*1 foreign purpose attachment, for a but was related directly entry judgment the effect of the on its continu- had judgment ance. fact been entered was not merely incidentally, recited but as the very basis for the Defendant premature intended motion. have been noticing her motion to dissolve the attachment, but doing gave plaintiff so all the notice of the entry she of judgment When to which he was entitled. he failed days within five perfect appeal judgment, from the defendant was entitled the attachment have dissolved. rehearing for a
Appellant’s petition was January denied J., Traynor, J., 1954. were of Carter, the opinion granted. petition that the should be A. 22341. In No. Bank. Jan. [L. 1954.] Appellant, v. BEYERBACH, CHARLES JUNO OIL COM (a Corporation) Respondents. PANY al., et *4 & Steffes, Zeutzius P.A. G-.Steffes and Jamison & Jamison Appellant. Harry Guy Templeton, E. Jessie Miller, Knupp, Jr., and Respondents. Burford & Hubler for O’Melveny Myers, & William Alsup, Philip W. F. West- Jr., Loeb, & brook, Susman, Loeb Allen E. John L. Cole and Selvin, Herman F. as Amici Curiae on Respondents. behalf of Plaintiff, a SCHAUER, stockholder of defendant Juno J. Oil instituted Company, a stockholder’s derivative suit compel Carpenter defendants Henderson and to transfer a Company certain to defendant Juno lease Oil and oil. pay account for Juno sums received under the lease royalties. moved, rents Defendants under section 834 Corporations Code, requiring for an order- expenses furnish for reasonable might which *5 Plain- with the action.
incurred defendants in connection by the trial court deposit security tiff as ordered failed to judgment of From the and the court dismissed the action. applicable the appeals. dismissal He contends that in unconstitutional, portions particularly of section 834 are security ex- plaintiff furnish requirement their that as officers penses of who are sued not individual defendants persons corporation as third employes or of defendant but established corporation; who dealt with the that defendants alternative, security in ground requiring any or, the no and the amount that the trial court abused its discretion as to erred in dis- security required; the court form modify plaintiff’s missing time motion to action at a when form original respect requirements as to order in to its security have pending. and amount of was We concluded of these is without merit. that each contentions applicable provisions para- The of section 834 are found in days (b) They are as follows: Within 30 graph thereof. stockholder’s derivative suit after service of summons in a may order, corporation any move for an defendant security. furnish hearing, requiring on notice following may grounds: The motion be based on either of probability prosecution (1) no reasonable that there is against moving party will benefit of the cause of action security holders; (2) moving corporation or its that the party, participate if did not other than the capacity. complained any of in the hear- the transaction At shall consider evidence material ing on the motion the court and, material, grounds when to a the motion deter- to the probable expenses, reasonable attor- including of the mination action. If the court ney’s fees, of the defense of the deter- party moving probability has established a mines that motion, grounds of it shall fix the support security by plaintiff to be nature furnished amount and including expenses expenses, for which the for reasonable may under section 830 corporation become liable of the Cor- furnishing as to the A determination portions Code.1 any of the merits of issue security a is not determination moving party “The shall in the action. security in such court to such amount have recourse provides of a di indemnification 1Section 830 expenses defending rector, employe incurred for reasonable officer or alleged wrong-to corpora against his him which is based on suit successfully tion, or if the court finds that his conduct has defended indemnity. merits termination of such action.” determine shall must be reasonable The amount If discretion. within the court’s changed from time time de- requires furnished the court defendant as to such the action shall be dismissed fendant, reasonable been furnished within has unless by the court. time fixed Hen- plaintiff, defendant alleges that complaint herein *6 that defendant agreed orally
derson, Carpenter2 and Scott operate oil leases organized be to Company would Juno" Oil defendants acquired individual by plaintiff be and the to of stock corporation in consideration the and transferred to formed corporation was by it; be to issued that the to Juno acquired and transferred issued; plaintiff stock that undertook defendants that the individual leases; certain oil Norris acquire known as the lease, to did a certain oil and agreed; and that as lease, it to Juno but to transfer refused compel transfer despite demands, refused to plaintiff’s Juno, compel transfer complaint seeks to of the lease. The Norris corporation of proceeds payment to the of such lease and allegedly by the individual defendants therefrom received corporation. the benefit of the Corpora- moved, section 834 of the defendant under
