ROY CAMPBELL, аs Trustee, etc., Respondent, v. A. OTIS BIRCH et al., Appellants.
L. A. No. 17907
In Bank
Mar. 5, 1942.
In refusing to hold the trust deed as security for the indebtedness of $7,850.70 the trial court in effect rescinded the trust deed to that extent. Defendants pleaded their right to rescission sufficiently when they alleged the misrepresentation and requested that the trust deed be declared void. Since defendants received nothing from plaintiff under the rescinded provision that they can restore, they are under no duty to make restitution. (See cases cited in
The judgment is affirmed.
Gibson, C. J., Shenk, J., Curtis, J., Edmonds, J., Houser, J., and Carter, J., concurred.
Syril S. Tipton for Respondent.
PETERS, J. pro tem.—This action was brought by рlaintiff for damages alleged to have been suffered by the trust estates represented by plaintiff as the result of an alleged fraudulent conspiracy by defendants whereby plaintiff was induced to settle an indebtedness of defendant A. Otis Birch owed to the trust estates for less than the amount due thereon, and to reduce the rental payable under a lease held by defendant A. Otis Birch on certain real property owned by the trust estates. The trial court found in detail that the compromise and modification agreements were entered into as a result of certain false and fraudulent representations made to Campbell concerning Birch‘s financial condition; that such representations were made pursuant to a conspiracy by defendants to induce plaintiff to accept the compromise and modification agreements; and that plaintiff relied thereon to his damage. Based on these findings, judgment was entered in favor of plaintiff, from which judgment defendants prosecute this appeal.
The main contention of appellants is that the basic findings of the trial court are not supported by the evidence. After an examination of the record we are convinced that the evidence, together with such inferences as may reasonably be drawn therefrom, amply support the findings and judgment.
On June 6, 1928, plaintiff‘s predecessors leased to A. D. Van Vracken certain real property in Los Angeles for a period of 99 years. The court found, and the finding is supported, that Van Vracken was acting for Birch, and that on the day the lease was executed it was assigned to Birch. The lease called for the payment of graduated rentals, which, during the years 1934, 1935 and 1936, amounted to $1,000 per month. Birch paid all rentals due under the lease until
The defendants and appellants are A. Otis Birch, his wife Estelle, and his cousin Lula M. Minter. The complaint alleges that defendants falsely and fraudulently represented to plaintiff, and he was thereby led to believe that at the time the compromise and lease modification agreements were entered into Birch was in an unsafe and dangerous condition financially; that it was represented to plaintiff that Birch was indebted to defendant Minter in the sum of $25,000 represented by a note secured by a second deed of trust on certain real property owned by Birch; that it was also represented to plaintiff that Birch was also indebted to defendant Minter in the sum of $130,000 represented by a note secured by a pledge оf the entire capital stock of the Birch Holding Company, which, in turn, held all the stock of the Birch Securities Company and of the Birch Ranch and Oil Company, which last two mentioned companies owned practically
The complaint also alleged that defendant Minter conspired with defendants Birch to accomplish the fraud. Plaintiff further alleged that the representations were false; that the $25,000 note and trust deed and the $130,000 indebtedness were fictitious and non-existent; that plaintiff, in belief and reliance on their genuineness, was induced to execute and perform the settlement agreement, to his damage.
The findings of the trial court followed substantially the allegations of the complaint. It is an admitted fact that the evidence supports the findings that Birch and Benson represented that Birch owed Minter a total sum of $155,000; that unless a modification were secured she would sell out the pledge and trust deed, thus stripping the Birches of substantially all of their assets; that the Birches would be forced into bankruptcy. It is a reasonable inference, and no contention is made to the contrary, that such reprеsentations were made for the purpose of inducing plaintiff to act upon them. There also can be no doubt that the evidence supports the findings that plaintiff executed the compromise and modification agreements in reliance on the truthfulness of such representations and would not have executed them otherwise. There can also be no doubt, and this is not disputed, that if the finding that the representation as to the existing indebtedness of Birch to Minter was false is supported, that plaintiff has a good cause of action for such fraud at least as against Birch. On the other hand, plaintiff admitted at the trial, and admits on this appeal, that if that finding is unsupported and the indebtedness to Minter actually existed, he has no cause of action against any of the defendants. So far as the sufficiency of the evidence is concerned, therefore, the only serious question presented for consideration is whether or not the finding that Birch was indebted to Minter is supported by the evidence.
The record shows that Birch commenced borrowing from his cousin, defendant Minter, and her relatives, many years before this controversy arose. The relationship between Birch and Minter was one of great affection and confidence. Birch had been reared by Miss Minter‘s parents and lived in their home until the time of his marriage. Although they were first cousins, they looked upon each other as brother and sister.
