Opinion
Rehearing Denied March 21, 1930
Hearing Granted by Supreme Court April 21, 1930
Appeal from Superior Court, Los Angeles County; F.C. Valentine, Judge
Action by Henry Goldwater against William Oltman and others. From a judgment entered in favor of certain defendants, following the granting of a motion for nonsuit, plaintiff appeals.
Affirmed. [Copyrighted Material Omitted] COUNSEL
John W. Rankin, Kimball Fletcher, and Albee & Watkinson, all of Los Angeles, for appellant.
Schweitzer & Hutton, of Los Angeles (H.F. Clary, of Los Angeles, of counsel), for respondents.
OPINION
IRA F. THOMPSON, J.
This appeal is taken from a judgment entered in favor of certain of the defendants following the granting of a motion for nonsuit. An understandable presentation of the points presented for our consideration requires that we first review, as briefly as possible, the extremely voluminous pleadings in order that the issues between the plaintiff and various groups of defendants may be clarified.
The second amended complaint, on which the plaintiff went to trial, sets forth ten causes of action. The first, omitting matters not germane to any point in controversy and dispensing with the legal verbiage, may be summarized as follows, the Roman numerals referring to the paragraphs as numbered in the pleading:
II. Defendants Oltman and Morante are partners under the name "Morante Comedy Company."
IV. All defendants other than Morante and Morante Comedy Company are partners under the name "Drascena Productions."
V. Between October 15, and December 1, 1920, Bloom Film Laboratories, a copartnership (hereinafter for brevity referred to as "Laboratories"), "performed and furnished work, labor and materials, and expended money, all at the special instance and request of defendants" Morante, Oltman and Morante Comedy Company.
VI. $3,822.94 was the reasonable value of this work, etc., of which $3,000 is unpaid.
VII. February 9, 1921, an agreement was made between defendants Oltman and Morante and Morante Comedy Company as vendors and all the other defendants as vendees whereby the business and property of the vendors was transferred to the vendees, who, as part of the consideration, "promised, assumed and agreed to pay" to the Laboratories the debt due from the vendor. This agreement, the plaintiff, on information and belief, alleges was in writing.
VIII. January 3, 1921, one of the three partners composing the Laboratories assigned his interests to the other two, who continued in business under the firm name, and on June 7, 1922, assigned and transferred the claim in suit to the plaintiff.
IX. February 9, 1921, "as evidence of said obligation of the defendants, excepting only *** Morante and Morante Comedy Company," the defendants other than these two executed and delivered to the Laboratories a note for $3,000, dated as above, payable April 15, drawing seven per cent. interest and containing a provision for attorney’s fees to be fixed by the court in case of suit for collection, and signed "Drascena Productions, by Charles M. Conant, President"; $1,273.78 is a reasonable attorney fee.
X. No part of the $3,000 "or any amount of principal, interest or attorney’s fees, of said note" has been paid.
XII. None of the defendants has filed certificate of copartnership in the clerk’s office.
The second, third, and fourth causes of action are identical with the first, with these exceptions: The second omits paragraph six, alleging reasonable value, and in lieu thereof alleges a promise to pay the Laboratories and a part payment, leaving a $3,000 balance unpaid; the third omits paragraphs five and six, and substitutes an allegation of account stated between Morante Comedy Company and the Laboratories; and the fourth, with the same omissions as the third, alleges the original indebtedness to have been on a book account.
The remaining causes of action all plead that the defendants other than Morante and Morante Comedy Company are members of and unit holders in an association known as "Drascena Productions," all the business of which is transacted and all the property of which is held in trust by five of the defendants as trustees under a declaration of trust of record in Los Angeles county, the provisions of which are, at least in part, set forth. It is further alleged that each of 72 named defendants owns the number of units or "shares of trust certificates" set opposite his name in the complaint. Except for the omission of the allegation as to partnership of those defendants connected with Drascena Productions found in paragraph four of the first cause of action, and by reference thereto incorporated in causes two, three, and four, and the substitution therefor of the allegation as to nature and membership of Drascena Productions above referred to, causes five to eight, both inclusive, contain the same allegations as do causes one to four, respectively; that is to say, five corresponds to one, counting on the reasonable value of the work done, etc., as the basis of the original indebtedness; six corresponds to two, counting on the promise of Morante Comedy Company to pay, and so on.
It is to be noted that, while the first eight causes of action differ in the details above enumerated, they all set up the note executed by Drascena Productions. The ninth and tenth causes of action do not. The ninth cause of action alleges indebtedness to the Laboratories on the part of all the defendants on a book account showing $3,000 due and an assignment thereof to the plaintiff, while the tenth sets up an account stated between the Laboratories and all the defendants together with such assignment. With these exceptions the last two causes of action are but a repetition of the allegations of the first, with paragraphs four, six, and nine, hereinabove briefed, omitted.
Drascena Productions as a separate entity was not made a party to the action, the title of the same as it appears from the complaint listing all defendants other than Oltman and Morante as "Co-partners, doing business under the firm name and style of ‘Drascena Productions.’ " The transcript fails to show service on or appearance by some of the defendants, including Oltman, Morante, and the Morante Comedy Company; others who were served defaulted, and their defaults were duly entered. Therefore, in further reference to "the defendants," we are to be understood as meaning only those who answered. These may be divided into four groups. Group one was composed of thirteen defendants on behalf of whom an answer was filed by attorneys Schweitzer & Hutton and included the defendant Lars A. Dahl, specially mentioned for reasons which will appear later. The answer of this group failed to deny or in any way refer to the tenth cause of action set up in the complaint. Group two also consisted of thirteen defendants, represented by attorney Winterer, and to these thirteen may be added defendants Apostol and Arnis, who had filed a separate answer by other counsel, but who were represented at the trial by Mr. Winterer. Group three was composed of defendants I.N. and Nellie M. Thompson, on whose behalf an answer was filed by attorney C.O. Morgan. The record indicates that Nellie M. Thompson died pending the proceedings, and that attorneys Bordwell & Mathews appeared for the executor at the trial. The fourth group (if merely for the purpose of classification we may be permitted to apply the word "group" to one individual) consisted of the defendant Howard C. Galloupe, who appeared in propria personam. The answers of the three last mentioned groups included denials as to the tenth cause of action.
During the progress of the trial, but before the plaintiff had rested his case in chief, the defendants composing groups one and two, as hereinabove designated, moved the court "that the plaintiff be required to elect as to which particular remedy and which particular cause of action in the amended complaint he will stand on." This motion the court granted, over the objection of the plaintiff, who thereupon elected to stand upon his fifth cause of action. No such motion was made on behalf of the other defendants.
Upon the plaintiff resting his case, Mr. Winterer, upon behalf of the fifteen defendants whom he represented, moved for a non-suit. Mr. Clary, appearing for Schweitzer and Hutton, made a similar motion on behalf of twelve of the defendants represented by that firm, but did not so move on behalf of the defendant Dahl. No such motion was made as to defendants Galloupe and I.N. Thompson, or as to the executor of Nellie M. Thompson. True, the judgment recites that such a motion was made on behalf of said executor, but the bill of exceptions contained in the transcript shows this to be incorrect. These two separate motions were granted and judgment was entered against the plaintiff and in favor of all the defendants represented by Mr. Winterer, the twelve defendants represented by Schweitzer and Hutton on whose behalf the motion had been made, and also in favor of the executor of the last will and testament of Nellie M. Thompson, as to whom the bill of exceptions, certified by the trial judge as correctly setting forth all of the proceedings had during the trial, fails to show that any such motion was made.
Although we have concluded that the non-suit was not erroneously ordered, we deem it essential under the special circumstances of the instant cause to discuss and determine the assignments of error.
The first point relied on by appellant for a reversal of the judgment is that the court erred in requiring him to elect as between his ten causes of action. This point is well taken, and except for the reasons later stated in this opinion would require a reversal of the judgment.