Bach required security to Code, plaintiff tions that be furnish including expenses, attorneys’ fees, probable reasonable which might defending the action. The motions were be incurred ground probability no based on the that there was reasonable prosecution that action would benefit the defendants, and, in the case of the individual on the further they participate in com- ground that did not the transaction plained hearing trial at the of. The court the of motions substantially conflicting testimony. affidavits considered and By the August 27, 1951, trial court or- formal order dated shall, thirty “plaintiff days from that within the dered date ’’ deposit security $5,000 hereof, of as to each of the individual $1,000 Juno, as to in the form of defendants cash or plaintiff surety company, of and that “fails bonds to Carpenter is since deceased. The administratrix of Ms 2Scott estate Carpenter as For convenience is named a defendant. Henderson as "be referred to the individual defendants. will sometimes joined individuals, three other of Plaintiff also directors Juno Oil defendants, Co., appeal but has since dismissed Ms he as to as them emphasize application security wishes to issues to the because he requirement assertedly wrong to those who not as strangers. employes, but as officers or provide security herein, such any the defendants within upon proper showing time herein then provided, thereof, action shall be as to all defendants for dismissed whom security given has been in the the sums and specified.” manner as herein September plaintiff
On 24, 1951, parte obtained an ex order grant purported days which from to him 30 date thereof deposit in which to security, 22, and on October 1951, parte obtained another ex purported order which grant days him 30 from the date thereof in which to deposit security. 1951, plaintiff On 26, October filed a Changing “Notice Motion for Order Amount and Form of Security,” by security which asked amount $2,000 be reduced to to the individual defendants and Juno, permitted $400 as to to file an under- taking by personal sureties, executed and that such on furnished or before December 1951. 30, 1951,
On October defendants filed notices of motions ground dismiss the action on the had failed deposit required by August order 1951. 19, 1951, On November of plaintiff motions change form and of amount defendants argued to dismiss the action were and taken under submission. *7 1951, defendant 27, On November Juno Company Oil filed dismiss, another notice of motion to and on 28, November 1951, the individual defendants filed a similar notice of These motions were heard and motion. submitted De- on cember 3. 14, 1951, granted the trial
On December court the last of mentioned motions defendants. On December 19 the plaintiff’s change court motion denied to the amount and security, prejudice of without form denied defendants’ .mo- of which notice been on 30, tions to dismiss had filed October judgment of from appeal and entered the dismissal which this is taken. appears comply
It did not any part with security. Instead, of the order he contends that section equal protection 834 violates clause of the federal Consti- 1) (Amendment XIV, provisions tution of the § against special (art. IV, 25) state Constitution laws § against special privileges (art. I, §21). and immunities plaintiff’s arguments Fundamentally, to .constitutionality directly or answered, by necessary implication, by are either Corp. Loan Cohen v. Industrial (1949), 337 U.S. Beneficial
19 upheld con- (which 1221, L.Ed. 541 S.Ct. 93 1528] [69 purpose similar with a stitutionality Jersey statute of a New Jersey the New 834; appears, far as to that of section so opinion does provision to, contained no statute or were not officers defendants who discuss, individual not Hogan (1952), 38 Cal.2d Ingold v. employes) [243 defend- problem as such individual (in which the to P.2d 1] Dabney (1915), arise); Whitten v. see, also, not ants did (which not 621, P. did involve Cal. 312] pointed constitutionality but which problem of the statute fiduciary such a should a out that “Not guardian a ad equivalent to that of capacity to [held right party to the is not in his own litem, who cause] willing first the sanction take no act that did not receive but, has more equity appealed, to which he of the court this, permitted not take act such than is without particular inasmuch sanction”). However, as some of the arguments constitutionality as to the aspects plaintiff’s possible provision for for and indemnification of employe is officer individual defendant who not sued as an appear corporation of a to be advanced this case for the specific aspects of time, give first we consideration to those arguments. his says exists, plain- discrimination
The unconstitutional requires tiff, because section to furnish expenses if the trial court there for defendants’ finds that probability corporation benefit is no reasonable will comparable action, from the but does not contain a derivative requiring post security provision plain- expenses probability if the trial court finds a tiff’s equal protec- benefit. This is will denial (1952), pointed Hogan Ingold tion. As was out v. power “If supra, 38 Cal.2d of the state over fiduciary litigation plenary, type as the Cohen case Corp. (1949), Industrial Loan states [Cohen Beneficial surely litigation supra, 541, 551], then 337 U.S. is sub- regulation provided by ject type section 834. . . . any liability will not if he The stockholder incur costs *8 essay bring equity in corporation’s in a suit does not bring he such a suit he he right. If does knows that [like subject regulating in be his will to the all others class] of the statute.” provisions
Although provide deposit for the law does not of beginning plaintiff’s expenses at of his it action, for 20 provide, apart
does
from statute,
charging against
corporation the
costs and
fees
counsel
of a
who has
successfully
representative
maintained a
(Fox
action.
v. Hale
& Norcross
(1895),
S.M. Co.
