictions or a substantial portion of them remain in force, form under the laws of the State of California a non-profit, cooperative corporation without capital stock, but with one share thereof appurtenant to each of the lots in such subdivision. Such corporation, when formed, shall have the power to interpret and enforce certain of the conditions, covenants and charges set forth in this declaration as hereinafter provided.”

In April, 1946, 54 persons representing 37 lots signed the articles of appellant Association, a nonprofit California corporation, and a certificate of incorporation issued. The articles provided that each lot owner should be a member and have one vote regardless of the number of lots owned by him.

The determination of this case turns on the question of voting power within the Association. Respondents contend, as the court found, that a member is entitled to as many votes as he has lots, while the appellants contend that a member is entitled to but one vote regardless of the number of lots owned by him.

Some time before this controversy arose 51 lots had been sold to individual owners, who built homes respecting which there is no question as to conformity.

This controversy started early in 1946. Before the incorporation respondents Barrett & Hilp, a firm of contractors, had bought en bloc the remaining 133 lots and prepared to build homes on some of them. A dispute had arisen between Barrett & Hilp and the other owners respecting the plans for the houses which Barrett & Hilp proposed to build. This controversy continued after the appellant Association was incorporated, but an agreement was reached and the Association ultimately approved the plans for 12 homes and entered into a writing with Barrett & Hilp wherein the latter recognized the Association as the entity contemplated by the recorded restrictions vested with the power of approval or disapproval of plans, and wherein they agreed that before they built any further homes their plans would be submitted to the Association in accordance with the amended declaration.

In the fall of 1946 Sunlite purchased en bloc from Barrett & Hilp their remaining 121 lots, with knowledge of the earlier controversy, and submitted plans for 116 homes which it proposed to build. The Association's architect advised that such construction would adversely affect the tract and its property values, and the Association disapproved the plans and so notified Sunlite. Sunlite commenced construction notwithstanding, and the Association filed this suit to enjoin the work.

In granting the temporary injunction, the judge wrote an opinion in which he held that the Association was the entity vested with power under the amended declaration to enforce the restrictions on the tract, but stated: “I do not intend to pass upon the rights of the defendants with respect to said corporation plaintiff; but I may point out that such rights, whatever they are, should be sought within the corporation, before a resort is made to the Courts for their enforcement.”

Apparently acting on this suggestion respondents had two representatives at the annual meeting held while the temporary injunction was in effect, one representing Sunlite, the other Barrett & Hilp. This meeting brought to a sharp and crucial test, as perhaps nothing else could have done, the question of voting power. The meeting was attended by 39 persons owning one lot each and by said 2 persons representing the respondents, who owned 133 lots between them. What went on at this meeting is best told by the trial judge in his opinion, as follows:

“Prior to the commencement of this action, plaintiff had been duly incorporated; and proceeded to function as the corporation designated in the declaration of restrictions. Defendant presented plans for building on said tract; and, after considerable delay and discussions, those plans were, by plaintiff, acting through its board of directors, disapproved. This action was in all respects lawful, and within the powers conferred by the declaration. Up to this time, and up to the time of the hearing of the preliminary injunction, no attack had been made on the voting provisions of the articles of incorporation and by-laws of plaintiff. Nor had defendant, Sunlite Homes, attempted to exercise, or claimed, any voting rights within the corporation, such as are now asserted. Since that hearing, however, a meeting of said plaintiff corporation was duly called and held on January 2nd, 1947. At that meeting there were present 39 persons, each owning one lot in said tract, and two persons owning an aggregate of 133 lots. * There were, then, present and participating in this meeting, 41 lot owners representing 172 lots owned by them. The owners of the remaining 12 lots in the tract were not present, or, if present, did not participate in the proceedings. Obviously, then, we have a duly called and organized meeting of the plaintiff corporation, with a full quorum present and participating.

“A motion was then duly made and seconded, to remove the then functioning board of directors. On a vote being taken on this motion, two persons, owning 133 lots voted aye, and 39 persons, owning 39 lots voted nay. Counting persons, the motion was lost by a vote of 39 to 2. Counting lots, the motion was carried by a vote of 133 to 39.