As we have noted, the first eight causes of action all count upon the note, the allegations of the nature of the original indebtedness which it evidenced, as arising upon a quantum meruit, a promise to pay, an account stated or a book account, being but matters of inducement. For the purpose of this discussion these eight causes of action may be grouped together and treated as one, namely, a cause of action on a promissory note. The ninth cause of action is not upon the note, which is neither pleaded therein by direct averment or by reference to other causes of action, but is upon a book account as to all the defendants, and the tenth is like the ninth except that it is upon an account stated. Assuming that these several causes of action are based upon the same transaction and involve the same amount of money, a fact which is conceded by all parties to this appeal, the plaintiff had a right to set them forth in varied or even in inconsistent counts (Keller v. Hicks, 22 Cal. 457, 83 Am.Dec. 78; Wilson v. Smith, 61 Cal. 209; Stockton Combined Harvester, etc., Works v. Glen Falls Ins. Co., 121 Cal. 167, 53 P. 565; Froeming v. Stockton Electric R.R. Co., 171 Cal. 401, 153 P. 712, Ann.Cas.1918B, 408; Tanforan v. Tanforan, 173 Cal. 270, 159 P. 709, 711; Turner v. Turner, 173 Cal. 782, 161 P. 980; Cameron v. Ah Quong, 175 Cal. 377, 165 P. 961), nor could he properly be compelled to elect as to which count or cause of action he relied on. Cowan v. Abbott, 92 Cal. 100, 28 P. 213; Rucker v. Hall, 105 Cal. 425, 38 P. 962; Estrella Vineyard Co. v. Butler, 125 Cal. 232, 57 P. 980; Murphy v. Crowley, 140 Cal. 141, 73 P. 820; Figlietti v. Frick, 203 Cal. 246, 263 P. 534; Van Lue v. Wahrlich-Cornett Co., 12 Cal.App. 749, 108 P. 717; Rand v. Columbian Realty Co., 13 Cal.App. 444, 110 P. 322. As said in Tanforan v. Tanforan, supra: "Since, then, inconsistent causes of action may be pleaded, it is not proper for the judge to force upon the plaintiff an election between those causes which he has a right to plead. Plaintiff is entitled to introduce his evidence upon each and all of these causes of action, and the election, or in other words the decision as to which of them is sustained, is, after the taking of all the evidence, a matter for the judge or the jury." In that case the court held that the order compelling the plaintiff to elect was erroneous, but that the plaintiff was not injured thereby since at the time it was made all of the plaintiff’s evidence had been submitted and "not one word of it substantiated" the count which, pursuant to the order to elect, he was compelled to abandon. But in the instant case the order was made before the plaintiff had rested, and he was therefore precluded from offering evidence, if any he had, which might have substantiated the allegations set forth in the causes of action, or one of them, which he was compelled to abandon by reason of the erroneous ruling. Moreover, the court’s order was not restricted to the plaintiff’s various causes of action as against the defendants on whose behalf the motion for an election was made, but required him to elect as to all defendants whether joining in the motion or not.
We do not, however, intend what we have said as to the right to plead inconsistent causes of action to be deemed a statement or even an implication that the counts in which the note is pleaded are inconsistent with those in which it is not. Ordinarily a promissory note is but an evidence of indebtedness. Gregory v. Williams, 106 Kan. 819, 189 P. 932. It "does not discharge the debt for which it is given unless such be the express agreement of the parties; it only operates to extend until its maturity the period for the payment of the debt" The Kimball, 3 Wall. 45, 18 L.Ed. 50. "Nothing is better settled than that accepting a note is not payment of an account" Black v. Sippy, 15 Or. 574, 16 P. 418, 419. The creditor, therefore, has his option either to sue on the original indebtedness or upon the note given as evidence thereof, except that he may not pursue the former remedy until the expiration of the time of maturity as extended by the note. Holley v. Smally, 50 App.D.C. 178, 269 F. 694; Lake v. Fletcher, 52 App.D.C. 46, 280 F. 1020; Schreyer v. Turner Flouring Mills Co., 29 Or. 1, 43 P. 719; Savage v. Savage, 36 Or. 268, 59 P. 461; Sullivan v. Rudisill, 63 Iowa, 158, 18 N.W. 856; Stalnaker v. Tolbert, 121 S.C. 437, 114 S.E. 412; First National Bank v. Larsen, 146 Wis. 653, 132 N.W. 610. Having his option to sue either on the original indebtedness or on the note given and received as evidencing it, it is proper under our practice for him, if so advised, to join in the one complaint a cause of action on the former with a cause of action on the latter; and it being proper for him to plead his case in this manner, it follows that it is improper for the court to compel him to elect to proceed on the one count and to abandon the other.
Turning our attention next to the point that the court erred in granting the motions for nonsuit, we shall first consider the question thus presented with respect to the defendants represented by Schweitzer and Hutton. The answer interposed by this group failed, as we have already noted, to in any way mention the tenth cause of action set up in the amended complaint. As to the seventh cause of action the answer was as follows: "That these defendants have no information or belief upon which to base an answer to the allegations contained in the seventh cause of action, and on that ground deny each and every allegation thereof." The eighth and ninth causes of action were treated in the same manner. As to these three causes of action the answer was entirely insufficient to raise an issue. The amended complaint was verified, and hence under section 437 of the Code of Civil Procedure as it stood during the period of the pendency of this case in the court below a specific denial of each allegation intended to be controverted was required in order to raise an issue thereon. This has always been the rule in this state. Hensley v. Tartar, 14 Cal. 508; Levinson v. Schwartz, 22 Cal. 229; People v. Hagar, 52 Cal. 171; Fish v. Redington, 31 Cal. 185; Gay v. Winter, 34 Cal. 153. In the absence of such specific denial the truth of the allegation is deemed admitted. Section 462, Code Civ.Proc.; Pico v. Colimas, 32 Cal. 578; Kinney v. Maryland Casualty Co., 15 Cal.App. 571, 115 P. 456; Hirons v. Clare, 38 Cal.App. 608, 177 P. 291. The case therefore stood, as to the defendants in the first group, in exactly the same position as if they had actually in terms admitted the truth of the allegations contained, either by direct averment or by reference to paragraphs in preceding causes of action, in the last four counts. A motion for nonsuit made by a defendant may be granted only "when upon the trial the plaintiff fails to prove a sufficient case for the jury" (section 581, Code Civ.Proc.). These causes of action being thus deemed admitted, the plaintiff was not required to offer proof as to any of them. Schwartz v. DeWit, 1 Cal.Unrep. 40.
The provisions of section 462 of the Code of Civil Procedure above cited are but a restatement of those of section 65 of the Practice Act, which was the predecessor of the Code. In Hensley v. Tartar, supra, decided under the provisions of the Practice Act, the defendant had thus answered the allegations of the verified complaint: "And now comes Nicholas Tartar, one of the defendants, and makes his separate answer and says, that he denies generally and specifically each and every material allegation in the complaint, the same as if such allegation were herein recapitulated." This was followed by a separate denial of each allegation in the same form (subject to certain qualifications and exceptions). The court held that these denials raised no issue upon any fact stated in the complaint. We quote from the opinion: "The point in the present case is this: The plaintiff was nonsuited for failing to introduce evidence in support of certain allegations of the complaint. This he assigns as error, and contends that under the pleadings these allegations were to be taken as true, and that the evidence was therefore unnecessary. Sec. 65 of the Practice Act, provides that ‘every material allegation of the complaint, when it is verified, not specifically controverted by the answer, shall, for the purpose of the action, be taken as true.’ (Wood’s Dig. 175.) In this neither of the answers contains a specific denial of any material allegation in the complaint. The denials are in the most general form, and their legal effect is not changed by expressions showing that they were intended to be specific." Because of this error the judgment was reversed. Except for the reasons later discussed it would have been erroneous for the court in the instant case to have granted a nonsuit as to the last four causes of action: Adams v. Tucker, 6 Colo.App. 393, 40 P. 783; Darlington v. Hamilton Bank (Sup.) 112 N.Y.S. 1097.
The order here involved may be treated as a general order of nonsuit as to the whole of the plaintiff’s case, including all causes of action set up in his amended complaint, since, as we have held, the order to elect was erroneous. The situation is similar to that in Pacific Vinegar Works v. Smith, 152 Cal. 507, 93 P. 85, 87, where it was urged that the trial court had erred in refusing to grant a nonsuit as to one of the plaintiff’s twelve causes of action as to which the proof had failed. Passing on this contention the court said: "But the motion was directed ‘to all the causes of action mentioned in the complaint,’ and was not tenable unless, as to all, there was a failure of evidence." The same reasoning might well apply to the order compelling an election, heretofore discussed.