Plaintiff unconstitutionally that section 834 against poor discriminates stockholders who are unable to required security. plaintiff’s furnish the But argument respect accepted then required were statute which payment furnishing of a fee or pre aas requisite filing complaint, to the levying a the issuance or procurement writ, of a appeal, record on etc., would Morganti unconstitutional. Plaintiff relies v. Mor ganti (1950), Cal.App.2d 512, (see, P.2d [222 78] Superior Dribin v. also, (1951), Court 345, 37 Cal.2d 349-350 809, 864]), P.2d 24 A.L.R.2d where it was held [231 right incurably spouse to divorce insane could not constitutionally guarantee be limited those who could spouse supported his would be or her life expectancy. Morganti controlling is or persuasive case not here; rather, analogies suggested (requirement defendants filing fees, etc.) pertinent. (See, also, are Escobedo v. (1950), 870, 35 Cal.2d 1].) State P.2d [222 of California basically, pointed More also out that the here is is right; rather, seeking any personal seeking enforce accept his the court nomination of himself have to act in guardian fiduciary capacity the nature of a ad litem. Corp. Industrial As held Cohen Loan Beneficial supra, (1949), 337 U.S. S.Ct. 93 L.Ed. permit may set the terms on which it will 1528], a state courts, type litigation litigations in its and no is more regulation than susceptible of that instituted volunteer plaintiff-fiduciary says that he seeks to who enforce derivative *9 through its board to act corporation which refuses rights a he end of directors to the demands. discriminatory in unconstitutionally 834 is
Section individual de- says plaintiff, because if the respect, another itself, by been sued the defendant fendants had representative his by than stockholder in rather security. This not to capacity, would have been entitled they an classifi- does create unreasonable effect the statute not to plaintiff, like is unable cation; every who, stockholder through directors, its board of induce the who particular behalf, a action on own and under- institute its representative to takes as its volunteer sue on cause as- security. may The by required furnish him, serted fact there be individual defendants who are sued proper by it, on deemed rather than causes stockholder-fiduciary by a self-nominated on causes deemed proper him, security, and thus have benefit of cannot complaint by plaintiff. is not cause for if he did furnish and points Plaintiff out might judgment, defendants prosecuted to action were security in amount as the to such “have recourse upon action,” of such court shall determine termination quoted portion that under this last of section 834 and might attorneys’ individual defendants be allowed to recover they ultimately prevailed, plain fees from if whereas from tiff could recover such fees not individual defend prevailed. if For reasons on the ants and authorities immediately already discussed as well as those hereinafter is ex summarized, there no merit this contention. In point further, plaintiff objects, of the same tension literally quoted language is defendants, read both corporate might be individual, allowed to recover ex although plaintiff penses prevailed in The present the action. has to the state where prob case not come the last-mentioned However, in argu lems arise. answer to the would last ment, may suggested appear it be an that would abuse make for a trial award of discretion court an costs attorneys’ losing against in favor fees of a defendant representative plaintiff materially in a situation where the suit corporation. benefited the support
In his contentions, above stated relies Supply Depot (1907), Builders’ v. O’Connor 150 Cal. Am.St.Rep. 193, P. 268-269 L.R.A.N.S. 909], provided statute under consideration there award attorneys’ fees to those who established an
their claims under
lien
and not to those
the mechanics’
law
successfully
who
held,
resisted such claims of lien.' This court
“A
gives
attorney’s
party
statute which
fee to one
in an
action and
the other,
denies it to
such fee in one
allows
kind of action and
other kinds of actions
where,
the statute here in question, the distinction is not founded
on
differences,
clearly
constitutional or natural
violative
provisions
of the constitutional
Const.,
above noticed [U.S.
*10
Const.,
I,
1, 21,
IV,
Amendment
Cal.
art.
XIV]
art.
