Melancon v. Superior Court , 42 Cal. 2d 698 ( 1954 )

CARTER, J.

I dissent.

It is my considered opinion that a full and substantial compliance with the laws of this state requires this court to issue a writ of mandate compelling the superior court to enforce petitioner’s right to take certain depositions. The right to take depositions is an essential element in the process of discovery and nowhere in the law is discovery more important than in stockholder derivative actions; since in this type of action the plaintiff shareholder must usually obtain his facts from the records of the corporation or from the corporate officers. To deny the right of discovery in such a ease is in effect a denial of the right to maintain a shareholder’s derivative action.

In the case at bar, petitioner filed a shareholder’s derivative action against the corporation and certain of its officers and directors. Thereafter the trial court issued subpoenas duces tecum re depositions which were duly served upon Mr. Les-sing and Mr. Johnson individually and upon Mr. Johnson as secretary of the defendant corporation. Petitioner was unable to perfect service upon Mr. Walt Disney and Mr. Eoy Disney. On July 6,1953, and pursuant to said subpoena, Mr. Lessing delivered copies of certain corporate records to petitioner and was sworn as a witness. When Mr. Lessing refused to answer 47 of the questions, he was ordered to appear in the superior court on July 13, 1953, to show cause why he should not answer the questions propounded by counsel for petitioner.

Meanwhile all of the defendants filed a motion, pursuant to section 834 of the Corporations Code, to require plaintiff to furnish security for expenses and attorney’s fees. At the time this motion was filed no depositions, except the incompleted one of Mr. Lessing, had been taken; nevertheless the trial court stayed further proceedings on the depositions until after the hearing and order on the motions for security. In so doing the court committed a grave error based upon a complete misconception of section 834 of the Corporations Code.

Under the provisions of said section 834, the motion for security may be supported on either of two grounds: “(1) That there is no reasonable probability that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the corporation or its security holders; (2) That the moving party, if other than the corporation, did not participate in the transaction complained of in any capacity.” In order to determine if either of these two elements are present and whether the motion for security should be granted, the trial court conducts a hearing, at which time, under the provisions of section 834, the court considers “such evidence written or oral, by witnesses or affidavit, as may be material: (a) to the ground or grounds upon which the motion is based, or (b) to a determination of the probable reasonable expenses, ...”

It thus becomes apparent that the hearing on the motion for security is in effect a “little trial” of the case in chief at which the plaintiff must make his showing of merit or risk complete defeat. In order to show that his case has merit, it is usually necessary for the shareholder plaintiff to subpoena certain corporate records and take the depositions of various corporate officers in advance of the hearing. Without these essential elements in the process of discovery the shareholder may have a valid cause of action which will benefit the corporation but he may be unable to produce the necessary evidence at the hearing on the motion for security. No impediment should be placed in the way of a shareholder plaintiff which would prevent the securing of this necessary evidence.

When the trial court stayed further proceedings on the depositions, until after the hearing on the motion for security, petitioner was in effect forced into the hearing without the necessary depositions and evidence. Such a situation could not have been contemplated by the Legislature when it enacted section 834. It is true that section 834 provides that after the motion for security has been filed “no pleadings need be filed by the corporation or any other defendant, and the prosecution of such action shall be stayed, until 10 days after such motion shall have been disposed of.” But this does not mean that the shareholder cannot continue to secure evidence which is necessary for the hearing. Nor does it mean that the avenues of discovery should be closed to the shareholder plaintiff. The mere fact that the plaintiff must show the merits of his case at the hearing on the motion for security, requires by necessary implication that he be permitted to continue his quest for the necessary evidence.

Section 2021 of the Code of Civil Procedure provides that “The testimony of a witness in this State may be taken by deposition in any action at any time after the service of the summons or the appearance of the defendant. ...” In McClatchy Newspapers v. Superior Court, 26 Cal.2d 386, 393 [159 P.2d 944], this court stated that: “Ordinarily the trial court has no discretion to refuse to exercise its powers so far as necessary to secure to a litigant the right to a deposition in the cases defined hy the code. [Citations.] The language of section 2021 of the Code of Civil Procedure providing that ‘The testimony of a witness . . . may be taken by deposition’ confers upon litigants the right to take depositions. (See [my dissent in] Hays v. Superior Court, 16 Cal.2d 260, 264 [105 P.2d 975].) ” It is well recognized that “Statutes authorizing the taking of depositions should be liberally construed with a view to effecting their objects and promoting justice, and to the end that a litigant in a pending action may be afforded a reasonable opportunity to procure available testimony in support of his cause.” (26 C.J.S., Depositions, § 4, p. 810; citing Pollak v. Superior Court, 197 Cal. 389 [240 P. 1006] ; Moran v. Superior Court, 38 Cal.App.2d 328 [100 P.2d 1096] ; and Zellerbach v. Superior Court, 3 Cal.App.2d 49 [39 P.2d 252].)