“Following this vote, a motion to adjourn was put; and 39 persons, with 39 lots voted aye, and 2 persons with 133 lots voted nay. The minority of persons and majority of lots then proceeded with the meeting, on the theory that the first motion had been carried and the second one lost. A new board of directors was elected at this prolonged meeting. The new board was organized and then proceeded to consider the proposed building plans which had previously been disapproved by the other board of directors. These plans were approved and this meeting adjourned.”

The trial court held that clause 7 of the declaration hereinabove quoted entitled Barrett & Hilp and Sunlite Homes, Inc. to one vote for each lot owned by them and accordingly entered the judgment in their favor from which this appeal is taken.

The question upon which the proper decision of the case depends is the construction to be put upon clause 7 of the declaration and particularly on the meaning of the language: “a non-profit, cooperative corporation without capital stock, but with one share thereof appurtenant to each of the lots in such subdivision.”

It is is elementary that the existing laws on the subject entered into and became a part of the declaration “as fully as if they were expressly referred to and incorporated in its terms.” 6 Cal.Jur. 310–311; 4 Cal.Jur. 10 Yr.Supp., 1943 Rev., 138. When we look to the existing laws we find that the only law under which a nonprofit corporation without capital stock of the character contemplated by the declaration could then be formed was Division First, Part IV, Title XII, Article I, secs. 593–605e, of the Civil Code, now Tit. 1, Div. 2, Pt. 1 of the Corporation Code, sec. 9000 et seq. Sections 600 and 603 of the Civil Code as they then read make it clear that a characteristic feature of this type of corporation is that, unless otherwise expressly provided in the articles of incorporation, each member shall be entitled to one vote. Sec. 600 read in part: “A nonprofit corporation shall have such memberships or classes thereof as may be specified in the articles or by-laws, but unless otherwise provided there shall be but one class of members whose rights and interests shall be equal.”

Sec. 603 provided: “Unless otherwise provided in the articles or by-laws every member of a nonprofit corporation shall be entitled to one vote and may vote or act by proxy. The manner of voting may be by ballot, mail or any reasonable means provided in the articles or by-laws. No member may cumulate his votes unless it is so provided in the articles or by-laws.”

So we may start with the premise that in providing for the formation of “a non-profit, cooperative corporation without capital stock” the declaration contemplated the formation of a corporation in which each member should have only one vote, unless the subsequent qualifying language may be properly interpreted to provide otherwise. The words “but with one share thereof appurtenant to each of the lots in such subdivision” were construed by the trial court to supply this qualification, the argument being that “one share” must mean “one vote.”

The crucial question therefore narrows to the meaning to be given to the words “one share thereof appurtenant to each of the lots.” One share of what? It cannot be one share of capital stock for the declaration explicitly states that the corporation shall be formed “without capital stock”. The noun to which “thereof” refers can only be the precedent word “corporation”. So that the qualifying phrase must be paraphrased to read “but with one share of the corporation appurtenant to each of the lots.”

This suggests the next question: what is a share of a nonprofit corporation without capital stock. The Civil Code as it read when the declaration was recorded supplies the answer. Sec. 278 thereof at that time provided: “ ‘Shares' and ‘shares of stock’ shall be construed to include membership in nonstock corporations unless the context requires otherwise”; and sec. 605d provided “* the term ‘shareholder’ or ‘holder of shares' shall include ‘member,’ and the term ‘shares' or ‘shares of stock’ shall include memberships in non-profit corporations.”

In the light of these definitions “a share * appurtenant to each lot” takes on its proper significance. It entitles the owner of the lot to membership in the corporation and by acquiring a lot he thereby becomes a member. If he acquires several lots he does not become several members. That is an absurdity to which reason cannot yield. That the legislature avoided this absurdity is plain from the language of sec. 605d above quoted “ ‘holder of shares' (note the plural) shall include ‘member,’ (note the singular).” In sec. 278, Civ.Code as it then read the obvious is again made explicit: “ ‘Member’ includes each person signing the articles of a nonstock corporation and each person admitted to membership therein.”

Since each member is entitled to one vote, sec. 603, Civ.Code, and the holder of shares is a member, sec. 605d, Civ.Code, it seems plain that the holder of several shares is not entitled to one vote per share as the trial court held but to one vote and only one vote as a member.

The error into which the trial court fell was in confusing a share in a nonstock corporation with a share of capital stock in a stock corporation. The ordinary rule in stock corporations is one vote per share of stock, the ordinary rule in nonstock corporations is one vote per member. 6a Cal.Jur. 845.