§§
However,
Supply
recog
as the Builders’
case
§25].”
point
long
nizes and
and
curiae
out,
as defendants
amici
so
the
of
Legislature
basis
the
reasonable,
classification is
provide
can
only
that in
of
types
various
action
a successful
plaintiff
appellant
or
attorneys’
only
can recover
fees or
a
defendant
appeal.
(Missouri,
can
& R.
K.
T.
Co. v. Cade
(1914),
649
58
642,
678,
233 U.S.
L.Ed.
S.Ct.
[34
1135]
providing
person may present
that
to his debtor
[statute
a bona fide claim
rendered,
furnished,
for services
material
damage
overcharges on or
freight,
injury
to stock, and
if
pay
days
that
person
debtor
not
30
does
within
such
can sue
and,
the claim
if his
successful,
suit is
can
recover
attorneys’
not
but
;
costs
also reasonable
fees]
Engebretsen
Gay (1910),
880,
v.
The Legislature, course, can weight attribute some to the corporation fact has not seen fit to institute action on a belongs cause which either to it or to no one. argues only
Plaintiff that section 834 violates not requirement equal protection but also the federal and state requirements process Const., (U.S. due Amend. V; Const., 13). argument Cal. art. I, by This is answered § consideration that expenses it is reasonable in an amount to hearing determined the court on notice and which plaintiff may required (See Cohen v. secure. Corp. Industrial Loan (1949), supra, 337 U.S. Beneficial 552.) It is to be noted that the California statute is even susceptible less charge to the process that it violates due than is the Jersey upheld New statute in the Cohen case, for the California statute safeguard, contains the not found in the New Jersey statute, of a preliminary showing defendants that there is no probability reasonable of benefit to corpo- prosecution ration from of the action.
Plaintiff claims that defendants have not met their burden proving probability there is no reasonable prose corporation cution of the action will benefit or its se curity on this holders. The evidence matter conflicting.4 is “ weigh for the trial court It is the evidence and finding, conflicting its based substantial evidence, is binding upon case every appellate this as civil representing agreement 4There no written memorandum the entire among dispute parties. agreement The factual is as to whether such (which, out, required organization far as it was carried so of the corporation and issuance of shares to and the individual de plaintiff’s transferring fendants in consideration of certain oil leases paying to the to transfer to tiating. to Henderson and the individual defendants’ certain sums plaintiff) required Carpenter acquire also and Henderson to lease, they nego the Norris for which were meeting parties prior Plaintiff testified that at of the organization Carpenter agreed and Henderson to transfer such lease. meeting parties testified that at said he Carpenter would not transfer his interest Norris lease and (since deceased) stated that he wanted think more time to defendant, respondent here, matter over. Another individual not a meeting testified that at such the Henderson said he would not transfer Carpenter company Norris lease said that he could not litigation.’’ act at the time because the individual defendant testified that was “in lease Still another *12 hearing Carpenter did not he recall say the lease company; that would his he transfer interest to the that said he litigation nothing “was under . . . could be done about testimony Although meetings it.’’ is to defendants agree as to the dates of the referred to uncertain, testimony trier of fact could resolve such favorable Carpenter and find that at no time did Henderson and transfer the Norris lease to Juno.
25 (Wood (1952), Cal.App.2d 374, v. 376 court.’’ Gordon argument de his that 84].) In connection with P.2d [246 proof as to their burden of fendants have not sustained probability of to the lack of benefit reasonable “Manifestly, security plaintiff says further, holders, its this is such a ‘strike suit’ as was mentioned the United not If in Cohen case. Supreme States Court its decision suit,’ possible not such reason it is a ‘strike then attorneys’ entirely allowing security and for fees for costs ’’ was not disappears. question But the before the trial court suit”; question a “strike for that court whether this was whether, regardless plaintiff’s instituting was motive in action, probability there was or was not a of benefit to argument corporate defendant. “The that the statute was intended and should limited suits is unavail to strike ing language.” (Wood v. (1952), in view of its Gordon supra, p. Cal.App.2d.) 377 of 112 security properly granted defendants’ motion was
Since ground probability on the there that was no reasonable that plaintiff’s will contention the action benefit they the individual shown that defendants have not that “did participate complained not of” the transaction need not be considered. urges
