PETERS, P. J. I dissent.
I am of the view that the majority opinion is predicated upon several basic misconceptions of the nature of the cause of action pleaded, and upon a misunderstanding of the legal principles applicable to such an action.
That the majority opinion is predicated upon basic misconceptions of the allegations of the complaint can be readily shown. That opinion correctly summarizes some of the allegations, and then, in my opinion, misinterprets them. Thus, after summarizing sufficient of the allegations to indicate beyond doubt that the basic charge in the complaint is that Louis misappropriated over $500,000 of corporate assets, the majority opinion proceeds to discuss those allegations as if they charged a mere commingling of personal with corporate assets that could easily have been discovered by a cursory examination of the corporate books. Thus, the majority opinion interprets the complaint as follows: “Primarily, the allegations of fraud are based upon the commingling of the funds of the corporation with the personal funds of Louis and those of his mother ... As stated before, all the allegations of fraud up to 1935, based upon information or belief or otherwise, rest upon the fact that there was a commingling of funds.” Based upon this major premise, the majority opinion then holds that, as a matter of law, the other stockholders should have discovered the commingling years before Louis died. This conception that Louis was a simple debtor of the company who had commingled personal with corporate assets permeates the majority opinion. It is true that the corporate books did show that Louis was indebted to the corporation for over $134,000, but the present action is not to recover that sum. That debt was discovered shortly after [422]Louis died, and his estate settled that obligation. Then in 1937 the other stockholders discovered that, in addition to that sum, Louis had embezzled large sums of money and property not shown by the corporate boobs. The present action was brought against the distributee of Louis’ estate to impose a trust upon the property that can be traced as stolen property. Stripped of non-essential allegations, the cause of action pleaded is that Louis, who had the full confidence and trust of his brothers and sisters, over a period of twenty-four years was false to that trust; that during that period he “misappropriated, embezzled, and converted to his own use and benefit” over $500,000 of corporate assets; that in order to ascertain the exact amount it will be necessary to have an accounting not only of the corporate books, but of the personal books of Louis and of the books of other persons and companies with whom Louis dealt; that the fraud of Louis was discovered in September, 1937, under circumstances later to be discussed. Thus it will be seen the action is not one based on a simple commingling easily ascertainable from the corporate boobs.
There is another factual matter that should be mentioned. The majority opinion, apparently in justification of applying a strict and technical interpretation to the allegations of the complaint, several times emphasizes that “the lips of Louis . . . have been sealed by death,” and that the charges “are directed against a man long since dead.” The opinion then goes on to hold, however, that the cause of action was barred ¡before Louis died. If that is so, the fact that he is now dead has no relevance to the discussion.
That the majority opinion is predicated upon a misunderstanding of the legal principles applicable to such a case, is also readily apparent. It holds that, as between the trusted managing officer who embezzles corporate funds and the corporation that he defrauds, the officers and stockholders are chargeable, as a matter of law, with knowledge that the officer they implicitly trusted is an embezzler, because, forsooth, they should not have trusted him—and this in a case where the corporation is a family corporation, managed by mutual consent by one brother who had the complete faith of his brothers and sisters, and who, so the complaint charges, was false to that trust. This startling result is reached by applying, incorrectly I believe, the rule applicable to the rights between corporations and third persons who deal with the managing officer. Obviously, when the board of directors [423]permits one of its members to manage a company and to deal with third persons, it cannot later avoid a transaction entered into by the managing officer with such third person on the claim that the other members of the board did not know the managing director was exercising the challenged power. Of course, in such a situation, the other directors are chargeable with such knowledge as a matter of law. The reasons for such a rule are obvious. That is all that was held in County etc. Bk. v. Coast D. & L. Co., 46 Cal.App.2d 355 [115 P.2d 988] (of which I was the author), from which several quotations are contained in the majority opinion. But that rule has not, and should not have, any application when the rights of third persons are not involved, and where the corporation is seeking to recover its stolen assets.
The opinion as written holds that the cause of action pleaded was barred before Louis died in 1935. Stated another way, were Louis alive today and in possession of the stolen property, or the proceeds or transmutations of the stolen property, the action of the corporation to impose a trust on that stolen property would be barred, as a matter of law, although the corporation brought the action within three years of the date of the discovery of the fraud, because the other stockholders should have discovered the thefts sooner. Before discussing the propriety of such holding at length, some reference should be made to the nature of the relief sought in this action. Plaintiff prays that an accounting be had in order to ascertain the amount of the misappropriations, and that a trust be impressed on property now in the hands of the distributee of the estate of Louis. The accounting is requested not only of the corporate books, but also the books of Louis, and also the books, records and entries of various other persons, firms and corporations with whom Louis had dealings.
With these preliminary remarks, consideration should now be given to the exact allegations of the complaint. It alleges at some length the background of the present controversy. It alleges that the plaintiff corporation was organized with 5,000 shares of stock held equally by Louis A. Schwabacher and each of his four brothers and sisters, Mina A. Eckstein, Jennie S. Rosenbaum, Samuel E. Schwabacher and Edgar B. Schwabacher. Sarah Schwabacher, mother of the stockholders, transferred stocks, bonds and securities to the corporation upon its formation, which were its sole assets, and [424]which., with their accretions, continue to he its sole assets. The business of plaintiff consists of dealing in securities and commodities for its own account, investing its assets and receiving interest and dividends. It is further alleged that the company was organized in 1911. Louis Schwabacher died August 1, 1935. The decree of final distribution in his estate was entered on May 2, 1938. This action was filed May 3, 1940, almost five years after the death of Louis. The misappropriations are alleged to have commenced upon formation of the plaintiff and to have continued until the death of Louis, almost twenty-four years later. The theory of plaintiff is that the alleged defalcations of Louis were not discovered until September, 1937, that the action is, therefore, within the three-year-period after discovery limited for commencement of actions based*on fraud.) See. 338, subd. 4, Code Civ. Proc.)
