New v. New

Plaintiff appeals from a judgment which rejects her claim that defendant, her former husband, wrongfully appropriated to himself a “corporate opportunity” which belonged to two corporations in which he held stock and that he is obligated, by property settlement agreement and decree of divorce, to pay her 25 per cent of the proceeds of such misappropriation.

By property settlement agreement of December 6, 1943, and ensuing divorce decree, the parties divided their community property. The wife received the home and its furnishings together with an automobile, and the husband took a second car. The community property also included 600 shares of capital stock of Continental Corporation and six shares of Continental Development Corporation, both incorporated under the laws of California. Each of these corporations had also issued “compensation interests” which were actually certificates of participation in the net proceeds of certain oil properties operated by them respectively. The New holding consisted of a 17 per cent interest in the net income of Continental and 20 per cent of the net income of

In May, 1944, Mr. William Smith, then chairman of Los Angeles County Board of Supervisors and chairman of its flood control committee, informed Mr. New that Associated Oil Company was seeking a lease to a portion of the surface of the flood control channel to enable it to slant drill into the area east of the channel, the proposed lease to cover lands already under the Continental drilling agreement. Such drilling was then forbidden by an ordinance of the city of Long Beach, in which the land was located. Indeed, Con

Notwithstanding the apparent obstacles to success, New and Ingold wanted and negotiated for the channel lease. Mr. Smith and another supervisor told them emphatically that no such lease could be obtained by Continental or Development. This seems to have been based upon certain political considerations. New and Ingold organized Continental Northern Corporation and Continental Southern Corporation, wholly owned by them, and the flood control district gave them channel leases which roughly corresponded to the west bank areas held by Continental and Development. This was on October 3, 1944. The leases conferred oil exploration rights limited to directional drilling, with no wells to be bottomed within the leased lands; they were expressly subject to the rights of Continental and Development under their drilling agreement. The court found: “Under the lease which Northern executed with the District, Northern was a tenant of the District, and occupied portions of the general surface area of said Flood Control right-of-way where wells of Continental and Development were located, but was limited to the production of oil only from areas outside of the Flood Control right-of-way; and Northern did bottom all of its wells in, and did produce oil only from, areas out

As a matter of law it appears that there was no agency and no trust. The terms of the settlement agreement preclude any such finding. That document, the ensuing interlocutory decree of divorce which incorporated it substantially in haec verba,, and the final decree which again incorporated it by reference to the interlocutory,—these things severed the confidential relationship previously existing between the parties and placed them at arm’s length toward each other except to such an extent, if any, as a confidential relationship was created by the agreement. It recites a mutual desire "to make a full and complete property settlement in order that each of the parties can deal with his or her property, the same as though they were sole and unmarried.” The wife "does hereby waive, assign, release and quitclaim all and every of her right, title and interest in and to any and all property which may hereafter be acquired by the second party or which he may now have, except as herein set forth, whether the same be separate or community property.” Paragraph 16 provides: "That from this day henceforth all earnings and any property, real or personal, whether community or separate, heretofore or hereafter owned or acquired by either of the parties hereto by gift, devise, bequest, distribution, purchase, exchange, or in any other manner whatsoever, as well as the rents, issues, profits, and income therefrom, shall be the sole and separate property and estate of the party earning, owning, or acquiring the same, ... to the end that the parties may dispose of and deal with such earnings and property hereafter in the same manner as though the marriage between the parties had never been consummated.” Paragraph 18: "This agreement is intended to be and shall operate as a full, complete and final settlement of all the property rights of the parties hereto, and each does hereby waive, relinquish, release, grant, bargain, quitclaim, convey, assign, transfer, and set over, unto the other, any and all rights that he or she may have or claim against the other as husband or wife, or otherwise, arising or growing out of the marital relation, or as heir at law of the other, or otherwise, which are inconsistent herewith.

"It is the intention of the parties that hereafter they . . . will acquire, convey, and deal in property and do ail business, regardless of the other, the same as if they were not married.” The court correctly interpreted the agreement in

It is immediately apparent that defendant, in managing his solely owned stock, was not acting as agent for plaintiff. “An agent is one who represents another, called the principal, in dealings with third persons. Such representation is called agency.” (Civ. Code, § 2295.) Certainly one cannot be an agent and a trustee at the same time, with respect to the same subject matter. “An agent acts for his principal in a representative capacity so that the principal, rather than the agent, is ordinarily bound by a contract entered into by the agent on behalf of the principal. On the other hand, a trustee represents only the trust estate, and not the beneficiary, so that he is ordinarily bound as a principal.” (2 Cal.Jur.2d § 7, p. 656.)

An equitable lien does not create or embrace a trust. (1 Scott on Trusts, § 10.4, p. 76; Rest., Trusts, § 10, comment c, p. 33.) Indeed, such a lien is not cognizable until it has been declared by court, whereupon it relates back to the acts giving rise to the equity. (Hise v. Superior Court, 21 Cal.2d 614 , 627 [ 134 P.2d 748 ].)