In view of the relevant statutory provisions we cannot agree that “one share * appurtenant to each of the lots” means one vote appurtenant to each lot. If the declarant had so intended it could have readily substituted the word “vote” in the declaration. The true purpose of the “one share appurtenant” provision is to secure that each lot owner shall become a member of the corporation with all rights of membership including the right to cast one vote.

The primary purpose of the declaration is to protect persons who might purchase lots and build homes for themselves thereon against the depreciation of the value of their home sites by the construction of unsuitable structures on the remaining lots. This case demonstrates that that purpose would be defeated by giving one vote per lot to a commercial builder who might acquire the majority of the lots in the tract when they were yet unbuilt upon. Thus the rule that a contract must if possible be construed to accomplish the object and purpose for which it was designed, 6 Cal.Jur. 256, adds further weight in support of the conclusion at which we have arrived.

Judgment reversed.

I dissent.

After stating the facts already quoted the trial judge in deciding the case, said: “We now have a fairly well defined issue presented for decision. Will a minority of lot owners control the use of all of the lots in this tract, or will the owners of a majority of the lots have the control? This question must find its answer within the terms and intent of the declaration of restrictions, which confers upon the plaintiff corporation whatever powers the latter has.

“It is not determinative of the question, that our corporation laws permit a restriction of voting power, or an inequality thereof among members or stockholders. If the creator of the power in question determined that it should be exercised in a certain way, the trustee corporation must so exercise it, or fail to qualify as the proper recipient of the power. Now, the corporation which was, under the terms of the declaration of restrictions, to be created, as the heir of the declarant to the powers of supervision, was specifically required to be ‘a non-profit, co-operative corporation, without capital stock, but with one share thereof appurtenant to each of the lots in such sub-division.’ Note the difference between this latter clause, and the provision that such corporation might be formed by ‘a majority of the property owners within said sub-division.’ For the purpose of reorganization, a majority of property owners (without regard to the number of lots owned by them) could act. But different terms were used when the functioning of that corporation was outlined. It was not to property owners, that the shares of such corporation were to be allocated, but to the lots—a share to each lot, and as appurtenant thereto.

“What did the declarant mean or intend, when he so provided for the allocation of such shares? A share in such a corporation could have no monetary value. The corporation was a non-profit affair. It had no assets, no capital stock, and its total maximum possible income would be no more than one dollar per lot per year, for necessary expense. And it had no power, authority, no purpose, no reason for existence, save only to exercise certain very limited supervision of these building restrictions. What then, did the possession or ownership of a share in such corporation carry or confer? Obviously, it could be nothing more or other than a voice or vote in the functioning of the corporation. And this, the declaration asserts, shall be vested in each lot, and be appurtenant thereto. That is to say, the control or voting power shall be by lots rather than by owners.

“I am quite well aware that the articles of incorporation and by-laws of this corporation have provisions inconsistent with these views; and those provisions are not unlawful. It would seem, however, that in order to qualify as the corporation vested with the powers of supervision under the declaration, it would have to conform to the conditions laid down therein. In other words, the plaintiff corporation must give each share an equal voice in its functioning, or else it has no right to function under the declaration.

“I am of opinion that the removal of the old directors, and the election of the new board, at the meeting of January 2nd, was valid and effective.

“I am of opinion, further, that the action of the newly elected board, in approving the plans theretofore denied approval by the former board, was valid and effective *”.

Appellant invoked the equity powers of the court and its standing in court was and is entirely dependent on the amended declaration of restrictions. The trial court rightly looked to the substantive provisions of the restrictions rather than to the provisions of the articles and by-laws which departed from them. The equity powers of the court having been invoked, the court decided the whole case. Hendrickson v. Bertelson, 1 Cal.2d 430, 434, 35 P.2d 318. “Equity regards that as done which ought to have been done”, 10 Cal.Jur. 505; Civil Code, sec. 3529. The holding was that the true intent of the underlying instrument was that each of the 184 lots with one share or membership in the corporation had one vote or voice in its control. I can see no escape from that conclusion.

The articles provide that the owner of any lot or lots “shall be entitled to be a member of this corporation; * No individual or corporation shall hold more than one membership in the corporation” and each member “shall be entitled to but one vote in all elections and other actions of the corporation.”