Defendant contends that the plaintiff is charged with notice of the alleged misappropriations as of a much earlier date than September, 1937; that in any event the delay from discovery in September, 1937, as alleged, to May 3, 1940, when suit was filed, constitutes laches as a matter of law.
The complaint alleges that Louis Schwabacher, the oldest of the brothers and sisters, at all times had exclusive management of the corporate affairs, without consultation with or advice from the others. He managed and controlled plaintiff corporation as if it were his individual property. In the period of almost twenty-four years before the death of Louis, no directors’ or stockholders’ meetings were held, and no financial statements were rendered the other stockholders. It is alleged that no separate bank account was maintained for the company, and that Louis deposited plaintiff’s funds in his personal bank account, or otherwise commingled plaintiff’s funds with his personal funds. Dividends were paid from time to time.
On the death of Louis in 1935, one of the brothers, Samuel Schwabacher, co-executor of the estate of Louis, was elected president of plaintiff at a directors’ meeting. The law firm which at all times had been the attorney for plaintiff company, and which continued to be its attorney until January 1938, was also attorney for Samuel Schwabacher and Norma Sehwabacher as executors of the estate of Louis, and for Norma Schwabacher individually. A member of that firm is a nephew of Norma Schwabacher.
In March, 1937, a settlement of the liability of Louis Schwa[425]bacher to the plaintiff corporation was entered into. On the theory that the corporate books showed that Louis was indebted to the plaintiff in the amount of $134,479.78, plaintiff’s claim for that sum, with interest, was filed and approved. A resolution was adopted by the directors in March, 1937, that the corporation accept certain stock in the estate of Louis, including his 1,000 shares of stock in plaintiff corporation, in discharge of the claim. In addition, the four brothers and sisters of Louis executed their written consents to this settlement and it was carried out.
By the complaint herein plaintiff seeks to avoid the settlement insofar as it fixes the amount of Louis’ indebtedness on the ground that it was entered into without knowledge of the fact that the indebtedness of Louis arising from his misappropriation of corporate property was in an amount exceeding the settlement. It is averred on information and belief that the value of the moneys and properties converted exceeds the sum of $500,000, that the exact amount is unknown to plaintiff and cannot be ascertained until after an audit and account is made not only of the corporate books and the books of Louis, but also the books, records and entries of various other persons, firms and corporations with which Louis had business dealings. It is alleged that the member of the law firm, referred to above, who was a nephew of Norma Schwabacher, was active in arranging the settlement and by his representations and advice prevented plaintiff from acquiring knowledge of the facts. The four brothers and sisters discovered the facts in September, 1937, under circumstances later set forth. Suit was filed in May, 1940.
Defendant contends that the other stockholders and directors must be deemed to have discovered the alleged misappropriations before the death of Louis Schwabacher; that the facts as alleged as a matter of law placed on them a duty of inquiry into the corporate management and records, which, if pursued, would have led to discovery. Since this action was brought almost five years after the death of Louis, it was barred in its entirety if the stockholders and directors were charged with knowledge before his death.
In considering the question whether there was a lack of diligence in failing to discover the facts before the death of Louis, I am of the view that upon the facts alleged it is immaterial whether all, or less than all, were originally elected directors. That is, it is not necessary here to determine whether, [426]if the facts were such as to impose a duty of investigation on directors, hut not on those who were stockholders only, the constructive notice of the directors would be imputed to the corporation to bar an action by it for the benefit of all stockholders. (See 39 Columb.L.Rev. 842; 41 Columb.L.Rev. 686; 54 Harv.L.Rev. 1040.) Under the facts alleged the “directors,” other than Louis, were mere stockholders and should be so treated.
It appears that the sole control of the corporation by Louis was with the knowledge and consent of all concerned. For a long period of years the corporation was administered as if he were the sole director. Under such circumstances, Louis could not in his lifetime, nor those who succeeded to his estate after his death, contend in avoidance of liability for his fraud that the directors were under a duty to themselves and to those stockholders, if any, who may not have been directors, to discharge actively the functions of director. The obligation of the directors implied in the corporate form of organization had been altered by long continued practice to which all consented. No question is here involved as to the liability of the inactive directors to third persons for malfeasance of the sole active director.
The rule is well settled that where all members of the board of directors in control of a corporation are implicated in a fraud against it, their knowledge is not the knowledge of the corporation to bar an action by it or a derivative suit by its stockholders on its behalf. (San Leandro Canning Co. v. Perillo, 211 Cal. 482 [295 P. 1026]; Whitten v. Dabney, 171 Cal. 621 [154 P. 312]; 6A Cal.Jur. p. 1232, see. 704.) Here, with the consent of all, Louis was, in effect, the sole director in exclusive management of the corporation. His knowledge in the circumstances alleged is not the knowledge of the corporation, and the question is, whether the four brothers and sisters as stockholders of plaintiff should have discovered the misappropriations of Louis. If all stockholders were charged with notice more than three years before action brought, the plaintiff corporation cannot maintain this action.
The failure of the stockholders other than Louis to take “any active or any other interest” in the company is attributed to the confidential relations existing between Louis and the others, to their full confidence in his integrity and ability, and to the express “wish and direction” of their mother that Louis assume control. The mother was a widow, sixty-four years of age when the corporation was formed. Louis was [427]the oldest of the five stockholders and a man of wide business experience. He was forty-one years old. Samuel was twenty-seven, and Edgar, twenty-one. Neither they nor the two sisters had any business experience, the complaint alleges. Louis was looked upon as the head of the family.