As to the defendants who appeared by Mr. Winterer (not including Apostol and Arnis, who had filed a separate answer) the situation is somewhat different, due to the fact that their answer does not omit reference to any of the causes of action and does contain specific denials of the matters alleged therein. Most of these denials, however, are on information and belief, and it is the contention of appellant that as to certain of these such form of denial was insufficient and raised no issue; that therefore this group of defendants must also be regarded as having admitted many of the facts alleged in the complaint, and hence are in the same category with the defendants in the first group. In discussing this point we shall confine our attention to matters which are specifically pointed out in the appellant’s briefs.
First: Paragraph seven of the first cause of action, which by reference is also incorporated in all other causes of action except the ninth and tenth, specifically alleges an agreement between the partnership known as Morante Comedy Company and all the other defendants, whereby the former sold, transferred, and conveyed all its business and properties to the latter, who "promised, assumed and agreed to pay" the amount due to the Laboratories. As these eight causes of action are actually upon the note, this allegation is but a matter of inducement, and not material, and for that reason the form of the denial is also immaterial.
Second: Paragraph nine of the first cause of action, similarly incorporated in the following seven counts, alleges the execution of the note and its delivery to Morante Comedy Company by all other defendants. This is met by a denial, on information and belief, "that on the 9th day of February, 1921, or at any other time, as evidence of any obligation at all of the said defendants, or any of them, the defendants, other than said Milburn Morante and Morante Company, or any of the said defendants, made, executed, and delivered, or made, executed or delivered, *** that certain alleged promissory note set forth in said paragraph." Inasmuch as the note which is set out in haec verba shows on its face that it was executed only by "Drascena Productions, by Charles M. Conant, President," it may be deemed that the note itself is contradictory of the allegation as to its execution by the defendants, in which case the note would govern as against the allegation, since specific averments must be given precedence over general averments in case of an inconsistency between the two. Horton v. Travelers’ Ins. Co., 45 Cal.App. 462, 187 P. 1070. Drascena Productions as an entity was not a defendant. We may, therefore, disregard the allegation as to execution of the note by the individual defendants and with it the form of the denial of its execution.
There still remains to be considered, however, the allegation that the note was delivered and that such delivery was as evidence of the obligation of the defendants. This allegation is met only by denial on information and belief, and it will be observed that even this is merely a denial that the note was delivered "as evidence of any obligation at all of the said defendants or any of them," and that it does not deny the fact of delivery. This is not a sufficient denial to raise an issue as to the delivery of the note. Whether or not the defendants delivered the note was a matter presumably within their own knowledge, and one, therefore, which they were called upon to deny positively if they wished to raise an issue on that point. Mulcahy v. Buckley, 100 Cal. 484, 35 P. 144; Zany v. Rawhide Gold Mining Co., 15 Cal.App. 373, 114 P. 1026; Jensen v. Dorr, 159 Cal. 742, 116 P. 553.
Third: Paragraph ten of the first cause of action, made a part of the other causes of action, alleges that Bloom Laboratories had filed the certificate required by sections 2466 and 2468 of the Civil Code. This was a matter of record which the defendants could not put in issue by denial on information and belief. Santa Barbara Lumber Co. v. Ross, 183 Cal. 657, 192 P. 436, and cases cited in 21 Cal.Jur., p. 150.
Fourth: The tenth cause of action alleges that an account was stated between the defendants and the Laboratories "wherein and whereby it was shown that the defendants and each of them were indebted to said Bloom Film Laboratories in the amount of $3,000, which amount the defendants and each of them promised and agreed to pay. ***" Whether or not an account had been stated, and whether or not the defendants had promised to pay the $3,000, were most certainly matters within their knowledge and which they were called upon to positively deny unless they desired to be deemed to have admitted them. A denial on information and belief as to these allegations is tantamount to an admission (see cases cited under "Second" above).
Thus we find that the answer of these defendants, like that of those in the first group, raises no issue whatever as to certain material allegations, and the latter being therefore deemed admitted, the plaintiff was required to offer no proof thereon and the court was not justified in granting a nonsuit against him on the theory that the answer was sufficient if, as the record indicates, there was evidence tending to support those material allegations which were properly denied.
Some of the grounds advanced in the motion for the nonsuit were not sufficiently stated, but one of them was based on the theory of the defendants that the declaration of trust under which Drascena Productions was created did not constitute a partnership and that the defendants holding interests therein were not liable personally as partners.
The "Agreement and Declaration of Trust" is set out in full as an exhibit attached to the answer of the defendants represented by Schweitzer and Hutton, and the same was by stipulation admitted in evidence. At the outset it recites that it is an agreement and declaration of trust made and entered into by and between certain named persons "and all other parties who may become parties to this agreement, herein designated as the ‘subscribers,’ " and certain others designated as trustees. It then witnesses that the subscribers "are now engaged in the business of producing motion picture films under the title and designation of Drascena Productions," have acquired the ownership of certain picture rights, leaseholds, and contracts, and have paid into a common fund the sum of $25,000, "to be used in defraying the costs and expenses of said business," and that they have individually signified their intention to form a permanent organization under the same name to carry on the said business and to transfer to such organization all their moneys, properties, etc. It then provides, among other things, that the five trustees shall have full authority and control; that title to the property shall be vested in them; that they shall fill vacancies and name successors; that they shall have full authority to borrow money and to execute notes therefor, and that they are authorized to issue 2,500 shares of trust certificates each of a par value of $100 to the several subscribers, and from time to time issue and sell up to 2,500 additional shares. There is also a provision as to liability of trustees and subscribers. The beneficiaries or certificate holders have no control of the affairs of the organization.
Appellant very frankly admits his inability to define the legal relationship between the subscribers to this agreement. Respondents insist that it constitutes what is known as a "Massachusetts Trust" and argue that, as held by the courts of that state with regard to such entities, the unit or certificate holders, or, as they are called in the instrument here involved, "the subscribers," are not individually liable for the debts of the trust as in the case of members of a copartnership. To this point they cite the cases of Williams v. Milton, 215 Mass. 1, 102 N.E. 355, 357; Frost v. Thompson, 219 Mass. 360, 106 N.E. 1009, and Bouchard v. First People’s Trust, 253 Mass. 351, 148 N.E. 895, as well as a number of cases from other jurisdictions, all of which support their contention. On the other hand, the appellant relies upon Stitzinger v. Truitt, 81 Cal.App. 502, 253 P. 971, 972, and Old Rivers Farms Co. v. Roscoe Haegelin Co. (Cal.App.) 276 P. 1047, 1050. For reasons we shall point out, these cases do not assist in a solution of the present problem. In the Stitzinger Case it is said: "It is pointed out that, when the members of a so-called business trust reserve to themselves such a large measure of power and control over the trustees as is done in this case, then the trustees are merely agents of the members and the members are personally liable for debts as general partners. Appellants have not replied to these authorities, having filed no closing brief; but in their opening brief appellants claim the articles constitute a joint-stock company. ‘At common law joint-stock companies were regarded as commercial partnerships, and in the absence of express provisions, statutory or otherwise, the rights and liabilities of their members are to be determined by substantially the same rules.’ " In the present instance, the absolute and entire control of the affairs is vested in five trustees without power of removal or election of new trustees by the members. There is, therefore, no question such as is mentioned in the first part of the quotation. Further, it is not contended that the organization is a joint-stock company. The perfected arrangement has every indication of being a valid trust and the question reduces itself to this: Can a trust be organized in this state for the purpose of engaging in business? If it can, then the law respecting the liability of beneficiaries would seem to answer the remaining question. There is a statement in the second case relied upon by appellant which, taken by itself and separated from the facts upon which it is predicated, seems to answer the question asked in the negative. It follows: "The law has anticipated that individuals may desire to embark in business ventures without risking their entire capital, and has provided for just such cases by ample statutory enactments and by direct constitutional provisions. Appellants, however, attempt to disregard all of these wise and salutary laws, and ask us to hold them as naught. This we decline to do." When applied to the question in that case the language is unobjectionable and apt, but we are not ready to accord to the statement an unlimited application. The argument advanced by appellant in that case was, that " ‘Roscoe Haegelin Company is a corporation as such term is defined in section 4 of article 12 of the Constitution of the state of California.’ " The section referred to reads: "The term corporations, as used in this article, shall be construed to include all associations and joint-stock companies having any of the powers or privileges of corporations not possessed by individuals or partnerships." It was argued that the Haegelin Company was a joint-stock company, hence a corporation under the quoted section. The language employed by the court in its application to the questions before it simply means that the state, in the exercise of its legislative function, has adopted wise and salutary laws providing for the method of organizing a corporation by those who desire to engage in business under a corporate form for the purpose of avoiding the risk of their entire capital in the enterprise, which laws we are asked to set aside by a declaration that the steps there outlined are not prerequisite to the lawful organization of a corporation. And the court concludes: "This we decline to do." When interpreted in the light of the questions involved in that case, the statements have quite another meaning from the one which might ordinarily attach if they were unrelated thereto. In other words, we do not read the words of the District Court of Appeal to mean that it is impossible in California for men to intrust their capital to one or more trustees in whom they have implicit confidence and over whom they seek to exercise no control without assuming any greater risk than the loss of the funds placed in the trust. Our laws expressly recognize the right of men to relieve themselves of the burden of personally supervising their affairs by placing their capital in the hands of trustees for management, reserving, to themselves or others, income therefrom. It is true that until the legislative session of 1929 certain limitations were placed upon the purposes for which estates in real property might be held in trust by section 857 of the Civil Code, but no such restrictions were laid against the creation of trusts in personal property, such as we are dealing with in the present action. Section 2220 of the Civil Code authorizes the creation of express trusts in personalty for any purpose for which a contract may lawfully be made. And our courts have recognized the right there declared. In Re Walkerly, 108 Cal. 627, 656, 41 P. 772, 778, 49 Am.St.Rep. 97, we find the following: "The essential difference in this state between trusts in real property known as ‘express trusts’ and those in personal property are: First, the former can only be of the kinds permitted by the statute, and no others (Civ.Code, § 857), while the latter may be created generally for any purpose for which a contract may be made (Civ.Code, § 2220); " and in Estate of Hinckley, 58 Cal. 457, 482, we read: "Here, as in New York, ‘trusts in personal estate are subject to no statutory restriction; in other words, the Legislature has never attempted to define and enumerate the lawful occasions for such trusts.’ (Gilman v. Reddington, 24 N.Y. 12.) They stand, therefore, as at the common law, subject only to the statutory rule of section 715, and to the direction against accumulations. (§ § 724, 2220.)" In Toland v. Toland, 123 Cal. 140, 55 P. 681, 682, it is said: "A trust in personal property may be created for any purpose for which a contract may lawfully be made (Civ.Code, § 2220), and the creation of a trust does not of itself suspend the power of alienation, unless a trust term in the property is created, within which a sale or other alienation by the trustee would be in contravention of the trust." The same principle is again recognized in Stephens v. Lemoore Canal & Irrigation Co., 22 Cal.App. 579, 135 P. 707. See, also, Hellman v. McWilliams, 70 Cal. 449, 11 P. 659; 25 Cal.Jur. p. 302.
It is obvious, therefore, that the settled legislative policy of this state is to lay no restrictions against the formation of trusts in personalty, but rather to leave open to such organizations the conduct of any lawful enterprise.
Having established the proposition of law that individuals have the right to formulate a trust in personalty for any legitimate purpose, can it be doubted that the arrangements here perfected constitute a trust rather than a partnership or joint stock association? We have already noted that the authorities relied upon by respondents support their contention. In view of the importance of the question under consideration, we deem it proper to quote at some length from Williams v. Milton, supra, the reasoning of which is in accord with the other authorities mentioned and a portion of which has been quoted with approval in the case of Crocker v. Malley, 249 U.S. 223, 39 S.Ct. 270, 63 L.Ed. 573, 2 A.L.R. 1601. The excerpt follows: "Williams v. Boston, 208 Mass. 497, 94 N.E. 808, was a similar case. The trust agreement in that case provided that the trust was established ‘for the purchase, development and disposition of’ the former site of the Museum of Fine Arts in Boston. The property was to be held by trustees, but the shareholders had a right to remove the trustees, and meetings of the shareholders were to be held at which the shareholders might authorize or instruct the trustees in any manner and alter or amend the declaration of trust, or direct the trustees to end the trust, sell the property and distribute the proceeds. The original papers in the case show these to have been the facts in the case, although they are not stated in the report of that decision. The property of this association was held to be taxable as partnership property.
"In Mayo v. Moritz, 151 Mass. 481, 24 N.E. 1083, on the other hand, it was held that certificate holders under the declaration of trust there in question were not partners. In that case an inventor transferred his invention to trustees to whom by the terms of the trust indenture the patent was to be issued when it was issued. The trust indenture provided for the issue of scrip to those who should furnish to the trustees the money necessary for the more advantageous disposition of the invention. The trust on which the trustees were to hold the invention and the money produced by the issue of scrip was to hold, manage and dispose of the invention or any part thereof or interest therein upon such terms as to them (the trustees) or a majority of them should seem best, the net proceeds to be paid one-half to the inventor and the other half to the holders of the scrip or certificates. The scrip, called in the trust indenture scrip or certificates, was transferable. Vacancies in the office of trustees were to be filled by the remaining trustees. It was held that the scrip holders were not partners, and in that respect the case was ‘unlike Gleason v. McKay, 134 Mass. 419, and Phillips v. Blatchford, 137 Mass. 510.’
"The difference between Hoadley v. County Commissioners, 105 Mass. 519 (involving the same indenture as that in Gleason v. McKay, 134 Mass. 419), Whitman v. Porter, 107 Mass. 522, Phillips v. Blatchford, 137 Mass. 510, Ricker v. American Loan & Trust Co., 140 Mass. 346, 5 N.E. 284, and Williams v. Boston, 208 Mass. 497, 94 N.E. 808, on the one hand, and Mayo v. Moritz, 151 Mass. 481, 24 N.E. 1083, on the other hand, lies in the fact that in the former cases the certificate holders are associated together by the terms of the ‘trust’ and are the principals whose instructions are to be obeyed by their agent who for their convenience holds the legal title to their property, the property is their property, they are the masters; while in Mayo v. Moritz, on the other hand, there is no association between the certificate holders, the property is the property of the trustees and the trustees are the masters. All that the certificate holders in Mayo v. Moritz had was a right to have the property managed by the trustees for their benefit. They had no right to manage it themselves nor to instruct the trustees how to manage it for them. As was said by C. Allen, J., in Mayo v. Moritz, 151 Mass. 481, 484, 24 N.E. 1083: ‘The scrip holders are cestuis que trust, and are entitled to their share of the avails of the property when the same is sold,’ and that is all to which they were entitled. In Mayo v. Moritz the scrip holders had a common interest in the trust fund in the same sense that the members of a class of life tenants and the members of a class of remaindermen (among whom the income of a trust fund and the corpus are to be distributed respectively) have a common interest. But in Mayo v. Moritz there was no association among the certificate holders just as there is no association although a common interest among the life tenants or the remaindermen in an ordinary trust. ***
"This brings us to the question of the character of the Boston Personal Property Trust. It is plain that it is a trust and not a partnership. By the terms of the indenture of trust the property contributed by the certificate holders, or that bought with money contributed by them (the original trust property could be acquired in both ways by the terms of the indenture of trust), was to be held by the trustees in trust to pay the income to the holders of the certificates, and on the termination of the trust to divide the trust fund or the proceeds thereof among them. The certificate holders are throughout called ‘cestuis que trustent.’ The certificate holders, or ‘cestuis que trustent,’ are in no way associated together, nor is there any provision in the indenture of trust for any meeting to be held by them. The only act which (under the trust indenture) they can do is to consent to an alteration or amendment of the trust created by the indenture or to a termination of it before the time fixed in the deed. But they cannot force the trustees to make such alteration, amendment or termination. It is for the trustees to decide whether they will do any one of these things. All that the certificate holders or ‘cestuis que trustent’ can do is to give or withhold their consent to the trustees taking such action. And the giving or withholding of consent by the cestuis que trust is not to be had in a meeting, but is to be given by them individually. As we have said, no meeting of the cestuis que trust for that or any other purpose is provided for in the trust indenture. The trustees of the Boston Personal Property Trust have a right to sell the trust securities and reinvest the proceeds, and also a limited power to borrow on the security of the trust property. The certificate holders, or ‘cestuis que trustent,’ as they are called in the trust deed, have a common interest in precisely the same sense that the members of a class of life tenants (among whom the income of a trust fund is to be distributed) have a common interest, but they are not socii, and it is the trustees, not the certificate holders, who are the masters of the trust property. The sole right of the cestuis que trust is to have the property administered in their interest by the trustees, who are the masters, to receive income while the trust lasts, and their share of the corpus when the trust comes to an end." (Italics ours.) The reasoning here employed meets with our approval. The sum and substance of the declaration of trust under consideration is, that the certificate holders are not associated together for the purpose of carrying on business in accordance with the definition of a partnership as found in section 2395 of the Civil Code as it existed prior to its repeal in 1929; they have no control or direction over the investment of the corpus of the trust; the trustees are the masters; the cestuis que trustent are entitled only to receive the net income not required for the operation of the trust and the proportion of the corpus of the trust upon its termination. Were we to hold that such an arrangement of affairs made of the certificate holders copartners, we would be assuming a function which belongs exclusively to the legislative department of government.