In support of his position petitioner relies upon section 2021 of the Code of Civil Procedure and upon cases in which mandamus has issued to compel the lower court to enforce the right to take depositions or to perpetuate testimony. (McClatchy Newspapers v. Superior Court, supra, 26 Cal.2d 386; Brown v. Superior Court, 34 Cal.2d 559 [212 P.2d 878] ; Superior Ins. Co. v. Superior Court, 37 Cal.2d 749 [235 P.2d 833].) In an attempt to distinguish these cases, the majority has stated in effect that in the instant case the hearing on the motions for security has already been held and there is thus no adequate reason why petitioner should be permitted to proceed with the taking of depositions. The majority argues that under such circumstances “it appears that the remedy by appeal from the judgment of dismissal which presumably will follow if the ordered security is not furnished is not only an adequate, but is clearly a more appropriate remedy than the writs here sought. ’ ’ Such reasoning loses sight of the fact that “Mandamus is the appropriate remedy to secure the enforcement of a litigant’s statutory right to take depositions, and an appeal from a final judgment is neither speedy nor adequate where a trial court improperly refused to order that a deposition be taken.” (McClatchy Newspapers v. Superior Court, supra, 26 Cal.2d 386, 392.) In Brown v. Superior Court, supra, 34 Cal.2d 559, 562, this court stated, after citing several eases, that “Three situations are presented by the above cases: (1) where a party seeks to perpetuate testimony under section 2083 et seq., of the Code of Civil Procedure prior to the bringing of an action; (2) where the deposition is sought under section 2021 after commencement of the action and pending trial; and (3) where the deposition is sought under section 2021 pending appeal and retrial upon a possible reversal of the judgment. We see no good reason for differentiating between these three situations insofar as appealability is concerned, or for departing from the cases which hold that the order is not appealable. Although such orders are, of course, reviewable by appeal from the final judgment, a party should not be required to proceed to trial without the benefits afforded by a deposition to which he is entitled, and it is well settled that under such circumstances the burden, expense and delay involved in a trial render an appeal from an eventual judgment an inadequate remedy. ’ ’

In the instant ease plaintiff desired to take certain depositions before the hearing on the motion for security was had, but the trial court stayed further proceedings on the depositions until after the hearing and order on the motions for security. Such arbitrary action on the part of the trial court forced petitioner to appear at the hearing without the benefit of the depositions. In its attempt to justify the trial court’s refusal to enforce petitioner’s right to take depositions prior to the hearing on security, the majority takes the position that petitioner’s rights were not violated since “He was given a .full opportunity to subpoena and produce witnesses, and to elicit evidence, both oral and by affidavit, and he did so, at the hearing on the security motions.” Such fallacious reasoning is similar to saying that where a person is given a trial and allowed to produce witnesses it is permissible to deny him the right to take depositions. It must be remembered that “The statutory right to take depositions may not be withheld or curtailed in the discretion of the court. The cases have consistently so held. ‘Insofar as the propriety of the use of the writ for this purpose is concerned, it is well settled that there is a clear duty on the trial court to enforce the statutory right to a deposition and compel a witness to testify. ’ (Brown v. Superior Court, 34 Cal.2d 559 [212 P.2d 878].) ” (Carnation Co. v. Superior Court, 96 Cal.App.2d 138, 141 [214 P.2d 552].)

■ The ease at bar presents the unique situation wherein the shareholder plaintiff was denied the right to take depositions once the defendants had filed their motions for security. He was thus denied certain essential rights of discovery which have become a part of our law. Thereafter petitioner was forced into the hearing on the motion for security without the benefit of the desired depositions and the trial court required more than $65,000 in security because it found among, other things “That there is no reasonable probability that the prosecution of the cause of action alleged . . . will benefit the corporation or its security holders.” In granting the motions for security the trial court did, however, refuse to require security for the “third party defendant” on the ground that it had no constitutional authority to grant such a motion. With this I am in full accord. For the reasons outlined in my dissent in Beyerbach v. Juno Oil Co., ante, p. 11 [265 P.2d 1], it is my considered opinion that section 834 of the Corporations Code is unconstitutional and a denial of equal protection of the law insofar as it requires a plaintiff shareholder to post security for third party defendants who are neither directors, officers, nor employees of the defendant corporation.

