Court Opinion

ID: 9550531
Source: CourtListenerOpinion
Date Created: 2023-08-07 18:36:40.264613+00
Date Added: 2024-06-11T15:21:44.704323
License: Public Domain

CARTER, J.
I dissent.
The main question presented is whether section 834 of the Corporations Code is to be applied to past transactions, that is, retroactively, as in the case at bar. That section requires two things prerequisite to the maintenance of a derivative action by a corporation shareholder: (1) That he be a registered stockholder at the time the fraudulent transaction occurred and at the time of the commencement of the action, and (2) that he post security guaranteeing the payment of' the expenses of the defense of the suit if he is unsuccessful.
*817Before discussing the main issue certain pertinent principles should be clarified inasmuch as the majority opinion either casts serious doubt upon them or repudiates them. The right to bring such an action is the established law of this state and elsewhere, except under the rules of procedure of the federal court, whether the shareholder was or was not a registered owner when the fraud was committed. It is a substantial right whether it be called procedural, property or otherwise. It is the only method whereby the fraud of the corporation management may be exposed and restitution obtained, contrary to the intimation of the majority opinion. In an attempt to ameliorate the serious consequence of its holding, the majority make the following highly misleading statements: “Stockholders, if they have a personal cause of action, are still free to sue the corporation, the majority stockholders, or the directors of the corporation, and to recover for any cause they can establish. . . . Plaintiff’s stock is still his; any personal rights of action he may possess as attributes or incidents of the stock are still his and, as already noted, are completely unaffected by section 834.” There can be no doubt that the majority is fully cognizant of the fact that there is no other remedy or cause of action known to the law available to obtain the relief sought, other than the one here involved. Historically ' speaking the remedy here sought is equitable, as will appear from the discussion to follow.
The majority cite and quote at some length from Whitten v. Dabney, 171 Cal. 621 [154 P. 312] relative to the capacity of a plaintiff in a so-called derivative action on behalf of a corporation and emphasis is placed upon the analogy made in that case between such a plaintiff and a guardian ad litem in the ordinary civil action. While this analogy strikes me as being inappropriate for obvious reasons, I can see no basis for resorting to terminology in order to impair plaintiff’s right to prosecute a derivative action. It should be apparent that the analogy between a plaintiff in a derivative action and a guardian ad litem is wholly unrealistic as there is no requirement whatever that a guardian ad litem have any interest directly or indirectly in the subject matter or outcome of the litigation. He merely stands in the place of the plaintiff who lacks capacity to prosecute the action in his own name. Such is not the case when a corporation' is in control of officers who have committed frauds which have resulted in pecuniary loss to its stockholders. There is no incapacity on the part of such corporation to seek redress for the loss *818sustained as the result of the fraudulent conduct of its officers, but the officers guilty of the fraud will not permit the corporation to sue in its own name to recover for the loss sustained. Hence, a stockholder who has indirectly suffered such loss in common with the other stockholders, has the right to prosecute such an action on behalf of himself and those similarly affected, including the corporation. Such right is a substantial property right as it may have the effect of substantially increasing the value of the shares of stock owned by the plaintiff by virtue of requiring the defrauding officers to return to the corporation the portion of its assets which they have misappropriated or misused to the detriment of not only the corporation but the shareholders thereof. While it is true as stated by the Supreme Court of the United States in Cohen v. Beneficial Ind. Loan Corp., 337 U.S. 541 [69 S.Ct. 1221, 93 L.Ed. 1528], that the plaintiff in such an action assumes a position of a fiduciary character, this does not mean that so far as his own interests are concerned, he is not acting for himself. The fiduciary capacity in which he serves is with relation to the corporation and the other stockholders whose interests he is seeking to advance in common with his own.
