Findley v. Garrett, 109 Cal. App. 2d 166 (1952)

Citation: Findley v. Garrett, 109 Cal. App. 2d 166 (1952)
Parent Document: Findley v. Garrett, 109 Cal. App. 2d 166 (1952)
Jurisdiction: California (state)
Effective Date: 1952-02-08
Original Source: https://www.courtlistener.com/opinion/1138834/findley-v-garrett/ ↗

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174 Cal. 218, it was said at page 221 [162 P. 894] : “ [I]t is not sufficient to allege fraud or its elements upon information and belief, unless the facts upon which the belief is founded are stated in the pleading.” The general charges of fraud, conspiracy and bad faith are insufficient to overcome the presumption that the 1948 board of directors (upon whom the demand was made) acted independently and honestly in declining to prosecute the claims in question against the defendants. Those general statements regarding participation, shielding, concealment, and bad faith by the additional nine directors, who had no stock in Garrett, are not sufficient to implicate said additional directors in the wrong allegedly committed by the organizers of Garrett. It appears, therefore, under the allegations of the amended complaint, that at all times after 1936 a majority of the board of directors of Douglas was independent and was not under disability or powerless to act with respect to the alleged wrong. There were 13 members of the Douglas board when plaintiff Findley made his demand that legal action be taken, and 11 of them were independent of Garrett and two were Garrett organizers and stockholders. The matter was within the discretionary power of the board. An independent majority of the board, in the determination of a discretionary matter, declined to commence an action. Notwithstanding the insufficiency of the allegations of - fraud and bad faith, it was necessary for the court to consider whether, on the facts alleged, the refusal of the directors to prosecute the claims was so clearly against the interests of the corporation that it must be concluded that the decision of the directors did not represent their honest and independent judgment. The facts alleged would not have justified such a conclusion. It was a question of business whether the transactions over a 12-year period should be investigated and prosecuted. Directors have the same discretion with respect to the prosecution of claims on behalf of the corporation as they have in other business matters. In this respect the fact that a claim may be founded in fraud does not differentiate it from other claims. Refusal to sue on a fraud claim is not, as plaintiffs contend, a ratification of fraud. The mere fact that a recoverv for the corporation would probably result from litigation does not require that an action be commenced to enforce the claim. Even if it appeared to the directors of Douglas that at the end of protracted litigation substantial sums could *178

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