The appellant seeks to fasten liability upon the defendants solely by reason of their ownership of certificates of beneficial interest. Not only one, but all of his causes of action are founded upon this theory. It would constitute a perversion of justice for us to say, under such circumstances, that the failure of the defendants to properly answer some of the counts of the complaint demanded that we should reverse the judgment. There can be no doubt that section 4½ of article 6 of the Constitution of California applies in this instance as well as in others, and not only authorizes but also requires us, in accordance with our own sense of natural justice, to refrain from making a mockery of the law by an over-indulgence in the refinements of pleadings with an attendant loss of substantive fairness. For like reasons the failure of counsel for the executor of the last will and testament of Nellie M. Thompson to join in the motion for nonsuit is of no serious import.
There are other reasons advanced by the respondents why the judgment should be affirmed. We are of the opinion that they are not well taken, and in view of the conclusion to which we have come it is not necessary to discuss them.
Judgment affirmed.
I concur: CRAIG, Acting P.J.
BURNELL, Justice pro tem. (dissenting).
I dissent. I am unable to concur with the majority of the court in the view that the error which they concede was committed in forcing the plaintiff to elect as between his causes of action does not necessitate a reversal of the judgment.
As stated in the majority opinion, in its most clear and able resuméof the issues as made by the pleadings, the answers of the defendants represented by the firm of Schweitzer and Hutton do not in any way mention, much less do they deny, the allegations contained in the tenth cause of action, and, as further pointed out therein, the answers of this group of defendants to the seventh, eighth, and ninth causes of action were so drafted as to amount to admissions of the allegations thereof. As well and clearly stated by my learned brethren, "The case therefore stood, as to the defendants in the first group, in exactly the same position as if they had actually in terms admitted the truth of the allegations contained, either by direct averment or by reference to paragraphs in preceding causes of action, in the last four counts." The answer of the group represented by Mr. Winterer, as held in the majority opinion, "raises no issue whatever as to certain material allegations, and the latter being therefore deemed admitted, the plaintiff was required to offer no proof thereon." Among the material allegations thus held by it to be admitted the majority opinion points out the allegation in the tenth cause of action that an account had been stated "between the defendants" and the plaintiff’s assignor, "wherein and whereby it was shown that the defendants and each of them were indebted to (the assignor) in the amount of $3,000, which amount the defendants and each of them promised and agreed to pay. ***" (Italics are my own.) At the time, therefore, when the court below forced the plaintiff to elect to stand upon but one of his ten causes of action and to abandon the remaining nine, there were four causes of action which in contemplation of law were as much admitted by one group of defendants as though they had filed a written stipulation admitting the truth of the facts alleged, while as to the other main group of defendants the situation was the same with respect to the tenth cause of action. It is indulging in mere judicial jugglery to say that plaintiff had but one real cause of action and that that depended upon the theory of the liability of the defendants by reason of their membership in and ownership of certificates of the organization known as "Drascena Productions." It goes even, in my opinion, beyond this, since, as to the tenth cause of action at least, the complaint alleged as a fact— which the majority opinion rightly holds was admitted by all the defendants of these two groups— that an account had been stated between plaintiff’s assignor and all of the defendants and that each and all of the individuals named as defendants had promised and agreed to pay the amount so stated. Irrespective of their legal liability as subscribers to the agreement under which Drascena Productions was organized, the defendants might, and it is an alleged and admitted fact as held by my learned associates that they did, severally and individually, "promise and agree to pay" the $3,000 representing the indebtedness assumed by their organization when it took over the business, assets, and liabilities of the Morante Comedies and for which there had been an account stated. How, then, can it be said that the plaintiff was not prejudiced by being forced to abandon a cause of action based upon a statement of facts sufficient to warrant a judgment in his favor, which facts were not denied but were in contemplation of law admitted by his adversaries?
I am also compelled to disagree with the majority opinion as to the ruling of the court below on the motions for nonsuit. What has just been said with respect to the order compelling plaintiff to elect applies with equal force to this branch of the case. It seems to me self-evident that where a cause of action states facts sufficient to support a judgment, and those facts are admitted by the defendants to be true, it is error of the most flagrant and prejudicial character to grant a nonsuit. The order granting the nonsuit applied to each and every one of the plaintiff’s causes of action, including the tenth the allegations of which were, as the majority opinion so clearly points out, admitted to be true by the defendants of both the Schweitzer and Hutton, and Winterer groups. The prevailing opinion so holds in the unmistakably clear language which I now quote: "The order here involved may be treated as a general order of nonsuit as to the whole of the plaintiff’s case, including all causes of action set up in his amended complaint, since, as we have held, the order to elect was erroneous. *** Pacific Vinegar Works v. Smith, 152 Cal. 507, 93 P. 85." (Italics mine.)
Confining the discussion to the tenth cause of action, does it allege facts sufficient, if proved or as in this case admitted, to have supported a judgment for the plaintiff? That, it seems to me, is an absolute test of the correctness or prejudicial erroneousness of the order granting a nonsuit as applied to the instant case. As pointed out, the tenth cause of action alleges an account stated and the promise of "the defendants and each of them" to pay the amount thereof, an allegation as to which, as the majority opinion correctly holds, "the plaintiff was not required to offer proof," since its truth was admitted. Suppose that a judgment on the pleadings had been given as to this cause of action. Bearing in mind that each cause of action must be separately stated (Code Civ.Proc. § 427; Cosgrove v. Fisk, 90 Cal. 77, 27 P. 56) and must be complete in itself (Hopkins v. Contra Costa County, 106 Cal. 566, 39 P. 933; Reading v. Reading, 96 Cal. 4, 30 P. 803), could this court hold on an appeal from such judgment that the admitted fact that an account had been stated and that the defendants and each of them had promised and agreed to pay the amount thereof was insufficient to warrant and support such judgment? Would the fact that the pleading also contained an averment that the defendants were members of a so-called trust, of the Sons and Daughters of I-Will-Arise or of the Hole-in-One club be regarded as having any bearing on the question of the liability of those who had admittedly promised and agreed to pay a certain sum? As to that cause of action, regarded, as it must be, as though it were the only cause of action set up, would not the averment of membership in Drascena Productions necessarily be treated as mere surplusage— as a statement which could not have the remotest bearing on the admitted fact that the defendants and each of them had promised and agreed to pay a certain sum of money? Or. if not so regarded would it not be deemed, as to this cause of action, a mere matter of inducement, explanatory, possibly, of the reason for the promise of the individual defendants to pay? In attempted justification of their attitude on this question the majority of the court says: "The appellant seeks to fasten liability upon the defendants solely by reason of their ownership of certificates of beneficial interest (in Drascena Productions). Not only one but all of his causes of action are founded upon this theory. It would constitute a perversion of justice for us to say under such circumstances that the failure of the defendants to properly answer some of the counts of the complaint demanded that we should reverse the judgment." (Italics are mine.) And this in the face of their positive statement that one group of defendants did not answer the tenth cause of action at all and that the answer of another group amounted to an express admission of the truth of its allegations! We are not concerned here with answers that merely failed to traverse averments of the complaint with scrupulous adherence to the rules of perfect pleading, but with answers which, to again quote the words of the majority opinion, placed one group of defendants "in exactly the same position as if they had actually in terms admitted the truth of the allegations" and another group in the position of having raised "no issue whatever as to certain material allegations." I cannot agree that, at least as to the tenth cause of action, the appellants sought to fasten liability upon the defendants solely or at all by reason of their ownership of certificates in Drascena Productions. As I have pointed out, the gravamen of that cause of action was the promise and agreement of each and all of the defendants to pay the amount of the account stated. Is this court to hold as a matter of law that the allegation of the complaint which it says was admitted as true by the defendants is in fact false? And without proof, or the opportunity for proof, is it to rule that the individual defendants did not nor did any of them promise and agree to pay? If this is the law it certainly was not the law until the majority of this court spoke. Having ruled in effect that persons engaged in a common business enterprise, without complying with those provisions of our law which enable individuals to escape full personal liability, may render themselves immune from their obligations by signing a paper called a trust agreement, are we to further hold that the fact of membership in this extra-legal organization negatives the admitted fact that the individual members and each of them "promised and agreed to pay"? The "perversion of justice," in my humble opinion, consists of the affirmance of a judgment of nonsuit as to a cause of action alleging facts sufficient to support a judgment in the face of the admission of those facts by the defendants, and in the assumption, in the face of the pleaded and admitted promise and agreement of the defendants and each of them to pay the amount of the account stated and without one word in the record to support such assumption, that the plaintiff, at least as regards the tenth cause of action, relied solely upon the membership of the defendants in Drascena Productions. Even if the defendants had not placed themselves as the majority opinion puts it, "in exactly the same position as if they had actually in terms admitted the truth of the allegations" as to the promise of each and all of them to pay the $3,000, had the court below the right to assume, without allowing an opportunity for the plaintiff to offer proof as to this cause of action, that he would have been unable to substantiate the truth of his averments therein contained? In my opinion the question answers itself.