The rule here involved is stated in Fletcher Cyclopedia Corporations with supporting authorities: “In several of the states the rule is well settled that a stockholder may sue although he purchased his shares after the transaction complained of. And it is generally held immaterial that he purchased for the purpose of acquiring the right to sue. A subsequent stockholder cannot recover, however, even under this majority rule, (1) when he is not a bona fide stockholder, or (2) when himself guilty of acquiescence in the wrong, or (3) when himself guilty of laches, or (4) where the transferor of the stock would have been barred from bringing suit by laches or acquiescence or the like.” (Fletcher Cyclopedia Corporations, [Perm. ed.] § 5980.) The opposing view is chiefly represented by federal eases which are controlled by a rule of procedure (Fed. Rules of Civ. Proc., rule 23 [b]) similar to section 834. (Fletcher Cyclopedia Corporations, [Perm. ed.] § 5981.) The majority rule has been established in this state. (Harvey v. Meigs, 17 Cal.App. 353 [119 P. 941] ; see Earl v. Lofquist, 135 Cal.App. 373 [27 P.2d 416] ; Beal v. Smith, 46 Cal.App. 271 [189 P. 341].) In the Harvey case the court said (p. 364) : “However this may be, both plaintiffs in any view have, on the showing made in the complaint, a right to prevent the payment of the fraudulent *819credits shown to stand on the company’s books in favor of defendants. And if the defendants have without consideration and fraudulently appropriated $94,000 of the corporate funds which should be restored to its treasury, I fail to see why they have not a cause of action to compel such return, even though they acquired their shares after such misappropriation. (See the question fully considered in Just v. Idaho Canal & Irr. Co., 16 Idaho 639 [102 P. 381, 133 Am.St.Rep. 140].)” The majority opinion fails to point out any sound reason why a transferee of stock should not receive any rights of action incidental to ownership of the stock which the transferor had. There is no reason for doubting the soundness of the rule, for otherwise there is a grave question of discrimination. If a transferee cannot sue because he did not own stock when the fraud occurred, it would logically follow that if some qualified stockholder sued and recovered, the stock of the transferee could not benefit by the recovery. The benefit would have to go to his transferor. No one would advocate such a proposition. Hence it must follow that when the stock is transferred, the transfer carries with it the right to recover on behalf of the corporation for past frauds perpetrated by its officers. An expert in corporation law agrees that it is “. . . a sound rule on principle as each share represents an interest in the entire concern and the several shareholders are entitled to equal rights irrespective of when they acquired their shares. The corporate cause of action is enforced for the benefit of all the shareholders.” (Ballantine, Abuses of Shareholders Derivative Suits: Sow Far is California’s New- “Security for Expenses” Act Sound Regulation? 37 Cal.L.Rev. 399, 414.)
Further, in this connection, and also pointing out the substantial character of the right, the United States Supreme Court has this to say in speaking of similar but less drastic New Jersey legislation than our section 834: “As business enterprise increasingly sought the advantages of incorporation, management became vested with almost uncontrolled discretion in handling other people’s money. The vast aggregate of funds committed to corporate control came to be drawn to a considerable extent from numerous and scattered holders of small interests. The director was not subject to an effective accountability. That created strong temptation for managers to profit personally at expense of their trust. The business code became all too tolerant of such practices. Corporate laws were lax and were not self-enforcing, and stockholders in face of *820gravest abuses, were singularly impotent in obtaining redress of abuses of trust.
“Equity came to the relief of the stockholder, who had no standing to bring civil action at law against faithless directors and managers. Equity, however, allowed him to step into the corporation’s shoes and to seek in its right the restitution he could not demand in his own. It required him first to demand that the corporation vindicate its own rights, but when, as was usual, those who perpetrated the wrongs also were able to obstruct any remedy, equity would hear and adjudge the corporation’s cause through its stockholder with the corporation as a defendant, albeit a rather nominal one. This remedy, born of stockholder helplessness, was long the chief regulator of corporate management and has afforded no small incentive to avoid at least grosser forms of betrayal of stockholders’ interests. It is argued, and not without reason, that without it there would be little practical check on such abuses.” (Italics added.) (Cohen v. Beneficial Ind. Loan Corp., 337 U.S. 541, 547 [69 S.Ct. 1221, 93 L.Ed. 1528].) And, speaking of the statutory requirement for security for expenses (p. 555) : “However, it creates a new liability where none existed before, for it makes a stockholder who institutes a derivative action liable for the expense to which he puts the corporation and other defendants, if he does not make good his claims. Such liability is not usual and it goes beyond payment of what we know as ‘costs.’ If all the Act did was to create this liability, it would clearly be substantive. But this new liability would be. without meaning and value in many cases if it resulted in nothing but a judgment for expenses at or after the end of the case. Therefore, a procedure is prescribed by which the liability is insured by entitling the corporate defendant to a bond of indemnity before the outlay is incurred. We do not think a statute which so conditions the stockholder’s action can be disregarded by the federal court as a mere procedural device.” (Italics added.)
