DeBaun v. First Western Bank and Trust Co.
California Court of Appeal
46 Cal.App.3d 686 (1975)
Alfred Johnson sold 20 of the 100 total shares in Alfred S. Johnson Inc. (the corporation) to DeBaun, and 10 shares to Stephens (plaintiffs). Upon Johnson’s death in 1965, his remaining 70 shares passed by will to a testamentary trust, for which First Western Bank and Trust Company (the Bank) (defendant) acted as executor and trustee. The corporation’s profits increased dramatically under DeBaun and Stephens, and by 1968 it was a going business concern with substantial assets. In 1968 the Bank sold the 70 shares to Raymond Mattison. The Bank requested a report on Mattison, which noted pending litigation, bankruptcies, and tax liens on corporations in which Mattison was a principal. The Bank’s vice president was also aware that there was a judgment against Mattison in favor of the Bank’s predecessor in interest for fraud, and that the judgment, which became an asset of the Bank, remained unsatisfied. Mattison’s counsel refused to comment on the status of litigation against Mattison, but stated to the Bank that such information was publicly available. The Bank did not investigate the public records, which contained substantial negative information about Mattison, including dozens of pending actions, and unsatisfied judgments and tax liens totaling hundreds of thousands of dollars. The Bank’s sale agreement with Mattison included a security agreement that secured Mattison’s obligation to the Bank with all of the corporation’s assets. At the time of the sale, the corporation was a successful business with a bright future. After the sale, Mattison looted the corporation of its assets, diverting corporate cash and income to himself and delaying payment or not paying creditors. In 1969 the Bank shut down the operations of the corporation, and, pursuant to the security agreement, sold the corporation’s remaining assets. After the sale, the corporation had no assets and owed its creditors $218,426. DeBaun and Stephens brought a stockholders’ derivative action against the Bank. The trial court entered judgment for DeBaun and Stephens, finding that the Bank had breached its duties to the corporation as a majority controlling shareholder. The Bank appealed.
Rule of Law
Holding and Reasoning (Thompson, A.J.)