I am convinced that the errors of the trial court, first in forcing the plaintiff to elect to proceed on one of his causes of action and to abandon the others and second in granting the motion for nonsuit, absolutely demand a reversal of the judgment irrespective of all question as to the liability of the defendants as members of Drascena Productions. Upon that question, which I do not admit is necessarily involved in the decision of the appeal I again find myself not in accord with the opinion of my learned brethren.
The majority opinion clearly and succinctly describes the provisions of the instrument under which Drascena Productions was organized, although it fails to note that this "Agreement and Declaration of Trust," in addition to the provisions reviewed, contains the following, which it seems to me somewhat negatives the apparent theory of my associates that the subscribers or members retained no control whatever over the business of the organization, namely, a clause reading: "Any changes, additions or alterations in any way affecting the rights, privileges, and interest of the ‘Cestui,’ shall only be made by the consent of the owners and holders of two-thirds of all the outstanding shares of trust certificates; " a clause providing for the termination of the trust by a two-thirds vote of all of the members at a meeting called for that purpose, in which event the assets are to be liquidated and the proceeds distributed in cash to the members "pro rata to each, according to their respective interests thereon [sic]," and a provision requiring the written consent of the holders of two-thirds of the issued certificates before any except a purchase-money mortgage can be placed on the property of the trust.
The agreement itself recites the fact that the subscribers had theretofore been engaged in a certain business, to wit, the production of motion picture films, and that they had been carrying on this business under the same name as that under which they were to continue to operate after signing the agreement. It further recites their acquisition of ownership in certain personal property and the existence of a common fund of $25,000, contributed by the subscribers, "to be used in defraying the costs and expenses of said business." It seems evident that these subscribers were previously and at the time of their execution of the so-called trust agreement engaged in a joint adventure, a common business enterprise, each being individually liable under the law for the debts incurred in carrying out such enterprise. Leake v. City of Venice, 50 Cal.App. 462, 195 P. 440. That is made clear by the recitals of their agreement, as follows: "Whereas, the subscribers are now engaged in the business of producing motion picture films under the title and designation of ‘Drascena Productions’ *** and whereas the said subscribers at a meeting held on the 25th day of August, 1920, individually signified their purpose to form a permanent organization to be known as ‘Drascena Productions,’ and to engage in and carry on the business of producing motion picture films. ***" (Italics mine.) Individuals engaged in a business venture and charged by law with liability to the creditors of the business may not, by the terminology they elect to employ or by any agreement among themselves, divest themselves of the obligations imposed by law with regard to their dealings with those who are not members of their organization or parties to their agreements. Streeter v. Bacon, 49 Cal.App. 327, 193 P. 285. Had these associates desired to continue to carry on their business under conditions whereunder their individual liability might have been legally limited, the Constitution and laws of the state provided the means whereby this end could have been attained, as, for example, by forming a corporation. The policy of our law has always been, as I understand it, that when two or more persons are engaged in a common business enterprise, under whatever name they may choose to label it, each is charged with liability for the debts incurred in its prosecution unless they see fit to organize their enterprise pursuant to and in accordance with laws which provide for a limited liability. In Old River Farms Co. v. Roscoe Haegelin Co. (Cal.App.) 276 P. 1047, 1050, a case in which this identical question was presented to this court, it was said of the subscribers to or members of just such a trust agreement: "The law has anticipated that individuals may desire to embark in business ventures without risking their entire capital, and has provided for just such cases by ample statutory enactments and by direct constitutional provisions. Appellants, however, attempt to disregard all of these wise and salutary laws, and ask us to hold them as naught. This we decline to do." It may be here noted in passing that the Supreme Court denied a hearing in the case just referred to, after judgment in the District Court of Appeal. The liability of such persons under the law is recognized by section 388 of the Code of Civil Procedure, which provides: "When two or more persons, associated in any business, transact such business under a common name, whether it comprises the names of such persons or not, the associates may be sued by such common name, the summons in such cases being served on one or more of the associates; and the judgment in the action shall bind the joint property of all the associates, and the individual property of the party or parties served with process, in the same manner as if all had been named defendants and had been sued upon their joint liability." Here the members of Drascena Productions were named as defendants, and the transcript shows that they not only were served with process, but that most of them appeared and answered.
