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Rugee v. Hadley Products, Inc.

Supreme Court of Arizona

March 10, 1952


Judgment reversed with directions.

Page 799

Clark & Coker, of Phoenix, for appellant.

George D. Locke and Leslie C. Hardy, of Phoenix, for appellee, Hadley Products, Inc. et al.

Udall, Chief Justice. Stanford, Phelps, De Concini and La Prade, JJ., concur.


Udall, Chief Justice.

[73 Ariz. 363] William F. Rugee, plaintiff below, has appealed from the judgment of the lower court sitting without a jury, awarding him $ 2,750 against only the defendant Sam H. Reed and specifically denying him recovery against the other defendant, Hadley Products, Inc. Defendant Reed did not appeal from the judgment entered against him.

Briefly the facts are that on January 10, 1947, Reed sold to the Hadley Products, Inc., certain oil refinery equipment for $ 5,500, receiving $ 2,500 in cash, and simultaneously Frank Hadley, president of the corporation, executed and delivered to Reed a conditional sales contract and a negotiable promissory note for the balance of the purchase price. The note and contract was signed "Hadley Products, Inc. Frank Hadley", drew interest at 6% per annum, and full payment was due on or before April 10, 1947. Reed, on February 4, 1947, discounted the note and conditional sales contract by both endorsement and assignment to the plaintiff for $ 2,750. The note was presented on its due date but payment was refused and plaintiff for the first time learned of the alleged misrepresentations of the defendant Reed as to the production capacity of the equipment.

Plaintiff sued only on the note without asking for foreclosure of the conditional sales agreement and named both the maker of the note, Hadley Products, Inc., and the payee -- endorser, Sam H. Reed as defendants, alleging he was a holder for value and that he took the instruments without knowledge or notice of any defects. Reed answered admitting that he was secondarily liable and cross claimed against the defendant Hadley Products, Inc., praying that the conditional sales contract be foreclosed and that the machinery be sold applying the proceeds of the sale to the debt. Defendant Hadley Products answered admitting that it was a corporation, and as such was in existence when these documents were executed; admitted that [73 Ariz. 364] the note was a corporate obligation and was not executed individually by Frank Hadley; admitted the dishonor; but set up the affirmative defense to the complaint of the plaintiff and the cross claim of the defendant of fraudulent representations by Reed as to the productive capacity of the equipment.

This action was filed on May 1, 1947 and from time to time thereafter the trial date was vacated; however it was finally tried on February 9, 1949. On the morning of the trial, Raymond O. Mitchell, a minority stockholder of the defendant corporation, tendered a motion to intervene together with an answer on behalf of the corporation. The motion was granted over objection of the plaintiff and defendant Reed. The only new defense attempted to be raised by the intervention was that the corporation was not legally in existence when the note and conditional sales contract were executed and alleged that it was not until February 13, 1947, 33 days after this transaction, that the articles of incorporation were filed with the Arizona Corporation Commission as required by law.

Plaintiff makes four assignments of error, the first of which have to do with the trial court's granting the motion to intervene. Plaintiff contends that in the absence of an allegation of fraud or bad faith a minority stockholder has no right to intervene when the defendant corporation has appeared in the action and answered the complaint. We agree with this contention.

Page 800

A corporation when acting in good faith and within its corporate powers represents and binds its stockholders. Where a corporation refuses or fails to defend in good faith, a stockholder upon a proper showing and application may be allowed to intervene and defend on the corporation's behalf. Where it is a disregard of duty rather than an error of judgment the stockholder may intervene but intervention should be granted only with caution and hesitancy. Difani v. Riverside County Oil Co.,201 Cal. 210, 256 P. 210; Eggers v. National Radio Co.,208 Cal. 308, 281 P. 58; Fitzwater v. National Bank,62 Kan. 163, 61 P. 684; 18 C.J.S., Corporations, ยง 560; 13 Fletcher Cyc. Corp., section 5853. In other words it is only where the intervening ...

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