It is further alleged that on one occasion, the date of which is not set forth, Samuel objected to the manner in which Louis handled a routine matter. His mother informed him that if he objected to the way in which Louis managed the corporation, or opposed him, she would disinherit him. He then withdrew his objection.
It is averred that Louis kept a minute book of purported directors’ meetings, but that none in fact were held. None of the stockholders “ever saw or were permitted by said Louis A. Sehwabacher to see” the books of account of plaintiff kept by Louis. It is alleged that Louis kept books of account of plaintiff, which, it is alleged on information and belief, did not contain true and correct entries of the transactions between plaintiff and Louis.
It is defendant’s theory, sustained by the majority opinion, that the stockholders were guilty of lack of diligence as a matter of law. This charge of lack of diligence on their part during the lifetime of Louis, is based on the theory that they permitted him to have exclusive management of the corporation without calling him to account for his management. That this does not constitute lack of diligence as a matter of law is readily demonstrated.
I have heretofore said that Louis, were he alive, obviously could not rely on the other directors having abrogated their functions in his favor to defeat liability, since it was with the consent of all. Their lack of diligence, if any, consists in their failing either to call Louis to account for his exclusive management over a long period of years, or to examine the books or cause an audit to be made. The majority opinion holds that the failure of Louis to render such financial statements, when considered alone, or in connection with the fact that dividends were paid by his personal check, as a matter of law should have aroused the suspicion of the other stockholders and dictated inquiry into his management.
I am of the view that it cannot be held on the facts alleged in the complaint that as a matter of law the four brothers and sisters of Louis Sehwabacher were chargeable with a want of diligence in failing to demand a report and account of [428]Louis or to procure an audit to be made of the corporate books. A fundamental factor in this case, as alleged, is the trust and confidence which the younger members of this family, inexperienced in business, placed in their, eldest brother as the head of the family and a man of wide business experience. Dividends were paid from time to time, which doubtless lulled the stockholders into a sense of security. That Louis should have exclusive control was the express wish of the mother, who had provided the securities which constituted the assets of the company. It has been held, under some circumstances, that directors and stockholders are chargeable with what the books show. (Turman v. Holmes, 29 Cal.App.2d 198 [84 P.2d 225] ; Daily Tel. Co. v. Long Beach Press Pub. Co., 133 Cal.App. 140 [23 P.2d 833] ; Lady Washington C. Co. v. Wood, 113 Cal. 482 [45 P. 809].) In other eases it has been held that in the absence of special facts which dictate inquiry, stockholders and even directors are not under a duty to know the corporate books. (West v. Great Western Power Co., 36 Cal.App.2d 403 [97 P.2d 1014]; Prewitt v. Sunnymead Orchard Co., 189 Cal. 723 [209 P. 995]; Reid v. Robinson, 64 Cal.App. 46 [220 P. 676].) In West v. Great Western Power Co., supra, the rule in Lady Washington C. Co. v. Wood is described as "radically curtailed” in Prewitt v. Sunnymead Orchard Co., supra.
If, as alleged in the complaint, Louis Schwabacher, has misappropriated corporate property in a large amount, I am of the view that the corporation, of which his brothers and sisters are stockholders, should not be held to have lost its remedy because Louis was trusted to the extent shown. I am of the view that this case is one where the following quotation is apposite: ‘ ‘ The courts will not lightly seize upon some small circumstance to deny relief to a party plainly shown to have been actually defrauded against those who defrauded him on the ground, forsooth, that he did not discover the fact that he had been cheated as soon as he might have done. It is only where the party defrauded should plainly have discovered the fraud except for his own inexcusable inattention that he will be charged with a discovery in advance of actual knowledge on his part.” (Victor Oil Co. v. Drum, 184 Cal. 226, 241 [193 P. 243].) It cannot be said that the conduct of the other stockholders in trusting their brother Louis to the extent that they did not ask for an accounting [429]of his stewardship or familiarize themselves with the contents of the corporate books is “inexcusable.”
Defendant relies strongly on Kenton v. Wood, 56 Ariz. 325 [107 P.2d 380] for the proposition that the other four brothers and sisters as stockholders and directors were under a duty to know the corporate books. The majority opinion quotes from that case at length. There are statements in that opinion that support defendant. They are contrary to the weight of authority and should not be followed here. Moreover, the case is distinguishable on several grounds. There the action was brought as a stockholder’s derivative suit on behalf of the corporation. The defendant, charged with diverting corporate property to his own use, was the son-in-law of the plaintiff, who up to a certain date was a stockholder as well as a director. The court said that it was the duty of the plaintiff as a director to examine the corporate books and records. Since the court also said that the defendant managed the corporation “as though it were his own private business,” and that he “remained in entire control of the affairs of the corporation,” defendant contends that the facts are analogous to those in the instant case. However, it does not appear that defendant thus conducted the business while plaintiff was a director. Plaintiff was employed by the corporation until December, 1934, when defendant discharged him. At the election of directors held in February, 1935, plaintiff was not elected a director. The opinion is not entirely clear, but the court’s statement as to defendant’s exclusive control would seem to relate to the period after plaintiff had ceased to be an employee and director of the company. In the case herein I have held that the duty of the four brothers and sisters of Louis was that of stockholders only by reason of the manner in which the corporation was managed with the consent of all.