In the face of those salutary and established principles the majority opinion arrives at the conclusion that section 834 was intended to apply to past transactions because, as to the expense security requirement, it is mere procedure, a proposition squarely contrary to the Cohen case, which holds that the requirement is more than for costs. That the statute would be given retroactive application in the instant case is clear. The last word by this court on the subject is that: “A retrospective law is one which affects rights, obligations, *821acts, transactions and conditions which are performed or exist prior to the adoption of the statute.” (Aetna Cas. & Surety Co. v. Industrial Acc. Com., 30 Cal.2d 388, 391 [182 P.2d 159].) There is by section 834 a requirement that security be posted by the plaintiff in derivative actions, and the plaintiff must have owned the stock when the fraud occurred. The right to maintain the action by one who acquired stock after the perpetration of the fraud without posting security for expenses both existed before section 834 was passed. If that section is applied in this case those rights are being affected. The new law is one, which in the language of the Aetna case, affects rights, obligations and conditions which existed prior to its adoption. That is true of both the expense and ownership requirements.
We thus come to the question of whether it was intended that section 834 should be applied retroactively. “It is an established canon of interpretation that statutes are not to be given a retrospective operation unless it is clearly made to appear that such was the legislative intent. ... It is contended upon behalf of respondents that this rule of statutory construction has no application to procedural statutes, and that section 4661 relates solely to matters of procedure or remedy. Feckenschaer v. Gamble, 12 Cal.2d 482 [85 P.2d 885], City of Los Angeles v. Oliver, 102 Cal.App. 299 [283 P. 298], San Bernardino County v. Industrial Acc. Com., 217 Cal. 618 [20 P.2d 673], and Davis & McMillan v. Industrial Acc. Com., 198 Cal. 631 [246 P. 1046, 46 A.L.R. 1095], are relied upon in support of the contention. In those cases, with one exception, it was held that the language of the statutes showed that the Legislature intended them to be applied retroactively, and the court was concerned mainly with the question of whether the Legislature- has power to give those laws such retroactive effect. Since the question of the constitutionality of retroactive legislation and the question of the applicability of a rule of statutory construction are distinct (Ware v. Heller, 63 Cal.App.2d 817, 821 [148 P.2d 410]), these cases are not in point. ... If substantial changes are made, even im, a statute which might ordinarily be classified as procedural, the operation on existing rights would be retroactive because the legal effects of past events would be changed, and the statute will be construed to operate only in futuro unless the legislative intent to the contrary clearly appears.” (Italics added.) (Aetna Cas. & Surety Co. v. Industrial Acc. Com., 30 Cal.2d 388, 393 [182 P.2d 159].) That the change in the law *822wrought by the adoption of section 834 is substantial and ■does affect existing rights is too obvious to require further discussion. True, section 834 states that no action may be “instituted or maintained,” but that is not sufficient to abrogate the rule that to be construed as retroactive in operation on substantial rights a statute must clearly so state. In Shielcrawt v. Moffett, 294 N.Y. 180 [61 N.E.2d 435, 159 A.L.R. 971], the court had before it a New York statute similarly phrased, which required posting of security for costs if plaintiff in a derivative action owned less than a specified percentage of stock. The court interpreted the statute as not applicable to an action which was commenced before its adoption, and while it mentioned a possible distinction between that situation and where the action was commenced later, it emphasized the nature of the right affected as substantial and invoked the rule of construction against retrospective operation, stating (p. 440 [61 N.E.2d]): “It is said that, when the Legislature provided that the defendant is entitled to require the plaintiff or plaintiffs to give security ‘in any action instituted or maintained in the right of any foreign or domestic corporation,’ it disclosed an intention that the statute should apply not only in actions thereafter instituted but also in actions previously ‘instituted’ and thereafter ‘maintained.’ The word ‘maintained’ may be used in a context where it clearly denotes that it includes pending actions. Cf. George Moore Ice Cream Co. v. Rose, 289 U.S. 373, 53 S.Ct. 620, 77 L.Ed. 1265. In other context it has frequently been given-other construction. See cases collated in 38 C.J., Maintain §§ 2, 3, 4, 5. In the statute we are now construing it is at most equivocal and does not, we think, disclose an intent of the Legislature that it should be applied in actions previously instituted.” A reasonable interpretation is that the use of the phraseology in section 834 that no action may be “instituted or maintained” unless the stock ownership at the time of the transaction is alleged, and security is posted if required, is merely another way of stating that a shareholder has no right of action on behalf of the corporation unless those conditions exist or are complied with. Such construction carries no retroactive implication. It does not necessarily point to an intent to have the statute operate on accrued rights. At best those words are equivocal and must be read in the light of section 4 of the Corporations Code that: “No action or proceeding commenced before this code takes effect, and no right accrued, is affected by the provisions of this code, but all procedure thereafter *823taken therein shall conform to the provisions of this code so far as possible.” True, reference is made to procedural statutes as applying to pending actions, but “rights” are also mentioned and here we have involved substantial rights. Section 4 is similar to a provision reading: “No part of it is retroactive, unless expressly so declared.” (Civ. Code, § 3; Code Civ. Proc., § 3; Pol. Code, § 3.) That provision in those codes has been held to apply to amendments or additions to them as well as the original codes. (Estate of Frees, 187 Cal. 150 [201 P. 112] ; Teralta Land & Water Co. v. Shaffer, 116 Cal. 518 [48 P. 613, 58 Am.St.Rep. 194] ; Blade v. Superior Court, 102 Cal.App. 375 [283 P. 81].)
