The Superior Court of the State of California
Chambers of Runston G. Maino
November 13, 1996
Case number: N64584
The purpose of this letter is to inform you as to how I saw the evidence. It is not a Statement of Decision.
I believe that I could appoint a platoon of lawyers and accountants to look into this case and I would still not be much closer to answering the following questions than I am today. The reason the truth will never be fully known is because the parties, all highly intelligent and capable, seem to have spent their lives forming organizations and then transferring money between these organizations to avoid problems with their opponents or the government. A good example of this is Ms. Farrel. She gives up US citizenship, takes Columbian citizenship, and resides in Switzerland to avoid taxes. She keeps her assets in the US, England, Switzerland, Germany, Singapore, and Japan. She sets up a Liberian corporation, Neca, to take charge of her assets for the Legion which is a Texas corporation doing business in California.
The questions are simply enough:
Although I believe Mr. Marcellus was wrong in many of the actions he took, such as preparing a false UCC-1, I think he told the truth. He was direct in his answers and did not hesitate to tell what he knew even when it cast him in an unfavorable light.
I believe his opinion at the time of the Farrel death the Legion had the ability to generate funds to go to court, in this country and abroad, in order to obtain some or all of the 16 million dollar Farrel estate. There was, therefore, a corporate opportunity in this estate for the Legion.
I believe Mr. Kerr, an introvert and a student of languages, when he stated that he did not have much to do with the Legion and that he never attended a Board of Directors meeting. Because of his testimony, and other evidence, I do not believe there ever was a Board meeting, of any sort, on or about March 5, 1991, in which the Legion decided not to accept the Farrel money but rather decided to direct the funds to a suitable independent organization under the direction of Mr. Patrick Foetisch.
I do not believe Mr. Kerr, during the Farrel estate litigation, was an independent member of the Board of Directors of the Legion. Whatever he did as a director was at the direction of Mr. Carto.
Mr. Kerr, I believe, never understood that as a member of the Board of Directors of the Legion that his responsibility was to act for the benefit of the Legion and not for the benefit of someone else. I think this is illustrated in his deposition when he stated that he fully approved of Mr. Carto having full control of the Farrel money. Deposition of Mr. Kerr page 28, lines 18-25.
To me Mr. Weber appeared to be an honest witness, although, like Mr. Marcellus, some of his actions seemed, in retrospect, rather foolish. For example, it seems rather foolish for him not to follow up on his agreement in 1986 with Mr. Carto as to a Directorship. (Mr. Weber probably sees his foolishness as trusting Mr. Carto and, in view of what has happened since 1986, Mr. Weber may be more correct than I.)
I thought he was honest. I believed his testimony that he would have remembered a discussion about 7.5 million dollars. His testimony, in conjunction with the testimony of other witness and other evidence, confirms my belief that the meeting on or about March 5, 1991, never occurred.
I believe Mrs. Carto has tried to be honest. However, her love and loyalty to her husband has blinded her to facts which do not support her husband’s position. For example, she, like Mr. Carto, believes that Ms. Farrel left her money to Mr. Carto to distribute it as he saw fit. There is no evidence to support this belief. No letter by Mrs. Farrel gave express or implied authority to Mr. Carto, as an individual, to have Farrel funds. Ms. Farrel knew how to write a will. Her will does not mention Mr. Carto, or, for that matter, Liberty Lobby. The settlement agreement does not give money to Mr. Carto in his individual capacity but only to him as an agent of the Legion.
Consequently, although I believe Mrs. Carto has tried to be honest, I do not have confidence in her testimony.
I do not believe he was an independent Director of the Legion. He acted at the direction and under the control of Mr. Carto. For example, he wrote a letter to Mr. David Hooper, the English lawyer, which was “basically prepared” by Mr. Carto. He allowed Mr. Carto to contact the other directors and then, after obtaining their opinions through Mr. Carto, he would draft the minutes of the Board.
There is no evidence he ever made inquiry from any source as to the size of the Farrel estate, the cost of obtaining the Legion’s portion of that estate, or the location of the estate’s assets once it had been distributed.
I find his actions as a Director to be done with gross negligence and with a wanton recklessness toward his obligations as a Director of the Legion. He is not protected by Corporations Code 5047.5 or any other section of that code.
I find that her actions as a member of the Board of Directors are not protected by Corporations Code 5047.5 or any other section. By her actions she has taken herself outside of the protection of Corporations Code 5047.5. Reference is made to the (c)(1)-(7) portion of that section, especially (6).