There is a further distinction between the cited case and the one before this court. The opinion states that the plaintiff delayed approximately eight years before bringing suit. The date of bringing suit does not appear from the opinion, but the eight-year-period must have included time after the discharge of plaintiff. The situation, unlike that in the present case, was not one where harmony prevailed. The discord and friction between the plaintiff and his son-in-law in that case might well have required inquiry on the part of plaintiff.
[430]In certain cases there are statements that there must be affirmative acts of concealment which prevent discovery of the fraud, that mere silence is not enough. (Daily Tel. Co. v. Long Beach Press Pub. Co., 133 Cal.App. 140 [23 P.2d 833]; West v. Great Western Power Co., 36 Cal.App.2d 403 [97 P.2d 1014].) The true rule is that if the facts are such that the plaintiff is not chargeable with lack of diligence in failing to make discovery of the fraud, the statute of limitations does not commence to run, although the defendant has not made further representations to conceal it. Mere silence, where there is a duty to speak, and where it is known that those to whom the duty is owing are unaware, may as effectively prevent discovery as positive misrepresentations made to that end.
On this branch of the ease I think that no other conclusion is reasonably possible but that the stockholders were not under a duty to know that the corporate books showed that Louis had appropriated to his own use money and property of the corporation of a value of more than $134,000, and hence they were not bound to investigate, by reason of knowledge of what the books showed, in order to discover the full extent of his peculations.
This is as far as the majority opinion goes. Inasmuch as it holds that the complaint was barred, as a matter of law, before Louis died in 1935, the majority did not find it necessary to consider other contentions of defendant. These will be considered seriatim.
The next question is whether the stockholders were charged with notice upon the death of Louis in August, 1935, or within such time thereafter that an action brought in May, 1940, was barred by the three-year-period of limitations. It is alleged that immediately after Louis’ death, the brother Samuel was elected president of plaintiff and continued to be president until April 30, 1940, three days before the present suit was filed. Samuel was co-executor of the estate of Louis with Norma Schwabacher, widow of Louis. The firm of attorneys which had represented the plaintiff corporation from its formation was also attorney for the executors and for Norma as legatee and devisee of Louis.
It is conceded by the complaint that Samuel knew on or about August 1, 1935, which is the date of the death of Louis, that the books of account of plaintiff showed a balance owing to plaintiff from Louis in the sum of $134,479.78, but it is alleged that the other stockholders did not know this until [431]March 15, 1937, which is the date of the settlement agreement. Neither Samuel nor the others knew that the indebtedness of Louis shown by the books of the plaintiff corporation arose from a misappropriation of corporate property, nor that there were further misappropriations, until September, 1937.
The defendant argues that Samuel, as executor of the estate of Louis and president of plaintiff, represented adverse interests. However, as executor his obligation was to act for creditors of Louis, including plaintiff, as well as for the devisees and legatees of his estate. Samuel’s personal financial interest would lie on the side of plaintiff, since he was a stockholder, rather than with Norma as legatee of the estate of Louis.
The firm of attorneys referred to above clearly represented adverse interests, although it is not contended that this was not with the knowledge and consent of all. The interests of plaintiff corporation, and of Norma Schwabacher as legatee and devisee of the estate of Louis, were conflicting. It is not alleged that any stockholder of plaintiff was represented by independent counsel.
In explanation of the failure of Samuel or the other stockholders to seek an audit or to discover the facts with reference to the nature and amount of the indebtedness of Louis, the complaint sets forth conduct and representations of that member of the legal firm referred to above who was a nephew of Norma Schwabacher, an attorney both for her and for plaintiff. It is alleged that the attorney was endeavoring to preserve for the benefit of Norma as large a portion of the assets of Louis as possible.
In paragraph XXXII it is alleged that between August 1, 1935, to and including January, 1938, Samuel, as president of plaintiff corporation, and as an executor of the last will of Louis, continuously consulted and advised with this attorney with respect to the indebtedness of Louis to plaintiff “as shown upon the books of account of plaintiff.” It is alleged that the attorney falsely advised Samuel that the books of account “were true and correct and had been examined and certified to by certified public accountants” (paragraph XXXIII); that Louis had not embezzled, misappropriated or converted to his own use any funds of plaintiff; that the books of account merely showed a balance due upon a book account, and any claim or action by plaintiff would have to be based upon such account and for the amount shown to be [432]owing on such books; that the balance shown to be due from Louis to plaintiff was not “moneys of plaintiff corporation used by said Louis A. Schwabacher without authorization from said plaintiff corporation for his own purposes.”
The attorney is not a party to this action, which seeks to hold Norma Schwabacher by reason of her receipt of property of plaintiff misappropriated by Louis.
The attorney prepared a creditor’s claim on behalf of plaintiff, which is attached to the complaint as an exhibit, and which was presented on February 18, 1936, after numerous conferences between the attorney and Samuel. The claim was signed and verified by one Helen M. Crowley as secretary of plaintiff. The claim recites that the books of plaintiff, kept by Louis, were “from time to time” examined and certified by certified public accountants; that starting with the year 1911, and until the death of Louis, dividend, coupon, rental and other payments to plaintiff were received by Louis and by him deposited in a bank account in which were also deposited funds of Louis Schwabacher, and Sarah Schwabacher, the mother; that true and correct books were kept for said account, which “correctly and accurately showed and now show each receipt thereof and disbursement therefrom and the credits of and charges against all persons whose funds were deposited in said account and who made withdrawals therefrom.” It is further recited in the claim that separate records and accounts were kept for each person, including Louis Schwabacher, whose funds were received in the account and who were charged with disbursements therefrom. At the time of the death of Louis the balance shown to be owing from him, without interest, was $134,479.78. The amount owing from Louis varied from time to time, the claim recites, as credits for payments made by Louis in the account reduced the balance owing from him, and on other occasions charges against Louis on the account increased the amount owing from him. The claim is for $134,479.78, plus interest at the rate of 5 per cent from the respective dates of the advances, amounting to $26,895.80 to the date of the claim, and for accruing interest.
