Crebs v. Uplifters Country Home

The plaintiffs, minority stockholders, commenced an action in behalf of themselves and all other interested persons against the defendant corporation and the directors thereof to obtain a judgment setting aside a written transfer and to obtain an accounting. At the end of the plaintiffs’ case the trial court ordered a nonsuit. From the judgment entered thereon the plaintiffs have appealed.

In their complaint the plaintiffs did not plead actual fraud and on the trial they did not introduce evidence proving or tending to prove actual fraud. However, it was the theory of their case that the transaction complained of constituted constructive fraud.

In 1920 a number of men residing in Los Angeles were invited to attend an outing given by the Family Club of San Francisco. They were so pleased with the entertainment, accommodations, surroundings, etc., that they commenced to discuss the formation of a club of their own. The result of those discussions led to the formation of a club named “The Uplifters”. Soon after the club was organized it became advisable to consider the matter of incorporating. At that time the provisions of the federal statutes were such that admission fees to a club were taxed. For the purpose of avoiding the taxation burdens two separate corporations were formed. The club was formed as a nonstock, nonprofit, social organization under the name of “The Uplifters”. Members of the club formed at the same time a stock corporation under the name of “Uplifters Country' Home”. At the time the latter corporation was formed the articles provided for a capital stock of $150,000 divided into 600 shares of the par value of $250 each. The first subscribers, those named in the articles of incorporation, were all members of the club. The directors of the two corporations were identical or nearly identical at the time of the formation of the two corporations and from time to time thereafter. Shares in the stock corporation were sold only to members of the club. Soon after the stock corporation was formed it purchased a tract of real estate in Rustic Canyon near the city of Santa Monica, in Los Angeles County, and commenced

In June, 1921, the Uplifters Country Home and The Up-lifters executed a lease for the term of fifty years. By its provisions Uplifters Country Home leased to The Uplifters all of the real estate it then owned together with the improvements thereon. It also agreed to buy additional lands and to erect such other improvements as the lessee might desire in a sum not to exceed $250,000. It agreed not to lease, or purchase, or acquire any interest in any other real property except on the written permission of the lessee. Any additional property purchased it agreed to lease to the lessee without any additional charge. The expenditures on any of said property were to be made under the supervision of the lessee and for such things as the lessee might request. The consideration for said lease was $10 per annum and a covenant that the lessee would pay all taxes, liens, assessments and claims assessed against the property leased or thereafter acquired by the lessor. That item is stated as amounting to $18,000 annually. Both parties agreed that the lessor would not sell any of its stock except to members of the lessee. The lessor further agreed that the members of the lessee might remove any buildings they had built on the lessor’s land. Having acquired some additional lands on the thirteenth day of April, 1927, the same lessor leased to the same lessee for the term of ten years all of the lands so acquired. The covenants contained in the lease are similar to those recited in the first lease. The plaintiffs pleaded one lease and the defendants pleaded the other. The genuineness and due execution of each was admitted by the pleadings. (Rosenthal v. Merced Bank, 110 Cal. 198 , 203 [ 42 Pac. 640 ].) On the twenty-sixth day of January, 1929, the Uplifters Country Home and The Uplifters executed a written contract which is the object of attack by the plaintiffs in this case. By the terms of that instrument The Uplifters sold and assigned to Uplifters Country Home all of its interests in both of the leases. It also sold and assigned to that com

In their complaint the plaintiffs did not plead the contract in kaec verba, but they alleged that it was neither executed for a adequate consideration nor any consideration whatever. That allegation was denied by the defendants. On the opening of the trial the plaintiffs made an extended statement showing in detail the facts on which they based their allegations. The defendants made an extended reply. The two statements showed that the parties did not disagree as to the probative facts, but did disagree as to the ultimate facts and the conclusions of law to be drawn therefrom. Thereupon the plaintiffs called the officers of the defendant corporation and other witnesses, and introduced evidence in minute detail which they claimed supported their allegations. They produced the ex-secretary and one of defendants’ attorneys. They introduced the books, copies of accounts, minutes and correspondence of the defendant corporation and its officers. Few objections were made and none was sustained so far as counsel have noted in their briefs. In presenting their case the plaintiffs claimed the right to introduce proof on every issue made by the pleadings. They proceeded accordingly. . When the plaintiffs rested every single material fact had apparently been examined into. Thereupon the defendants made a motion for a nonsuit, which was granted and, as recited above, the plaintiffs have appealed from the judgment entered thereon.