Plaintiff that the trial court abused its discretion ordering that furnish an excessive amount Juno, Carpenter. Henderson, previously As stated, was ordered furnish $1,000 for Juno $5,000 Carpenter. each for Henderson and if Even assume, argued by plaintiff, we if action is to be tried on Carpenter its merits it is Henderson and who carry defending will the main burden of the suit and that actively need resist the claims (see Meyers (1933), v. Smith 190 Minn. N.W. [251 20]; v. Rieber (1942), N.J.Eq. 412, Slutzker 413, 415 ; Chaplin A.2d (1945), Selznick Misc. 66 528] [58 453, 455]), N.Y.S.2d it does not follow that the amount fixed beyond as to range defendant is unreasonable and judicial Obviously, proper it is discretion. the cor position justified poration, all, employ if its counsel, at appear proceeding by otherwise, answer or and move deposit expenses. its It deposited security had and the action had been might tried, developed have $1,000 would have ex- *13 expenses. ceeded the amount of Juno’s reasonable But appear it does not as a matter of law that it was unreasonable require security $1,000 to of at the time the order was made. $1,000 deposited security And the order be as does not a determination that that will the constitute be amount of attorneys’ fees; plaintiff Juno’s costs and reasonable is mis taken his assertion that such order in an “was effect fixing $1,000.00 order a retainer of corporation”; attorneys’ under section 834 the amount costs of fees completion cannot be until the determined of suit. the requirement security $5,000 The of of each toas Carpenter appear Henderson and (if does not so excessive all) at an excessive as to constitute of discretion abuse of the a matter law. At time the order made it was had contemplated attorneys to be the for those individual against representative to defendants would have defend suit on merits possibly at extended trial security fit to furnish suit; saw and continue such complaint compel assignment seeks not to aof described but accounting recovery oil lease also an of more $75,000 alleged to wrongfully than have been collected and defendants; the individual possibility withheld and the appeal and costs on to of services was be considered. Perti- subject—and tending derogate to this to plaintiff’s nent also arguments against type legislation more basic of here although security the fact that no involved—is has been fur- attorneys nished, already defendants’ have rendered substan- superior in the the primary tial services court on and counter appeal on this defense of motions the attack made constitutionality on the by plaintiff section application of its propriety here. objection the order requiring deposit
Plaintiff’s only to amount but also to extends the form security. superior court ordered said “that of. shall deposited the form cash or a bond or bonds company by security issued authorized to issue bonds.” already making of mentioned, As after the this order plain- changing tiff moved an order amount and form of security. support In he filed motion an affidavit which has fair although he assets the market value of which avers that security required, exceeds the amount of would sustain converting cash, those into financial loss assets and that surety companies execute bonds which which the court him furnish demand cash collateral permits order in the appears It that before the trial total amount of such bonds. resulting hardship himself plaintiff emphasized the court sufficiency requirement cash, rather than the or from the protection of the form of reasonableness defendants. argues appeal plaintiff the Code Civil
On 1057)5 (§§ 1041, provides that wherever a bond is Procedure undertaking of this state it required by law householders, freeholders, by two residents and executed requirement accept There is no such within state. *14 every undertaking personal sureties in executed ance of an of security necessary; the Code Civil Procedure is case where undertake what what the sureties must and simply prescribes taking require in the event a free the bond must the officer 834 of is furnished. Section can be and holders’ bond specifically to and Code, which relates Corporations the prescribe type the proceeding, does not present controls the required; provision that “the be its security of which can security” the, leaves fix nature amount court shall the and trial court. Where of the matter to the sound discretion that there upon sufficient evidence the trial court determines plaintiff’s representative suit has slight probability is that multiplicity of issues- from merit and where the nature might one, an extended trial be appears involved that the appeals, or defend might prosecute have to and that counsel law, abused court, a matter we hold that the cannot or character fixing the amounts in either its discretion security prescribed. here that, regardless of the furthermore to be observed
It is requiring deposit propriety of the order judgment is, for an defendants, the of dismissal individual only proper judgment independent reason, other and security for to furnish the here. Plaintiff failed and refused in- corporation is an ordered. provide part in 5Those sections material as follows: party proceeding desires 1041: “Whenever to an action or Section undertaking provided given by any give of this to be statute to an indicating sign undertaking State, it shall be sufficient the sureties they obligations requiring bound to the the statute that are given. undertaking may undertaking in Such form as fol- to be lows: .. undertaking “In 1057: case where an or bond author- Section State, taking required any law of this the officer the same or ized must require accompany sureties to it with an . . . affidavit householders, freeholders, they are each residents within the specified undertaking State, the sum are each worth . . 28
dispensable party
representative
brought
to a
action
on its
behalf;
its rights,
plaintiff,
not those of the nominal
are to
litigated,
jurisdiction
adjudicate
and the court has no
rights
party.
its
in its absence as a
Dismissal of the
any stage
representative
at
in a
action must result
in a
action,
discontinuance of the
not for a mere
defect
parties,
jurisdiction
proceed. (Beach
but for lack of
Cooper (1887),
;
103
Cal.