In paragraph XXXIV of the complaint it is alleged that the attorney finally advised Samuel that he would recommend to the executors that they settle the claim of plaintiff by transfer to plaintiff of eighty-six shares of Schwabacher Bros. & Co., Inc., at an agreed valuation of $500 per share, and 1,000 shares of stock in plaintiff corporation at an agreed [433]valuation of $120 per share, and also by waiving the estate’s claim to dividends on the stock in plaintiff corporation, which dividends had been declared in the amount of $10,650, but had not been paid. This 1,000 shares of plaintiff corporation constituted the total interest of the estate of Louis in plaintiff corporation.
The attorney further advised “plaintiff corporation and Samuel as president thereof” that plaintiff should accept the offer, that acceptance would best serve plaintiff’s interests. Acting upon the advice of the attorney, “plaintiff corporation and Samuel I. Schwabacher, as president of said plaintiff corporation” agreed to and did accept the offer. The attorney prepared resolutions to be adopted at a directors’ meeting for settlement of plaintiff’s claim. Acting upon the representation and advice of the attorney and Samuel “to the effect that plaintiff corporation was receiving all that it was entitled to” from the estate of Louis, and that the settlement was for its best interests, the directors of plaintiff adopted the resolutions. (Paragraph XXXV.)
At the same time the four brothers and sisters of Louis also executed a form of consent to the settlement prepared by the attorney.
Paragraph XXXVI contains further allegations concerning the attorney. It is averred that “in his capacity as attorney for and advisor of plaintiff corporation” he did not advise Samuel as president of plaintiff to make or cause to be made an examination or investigation of transactions between Louis and plaintiff corporation; that he did not advise Samuel to make or cause to be made an examination or audit of the purported books of account of plaintiff, but advised him that the boobs of account had been certified by certified public accountants; that the attorney did not advise Samuel that Louis had misappropriated and embezzled large sums of money belonging to plaintiff, but represented that the claim of plaintiff was based “only upon a book account representing an alleged authorized indebtedness of said Louis A. Schwabacher to the plaintiff corporation in the sum of $134,-479.78”; that the transactions between plaintiff and Louis were 1 ‘ in the nature of a loan, ’ ’ and plaintiff was not entitled to damages. It is also alleged on information and belief that the attorney “knew that the said Louis A. Schwabacher had misappropriated, embezzled and converted to his own use assets of said plaintiff.”
[434]The allegations with reference to the discovery that the indebtedness of Louis to the corporation arose from his misappropriation of corporate property, and that it exceeded the sum of $134,479.78, are set forth in paragraph XXXIX. In 1937 the brother Edgar experienced financial difficulties and sought a loan from plaintiff. He informed his attorney of the settlement and requested him to determine the fairness of the valuation placed upon the stocks accepted by plaintiff. Edgar’s attorney was informed of the manner in which Louis had conducted the business of plaintiff. “Further investigation” disclosed some of the misappropriations, embezzlements and conversions of plaintiff’s funds by Louis. The-investigation was concluded during the month of September, 1937, at which time the stockholders, officers and directors of plaintiff first ascertained the facts concerning the transactions between Louis and plaintiff.
The purpose of the following paragraph of the complaint (XL) is to set forth the reason why plaintiff delayed filing suit from discovery in September, 1937, to May 3, 1940. It is averred that the stockholders of plaintiff sought to conceal Louis’ misappropriations from their mother, who was ninety years of age when Louis died in 1937 and was deeply grieved by his death. She was still alive when suit was filed in 1940 to prevent the running of the statute of limitations, but has since died.
Under the facts alleged, I am of the opinion that the directors, other than Samuel, who had actual notice, should be deemed charged with constructive notice of the indebtedness of Louis shown by the corporate books as of a date soon after the death of Louis; that upon his death it was their duty to ascertain at least in a general way the corporate financial status, and that any inquiry with such purpose would have revealed to them that the books showed such indebtedness. This conclusion follows from the fact that, although, after the death of Louis, Samuel assumed the management of the company, there are no allegations that the other stockholders and directors allowed him to manage the company without supervision or control. In the absence of allegations to the contrary, it must be assumed that the board of directors was active and functioning. Such a board, in the exercise of due diligence, taking over after Louis’ death, would be required to ascertain the financial status of the company. Had they done so, they would have discovered the indebtedness of Louis to [435]the company of $134,479.78. As to that fact, the board must be charged with constructive notice in 1935. But knowledge of that fact does not, as a matter of law, bar the present action. The present action does not involve the admitted indebtedness of Louis. It is an action to recover an amount in excess of that indebtedness as shown by the books to be owing from Louis to the corporation. The amounts here involved were not discovered, so it is alleged, until the attorney for Edgar Sehwabacher caused an investigation to be made in 1937. As an excuse for failure to undertake at an earlier date the investigation which led to discovery, the plaintiff relies on the representations and advice of the attorney who was the nephew of Norma Schwabacher and also her attorney and attorney for plaintiff. The representations of the attorney preliminary to the settlement of 1937 were alleged to have been made to Samuel only. However, I am of the view that if director Samuel, who had actual notice of what the books showed, is excused from his failure to institute an investigation at an earlier date, the other directors, who had only constructive notice of what the books showed, cannot be charged, as a matter of law, with constructive notice of the additional misappropriations because of their failure to investigate. The attorney represented the corporation. When the directors, other than Samuel, learned in March, 1937, what the books showed, they relied on the attorney’s advice, and it will be presumed that had they sooner acquired actual knowledge of the contents of the books they would have relied on the advice of the attorney, as Samuel had done and as they did later when they received actual notice of what the books showed in March, 1937.