The parties expressly set aside a four per cent interest in the income of Development as a trust for the benefit of their daughter. By way of contrast the provisions of the agreement defining their rights with respect to each other (above quoted), studiously avoided any such relationship. Counsel for appellant concede in their briefs that “since the property settlement agreement did not contain a declaration of trust, it was not an express trust.” But they insist upon some implied fiduciary obligation in the nature of a trust,—

The court found that “plaintiff and defendant became obligated, and at all times thereafter remained obligated, to act toward each other with good faith and to deal honestly with each other concerning the subject matter of said paragraph 14 of said agreement as embodied in said Interlocutory Judgment of Divorce.

“There was and at all times has been, an implied term in said Property Settlement Agreement, and particularly in paragraph 14 thereof as embodied in said Interlocutory Judgment of Divorce, that neither party would do anything to deprive the other of the fruits and benefits thereof.” This is an implied term of every contract. “In every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract, which means that in every contract there exists an implied covenant of good faith and fair dealing. (17 C.J.S. 778, § 328.) ” (Universal Sales Corp. v. California etc. Mfg. Co., 20 Cal.2d 751 , 771 [ 128 P.2d 665 ].) Being of

The trial court’s ultimate holding rests upon two broad grounds. First, that there was no “corporate opportunity” for Mr. New to misappropriate, and second, that he did not stand in a fiduciary relationship to plaintiff and owed her personally no duty to refrain from appropriating that opportunity if one did exist.

The first proposition presents a mixed question of law and fact, the solution of which involves numerous complex factors. To that question of the existence of the alleged corporate opportunity we now address ourselves, first adverting to the applicable rule of review of conflicting evidence.

The appellate court must accept as established all facts and all inferences favorable to respondent which find substantial support in the evidence. “And where appellant urges the insufficiency of the evidence to sustain the findings . . . the rule is that, ‘Such contention requires def enda/nts to demonstrate that there is no substantial evidence to support the challenged findings.’ (Nichols v. Mitchell, 32 Cal.2d 598 , 600 [ 197 P.2d 550 ].) (Emphasis added.) It is said in Crawford v. Southern Pac. Co., 3 Cal.2d 427 , 429 [ 45 P.2d 183 ], that: ‘It is an elementary, but often overlooked principle of law, that when a verdict is attacked as being unsupported, the power of the appellate court begins and ends with a determination as to whether there is any substantial evidence, contradicted or uncontradieted, which will support the conclusion reached by the jury. When two or more inferences can be reasonably deduced from the facts, the reviewing court is without power to substitute its deduction for those of the trial court.’ ” (Hartzell v. Myall, 115 Cal.App.2d 670 , 673 [ 252 P.2d 676 ].)

Plaintiff argues that certain of the evidence is inherently improbable and hence ceases to be substantial evidence within the doctrine of Herbert v. Lankershim, 9 Cal.2d 409 , 471 [ 71 P.2d 220 ]. That case can have only narrow application, for the general rule is as stated in People v. Huston, 21 Cal.2d 690 , 693 [ 134 P.2d 758 ] : “Although an appellate court will not uphold a judgment or verdict based upon

The corporate opportunity doctrine is stated in the Industrial Indemnity case, supra, at page 533, as follows: “Since the leading case of Guth v. Loft, 23 Del. Ch. 255 [ 5 A.2d 503 ], it has been generally accepted that a corporate officer or director may not seize for himself to the detriment of his company business opportunities in the company’s line of activities which the company has an interest and prior claim to obtain, and that if he seizes them in violation of his fiduciary duty the corporation may claim for itself all benefits so obtained by him. . . . However this doctrine does not exclude the fiduciary from all business activity of his own in the field in which he works for others. '... The directors or officers of a "going, solvent corporation cannot, however, engage in a competing business to the detriment of the corporation which they represent.’ 13 Am.Jur. 953, Corporations, § 999. To the same effect 19 C.J.S. 160, Corporations, §785; 3 Fletcher, Corporations (1947 rev.) 214-215, § 856; Ballantine on Corporations (1946 ed.) 203 et seq., §79. The latter points out (p. 205) that the basis of the doctrine must be found ‘in the unfairness on the. particular facts of a fiduciary taking advantage of an opportunity

If all this were accomplished successfully it would mean nothing unless pursued by a drilling campaign. While the evidence is conflicting on the point the court was justified in concluding that neither Continental nor Development had the necessary funds or ability to command the same. Continental had sold 86 per cent of its compensation interest (net income) and Development had disposed of 73 per cent of its share. Neither corporation had large working capital or reserve. It appears that Development, in order to complete its existing program by drilling six more wells, had to borrow $175,000. This it was able to do only through voluntary subordination of all outstanding compensation interests (net income from existing wells) to the claim of the lending bank; this was done by all holders except Mrs. New who was not asked to join therein. No one was obligated to make such a subordination in order to promote a slant drilling campaign, and it does not' hppear that the holders thereof could

The prospect of large returns from the proposed new venture were slim. New and Ingold did not consider the geology particularly promising; they thought the oil sands were thinning toward the east. They invested their time and money in the venture chiefly as a gamble, in the belief that the Associated Oil Company had a “smart” group of men in it, and that if both Associated and Crown Petroleum wanted the lease, they could afford to speculate on it too. The Golden Avenue fault and the virgin pool lying east of it (some 700 feet east of the east boundary of the flood control channel) were wholly unknown until drilling proved their existence, and that was about a year and a half after the leases to Northern and Southern were made.