P.
Wickersham v.
[13
161]
(1892),
Crittenden
788];
Cal.
P.
Turner v.
[28
United
Corp. (1941),
Mineral
Plaintiff contends, finally, that the erroneously court below dismissed the action at a time when his motion change amount and form of pending. previously was As stated, August required the order of 27, 1951, "deposit security days within and that if he did not so do action, upon proper showing, should be dismissed. Twice parte on ex application judge signed an order purporting modify original effect to order (which regularly had been hearing notice) entered after on by ex tending deposit security. time Although purpose defendants have, of argument, assumed that *15 parte might the ex effective, orders at part, least in assumption contrary to the established rule that “the trial power judicial court is to set aside an order involving without regularly made, action and and enter another and different party.” (Harth order without notice to the adverse v. Ten Eyck 829, 16 (1941), ; Cal.2d 834 P.2d Bond [108 675] Farmers Nat. (1944), Cal.App.2d 842, & Merchants Bank 64 722].) In P.2d this case the determination, period the fixing order, of the which the under all the circumstances shown would constitute a reasonable time furnishing security just for part the the was as much a “judicial of the the fixing action” was determination and security required. of the and character of amount to be seeking any particular A motion to amend that order in which judicial part had been fixed as a action could be enter only upon parties. tained notice adverse It follows that purported postponing deposit orders the time for of the security, having parte, been made ex were ineffective. change subsequent motion to the form
Plaintiff’s furnishing same, and the date and amount of upon the court for however, properly disposition, was before Corporations argument. after Section 834 of the notice and ‘‘ security may The amount thereafter provides, Code or decreased in the from time to time be increased discretion showing security provided that the has or of the court inadequate or is excessive.” The trial court become questions appropriate power to reconsider had Eyck (see (1941), and form of Earth v. amount Ten Cal.2d) and it did supra, pp. 833-834 of reconsider those grant deny plaintiff’s it should questions. But whether a matter addressed its sound discretion. And motion was determined, in after it had the exercise of that it was discretion, that, that the motion should denied on December judgment entered the of dismissal. The fact that on minute order dismissal was entered December 14 is immaterial. judgment the reasons above stated the is affirmed.
For J., Traynor, J., Gibson, J., Shenk, C. and Spence, J., concurred.
EDMONDS, judgment upon J. I concurin ground provide security that the failed to as ordered the court.
CARTER, J. I dissent. my opinion It is considered portions certain of section Corporations 834 of the Code, applied here, are uncon- stitutional, particularly requirement share- holder a derivative suit furnish expenses of individual sued, defendants who are not as officers or employees of defendant but as persons third who corporation. with dealt provision Such a is violative of equal protection clause of the federal (IT. Constitution S. Const., XIV, 1) provisions Amendment § of the Cali- against fornia special 'Constitution (Cal. laws Const., art. 25). IV, provides
Section that within 30 days after service of summons in a shareholder’s action the corporation or other *16 may move the court for an order requiring plain- defendant tiff shareholder to furnish for the reasonable ex- including attorney’s penses, fees of corporation and the moving party which will incurred in the defense of the precedent action. This means that aas condition to the main- tenance of the action a stockholder required can be post security to for corporation’s not expenses but also for expenses, including attorney’s fees, party third officers, who are neither directors, nor employees defendants corporation. It is in this respect that I would hold the statute equal protection. unconstitutional as denial of majority recognizes precise question the fact that this “ yet has never been decided, as it However, states: inasmuch particular aspects plaintiff’s as some arguments as to the constitutionality provision of a for and possible indemnification of an individual defendant who is not employe sued as officer or of a appear to give be advanced in this case for the we specific first time aspects arguments.” consideration to those of his spite of In this, majority opinion proceeds merely gloss to over the by inadequately discussing principal issue constitutional objection saying: “Fundamentally, plaintiff’s argu and then constitutionality are answered, directly ments as to either or necessary implication, Cohen v. Industrial Beneficial Corp. Following Loan ...” this statement it admits that “ Jersey (. statute, case, involved in the Cohen New . . so provision no appears, to, far as . . . contained opinion discuss, not individual does defendants who were employes). ...” officers
In
Industrial Loan Corp.,
the case
Cohen Beneficial
Supreme
supra,
up-
the United States
Court
U.S.