She never made the following reasonable investigations: (1) What was the size of the Farrel estate? (2) What percentage and what amount of the Farrel estate went to the Legion? (3) What money from the Legion went to the International Legion and to Vibet? (4) Where did the Farrel estate money go? (5) Where did the gems go? (6) Where were deposit and withdrawal slips? (7) Where was Mr. Carto’s accounting of what it had cost to recover 45% of the Farrel estate for the Legion? (8) Who financed the legal proceedings whereby the will of Ms. Farrel, which gave money to the Legion only as a residual beneficiary, was “broken” and the Legion got 45%? (9) What was Mr. Carto doing giving Legion money to Liberty Lobby, Sun Communications, and other organizations?
She also did not investigate Mr. Carto’s false statement to her that the amount of the Farrel money for the Legion was about $1,000,000. She, like her husband, allowed Mr. Carto to tell her how other Board members voted without checking with them. She never consulted an attorney between 1979 and 1983 as to how corporate affairs should be conducted. She never made a reasonable inquiry as to how Neca related to the Farrel estate or to the Legion. She never sought permission from California or Texas authorities to give millions of dollars of Legion money to “good causes". Mrs. Furr allowed Mr. Carto, who was not a Director, to draft minutes of the Board of Directors and then to backdate those minutes. She signed her name to false minutes and resolutions such as that of March 5, 1991.
In brief, Mrs. Furr completely abandoned her obligations as a Director of the Legion. She allowed herself to become the pawn of Mr. Carto and allowed him to dispose of Legion assets contrary to her obligations as a Director and contrary to the law.
Mr. Carto is not without sympathy. If he had not purchased the debts of the Legion many years ago it probably would have expired. He has devoted many years of his life toward the Legion, perhaps without pay. He took it upon himself to pursue the Farrel estate at considerable cost to his time and to some of his personal money.
However, I did not find him to be a witness who can be relied upon. His demeanor when he testified was evasive and argumentative. He could not follow the instructions of the court or his counsel when they asked him not to volunteer information. His demeanor on the stand made the job of his very able counsel much more difficult. I found that much of his testimony made no sense, much of his testimony in court was different from his previous testimony, much of his testimony was contradicted by other witnesses or by documents. By the end of the trial I was of the opinion that Mr. Carto lacked candor, lacked memory, and lacked the ability to be forthright about what he did honestly remember.
One of Mr. Carto’s fundamental misconceptions is his relationship to the Legion. Just because he purchased the debts of the Legion and devoted time and money toward its goals does not allow him to use the Legion as if he owned it. The Legion is a public non-profit institution which has a life separate from Mr. Carto’s life.
Mr. Carto believes that his status as a “substitute incorporator” or “member” of the Legion gives him the power and right to control the Legion. This is not the law. There is no statute or decision which gives “incorporators” or “substitute incorporators” authority over the Board of Directors or the authority to elect, appoint, or remove a member of the Board of Directors. In addition, the Legion had no “member” who could elect, appoint, or remove a member of the Board of Directors.
Because Mr. Carto thinks he is the Legion and he owns and controls it, he acted in a certain way toward it. He told people they were appointed or elected to the Board of Directors when they were not so appointed or elected. Mr. Carto did not keep the Directors fully informed about Legion business. He wrote Board minutes and ordered them backdated. Mr. Carto tried to direct the educational direction of the Legion by issuing orders to the staff and by threatening to fire them. Mr. Carto had no legal right to do any of these things.
Mr. Carto took advantage of the Board of Directors by failing to inform them of the corporate opportunity in the Farrel estate. For the Legion to know whether or not there is a corporate opportunity and whether or not they want to and can take advantage of it is a decision to be made by the Board of Directors. This is not a decision for Mr. Carto.
Mr. Carto had a legal obligation to fully disclose to the Board of Directors the potential size of the Farrel estate, how much it might cost to recover it, the size of the legacy once recovered, the nature and location of the assets, and when, and to whom and why assets from the estate had been disbursed. Mr. Carto failed to discharge any of these legal obligations.
Another of Mr. Carto’s misconceptions is that he and not the Legion is entitled to the proceeds from the Farrel estate. This makes no sense. I have already discussed some reasons for this opinion. In addition, the evidence is that when Mr. Carto went into court in this country he brought suit on behalf of the Legion and not on behalf of himself. He had agency status from the Legion to recover funds and he got the Legion to give up the Farrel money. There was no reason to do any of these things if Mr. Carto really believed the Farrel money was his.
Another misconception by Mr. Carto is that he had the right to take the Farrel money and give it to other good causes instead of the Legion. Mr. Carto cannot do this. Mr. Carto was an agent for the Legion. His obligation was to collect Farrel money for the Legion and to account for it. He was not an agent for Ms. Farrel or her estate.