I am of the view that, upon the facts alleged, Samuel (and therefore the other stockholders) cannot be charged with lack of due diligence as a matter of law. Plaintiff relied on the representations of its attorney. According to the allegations, that attorney, who was also representing the adverse interests of the defendant as legatee of Louis, falsely represented the very facts that the board of directors, in the exercise of due diligence, should have investigated. Samuel, as managing officer, did not cause the investigation to be made because he was told by the attorney that an audit had been made, and that the books showed transactions in the nature of a loan by Louis—not a misappropriation. Under the circumstances, the corporation, or its officers or stockholders, can[436]not, as a matter of law, be charged with lack of due diligence in failing to ascertain facts that they were prevented from investigating by the false representations of the attorney for defendant.
On the facts alleged, plaintiff was justified in relying on the representations of its counsel. While it is true that both principals are bound by the acts of a dual agent appointed with their consent, this rule has no application where the principals would not have consented to such dual agency had the facts known to the agent been known to them. The complaint alleges (par. XLI) that, had the plaintiff known the facts, it would not have filed the claim in the form in which it -yas filed, would not have consented to the settlement, and would not have consented to the dual agency, but would have secured independent counsel. The rule as to dual agents certainly has no application where the agent acts fraudulently on behalf of one of his principals and against the interests of his other principal. '(See eases collected 2 Am.Jur. p. 214, see. 266, et seq.; Restatement, Agency, sec. 392.) Defendant is in no position to claim that the stockholders should have discovered the facts in 1935, when the complaint alleges that her attorney, by false representations, prevented the very investigation that would have disclosed those facts. Bluntly stated, defendant contends that the statute of limitations has run because the stockholders should have discovered in 1935 the misappropriations of her husband, when the complaint alleges that such fact was not discovered because her attorney, by false representations, successfully prevented the discovery of those facts. The statute of limitations was never intended to act as a shield in such a case.
Defendant next contends that plaintiff was guilty of laches as a matter of law in delaying action from discovery in September, 1937, to May, 1940. It is the law that delay for less than the period of limitations will not bar an action unless it has resulted in prejudice to the opposing party. (Fry v. Board of Education, 17 Cal.2d 753, 761 [112 P.2d 229]; Burns v. Ross, 190 Cal. 269 [212 P. 17]; Victor Oil Co. v. Drum, 184 Cal. 226 [193 P. 243]; 5 Cal.Jur.Supp., p. 503, sec. 62, p. 505, sec. 68.) It has been said that where the action is one for rescission it will be dismissed unless brought promptly without necessity for a showing of damage to the defendant. (Victor Oil Co. v. Drum, supra; Stevens v. Bryson, 135 Cal.App. 684 [27 P.2d 932].) The suit herein is not one for [437]rescission of. the settlement as made. The plaintiff does not offer to restore the property received, but seeks to retain it. The action is one to secure a remedy for additional appropriations to those for which satisfaction has been given by the settlement. Plaintiff seeks to avoid the settlement only insofar as it fixes the extent of the indebtedness of Louis. In such a case the rule applied in suits for rescission does not control.
I cannot agree with defendant’s contention that the complaint herein shows prejudice to defendant from the delay, as a matter of law. It does not appear, as a matter of law, that defendant will be in a worse position if plaintiff establishes a right of recovery in the suit brought in May, 1940, than she would have been if suit had been filed in September, 1937. Any facts that will show such damage are a matter of defense and may be pleaded in the answer, and determined at the trial. Plaintiff contends that evidence has been lost and the recollection of witnesses has become dim. She further contends that since the decree of final distribution has been entered in the estate, this court may take judicial notice that inheritance taxes and attorneys’ fees have been paid on the basis of the property here claimed being part of the estate, which would not have been paid had the suit been brought before distribution in 1938. On the other hand, if plaintiff is able to prove on trial herein that the “estate” of Louis as probated consisted of property which can be traced to his misappropriations from the corporation, then plaintiff, and not defendant, has lost by such payment. The argument as to prejudice suffered by defendant is based, in part, on the erroneous premise that plaintiff must restore to defendant the securities received in the settlement of 1937, which, she argues, may have declined in value between 1937 and 1940. I am of the view that on the facts alleged the question of laches should be determined after trial, rather than on demurrer.
Defendant also contends that the complaint is insufficient for the reason that some of the charges of fraud against Louis are made on information and belief, and the facts which give rise to the belief are not stated, relying on such cases as Dowling v. Spring Valley Water Co., 174 Cal. 218 [162 P. 894]; Mason v. San-Val Oil & Water Co., Ltd., 1 Cal.2d 670 [36 P.2d 616] ; North v. Union Savings & Loan Association 59 Ore. 483 [117 P. 822], The rule of these cases is not here applicable. It is averred in paragraph XX “that during all of the times herein mentioned the said Louis A. Sehwabacher [438]had misappropriated, embezzled and converted to his own use and benefit large sums of money and properties of great value belonging to the plaintiff corporation, the exact amount and character of which said money and properties are unknown to plaintiff at the present time. ...” This is the basic charge of the complaint, and it is not on information and belief.
