Hagan v. Superior Court

TRAYNOR, J.

In September 1957 four of the five directors of Benedict Heights, Inc., a California corporation, filed in respondent superior court a complaint for involuntary dissolution and winding up of the corporation. The corporation did not answer and its default was entered in December 1957. Petitioners learned of these proceedings in March 1959 and obtained permission of the court to intervene. They filed a complaint in intervention, naming as defendants in intervention the four plaintiff directors and their attorney, Joseph Fairfield, who is allegedly in control of the corporation, its books and assets. The complaint in intervention included allegations that petitioners are shareholders in Benedict Heights, Inc., that defendants in intervention refuse to recognize them as such, that Fairfield has made unauthorized expenditures of corporate funds and threatens to continue to do so, and that Fairfield and perhaps two of the plaintiff directors, Rosner and Benjamin, are indebted to the corporation for wrongful diversion of its assets and for dereliction of duty. The relief sought included: (1) an order compelling defendants in intervention to register petitioners’ shares on the corporation’s books and to issue new certificates evidencing such shares, (2) a preliminary injunction restraining Fair-field from paying out any of the corporation’s assets until trial of the involuntary dissolution action, (3) an order setting aside the default of Benedict Heights, Inc., and permitting petitioners to answer in behalf of the corporation, and (4) an order requiring Fairfield to post a bond pendente lite in an amount equal to the value of the corporation’s assets.

Defendants in intervention filed no answer but filed a motion under section 834 of the Corporations Code for an order requiring petitioners to post security for costs. Respondent court granted the motion and ordered petitioners to post $3,500 as security within 30 days after service of the order. The order was served on May 13, 1959, but petitioners have not posted any security. They allege that respondent court has threatened to find them in contempt if they take any further action in connection with the involuntary dissolution proceedings.

Petitioners seek a writ of prohibition ordering respondent court to desist from entering judgment in the involuntary dissolution proceedings and to desist from enforcing its order requiring petitioners to post security. Fairfield, Rosner, and Benjamin, as real parties in interest, oppose issuance of the writ.

A writ of prohibition is an appropriate remedy to arrest the proceedings of a court when there is not a plain, speedy, and adequate remedy in the ordinary course of the law and when the proceedings of the court are without or in excess of its jurisdiction. (Code Civ. Proc., §§ 1102, 1103.)

Real parties in interest contend that the remedy by appeal is adequate. Petitioners could request, and if necessary compel, respondent court to enter a judgment dismissing their complaint in intervention for failure to comply with its security order. (See Corp. Code, § 834, subd. (b); Berri v. Superior Court, 43 Cal.2d 856, 860-861 [279 P.2d 8].) An appeal could then be taken from such dismissal challenging the propriety of the security order. Such an appeal, however, would raise a question that has already been fully presented and considered at length in this proceeding, and no purpose but delay, to the prejudice of the parties and the courts, would be served by refusing to decide the jurisdictional question at this time. (Atkinson v. Superior Court, 49 Cal.2d 338, 342 [316 P.2d 960] ; Bowles v. Superior Court, 44 Cal.2d 574, 582 [283 P.2d 704]; see also City & County of San Francisco v. Superior Court, ante, pp. 236, 243 [347 P.2d 294]; City of Los Angeles v. Superior Court, 51 Cal.2d 423, 429 [333 P. 2d 745] ,)¹

Petitioners contend that the order requiring security and its threatened enforcement are in excess of respondent court’s jurisdiction because the security provisions of section 834 do not apply to their complaint in intervention. “Speaking generally, any acts which exceed the defined power of a court in any instance, whether that power be defined by constitutional provision, express statutory declaration, or rules developed by the courts and followed under the doctrine of stare decisis, are in excess of jurisdiction, insofar as that term is used to indicate that those acts may be restrained by prohibition or annulled on certiorari.” (Abelleira v. District Court of Appeal, 17 Cal.2d 280, 291 [109 P.2d 942, 132 A.L.R. 715]; see Pacific Mutual Life Ins. Co. v. McConnell, 44 Cal.2d 715, 725 [285 P.2d 636]; Tidewater Assoc. Oil Co. v. Superior Court, 43 Cal.2d 815, 821 [279 P.2d 35] ; Fortenbury v. Superior Court, 16 Cal.2d 405, 407-408 [106 P.2d 411]; Spreckels Sugar Co. v. Industrial Acc. Com., 186 Cal. 256, 260 [199 P. 8].) A court acts in excess of its jurisdiction in this sense if it awards costs not provided by statute (Abelleira v. District Court of Appeal, 17 Cal.2d 280, 289 [109 P.2d 942, 132 A.L.R. 715]; see Michel v. Williams, 13 Cal.App.2d 198 [56 P.2d 546]) or if it entertains an action without requiring the posting of security for costs when such security is prescribed by statute (Kennaley v. Superior Court, 43 Cal.2d 512, 514-515 [275 P.2d 1]; Shell Oil Co. v. Superior Court, 2 Cal.App.2d 348, 352-355 [37 P.2d 1078] ; see Abelleira v. District Court of Appeal, 17 Cal.2d 280, 288-289 [109 P.2d 942, 132 A.L.R. 715]). Conversely, it exceeds its jurisdiction if it dismisses for failure to comply with a statutory security provision a cause of action properly before it to which the provision does not apply.