posted
to be
requiring
corpora-
held a statute
brings
representative
tion
a shareholder
suit. The
when
proper
held
a classification was a
one
court there
that such
required by
legislation
can be
state
since the shareholder
represent.
he
to
It said:
protect
seeks
corporate
have chosen the
“And while the stockholders
plain-
they have no such election as to a
manager,
director or
represent them. He is a self-chosen
steps forward to
tiff who
champion.
volunteer
The Federal
and a
Con-
representative
place
litigating
oblige the state to
its
stitution does
disposal
representative,
at the
of such a
adjudicating processes
liability
responsibility,
imposing standards of
at least without
will
accountability
protect
it considers
the interests
which
added..)
represent.
(Emphasis
Thus
elects
himself
proper
require
may a state
appear that it
would
representing
protect the interests he is
stockholder
*17
by posting security, but
this cannot be construed mean that
including
protect
party
he is to
all interests
the third
de-
against
proceeds.
majority
fendants
whom he
The
also cites
Hogan v. Ingold,
1],
answering
The seems to feel that it is not essential to make complete study question illus- of this constitutional as is by following regardless trated the “. . . statement: propriety security requiring deposit of the order for the judgment is, for an- defendants, individual the of dismissal other independent reason, only proper judgment here. and security Plaintiff failed refused to furnish the for the and Therefore, as . . when refused ordered. . required deposit the action against indispensable in its party, could not continue any against party, absence other and trial court had no argu- alternative but to This dismiss as to all defendants.” misleading plain- ment is as it overlooks the fact that even if posted security tiff had still would proceed against been defendants not have able to the other furnishing prescribed without as to them. first grave questions In view of of constitu- fact that tionality involved, plaintiff appears followed a were to have proper appealing course of action from order of dis- missal. recognized equal protection well
It is that the pro- clause discriminating partial legislation hibits and par- favor of persons against in like ticular others condition. The United Supreme “. . equal protection States Court has said that: . given all and should be under like circumstances enjoyment personal and in the their civil rights; that all equally persons pursue entitled to happiness should their enjoy property; and acquire they should have like country protection to the courts access of their persons property, prevention wrongs, and redress of contracts; impediment and the enforcement of that no should pursuits except applied to, interposed to the one pursuits circumstances; others under like that no same upon one are laid greater burdens should be laid than calling (Emphasis in the same and condition. ...” others added; Barbier v. Connolly, 27, 113 U.S. S.Ct. 923].) L.Ed. equal protection prevent Legislature clause does not setting up requirements from different types different litigants; however, legislature classes state arbitrarily select operation certain individuals for the of its statutes since equal such selection is pro- obnoxious to the Legislation tection clause. which is directed toward certain limited individuals and not against others can be sus- tained the classification is a adequate reasonable one based on grounds.
Under provisions of section presented situation is *18 plaintiff where the in a shareholder’s derivative suit required pay attorney’s to the defendant’s if fees un- is required successful, pay but the defendant is not plaintiff’s to if gives counsel fees the latter wins. a party Such statute one greater rights advantages and than the other and is invalid adequate unless why there is some reason party third de- should plain- fendants receive different treatment than the adequate tiff No such shareholder. reason has been advanced majority I .legislation and am convinced the arbitrary is equal protection and a denial of the in the law that the is an classification unreasonable one. legislation
Discriminatory type of this was held unconstitu- in Supply Depot tional Builders’ 265 O’Connor, Cal. Am.St.Rep. 193, P. In that L.R.A.N.S. 909]. attorney’s provided case lien law fees the mechanic’s those claim to who established their under said law and successfully In to those who resisted such claim of lien. 268) holding (p. a unconstitutional this such law court said: ‘‘ provision opinion This is in our violative both of the federal constitution—of fourteenth amendment of and the state guarantees every person equal pro- former, which ‘the law,’ provisions of the state con- tection of the and of the uniform, provide general stitution which laws shall rights prohibit special laws, and declare inalienable A acquiring, protecting property. possessing, men of all gives attorney’s party in an action which fee one statute and allows such fee in one kind other, it to the and denies where, as in the not in other kinds actions of action and question, is not founded on in the distinction statute here differences, clearly is violative or natural constitutional ’’ provisions above noticed. constitutional If plaintiff security did furnish prose- and the action were judgment cuted to defendant, individual under section attorney’s could recover fees from if they pre- vailed but could not recover such fees from the prevailed. individual defendants if he What basis sound provision can there be for the gives section 834 which party defendant, third who is not an officer employee or preferential Merely defendant treatment ? because an individual is sued a derivative suit defendant than, him put any substantially does not different position if directly by he had been sued either the plaintiff and for this reason he should not be entitled to special consideration. It is true that shall be responsible for the costs and counsel of plaintiff fees who successfully has maintained shareholder’s derivative suit remedy but this does not situation since the put disadvantage still expense posting for a defendant who corresponding is under no disadvantage. if ultimately