It is true that the paragraph proceeds to allege on information and belief that the value of said moneys and properties exceeds the sum of $500,000, the exact amount of which can be ascertained only after an audit and accounting is made. It further alleges, on information and belief, that the sum of $134,479.78, which Louis’ books of account acknowledge that he owed the company, is far less than the actual sum converted by him to his own use. Plaintiff’s estimation of the amount of the loss, made on information and belief, does not qualify the above positive allegation as to the fact of misappropriations. Whatever inconsistencies and ambiguities there may be between the positive allegation above quoted and other provisions of the complaint have not been made the subject of special demurrer. The complaint is good as against general demurrer. The trial court may, in its discretion, require the clarification of uncertainties or ambiguities in the complaint. (Wennerholm v. Stanford Univ. Sch. of Med., 20 Cal.2d 713 [128 P.2d 522]; Guilliams v. Hollywood Hospital, 18 Cal.2d. 97 [114 P.2d 1].)
The next contention of defendant is that the remedy sought—imposing a trust on the property in the hands of defendant—under the facts here alleged, is not available to plaintiff. Where a trustee has misappropriated trust property, the cestui after death of the trustee may either recover a money judgment for the value of the property, with incidental damages, on the theory that the decedent was personally liable therefor, or he may reclaim the trust property, tracing it where it has changed form. (Mix v. Yoakum, 200 Cal. 681 [254 P. 557] ; Estate of Dutard, 147 Cal. 253 [81 P. 519] ; Elizalde v. Elizalde, 137 Cal. 634 [66 P. 369, 70 P. 861]; Lathrop v. Bampton, 31 Cal. 17 [89 Am.Dec. 141].) If the latter course be pursued, a claim need not be filed in the estate, for the theory is, that trust property and its proceeds are not part of the estate. In the case herein plaintiff filed a claim for $134,479.78, the amount of the indebtedness of Louis as shown on plaintiff’s books, and for interest. The [439]claim was not drawn on the theory of tracing trust property, and the settlement was not had on that basis. In the settlement plaintiff received the one thousand shares of plaintiff’s capital stock which Louis had owned from the formation of plaintiff, and which could not be property of plaintiff which Louis had converted to his own use, or the proceeds of such property. Thus the settlement was of a personal liability of Louis.
Defendant correctly contends that plaintiff is without right to recover a judgment for the alleged additional misappropriations based on personal liability of Louis for the reason that such recovery should have been sought in the probate proceeding before distribution. Defendant further contends that plaintiff’s retention of the property received in the settlement of 1937 constitutes an election of remedies which bars its right to follow the trust property into the hands of Norma Schwabacher, to whom the estate of Louis was distributed in 1938. This last contention is unsound.
I agree with defendant’s position that plaintiff may not now, after distribution, recover a money judgment against Norma Schwabacher, distributee of the estate of Louis, based on a theory of personal liability of Louis. When plaintiff learned that more had been taken than shown on the books, the time for filing claims had expired. Defendant suggests that the claim as filed might have been then amended to demand a larger sum, or that the misappropriations might have been treated as sounding in tort, in which event an action for a money judgment may be brought without the necessity for filing a claim, the money judgment to be paid in due course of administration. It is not necessary to decide what remedy, if any, is available to reach assets of an estate in satisfaction of a personal liability of the decedent based on fraud, or which has been fraudulently concealed, and not discovered until after the time for filing claims has passed. At any rate, where the facts are discovered before distribution, as in the present ease, whatever proceedings may be available to reach assets of the estate should be set in motion before distribution, in order that the closing of the estate may be postponed to await the outcome. In default of such proceedings prior to distribution, the creditor should not be permitted to hold the estate in the hands of distributees liable to the satisfaction of a claim based on personal liability of the de[440]cedent. This matter is of importance in the present case since the complaint contains reference to items which could be recovered only on a basis of personal liability of the alleged wrongdoer. For example, the complaint alleges damages suffered by reason of the misappropriations of Louis in addition to loss of the property. Such damages may not be recovered in the circumstances alleged in this case after distribution of the estate, which took place after knowledge that damages had been suffered. (Elizalde v. Elizalde, 137 Cal. 634 [66 P. 369, 70 P. 861] ; Noble v. Noble, 198 Cal. 129 [243 P. 439, 43 A.L.R. 1235].)
The remedy of following trust property, on the other hand, is not based on a theory of reaching assets of the estate as such, but, rather, as pointed out above, is predicated on the premise that such property in its original or changed form constitutes no part of the estate of the decedent. The failure of the cestui to institute action to recover the property before distribution should not have the same effect as a failure to commence proceedings which have for their purpose reaching property of the estate in satisfaction of a personal liability of the decedent. For these reasons, it seems quite clear that the action to reach trust property that has been misappropriated is not barred as a matter of law because distribution has taken place and the cestui had knowledge prior to distribution of the alleged misappropriations.
The contention that the remedy of reclaiming trust property is not available by reason of the doctrine of election of remedies is also unsound. The settlement of the indebtedness of Louis to plaintiff as shown on the books was based on the theory of a satisfaction of a personal liability of Louis. Upon the facts alleged this settlement was entered into without knowledge, actual or constructive, of misappropriations in a larger amount. Choice of a remedy without full knowledge of the facts does not constitute an election. (10 Cal.Jur., p. 6, citing eases.) Defendant contends, however, that when plaintiff acquired knowledge in September, 1937, it was required then to elect, and if it wished to follow the misappropriated property it should have rescinded the settlement promptly and restored the property received under it. This plaintiff did not do. In the complaint herein plaintiff alleges that the settlement is null and void, but it is apparent that it means only that it is of no effect as a determination of the amount of the misappropriations, since it does not offer to [441]restore the property, part of which, as noted above, appears not to have been trust property or the proceeds of trust property. Plaintiff does offer to credit the property received, at a valuation of $173,329.02, on what may be found due. I am of the view that the settlement for a portion of the misappropriations, the only portion known to exist at the time of the settlement, and on the basis of the personal liability of the wrongdoer, does not bar a suit to reclaim when it is thereafter discovered that there are further misappropriations. Recovery must, of course, be adjusted in a manner which will not result in a double relief. That plaintiff does not seek double relief is demonstrated by its offer to credit the $173,329.02 already received by it.