The court found: “The community oil leases obtained by Southern, and the development thereof by Southern, and the operation of oil wells bottomed therein for the production of oil, gas, and other hydrocarbon substances, were not activities of Continental and Development, or either of them;” that at no time did defendant receive “sums, proceeds, benefits, compensation or emoluments or any thereof, either directly or indirectly, from Continental and Development or from Continental or Development or from Northern or Southern by reason of or growing out of the interest and rights or interest or any right which plaintiff possessed under said Property Settlement Agreement of December 6, 1943 for the use and benefit of plaintiff, or otherwise.” Again, “It is not true that all or any of the shares of capital stock of Southern or Northern issued in the name of the defendant, or all money or any money received by defendant from the sale of shares of the capital stock of Southern or Northern, were received, or was received, by defendant directly or indirectly or otherAvise from Continental or Development within the meaning and intent or within the meaning or intent of the provisions of said Property Settlement Agreement dated December 6, 1943, or said Interlocutory Judgment of Divorce (Default), or said Order Correcting Interlocutory Judgment of Divorce.”

Implicit in these findings are any subsidiary ones which may be necessary to support them. (2 Witkin on California

The trial court found in effect that the venture of Northern and Southern was not a corporate opportunity which Continental and Development, or either of them, could have grasped and pursued. We cannot say that this conclusion is not supported by substantial credible evidence.

If the existence and misappropriation of a corporate opportunity be conceded arguendo, it does not follow that plaintiff should prevail herein. The applicable doctrine is stated in Industrial Indem. Co. v. Golden State Co., supra, 117 Cal.App.2d 519 , 533-534. Manifestly, a recovery on that theory must proceed solely upon the basis of a breach of a fiduciary duty. Where no such relationship exists there is no room for application of the doctrine. In the case of a corporation the violation of the rule results in a cause of action to compel the faithless trustee to disgorge his profits, but the right of recovery resides in the corporation, not its individual stockholders. They can enforce it only through a derivative suit wherein they assert the corporate right. (Anderson v. Derrick, 220 Cal. 770 , 773 [ 32 P.2d 1078 ]; Shenberg v. De Garmo, 61 Cal.App.2d 326 , 330, 332 [ 143 P.2d 74 ].) Plaintiff herein would have no such standing because she is not a stockholder in Continental or Development.

If that hurdle were overcome it would immediately appear that the proceeds of such misappropriation of the corporate opportunity would not belong to defendant, but to the corporation; as defendant would be obligated to pay the entire amount to the corporation, it could not be said to have been received by him from it or on account of his stock within the purview of the contract. He not being entitled to keep those moneys, any division of same with plaintiff would render her liable to the corporation to that extent, for she affirmatively stands upon the fact of misappropriation and would take with full knowledge, thus making her liable for restitution. (Rest., Trusts, § 291, comment (a), p. 882.) Moreover, such wrongful profits, when restored to the corporation, would go into its treasury, and could be used to pay debts, increase surplus or augment working capital. If any part was used for payment of dividends or salary of

Plaintiff also claims that defendant’s activities (which she has designated as wrongful appropriation of a corporate opportunity) were actionable upon another ground, namely, a violation of her rights as a holder of compensation interests. This contention must fail for reasons similar to those stated above. In the first place, her ownership is a participation in the net earnings of the corporation derived from the drilling agreement, which is carefully confined to oil produced from the lands described therein. The certificate itself limits the participation to “compensation payable to, or realized or retained by assignor under and by virtue of the said drilling and operating agreement between said District and Assignor.” The assignment made by defendant to plaintiff is equally specific. Neither Northern nor Southern ever produced or acquired the right to produce oil originating in the channel or its west bank. Respondent well says: “Thus the rights of Continental and Development under the Drilling and Operating Agreement of January 30, 1939, as amended, were limited to operations on the channel only. Therefore, even if Continental and Development, rather than Northern and Southern, had entered with the District the surface leases of October 3, 1944, and thereafter had produced oil from the area east of the channel, as Northern and Southern did, appellant and other holders of compensation interests would not have shared in the proceeds simply because the proceeds would not have been received under the Drilling and Operating Agreement at all. Thus appellant cannot show any injury at all to her compensation interests upon which she can now maintain this action.”

Secondly, plaintiff’s right as the holder of a compensation interest is to receive from the corporation a share of the net income actually coming into its possession, and her right against defendant with respect thereto (if any such right there were) would be a derivative one,—the proceeds of any suit would go to the corporation, not to her, and she in due course would receive her share from it.

Appellant’s counsel make an elaborate argument to show that in acquiring and pursuing the Northern and Southern leases Mr. New, Mr. Ingold, and those corporations improperly used the property, funds and credit of Continental and Development. This, if established, would fall in the same category of corporate wrong. To the extent, if at all, that it