Loney v. Consolidated Water Co.

California Court of Appeal Apr 5, 1932 No. Docket No. 8243.Published

Before: Nourse

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Holding. The court held that minority stockholders cannot maintain a suit for the dissolution of a corporation and distribution of its assets absent allegations of fraud, bad faith, or ultra vires acts, and that the sale of the water system did not require stockholder consent.

Issues

Whether minority stockholders may maintain an action for the dissolution of a corporation and distribution of its assets.
Whether the sale of the corporation's water system required stockholder consent under the law existing at the time.
Whether the cross-complaint sufficiently alleged fraud or bad faith to invoke equity jurisdiction.

Disposition. affirmed

Quotations verified verbatim against the opinion

“That such a suit may not be maintained by the stockholders is determined both by statute and authority.”

“But fraud, breach of faith, or transactions which are ultra vires are the foundations upon which such equity jurisdiction is based.”

“He does not charge any acts of fraud or bad faith, but relies solely upon generalities and conclusions.”

NOURSE, P. J.

Plaintiff sued for the dissolution of the defendant corporation and for an accounting by its president and controlling director. Defendant Haskell, as a stockholder of the Water Company, filed a cross-complaint praying for an accounting by the corporation, for a restoration of funds “wrongfully” diverted, and for a dissolution of the corporation. The corporation and its directors demurred to the cross-complaint and their demurrers were sustained. An amended cross-complaint was filed; the same parties filed a general and special demurrer, which was sustained; the cross-complainant declined to amend further; judgment was entered against him from which he appeals.

The amended cross-complaint was framed to plead two separate causes of action. In the first it was alleged that defendant Lathrop controlled the corporation through a dummy board of directors, received a salary of $400 per month as general manager, overdrew his account through loans made to another corporation, and caused the directors to vote the amount of his overdraft as additional compensation. For a second cause it was alleged that the cor

[352]

poration was organized for the purpose of supplying water to the inhabitants of the city of Pomona and vicinity, that, through the influence of Lathrop, it sold its water system to the city of Pomona for the sum of $831,000, without the consent of the stockholders, that said Lathrop, following this sale, moved the principal place of business of the corporation to the city of Los Angeles and was engaged in using its assets for his personal interests. It was also alleged that, because of changes in the water system made by the city of Pomona, it was impossible to make a rescission of the sale. Upon this cross-complaint it was prayed that the corporation and its directors be required to make an accounting, to dissolve the corporation, and to distribute the assets to the stockholders.

Stripped of all the academic discussion which surrounds the points raised in the briefs the cross-complaint presents a simple suit by minority stockholders for the dissolution of the corporation and the distribution of its assets among the stockholders. That such a suit may not be maintained by the stockholders is determined both by statute and authority. (Sec. 358, Civ. Code, as it read prior to the amendment in 1931; sec. 803, Code Civ. Proc.; 7 Cal. Jur., p. 135.)

Loney v. Consolidated Water Co.

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NOURSE, P. J.

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