When this language is contrasted with the “appurtenant” provision it would appear that the articles were designed to contravene rather than follow that basic and underlying provision. Nowhere in the articles is the “appurtenant” provision mentioned.

The by-laws differ slightly from the articles. While the by-laws provide that “Each member shall be entitled to one vote”, they also say that, “Any person or corporation being the beneficial and bona fide owner of the fee interest of any lot or lots in said tract * shall be a member of the association; * no individual or corporation shall hold more than one membership in this corporation.” (Emphasis added).

The “appurtenant” provision, while omitted entirely from the articles, is changed around in the by-laws to read as follows: “The ownership of the assets of this corporation shall be vested in the owners of the lots in said tract. * The only shares in such ownership shall be one share appurtenant to each of said lots.” (Emphasis added). Nowhere in the restrictions does the word “assets” or its equivalent appear. Except for this reference—of decidedly doubtful meaning—no mention is made in the by-laws of the “appurtenant” provision contained in the restrictions.

Appellants cite no statutory authority for these provisions of the articles and by-laws which attempt to divest certain shares or memberships of their voting power. Appellants say “The restrictions provide and contemplate that a corporation may be formed, the members of which shall have equal voting rights regardless of the number of lots owned.” No such provision is to be found in the restrictions. Nor do appellants cite any statutory authority to support their claim that “it is fundamental both in non-profit and in cooperative corporations, that voting rights shall be equal, regardless of the number of shares owned by any shareholder or member”, save former section 653.9, Civil Code, which provided that “Any shareholder and/or member shall be entitled to cast one vote and no more, regardless of the number of shares and/or memberships held by him”. That section, however, relates to corporations “composed of ultimate producers and/or consumers”, section 653.1, Civil Code, and was part of the provisions for marketing “cooperatives”. When clause 7 calls for “a non-profit, cooperative corporation” it is obvious that the word “cooperative” is a misnomer, since the only cooperative corporations authorized either in 1938 when the restrictions were drawn, or in 1946 when the Association was formed, were those for the marketing of agricultural products, secs. 653aa and 653.1, Civ.Code. Appellants' argument, in so far as it is based on such sections, has no bearing at all on the present problem.

The prevailing opinion says that “The ordinary rule in stock corporations is one vote per share of stock * 6a Cal.Jur. 845.” But, as it also points out, section 278 Civil Code (made part of the nonprofit article by cross references in sections 279 and 605d) provided that “ ‘Shares' and ‘shares of stock’ shall be construed to include membership in nonstock corporations unless the context requires otherwise”, and sec. 605d provided “* the term ‘shareholder’ or ‘holder of shares' shall include ‘member,’ and the term ‘shares' or ‘shares of stock’ shall include memberships in nonprofit corporations.” If under the “appurtenant” provision each lot owner has one share or membership in the corporation there is no reason why he has not the voting power which goes with such share or membership particularly when it is borne in mind that in a corporation such as this a share or membership therein can mean nothing else but a vote or voice in its control. The trial judge pointed out that the corporation was not designed to have any assets. To hold, as the trial court did, that each owner shall have as many memberships or shares in the corporation as he has lots, is in consonance with the underlying declaration and does no violence to any statutory language.

Section 278, Civil Code, also provided, among its definitions, that “ ‘To represent shares' means to vote, to give written consent to corporate action, to dissent therefrom *”. And “shares” mean “memberships”.

Section 600, Civil Code, provides that in a nonprofit corporation with but one class of membership the members' “rights and interests shall be equal. *” It is difficult to see how there can be such equality if a member who happens to own two lots, which means two shares, is “disfranchised” as to one of them simply because he owns more than one lot.

The last sentence of section 603 makes it clear that the statute contemplated that a member in a nonprofit corporation could have more than one membership when it uses the plural “votes” as follows: “No member may cumulate his votes unless it is so provided in the articles or by-laws.”

As the trial judge pointed out, his conclusion means majority, not minority, control of the tract. This, in my opinion, was the clear intent of the amended declaration. Such intent should not be defeated by provisions in articles and by-laws which clearly depart from the basic declaration of substantive rights of the lot owners. The trial court, as I saw it, was correct in adhering to the provisions of the underlying instrument.

GODDELL, J., dissenting.