REED v. NORMAN (1956)

Respondents Norman and Haskins move to dismiss plaintiff's appeal upon this ground: That the complaint asserts an alleged cause of action belonging to defendant Norman Decorating Co., Inc., a domestic corporation, and plaintiff's action, brought by him as a stockholder, is derivative in nature; that the corporate right to do business has been suspended for non-payment of its franchise tax; that there has been no reinstatement or revivor of that right, and hence the corporation cannot prosecute or defend any suit; that, as the cause of action belongs to the corporation, a stockholder cannot maintain a derivative suit to recover for the benefit of the corporation.

Defendants' objection to introduction of evidence under the amended complaint and supplemental complaint was sustained in the trial court upon the ground that the action is derivative in nature and the pleading fails to comply with the requirements of § 834, Corporations Code. Judgment having been entered in favor of defendants, plaintiff appeals therefrom. He also purports to appeal from an order taxing costs and denying motion to strike the costs, but there is no motion for such an order and no such order in the record at bar.

If this is a derivative action and if the corporate franchise has been suspended pursuant to § 23301, Revenue and Taxation Code and not revived, as contended by respondents, the motion to dismiss must be granted. That section of the code provides for suspension of the corporate powers of a domestic corporation for nonpayment of its franchise tax, ‘[e]xcept for the purpose of amending the articles of incorporation to set forth a new name’. Section 23303 makes it a misdemeanor to exercise or purport to exercise any corporate powers of the suspended corporation ‘except as hereinabove permitted,’ referring obviously to § 23301. The suspension becomes effective upon transmittal of the information from the Franchise Tax Board to the Secretary of State, § 23302. Section 23305 affords a right to relief from the suspension upon making proper application and payment of all delinquent taxes, interest and penalties due under that part of the code. This right is given to any stockholder or creditor or a majority of the surviving trustees or directors of the corporation.

During such suspension the corporate disability extends to the defense of an action and the right of appeal from an adverse judgment. Boyle v. Lakeview Creamery Co., 9 Cal.2d 16, 19–20, 68 P.2d 968; Fidelity Metals Corp. v. Risley, 77 Cal.App.2d 377, 383, 175 P.2d 592. As the cause of action belongs to the corporation, Melancon v. Superior Court, 42 Cal.2d 698, 708, 268 P.2d 1050, the stockholder who sues in its right is subject to the same limitations as the corporation would be if suing in its own name; his status is that of trustee and any judgment recovered inures to the benefit of the corporation (12 Cal.Jur.2d, § 221, p. 775); it follows that if the corporation cannot maintain the action or appeal the stockholder may not do so; he cannot accomplish by indirection the thing that the statute prohibits when done directly. See Smith v. Lewis, 211 Cal. 294, 298, 295 P. 37; Ransome-Crummey Co. v. Superior Court, 188 Cal. 393, 397, 205 P. 446; Graceland v. Peebler, 50 Cal.App.2d 545, 123 P.2d 527.

The amended complaint in the instant case presented a dual aspect. It complained of defendant Norman's interference with plaintiff's exercise of his rights as an officer and as holder of a majority of the stock of the corporation, a personal wrong to him; it also alleged numerous misappropriations of corporate funds and property, constituting wrongs to the corporation. ‘Under proper circumstances a stockholder may bring a representative action or derivative action on behalf of the corporation. [Citations.] But ‘If the injury is one to the plaintiff as a stockholder and to him individually, and not to the corporation, as where the action is based on a contract to which he is a party, or on a right belonging severally to him, or on a fraud affecting him directly, it is an individual action. * * * The action is derivative, i. e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its assets.’ [Citations.] And a stockholder may sue as an individual where he is directly and individually injured although the corporation may also have a cause of action for the same wrong.' Sutter v. General Petroleum Corp., 28 Cal.2d 525, 530, 170 P.2d 898, 901, 167 A.L.R. 271. One of the cases cited in support of the last stated proposition is Witherbee v. Bowles, 201 N.Y. 427, 95 N.E. 27, which holds that an interference with a shareholder's right to exercise a majority stockholder's control of the corporation is a wrong inflicted upon him individually. 95 N.E. at page 28. In effect it also holds that he may elect to sue in his own right or on behalf of the corporation, or both, where the facts give rise to a cause of action in favor of each. Hammer v. Werner, 239 App.Div. 38, 265 N.Y.S. 172, 179, says: ‘The fact that a particular act of directors may constitute a wrong to the corporation which may be righted ordinarily on behalf of the corporation does not bar a stockholder from having redress if that act effects a separate and distinct wrong to him independently of the wrong to the corporation. Redress of this latter wrong is available to him personally despite the right of a present stockholder to redress the wrong in a derivative action so far as it relates to the corporation.’ See also, 18 C.J.S., Corporations, § 559, p. 1275.

During the argument upon the objection to introduction of evidence in support of the amended and supplemental complaints (which had been filed on May 9, 1950 and May 31, 1951, respectively), counsel for plaintiff conceded that those aspects of the pleading which asserted a wrong personal to his client had been eliminated by the ruling and the sequelae of the ruling in Reed v. Norman, 41 Cal.2d 17, 256 P.2d 930, wherein it was held that 105 shares of defendant Norman's stock were void for non-compliance with the cash requirement of the corporation's permit to sell stock, and hence that the election of directors at which he voted these shares was illegal. This holding reduced Norman's ownership to 150 shares and left plaintiff the owner of 245 shares, thus being the controlling stockholder. The court also remarked, 41 Cal.2d on page 22, 256 P.2d on page 933: ‘it seems appropriate, however, to call attention to the fact that Reed's rights with respect to the accounting may be derivative in nature and that the record indicates that he has not met the requirements of section 834 of the Corporations Code.’ That decision was rendered in superior court case No. 573,954, which is a companion to the case at bar. But an appeal in the case now before us (superior court No. 572,897) was decided at the same time and upon the same principles, it being held that ‘that decision is controlling herein.’ Reed v. Norman, 41 Cal.2d 901, 256 P.2d 933. These rulings were made on May 12, 1953, and were followed by entry of judgment in case No. 573,954 to the effect that 105 shares of the stock issued to Norman were void and the election of Norman and Haskins to the board of directors on April 27, 1950, was illegal.