My brethren pro tempore lay particular stress upon the proposition that a trust may be formed in personal property. This may readily be granted, but the question of the legal liability to creditors of the associates engaged in, and forming a permanent organization for the purpose of continuing to engage in, a certain business is what we are discussing, not the legality of their organization. We may concede that these associates in a common business venture could form a trust without violating any statutory law of the state and transfer the legal title to their common property used in such business to the trustees thereof, and still leave undetermined the question of the power of such associates to escape from their obligations to the creditors of their business by agreement among themselves that sole liability should rest with the fictitious entity thus evolved. I can find no authority in the decisions of the courts of this state, whatever conclusion those of other jurisdictions may have arrived at, which sanctions such facinorous vermiculation toward the destruction of the foundation of the bulwark which the law has erected for the protection of those who in good faith pay over their money, deliver their goods, or furnish the labor of their hands, or the work of their brains to an enterprise organized for the enrichment of others, unless those others bring their organization within the purview of statutory provisions expressly providing for limitation of their individual liability. On the contrary, I find that our courts have heretofore uniformly set the seal of their disapproval upon such attempted evasions. Thus in Shorb v. Beaudry, 56 Cal. 446, certain individuals had, to quote from the opinion, "associated themselves together for the purpose of uniting in one owner certain lands and water rights, some of which they then owned, and some of which were to be obtained from other parties, for the purpose of developing and selling the same, and dividing the proceeds of the sales between themselves, according to *** their agreements in writing." For this purpose they agreed to form a corporation to which should be conveyed the property above referred to. Looking through the shadow thus projected by these associates to the substance behind it, the Supreme Court said: "That the corporation was formed as a mere agency for more conveniently carrying out the agreements between Temple, Beaudry, and Wilson, is sufficiently apparent. As a corporation, it paid nothing, incurred no liability, and was not to receive any part of the proceeds of the sales of land, except for the purpose of developing and improving the property held by it. All the profits were to be distributed among the three members of the association, in the proportion fixed by their contract. *** The relation which the corporation sustained to Wilson, Temple, and Beaudry was substantially, if not technically, that of a trustee. As was said by this court in Chater v. S.F.S.R. Co., 19 Cal. 246, 247: ‘The truth is, the corporation, under our system, following such an agreement, would be the mere agency of the associates, created for the sake of convenience in carrying out the agreement, as between those who made the bargain, the different characters or forms in which or by which the bargain was made, and the order in which the several parts of it were executed, making no substantial difference in the obligation.’ Substantial justice can be administered in this case by treating the parties in the light of their agreements between themselves, independently of their incorporation, and in no other way that we have been able to discover can this be done. Laying aside the act of incorporation, their relations to each other were those of partners. ***" If this can be said where the persons engaged in carrying on a business and desirous of forming a permanent organization through which to continue to carry it on have gone through the form of organizing a corporation, how greater the application to those who have not even attempted to take refuge behind the skirts of a constitutional provision for limited personal liability! Shorb v. Beaudry has frequently been cited as authority in later decisions, among which are Connover v. Smith, 83 Cal.App. 227, 256 P. 835, 836, holding that "equity will look through form to substance where corporations are but the mere instrumentalities through which the associates acted"; Wittmann v. Whittingham, 85 Cal.App. 140, 259 P. 63; Conway v. Citrus Belt Land Co. (Cal.App.) 271 P. 525, 527, and Continental Securities, etc., Co. v. Rawson (Cal.Sup.) 280 P. 954. In Conway v. Citrus Belt Land Co., supra, the court held that the "assumed corporate personalities" of corporations may be regarded as those of the individuals of which they may be composed, where the rights of creditors are involved, and quoted this language from Hunt v. Davis, 135 Cal. 31, 66 P. 957: " ‘The corporation was formed as a mere agency for more conveniently carrying out the agreements’ of the parties; and the relation sustained by it to them is ‘substantially, if not technically, that of a trustee.’ " I fail to see in what way or by what magic the individual liability that may exist, even where the form of a corporation is erected as a screen and the relation of the corporation is, as to its members, "that of a trustee," can be made to vanish into thin air by the selection by those associated in a business enterprise of five of their number to act as their trustees in a continuation of the same business.
Approaching the question from a somewhat different angle, a well-established principle of law is well stated in Wenban Estate, Inc., v. Hewlett, 193 Cal. 675, at page 696, 227 P. 723, 731: "While it is the general rule that a corporation is an entity separate and distinct from its stockholders, with separate, distinct liabilities and obligations, nevertheless there is a well-recognized and firmly settled exception to this general rule, that, when necessary to redress fraud, protect the rights of third persons, or prevent a palpable injustice, the law and equity will intervene and cast aside the legal fiction of independent corporate existence, as distinguished from those who hold and own the corporate capital stock, and deal with the corporation and stockholders as identical entities with identical duties and obligations. Accordingly it has been held that upon a sufficient showing that a corporation is but the instrumentality through which an individual, who is the sole owner of all of the corporate capital stock, for convenience transacts his business, equity, looking to the substance rather than the form of the relation, and the law as well, will hold such corporation obligated for the acts of the sole owner of the corporation to the same extent and just as he would be bound in the absence of the existence of the corporation. Llewellyn Iron Works v. Abbott Kinney Co., 172 Cal. 210, 155 P. 986; Commercial Security Co. v. Modesto Drug Co., 43 Cal.App. 162, 184 P. 964; Minifie v. Rowley, 187 Cal. 481, 202 P. 673. Thus proof that an individual owns all of the stock of a corporation and that the corporation is in truth and in fact but the corporate double of the owner of the stock will, in conjunction with a further showing that as a result of the double relationship fraud or injustice will inure to a third person, suffice to dissipate the separate identity of the corporation. Minifie v. Rowley, supra. In such a situation, where, as here, the rights of third persons are involved, the law will have no compunction in holding the contract of the owner of the corporation dealing with the corporate assets to be the contract of the corporation. Porter v. Lassen County Land Co., 127 Cal. 261, 59 P. 563; Schuyler v. Pantages, 54 Cal.App. 83, 201 P. 137; Swartz v. Burr, 43 Cal.App. 442, 185 P. 411." I submit that the same principle applies where the entity, be it in the guise of a corporation or a "trust," under which the business is carried on, is but the alter ego of a group of associates instead of but a single individual.
In the opinion of the majority much stress is placed upon the fact that the subscribers to the trust agreement retained little or no control over the management of the business, that being delegated, as they say, entirely to the board of trustees by the terms of the agreement. But was this not also true as to the form of corporate organization employed in the cases above referred to?
There is much, although not unanimous, authority outside of the state for holding that the beneficiaries of a trust of the character commonly referred to as a "Massachusetts Trust" are not personally liable where, by the terms of the declaration of trust, all title to the assets and all control of business is vested in the trustees with no reservation of control power in the membership at large. See Rand v. Morse (C.C.A.) 289 F. 339; Simson v. Klipstein (D.C.) 262 F. 823; Baker-McGrew Co. v. Union Seed, etc., Co., 125 Ark. 146, 188 S.W. 571; Thompson v. Schmitt, 115 Tex. 53, 274 S.W. 554; Marchulonis v. Adams, 97 W.Va. 517, 125 S.E. 340; Roller v. Madison, 172 Ky. 693, 189 S.W. 914; Hollister v. McCamey, 115 Tex. 49, 274 S.W. 562; Howe v. Keystone Pipe & Supply Co., 115 Tex. 158, 274 S.W. 563, 278 S.W. 177, and Medlin v. Ebenezer Methodist Church, 132 S.C. 498, 129 S.E. 830, which hold members of such associations individually liable. But even if we were to concede that individuals initiating a new business venture and starting, so to speak, with a clean slate, might contribute money or other property into such a trust without incurring personal liability for debts thereafter incurred by the trustees, a different case is presented when those already engaged in the conduct of a certain business venture, for the debts incurred in the prosecution of which they are individually liable as partners or as joint adventurers, merely continue the same business under a different label.
Reverting to Old River Farms Co. v. Roscoe Haegelin Co., supra, I am unable to follow the reasoning of my associates in their construction and application of the decision in that case. As I read the opinion of the majority of the court it seems to be based upon the theory that the question under discussion here was not involved there, and that the factor of absolute control in the hands of the trustees was not presented to the court. The reverse is true. The "Agreement and Declaration of Trust" under which the Roscoe Haegelin Company was organized was before the court, being included in the appendix to appellants’ opening brief. Irrespective, therefore, of the name by which the parties to the appeal referred to that organization, whether as an "unincorporated association," a "joint stock company," a "Massachusetts Trust" or a "corporation," its exact nature and legal status was ascertainable to the court from an inspection of the instrument of its creation. Parenthetically it may be noted that such business organizations seem to be referred to indiscriminately in the digests and decisions either as joint-stock companies or as Massachusetts trusts. For instance, the heading under which the cases relating to them are collated in the American Digest, Decennial Edition, is "Joint Stock Companies and Business Trusts." Moreover, the question of the individual liability of the members was directly presented to the court, both upon the appeal and upon the petition for hearing in the Supreme Court, which petition the last-named tribunal denied. One of the four points urged by appellants is thus stated in bold-faced capitals in their opening brief: "Defendants’ articles of association and the evidence without contradiction show that the shareholders of the association, other than the trustees had no voice in the management of the company and no title or interest in the property of the association. The trustees, therefore, were without power to create a personal liability against the shareholders, of which fact plaintiff had notice." (The trust agreement was recorded and the lease on which the action was brought was signed "Roscoe Haegelin Company, No personal liability, by Roscoe Haegelin, President.") In their petition for a hearing in the Supreme Court after the judgment of the District Court of Appeal, the appellants, under the caption "Question Presented," said: "The chief question presented by this appeal is one that has never been answered by this Honorable Court so far as research of counsel has been able to determine. We therefore believe that we are justified in asking the court to pass upon it. That question is, what is the liability of a stockholder of a joint stock association, who is not one of the trustees or directors of the association to a creditor of the association? *** The Honorable District Court of Appeal *** has held that such stockholder is liable as a general partner for the entire debt of the association, not for his proportionate share." And the petition points out that according to the terms of the trust agreement "The trustees held the legal title to all property at any time belonging to the company and had the absolute control, management and disposition thereof and of the business; they had a right to adopt a seal, elect their own officers, appoint their own agents, etc.; they were required to keep a record of their meetings and other records as in the case of corporations; to issue certificates for shares and transfer the same. As to the shareholders, it was provided that the owners of shares held no title in or to the trust property or had they any right in or to a partition, or division of the same, or to an accounting, and it was further provided that the trustees had no power to bind the shareholders personally." (Italics mine.)