As part of its order requiring security the court stayed further prosecution of the action by plaintiff. The majority attempts to interpret this stay of prosecution as being sufficient to deny petitioner the right to proceed with the taking of depositions. In support of this position they rely on the case of Ray Wong v. Earle C. Anthony, Inc., 199 Cal. 15, 18 [247 P. 894], in which it is stated that “The term ‘prosecution’ is sufficiently comprehensive to include every step in an action from its commencement to its final determination.” The Wong case involved an action for malicious prosecution wherein it was essential to the cause of action that the prosecution had begun. In such a ease a comprehensive definition of this nature may have been proper. However, it is clear that the Legislature did not intend the word prosecution as used in section 834 of the Corporations Code to have such an extensive connotation. It is true that section 834, subdivision (c), provides that “If any such motion is filed, no pleadings need be filed by the corporation or any other defendant, and the prosecution of such action shall be stayed, until 10 days after such motion shall have been disposed of ”; however, there is no indication anywhere in the section that the plaintiff shareholder is to stop all activity. The mere fact that a hearing on the motion for security is required illustrates the need for plaintiff’s continued activity. Such activity must necessarily involve the gathering of evidence, the preparation of affidavits, the subpoenaing of witnesses, and the pursuit of various avenues of discovery, including the taking of depositions. Section 834 requires that all prosecution be stayed, but there is nothing to indicate that the word prosecution, as used, was meant to include every step in an action, since by its very terms, section 834 requires a hearing following the motion for security at which time the court “shall consider such evidence, written or oral, by witness or affidavit, as may be material: . . .” Therefore if further proceedings are required after the motion for security has been filed the term prosecution could not have been used in such a way as to include “every step in an action from its commencement to its final determination. ’ ’

In view of the fact that section 834 requires the shareholder plaintiff to produce evidence, at the hearing, which will substantiate his claim, it is not reasonable to say that the same section also prohibits him from proceeding to take the depositions through which such required evidence can be obtained. Such an interpretation would have the same effect as saying that a plaintiff cannot take his depositions until after the trial of his case. In shareholder derivative actions, the hearing on the motion for security is actually a “little trial” of the case and in many cases it is the deciding factor. If a shareholder is unable to secure the necessary depositions he may be unable to secure the evidence needed to oppose the motion for security. If the necessary evidence is not available at the security hearing plaintiff may be required to post security for the expenses and attorneys’ fees of all the defendants. Such expenses are frequently quite extensive, especially where a great many directors and officers are involved as defendants. The higher the security requirement the more insurmountable the barrier to continuing the derivative action. In the instant case the trial court required petitioner to post more than $65,000 in security before proceeding. How many small shareholders are in a position to raise $65,000? How many could raise even one half that amount ? It thus becomes apparent that the outcome of the hearing on the motion for security may be the deciding factor of the entire derivative action.

Recognizing the crucial nature of the security requirement, what brand of justice would prohibit the taking of depositions preceding a hearing on the motion for security? On the contrary, the courts of this state have consistently upheld the right to take depositions and have frequently stated that it would not be proper to compel a party to proceed to trial without the depositions for which he had made proper request. In the case of McClatchy Newspapers v. Superior Court, supra, 26 Cal.2d 386, 393, this court discussed Hays v. Superior Court, 16 Cal.2d 260 [105 P.2d 975], and Patrick Farms, Inc. v. Superior Court, 13 Cal.App.2d 424 [56 P.2d 1283], and then stated that although in those cases “the deferment of the time of taking the deposition was deemed justified by reason of special circumstances, there is no suggestion in those cases that it would be proper to compel a party to proceed to trial without a deposition for which a proper request has been made.” By the same reasoning it is not proper to compel a party to proceed to a hearing, which may be the turning point of the case, without depositions for which a proper request had been made.

It is true that petitioner may have the amount of the security reduced upon a proper showing that such amount is excessive; however such a showing requires additional evidence which may not be available to petitioner unless he is permitted to take certain depositions. In the instant case the trial court stayed further proceedings on the depositions both before and after the order for security had been rendered. This placed the shareholder petitioner in the unique position of not only being prevented from taking depositions in order to oppose the motion for security but of also being prohibited from taking depositions which could uncover the evidence needed to reduce the security requirement. Thus petitioner could not secure the depositions needed to oppose the motion for security nor could he secure the depositions needed to show why such security should be reduced.

If this court sustains such action on the part of the trial court, it will merely be tying another knot in the cord which is gradually snuffing out the rights of corporate shareholders to maintain derivative actions. For these reasons I would grant the writ of mandate to compel the superior court to enforce petitioner’s right to take the requested depositions.