Escondido Mutual Water Co. v. George A. Hillebrecht, Inc.

STONE, J.* Respondent, Escondido Mutual Water Company, brought this action for declaratory relief, seeking court approval of a proposed contract for the sale of its water rights and water distribution facilities to the City of Escondido. The contract, although apparently approved by the directors of Mutual and by the city council, has never been executed. Nor has the contract been approved by the shareholders of Mutual, as required by Corporations Code section 3901, governing a sale of all or substantially all of a corporation’s assets.

The articles of incorporation of Mutual provide that upon dissolution the water and water rights are to be distributed in kind according to whether shareholders own Class A or Class B stock. A proposed amendment to the articles providing for distribution in cash, $5.25 per share for Class A stock and $2.30 per share for Class B stock, was also presented to the court for approval although the amendment has not been approved by the shareholders.

All stockholders were notified of the pending declaratory relief action, and certain stockholders from each class were made defendants, one of them being the appellant herein.

The trial court found the consideration for the sale of Mutual’s assets to the city to be fair and reasonable, based upon an appraisal made in 1962. The court also found the terms of the contract just and reasonable, and entered a judgment declaring the contract, “when and if the same is approved by the vote or written consent of the holders of a majority of the [412]outstanding Class A stock and of the outstanding Class B stock of Mutual, taken together, and is executed by City and Mutual, will be in all respects a valid, binding and subsisting agreement in favor of and against the parties thereto, and the shareholders of Mutual.”

Manifestly, the judgment does not declare the rights of the parties under an existing contract but, rather, hypothetical rights that may or may not arise, depending upon contingencies. Whether there will be a contract depends upon approval of the proposed sale of assets by a majority of the shareholders and upon an amendment to the articles of incorporation of Mutual. The judgment so provides.

Appellant first urges that the court lacked jurisdiction to hear the matter because no justiciable issue was presented to the court, that is, no contract was in existence for the court to construe. Code of Civil Procedure section 1060 provides that any person interested “under a contract,” in cases of actual controversy relating to the “legal rights and duties of the respective parties, ’ ’ may bring an action in the superior court for a declaration of his rights and duties thereunder. Since the proposed contract was not executed, appellant contends there was no contract and no actual controversy, and that no valid declaration of legal rights and duties could be made.