Turning to the trust agreement which the court had before it when preparing its decision in the Haegelin Case, it will be found that it corresponds in all respects to that under which the business which had been theretofore known as Drascena Productions was to be carried on under the same name. The Roscoe Haegelin agreement first recites that the parties to it are five named persons "together with their successors herein designated as ‘Trustees’ " and certain other named individuals "together with their legal successors or assigns, hereinafter called ‘Subscribers.’ " It provides that there shall be five trustees who shall be designated as the Roscoe Haegelin Company and under that name shall "conduct all business and execute all instruments in writing, in the performance of their trust," and that "The trustees shall hold the legal title to all property at any time belonging to this trust, and subject only to the specific limitations herein contained, they shall have the absolute control, management and disposition thereof and shall likewise have the absolute control of the conduct of all the business of the trust." (Italics mine.) The "specific limitations" on the otherwise absolute authority of the trustees are the following, and these only: The number of shares "with the consent of not less than two-thirds of such of the shares as are represented and voted upon at any meeting called for that purpose" may be increased or diminished; the consent of the holders of at least two-thirds of the outstanding shares is required before the trustees can mortgage or pledge any of the property of the trust (the Drascena Productions agreement contains an almost identical provision); the trust agreement may be amended "except as regards the exemption from personal liability of the trustees, officers and shareholders" and "the priorities of the preferred shares, if any," at a special meeting of the shareholders, called for that purpose, with the consent of the holders of at least two-thirds of the outstanding shares. (The Drascena Productions agreement requires consent of the holders of two-thirds of all the outstanding certificates as a prerequisite to any change in the trust agreement which shall in anywise "affect or change the status of the cestuis qui trust in any particular manner.") The trustees are authorized: "(a) To purchase, lease or otherwise acquire lands and holdings in the State of California, or elsewhere, for the erection and establishment of a pickling, preserving and canning plant, together with the necessary appurtenances, engines and machinery, with a view to manufacture, buy, sell, import or otherwise deal in, either directly or indirectly, green, dried, pickled, preserved and canned meats, fruits, vegetables or other food products, through medium of agents or otherwise, and to purchase or otherwise acquire patents, patent rights, copyrights and privileges, improvements or secret processes of whatsoever nature or in anywise relating to all or any of the subjects aforesaid and to grant licenses for the use of or to sell or otherwise deal in any patents, patent rights, copyrights and privileges, improvements or secret processes, acquired by the company. (b) To engage in horticulture, viticulture or agriculture, and conduct and manage experimental farms for the encouragement of the growing of various food products necessary in said business in such localities in the state of California, or elsewhere, as they deem proper. To erect, maintain, purchase or rent, hire, lease, let or otherwise acquire or dispose of all real or personal property necessary or convenient to such business, in the manner provided in the eleventh paragraph hereafter. To acquire the good will, rights and property of any person, firm, association or corporation, and pay for the same in cash or stock of this company, bonds or obligations of this company, or otherwise, and to hold or in any manner dispose of the whole or any part of the property so acquired. (c) To engage in any business similar in character to that above mentioned which the trustees may deem expedient and to acquire, hold and dispose of the stocks, shares or securities of corporations, associations or persons doing business of a character similar to any business above described." It is provided that the enumeration of specific duties and powers "shall not be construed in anywise as a limitation upon the general powers intended to be conferred upon them." Among the specific powers conferred are: "*** to adopt and use a common seal; to make all such contracts as they may deem expedient in the conduct of the business of the trust; from time to time to release, sell, exchange or otherwise dispose of, at public or private sale, any or all of the trust property, whether real or personal, for such price and prices, either in cash or in the stocks, shares or securities of corporations or associations, and upon such terms as to credit or otherwise as they may deem expedient; to guarantee the obligations of corporations or associations, and to enter into such agreement by way of indemnity, or otherwise, as they deem expedient in connection with the acquisition of property from the subscribers as hereinafter provided, or otherwise, to confer, by way of substitution such power and authority upon the president, treasurer and secretary and other officers and agents appointed by them, as they may deem expedient; to borrow money for the purpose of the trust, and give the obligations of the trustees therefor; to loan any money from time to time in the hands of the trustees, with or without security, on such terms in the furtherance of the business of the trust as the trustees may deem expedient; to subscribe for, acquire, own, sell or otherwise dispose of real and personal property, including the stocks, shares and securities of any corporation, trust and associations as they may deem expedient, in connection with the purpose of the trust; to vote in person or proxy on all shares of stock at any time held by them, and to collect and receive the income, interest and profits of any such stock or securities, to collect, sue for, receive and receipt for all sums of money at any time becoming due to said trust; to employ counsel and to begin, prosecute, defend and settle suits at law, or in equity, and to compromise or refer to arbitration any claims in favor of or against the trust; and in general, to do all such matters and things as in their judgment will promote or advance the business which they are authorized to carry on, although such matters and things may be not specifically authorized."
They are further empowered to adopt, amend, and repeal by-laws, to elect from among their number a president, vice-president, secretary, and treasurer, and "to appoint such other officers, agents and attorneys as they may deem necessary or expedient in the conduct of said business," to fix the compensation thereof and to "remove any officer or agent elected or appointed by them." Transferable shares were to be issued to the subscribers as in the case of Drascena Productions, and the agreement provided: "The ownership of shares hereunder shall not entitle the shareholders to any title in or to the trust property whatsoever, or right to call for a partition or division of the same or for any accounting, and no shareholders shall have any right or further rights than the right of a stockholder in a corporation so far as the same may be applicable. The trustees shall have no power to bind the shareholders personally, or to call upon them for the payment of any sum or sums of money or any payment whatever other than such sums as they may at any time personally agree to pay by way of subscription to any new shares or otherwise. All persons or corporations extending credit to, contracting with or having any claim against the trustees shall look only to the funds and property of the trust for the payment of any such contracts or the claim or claims, or for the payment of any debt, damage, mortgage, judgment or decree or any money that may otherwise become due or payable to them from the trustees. In every written order, contract, or obligation which the trustees or officers shall give, authorize or enter into, it shall be the duty of the trustees and officers to stipulate or cause to be stipulated, that neither the trustees, officers nor shareholders shall be to any personal liability under or by reason of such order, contract or obligation, and on all statements, letterheads, stationery, used by the trustees in the conduct of the business of said trust, shall be printed the words ‘No personal liability.’ " The duration of the trust was to be "for the term of ten years after the death of the last survivor of the persons whose names are signed hereto," at which time the trustees were required to liquidate its assets and distribute the proceeds to the then shareholders. (The Drascena Productions trust was to continue during the natural life of the subscribers who signed the agreement, with a like provision as to liquidation and distribution.)
I have quoted at length from the trust agreement of the Roscoe Haegelin Company in order to make it plain, to the point of demonstration, that the court was considering the liability of the members of an organization identical in every way with Drascena Productions. There are other clauses in one trust agreement that are almost word for word like those in the other, as for example those dealing with "Strangers to the Trust," declaration of dividends, trustee’s liability for errors of judgment, and trustee’s lack of power to bind shareholders personally.
The court in deciding the case of Old Farms Company v. Roscoe Haegelin Company squarely and unequivocally passed on the precise question here presented, and in closing its opinion with the language which I have quoted held that those choosing to conduct their business ventures under the guise of a trust could not limit or escape from their liability to the creditors of the business. The point was an important one, never before squarely presented in this state and with authority on both sides of the question in other states. Are we to place no importance at all in the fact that the highest court of the state, its attention called to the novelty and importance of the point at issue, declined to accord a further hearing after reading and considering the ruling of the District Court of Appeal?
For the reasons herein set forth, the judgment should be reversed.