Even the shareholder could prevail, this re- quirement of an advance for each individual de- might impose fendant such a severe financial strain shareholder that he money would be unable to raise the consequently be unable to continue with the derivative suit. In the instant required ease the trial $5,000 court a bond of for each individual defendant. What there had been 20 or many more such defendants? How small shareholders are position post in a $100,000 bonds of or more? *19 practical requirement As a matter type keep a of this would bringing most small shareholders from derivative suits and highly is therefore discriminatory. purpose It has been said that the of statutes of type this (cid:127) protect
is to corporations, their directors, officers and em- ployees against so-called “strike suits” and litigation may expenses unjustifiably which be upon foisted them; legislation the California goes however beyond this in that liability imposes on the for expenses of success- stranger ful defendants under certain conditions. frequently argued It is that the posting of such security corporate in favor of the justifiable defendant is since where the shareholder elects himself champion as the of the cor- poration’s cause of action he any should liable for expenses brings he about which should he be (See unsuccessful. Cohen v. Industrial Loan Corp., supra, 337 U.S. Beneficial special applicable where is not
541.) argument Such would be who party defendant to a third protection given sued if he had been consideration special to no entitled plaintiff. by an individual corporation directly in a de- is sued individual defendant mere fact that The disadvantage greater him put at does suit not rivative than he should reason, and this directly, were sued he expense of the at the protection special be entitled plaintiff shareholder. recognized courts California 1949 the prior Even
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said to be “to litigation so-called ‘strike suits’ and against employees unjustifiably may foisted expenses which them.” Derivative (Ballantine, Abuses Shareholders Suits: Sow “Security Expenses” New Act Far is Sound California’s 399.) carry In order to .Regulation? 37 Cal.L.Rev. out this (N.Y. Laws, Corp. Law purpose supra, New York Gen. 3-14) (N.J. Jersey Ann., Law Stat. tit. 61-b), the New §§ § Ann., Pennsylvania (Pa. tit. Law Stat. and the §§ plaintiff post shareholder 1323) provides that the each other de- expenses for the (i.e., be liable costs the fendants whose they However, do not re- employees). directors, officers expenses person third quire post employees nor directors, officers are neither defendants who *20 plaintiff elects corporation which corporation since the of the expenses. In not be liable Cali- represent would go considerably further purports than fornia section requiring share- of its sister states the laws attorney’s party fees of third de- liable for the holder to be though itself could not be held fendants even only is not expenses. provision un- for such Such liable equal protection of it is a of the warranted but denial post security requires plaintiff shareholder to since laws attorney’s without im- defendant’s fees party for the third party on defendant. liability the third posing corresponding precaution prudent hold that it is a authorities Some actions to regulation of derivative attempt reasonable some the rule but I feel that Whitten prevent suits, strike right (limiting the shareholder’s Dabney, 171 Cal. supra, commenced) provisions suits once to settle derivative corporation’s ex requiring of section why the I no sound reason see penses are sufficient. further, by having post limited should be shareholder party defendants. expenses of third necessary it should restrictions are Granting that some “ if undue however, result evil, will that Great remembered who has path of a shareholder in the placed obstacles are practi action is suing. The derivative legitimate grounds for management to account remedy calling cally obtain restitu wrongs corporation and to against the for its Suits, Derivative Abuses Shareholders (Ballentine, tion.” 399, 416.) supra, 37 Cal.L.Rev. adequate no I feel For these reasons there basis for 834; they discriminatory provisions of section violate of the Fourteenth equal protection clause Amendment to United constitute an undue States the Constitution necessary very stockholder’s derivative suit. impediment to the reported decisions of this must be remembered It many corpora- in which stockholders instances court show many suits have and that derivative have been defrauded tions meritorious. been judgment dismissal. reverse the
I would therefore