It is first contended that the consideration for the merger agreement was inadequate. The point involves the accounts as of the date of the merger agreement. The plaintiffs introduced balance sheets dated August 31, 1928. They take their figures from those sheets. The Uplifters Country Home so kept its books as to show a charge against The Uplifters for depreciation in the sum of $50,034.88. The plaintiffs have not quoted any facts and have not cited any authorities showing that said charge was a legal charge against The Uplifters. They intimate that the “Saddle Club’’ was indebted to the Uplifters Country Home. Be that as it may, the accounts of the Saddle Club were included in those of The Uplifters as shown by the balance

But, the plaintiffs argue, there are other facts on which they rely. They say: “Before we consider the effect of the agreement—what it accomplished—we wish to make it clear that we make no point whatever that these five directors were interested directors within the settled rule. Necessarily they were, under the mechanics of the by-law of the land corporation we have discussed above, and in such a way that appellants cannot complain on that score. Under that by-law, which was, and is, binding on appellants, every act of the directors of the land corporation was necessarily, at least, theoretically, the act of interested directors,- and to this appellants as stockholders impliedly consent. But we do invoke the rule—thereafter discussed—that these directors, even though interested in such a way as to occasion no complaint of their acts as such, are forbidden to use their position to benefit themselves amd the majority, of whom they are a part, to the detriment of the minority stockholders (Italics by plaintiffs.) They then quote as follows: “Where the majority of a company propose to benefit themselves at the expense of the minority, the court may interfere to protect the minority.” (Menier v. Hooper’s Telegraph Works, 9 Ch. App. Cas. 350.) In what we said in discussing the last point it is at once apparent that the defendants did not “benefit themselves” at the expense of the minority. As thereeord stands, it would appear the minority got more than it was entitled to.

Preceding. the annual meeting of October 27, 1923, the matter of the merger was discussed among some of the stockholders. That discussion was given the widest publicity. When the meeting convened more than two-thirds of the stockholders gave their consent to the merger after the subject had been fully discussed. At that same meeting a new board of directors was chosen for the purpose of adopting and formulating a plan. The meeting then adjourned to reconvene on the last Saturday in January, 1929. On that date the agreement was presented, approved and signed by a.uthority of the board of directors and on the same date it was presented to an adjourned meeting of stockholders and was ratified by a vote of more than a majority of them. Some dissenting voices having been heard, the matter was

It is said the contract of merger was written in secrecy. That statement rests on the fact that the attorneys who wrote it did not, prior to the meeting of the board of directors at which it was adopted, advise Mr. Lawler that they were writing the instrument. Such fact did not prove nor tend to prove any issue made by the pleadings.

It is intimated that the accounts receivable which were assigned by The Uplifters were not collectible. However, there was no evidence what accounts were receivable or were assigned by The Uplifters. Accounts held in August, 1928, may have been paid prior to January 26, 1929. As to whether they were paid or were not paid, as to whether they were disputed or undisputed, and as to whether the debtors were solvent or insolvent, no evidence was introduced. The plaintiffs contend the evidence which they had introduced was such that the motion for a nonsuit should have

After an examination of the entire cause, including the evidence, this court is wholly unable to form the opinion that the order granting a nonsuit has resulted in a miscarriage of justice.

The order appealed from is affirmed.

Nourse, P. J., concurred.

A petition for a rehearing of this cause was denied by the District Court of Appeal on July 29, 1933, and an application by appellants to have the cause heard in the Supreme Court, after judgment in the District Court of Appeal, was denied by the Supreme Court on August 28, 1933.