As above indicated, when the trial of the instant case started on April 21, 1955, counsel for plaintiff conceded, under quizzing by the court, that the allegations relative to plaintiff's personal right of action had been disposed of through the ruling of the Supreme Court and the judgment entered pursuant thereto. The argument thenceforth proceeded upon the assumption that the action is derivative and the matter was decided on that basis. Plaintiff tendered a second amended complaint which alleged the fact of the Supreme Court holding that 105 shares of Norman's stock were void, set forth numerous misappropriations of corporate funds and property, asked no relief in favor of plaintiff personally, but prayed for an accounting in favor of the corporation. The arguments set forth in the opening brief in this court are made upon the assumption that the action is by nature derivative. The motion papers assert that to be a fact and appellant's counsel has not denied it. We hold therefore that the instant action is a derivative one and cannot be maintained if the corporation itself could not do so.

Opposing counsel rely upon different statutes in discussing the effect of the suspension of the corporate franchise. Plaintiff says that § 5904, Corporations Code is controlling. So far as pertinent, it says: ‘The directors or managers in office at the time that any corporation, domestic or foreign, forfeited its charter or right to do business in this State for nonpayment of the license tax and penalties imposed by Chapter 386, Statutes of 1905, are trustees of the corporation and its shareholders or members. Such trustees have full power to settle the affairs of the corporation and to maintain or defend any action or proceeding then pending in behalf of or against it or to take such legal proceedings as may be necessary to fully settle its affairs. Such trustees may be sued in any of the courts of this State by any person having a claim against the corporation.’ Respondents rely on § 23301, Revenue and Taxation Code, which says: ‘Except for the purpose of amending the articles of incorporation to set forth a new name, the corporate powers, rights and privileges of a domestic taxpayer shall be suspended, and the exercise of the corporate powers, rights and privileges of a foreign taxpayer in this State shall be forfeited if any of the following conditions occur: * * *.’ Here follow specifications of defaults in the payment of franchise taxes. Section 23303, as above pointed out, makes it a misdemeanor, to attempt or purport to exercise any of the corporate powers ‘except as hereinabove permitted’. The certificate of the Secretary of State evidencing the fact of suspension refers specifically to § 23302 of the same code, leaving no doubt that the suspension occurred under § 23301.

Section 5904, Corporations Code, is carefully limited to corporations whose right to do business was forfeited ‘for nonpayment of the license tax and penalties imposed by Chapter 386, Statutes of 1905’. That was the original Corporation License Tax Act. It was repealed in 1913, Stats.1913, Ch. 336, p. 680. The result is that § 5904 and related sections, though still on the books, are of narrow application, being limited to suspensions occurring while a former statute was in effect.

Section 23301, Revenue and Taxation Code, permits the exercise of corporate powers after suspension only for the purpose of amending the articles to set forth a new name, and declares it a misdemeanor to attempt or purport to exercise such powers for any other purpose. This language (quoted above) is substantially the same as that of the Act which was under consideration in Boyle v. Lakeview Creamery Co., 9 Cal.2d 16, 68 P.2d 968. Though the phrasing is slightly different the meaning is the same. The court said in that case, 9 Cal.2d at page 19, 68 P.2d at page 969: ‘From a consideration of these statutes, the policy is clearly to prohibit the delinquent corporation from enjoying the ordinary privileges of a going concern, in order that some pressure will be brought to bear to force the payment of taxes. Under the Political Code, § 3669c, which covers certain state taxes other than those specified by the Franchise Tax Act, the penalty is not made too drastic; the corporation may not sue, but it may defend. * * * But the exception covering the defense of actions is omitted from Franchise Tax Act, which prescribes the entire procedure of levy and collection of the taxes imposed thereunder, as well as the penalties for delinquency. The omission seems deliberate, and indicates the legislative intention that such corporations shall be deprived of the power to defend suits. The statute expressly deprives the corporation of all ‘corporate powers, rights and privileges,’ subject to one exception, which is specifically set forth, the right to amend the articles to change the name. As the court declared in Ransome-Crummey Co. v. Superior Court, supra, 188 Cal. 393, 397, 205 P. 446, 448: ‘During the time its taxes were unpaid, petitioner was shorn of all rights save those expressly reserved by the statutes.’ The conclusion which we are forced to draw is that the appellant corporation has lost the right to defend the suit in question, and since it has no right to defend, it has no right to appeal from an adverse decision. See, also, 6A Cal.Jur. § 864, p. 1469.' That case is controlling here. There is no right to maintain this action.

Any seeming hardship in this ruling appears to have been invited by appellant. The notice of motion to dismiss was served on August 27, 1956; the suspension point was there made and certificate of the Secretary of State attached thereto; both refer to the applicable statute. A stockholder may effect such a revivor, § 23305, Rev. & Tax.Code; appellant has done nothing to that end but has mistakenly stood upon Corporations Code, § 5904.

The motion to dismiss this appeal is granted.

ASHBURN, Justice.

MOORE, P. J., and FOX, J., concur.