This court recently had occasion to consider the doctrine of election of remedies in Perkins v. Bengnet Cons. Min. Co., 55 Cal.App.2d 720, 753 [132 P.2d 70], It is there said that in some states harsh application of the doctrine of election of remedies is avoided through viewing it as an aspect of the law of res judicata, merger, waiver, estoppel and allied doctrines, and that in California it has been declared repeatedly that the doctrine is a phase of the law of estoppel, (p. 758.) It does not appear from the complaint that it is inequitable to permit plaintiff to obtain relief for part of the misappropriations on the basis of adjustment of a personal liability (the settlement), and for the balance through following trust property. If there are circumstances of estoppel in this case, that is a matter of defense which does not arise on demurrer to the complaint, but should be raised by answer.
The allegations of the complaint and prayer seem to have been drawn without full realization of the theory on which plaintiff may recover. Plaintiff seems to be of the view that the court should determine the amount of money appropriated and the value of the property taken, and that it may have judgment for the amount thereof, and for damages in addition, payable from all property distributed to Norma Schwabaeher and from the life insurance proceeds received by her. Plaintiff even includes in the complaint an allegation that the properties of plaintiff have been so commingled with the properties of Louis Schwabacher as to be impossible of segregation.
In support of its prayer for relief plaintiff cites Noble v. Noble, 198 Cal. 129 [243 P. 439, 43 A.L.R. 1235], as standing [442]for the proposition that where the estate is solvent and it is impossible to trace trust property, the cestui has a lien on the entire estate for the value of the property converted. The decision is not so broad. In that case it was held that the cestm was without right to a judgment based on a personal liability of the deceased trustee for the reason that no claim had been presented. Any recovery, therefore, had to be based on a theory of following trust property. The court did not hold that the cestui was entitled to judgment for the original value of the trust res payable from the entire estate of the trustee. The trust property originally consisted of a. parcel of real property of the value of $7,500. This was exchanged for other real property, which later was sold for $3,681.14 net, deposited in the trustee’s personal bank account. At his death this account was reduced to $1,430.47. There was also $462.22 in another bank account, bonds of the value of $26,112.12 and real estate of the value of $5,500. There were no creditors. The trial court gave judgment for plaintiff for $7,500, the value of the original trust res, less advances of $1,416.43 made by the trustee. On appeal the court held that plaintiff was entitled to judgment for $3,684.14, without further tracing than noted above, but not to judgment for a larger amount based on value of the original trust property. The court in effect held that the trust funds should be deemed to have been traced to the estate left by the trustee. In Mitchell v. Dunn, 211 Cal. 129 [294 P. 386], the Noble case is cited for the point that where the trustee, or his estate, is solvent, the degree of identification required is “far less” than where the trustee is insolvent and the rights of creditors are involved. (See, also, Kobida v. Hinkelmann, 53 Cal.App.2d 186 [127 P.2d 657].) The court further held in the Noble case that the personal liability of the trustee for negligent handling of the trust property, resulting in loss in value, could not be taken into consideration in the action to trace trust property.
As applied to the instant case the effect of the decision in Noble v. Noble is that plaintiff cannot recover damages arising from the alleged misappropriations. But if plaintiff can establish the allegations of its complaint it should be entitled to relief upon tracing the trust property as required by the liberal rule heretofore noted. I am of the view that plaintiff should not be deemed to have abandoned the remedy to which it may be entitled on the facts alleged because of the aver[443]ment that the properties of plaintiff are impossible of segregation. That averment should not he construed as negating the possibility of tracing within the liberal rules laid down in such eases as Noble v. Noble, supra.
If the trust property is sufficiently traced to the estate of decedent, and to a distributee, circumstances may arise thereafter which would permit a judgment based on a personal liability of the distributee, as where the property had passed from a distributee with knowledge of the trust claim to a bona fide purchaser. But this would be something different from enforcing after distribution a personal liability' of the decedent through making all property distributed liable to the extent of such personal liability, without any tracing at all.
The fact that plaintiff may pray for relief to which it is not entitled does not mean, at least in the absence of a special demurrer on that ground, that the complaint is insufficient to state a cause of action, where, upon the facts alleged, plaintiff is entitled to other relief. Such uncertainties may be clarified by the trial court.
I have thus considered the allegations of this complaint at some length. I believe the complaint, though far from a model of pleading, states a good cause of action that is not barred as a matter of law. If the allegations of that complaint are true (which must be conclusively presumed on this appeal) Louis stole large sums from plaintiff, he successfully hid that fact from the corporation, and the ill gotten gains so secured are now in the hands of defendant. Under the liberal rule applied in interpreting pleadings in this state, and in view of the nature of the controversy, a court should not, by a strict and technical construction, seek an interpretation to prevent the controversy from being tried. For that reason I believe the judgment should be reversed.
A petition for a rehearing was denied March 31,1943. Peters, P. J., voted for a rehearing.
Appellant’s petition for a hearing by the Supreme Court was denied April 29, 1943. Carter, J., and Traynor, J., voted for a hearing.