Furthermore, it should be remembered that section 834 embraces the requirement of shareholding at the time named as well as the requirement of security in one cohesive coverage regulating derivative actions. It is not to be supposed that part of it is to be retroactive but not the remainder, the security mandate and stockholder prerequisite, for the first sentence purports to require all of the conditions to be on the same footing. There can be no doubt that the stock ownership requirement would operate upon a prior accrued right of vital importance.
In connection with the ownership requirement it should be observed that the majority opinion does not discuss that phase of section 834, with reference to retroactivity. It holds the expense security requirement either is not being applied retrospectively, or even if it is, that is a proper construction of it. If such is true of that part of the section it must also be true of the ownership requisite, unless it is said that the parts of the section are severable, a problem heretofore mentioned by me but not even discussed in the majority opinion. If the majority thinks there is severability, it need not discuss the ownership feature. Otherwise it must.
The majority opinion endeavors to sidestep the ownership question by the statement: “As previously mentioned, . .■. it was for failure to furnish the security as ordered that the action was dismissed. Thus as applied here the statute did not operate to absolutely preclude plaintiff from maintaining the suit; it merely required him to furnish the security if he were to proceed further in his fiduciary capacity. ” That is not true in any realistic sense. The majority concedes that the trial court based its dismissal of the action solely upon the fact that plaintiff was not an owner of stock when the fraud was committed. It was on that basis, and that alone, that *824the expense security was ordered by the court. The dismissal followed when the security was not furnished. But, nevertheless, it was in effect based upon the lack of stock ownership. It is idle to reason, as does the majority, that plaintiff was not injured because he could have posted the security and thus avoided dismissal. If he had supplied it, he would have suffered the burden imposed by section 834, and his complaint would be subject to dismissal on general demurrer for it shows that he was not an owner of stock when the fraud occurred.
Finally, it should be pointed out that there are grave question's of constitutionality involving equal protection of the law which were not decided in Cohen v. Beneficial Ind. Loan Corp., supra, 337 U.S. 541, in connection with the requirement that security be posted to cover expenses including attorney’s fees and that such expenses shall be allowed against the security if the action is unsuccessful. A situation is presented where the plaintiff must pay the defendant’s attorney’s fees if unsuccessful, but the defendant is not required to pay plaintiff’s counsel fees if the latter wins. Such a statute is invalid unless there is some reason why plaintiffs are in a different position than defendants. (See Chicago & N. W. Ry. Co. v. Nye Schneider Fowler Co., 260 U.S. 35 [43 S.Ct. 55, 67 L.Ed. 115]; Atchison etc. R. Co. v. Matthews, 174 U.S. 96 [19 S.Ct. 609, 43 L.Ed. 909].) It may be argued that because of the danger of spite suits, bad faith suits, by stockholders in derivative actions it is proper to place those actions in a separate class, but that cannot apply here. Under section 834 plaintiff is to post security for attorney’s fees when it appears on the motion therefor that the corporation would not benefit by the action. Suppose the court finds the corporation would probably benefit by the action, then the corporation should be required to post security for plaintiff’s counsel fees, a wholly reasonable demand because the corporation is the one that benefits by the recovery; the action is on its behalf and ultimately for the good of all stockholders. Section 834 makes no such provision, however, and for that reason is strongly suspect of denying equal protection of the law.
I would therefore reverse the order of dismissal.
Gibson, C. J., and Traynor, J., concurred.
Appellant’s petition for a rehearing was denied May 15, 1952. Gibson, C. J., Carter, J., and Traynor, J., were of the opinion that the petition should be granted.