A final misconception of Mr. Carto’s is that the Board of Directors gave up the assets of the Farrel estate on March 5, 1991, and allowed Mr. Foetisch to disburse it to suitable independent organizations. This is not so. The Legion never gave such permission on March 5, 1991, or on any other date. And even if they had done so, such an act was contrary to the law.
In deciding who is to be believed and who is not to be believed, a court can take into account the attitude of a witness toward the giving of testimony. Obviously, a central issue in this case from the date it was filed was: Where did the Farrel money go? Mr. Carto is an intelligent and capable man and he has known for some time this question would be asked. On the last day of testimony in this trial Mr. Carto comes up with Exhibit #208 which is a handwritten document as to what has happened to 7.5 million dollars. This last-minute document, and Mr. Carto’s testimony which accompanied it, illustrates to me his entire attitude: one of arrogance, deceit, evasiveness, and convenient memory. A copy will be attached.
Based on Exhibit 208 and other evidence I find that 7.5 million of the Farrel estate rightfully belonged to the Legion. From this figure I will allow the following amounts to be deducted as necessary and reasonable expenses to recover the 7.5 million.
|Althaus Executor’s fees||$300,000|
|Money to relatives of Jean Farrel||450,000|
|Dr. Triekel (German)||25,000|
|Mathew Aruso + Japan||50,000|
|Mr. and Mrs. Carto expenses||20,000|
I will also find that $100,000 of the Farrel money went to the Legion. This total, $1,070,000, is to be deducted from $7,500,000 leaving $6,430,000. $6,430,000 will be the amount Mr. and Mrs. Carto, Mr. and Mrs. Furr, Mr. Fischer, and Vibet owe the Legion.
As to Liberty Lobby, I find they owe the Legion $2,650,000. Of course, if Liberty Lobby pays the Legion $2,650,000 or any lesser sum this will reduce, dollar for dollar, the judgment for $6,430,000.
Other claimed expenses including, but not limited to, the Cal Future and Euro Disney losses, the Expediter, Fischer, the $750,000 to the Legion as claimed by Mr. Carto, and the $500,000 to FDFA are not allowed because they were not reasonable, not necessary, and there was no proof they took place.
I have reviewed the entire file, all of the evidence, all of my notes taken during the trial and during closing arguments, and wish to make some comments.
An argument was made that if the Furrs did nothing wrong then Liberty Lobby could do nothing wrong. I do not believe this is the law of conversion. Conversion can occur even if there is good faith. The essence of the tort is the actual interference with the rightful owner’s use or possession of his property. The act of conversion must be an intentional act but there need not be a wrongful intent. Therefore, due care, good faith, or mistake or not defenses.
Counsel for Mr. Carto tried to convince me that Mr. Carto was a risk taker and if the Legion gets any recovery this is a windfall for them. I did not see the evidence this way. Mr. Carto used very little of his personal money to pursue the Farrel money. There was no real economic risk to Mr. Carto.
Counsel for Mr. Carto tried to convince me that if the Legion had obtained funds through a loan or an appeal to the public and then used these funds to try and get their portion of the Farrel estate, this would be an illegal act by the Legion. No statute, no case and common sense does not support this argument. Of course, a public non-profit corporation can raise funds for its legal needs and to put forth its position in court.
The Statute of Limitations and Laches arguments did not appeal to me. Mr. Carto intentionally lied to the Furrs and other actual and purported members of the Board of Directors of the Legion so nobody would know of his illegal acts. It was not until June/July/August of 1993 when his illegal acts were and could have been discovered. The Statute of Limitations and Laches are defenses. They punish someone for not asserting a claim; they do not reward someone who is clever enough to hide illegal acts.
In closing argument counsel for Mr. Carto brought up, for the first time, CCP 425.15, and says that this entire case should be dismissed because the plaintiffs did not comply with this section. I found this argument to be almost as amazing as Exhibit #208. I will assume that CCP 425.15 applies to this case. The case still should not be dismissed. CCP 430.80 provides that if there is no objection to the complaint, there is a waiver of the defect. Attention is also invited to CCP 452, CCP 475, and the California Constitution Article 6, Section 13, which directs courts to use pleadings to arrive at justice and not to dismiss cases for pleading error if this will result in a miscarriage of justice. What possible justice is there in dismissing this 6 volume case involving numerous parties, thousands of dollars in attorney fees, and numerous hours of attorney and court time and millions of dollars because of the lack of compliance with CCP 425.15? This is especially so when the alleged defect is brought up on the last day of trial.
I do, however, agree with the defendant that the plaintiff should not be allowed to amend the 6th Cause of Action for the second time after the evidence is completed. This defect was brought to the attention of the plaintiff long ago and should have been corrected long ago. To allow this late amendment would prejudice the defense as they could not defend against it.
Very truly yours,
Runston G. Maino
Judge of the Superior Court