Section 834 applies only to actions by shareholders in the right of a corporation. It does not authorize the requiring of security from shareholders who seek to vindicate their personal rights, even though they allege facts that would also give rise to a corporate cause of action. (Sutter v. General Petroleum Corp., 28 Cal.2d 525, 530 [170 P.2d 898,167 A.L.R. 271]; Campbell v. Clark, 159 Cal.App.2d 439, 443 [324 P.2d 55] ; Dumm v. Pacific Valves, 146 Cal.App.2d 792, 798 [304 P.2d 738].)

In their complaint in intervention petitioners allege that they are shareholders in Benedict Heights, Inc., and that by refusing to recognize them as such defendants in intervention have prevented them from participating in the affairs of the corporation. They request an order compelling defendants in intervention to register their shares on the corporation’s books and to issue new certificates evidencing such shares. This part of the complaint in intervention asserts rights that are indisputably personal to petitioners and appropriately raised in the involuntary dissolution proceedings to ensure recognition of petitioners’ claims during the impending distribution of corporate assets. It is therefore in excess of the jurisdiction of respondent court to condition the vindication of these rights upon a posting of security under the provisions of section 834. Even if other parts of the complaint in intervention set forth derivative causes of action, they would not give respondent court jurisdiction to require security under section 834 with regard to independent personal causes of action, to which that section does not apply.

Moreover, other parts of the complaint in intervention set forth matters that petitioners were also entitled to pursue without posting security. Section 4653 of the Corporations Code gives to 11 any shareholder or creditor ’ ’ an unqualified right to intervene in proceedings for the involuntary winding up or dissolution of a corporation. It does not make that right subject to section 834, which in no event can apply to creditors. It cannot reasonably be assumed that the Legislature restricted the rights of shareholders but not those of creditors, for the right of intervention is given equally to both. Moreover, there is no need for the special protection of section 834 in involuntary dissolution proceedings since the court has broad powers of supervision and can make such orders as “justice and equity require.” (Corp.

Code, §§ 4654, 4657.) The necessity for an unqualified right to intervene in such proceedings is demonstrated by the very nature of the grounds for involuntary dissolution set forth in section 4651 of the Corporations Code.² Almost without exception these grounds describe situations in which the interests of individual shareholders or creditors are not likely to be protected effectively by the corporation’s directors.

Accordingly an intervenor, whether he be shareholder or creditor, may seek any relief that the court has jurisdiction to grant in such proceedings that affects or protects his underlying interest in the corporation or its assets. He may, therefore, request the court to preserve corporate assets during the pendency of the proceedings by enjoining expenditures and requiring a bond pendente lite in the amount of such assets. He may also bring to the court’s attention the existence of corporate assets in the form of claims against the corporation’s attorney or its directors and is entitled to use reasonable discovery procedures to these ends. Upon further investigation the court might order the directors to press the claims or might appoint a receiver to do so. (See Corp. Code, § 4656.)

Let a peremptory writ of prohibition issue to restrain respondent court from enforcing its order requiring petitioners to post security and to restrain respondent court from entering judgment in the involuntary dissolution proceedings until petitioners have been accorded an opportunity to establish their status as shareholders in Benedict Heights, Inc., and to exercise their rights as intervenors.

Gibson, C. J., Peters, J., and Peek, J. pro tem.,^* concurred.

1 In these eases an alternative writ rather than an order to show cause had issued. An order to show cause, however, like an alternative writ, entails an expenditure of time and effort of court and counsel that would he wasted if another remedy were subsequently found adequate and the merits of the dispute, although fully presented, were not determined.

2 ‘The court, upon filing of a verified complaint may entertain proceedings for the involuntary winding up or dissolution of such a corporation, when it is shown that any one or more of the following reasons exist:

(a) The corporation has abandoned its business for more than one year.

(b) The corporation has an even number of directors who are equally divided and cannot agree as to the management of its affairs, so that its business cannot longer be conducted to advantage or so that there is danger that its property and business will be impaired and lost.

(c) The holders of the voting shares of the corporation are so divided into factions that they cannot agree upon or elect a board of directors consisting of an uneven number.

(d) There is internal dissension and two or more factions of shareholders in the corporation are so deadlocked that its business cannot longer be conducted with advantage to its shareholders.

(e) The directors or those in control of the corporation have been guilty of persistent fraud, mismanagement, or abuse of authority, or persistent unfairness toward minority shareholders, or its property is being misapplied, wasted, or lost by its directors or officers.

_ (f) The liquidation is reasonably necessary for the protection of the rights or interests of any substantial number of the shareholders, or of the complaining shareholders.

_ (g) The period for which the corporation was formed has terminated without extension of such period.”

* Assigned by Chairman of Judicial Council.