Many of the transactions involved the transfer from Birch to Minter of Yolo County reclamation district bonds on a ranch owned by the Birches known as the Conaway Ranch. These bonds were part of a $2,000,000 issue, less than one-quarter of which had been sold to the public, the balance being owned by Birch. The bonds had a par value of $1,000, and bore 6% interest. Default on the bonds occurred in 1934. In 1928, and each year following up to 1934, Miss Minter purchased from Birch large numbers of these bonds aggregating $80,000, for which she paid Birch by checks on her account. Birch testified that these bonds wеre sold by him to Miss Minter subject to his oral promise to repurchase the bonds at par. From time to time he did repurchase some of the bonds when she needed cash. The trial judge, who had the power to pass on the credibility of the witnesses, was not bound by this testimony. He could, and apparently did, disbelieve Birch‘s story, and concluded from all the testimony that Miss Minter made an outright purchase of these bonds.
By 1932 Birch undoubtedly owed to Miss Minter another sum of $50,000, represented by a note secured by a mortgage. It should be here mentioned that up to 1930 Birch was a man of considerable wealth and was engaged in many profitable enterprises. From 1926 through 1929 his net worth was over $3,000,000, and his net income over $100,000 a year. After 1930 Birch became financially involved and his assets began to shrink in value, although at no time did his status approach that of insolvency. It is clear that after 1930 the sums borrowed by him from Miss Minter were desired by him to assist him in his financial difficulties.
Giving the evidence the strongest possible interpretation in favor of appellants, and disregarding the possible and rea-
In 1932 and 1933 Birch transferred to Miss Minter stock of five different companies. He transferred to her 90% of the stock of the Birch-Smith Storage Company. Birch and Minter testified that this stock was valueless, but Smith, an officer of the company and a witness for defendants, testified that its value at the time of transfer was $75,000, less an $8,543.32 loss. In view of this evidence it must be assumed, in support of the judgment, that 90% of this stock transferred by Birch to Minter was then worth about $60,000. In 1935 Birch testified in a supplementary proceeding in which plaintiff was attempting to collect his judgments that Miss Minter “purchased” this stock from him. While testifying in the instant case he stated that what he meant was that “she was entitled to that stock and possibly much more, because of many loans that she had made times when I was badly in need of them. She had loaned me money just before I gave her the stock. She actually paid nothing for it.” Admittedly, the only loans made by Miss Minter at this time were part of the $130,000 above-mentioned. What does the testimony above-quoted mean? Is it an admission that the stock was turned over in partial payment of the debts then existing? That is a reasonable interpretation of the testimony.
Also during 1932 and 1933 he transferred to Miss Minter over 600 shares of Lyon Storage Company stock, 400 shares of Pacific Crest Cemetery stock, an unfixed number of shares of Citizen‘s National Bank stock and 40 shares of Western State Life Insurance Company stock. Birch testified that the value of these shares at the time of the transfer was between $60,000 and $100,000, and that such stock was absolutely clear when transferred. In explanation of these transactions, although he had failed to mention these transfers on former hearings, Birch testified that this stock was transferred in return for a promise of Miss Minter to will her home place
Thus, during this period at a time when he claims to have owed Miss Minter $130,000, he transferred to her assets which, taking their highest values as fixed by the evidence, were worth $160,000 or more. It should also be mentioned that in 1933 Birch prepared a detailed financial statement in which he did not list the $80,000 claimed to be owing to Miss Minter as a liability.
If the trial judge had believed the testimony of Birch and Minter he could have found that these transfers were either gifts from Birch to Minter, or were in return for the promise to will the home place to him. But the court was not bound to so find. The trial court could, and did, disbelieve thе testimony of these two witnesses. It is a reasonable inference that if the indebtedness existed it was canceled by these transfers. The trial judge saw the witnesses. He knew of the many contradictions in Birch‘s testimony. He was in a much better position than this court to pass upon the credibility of the witnesses. He found that no indebtedness in fact existed. He was not bound to believe the explanation proffered by Birch. He knew that these parties had been dealing together for many years with no evidence of large gifts passing between them. He knew that after the 1932-1933 transactions the parties again entered into many transactions. He knew that Birch was heavily involved in 1932 and 1933. He knew of the close relationship existing between the parties. Under such circumstances, the trial court was entitled to infer that Birch in fact was attempting to protect Miss Minter, and, to do so, transferred to her these assets in payment of the existing obligations. This inference is more than a mere suspicion—it is predicated upon the evidence and is based on reasonable probabilities.
After the transactions of 1932-1933, above-described, Birch and Miss Minter went through the motions of purporting to keep the indebtedness alive. In October of 1934, the same month he first failed to pay rent on the Campbell lease, Mr. and Mrs. Birch formed three Birch corporations, in one of which they vested their ownership of the reclamation bonds and other securities, and to another they transferred most of their other assets valued at many hundreds of thousands of dollars. The third corporation was a holding company, pos-
In November of 1934 the Birches gave Miss Minter a second deed of trust on certain real property referred to as the Broadway property, as security for a loan of $15,000 and future advancements. On May 1, 1935, Miss Minter advanced another $10,000 under this agreement. It is to be noted that this $25,000, when added to the $130,000 above mentioned, makes a total of $155,000 allegedly then owed to Miss Minter. That is almost the exact value of the stock transferred to Miss Minter by Birch in 1932 and 1933. The trial court found that the $25,000 indebtedness, as well as the $130,000 indebtedness, was fictitious. The bаsis for these findings has already been discussed. Although the $25,000 undoubtedly passed from Miss Minter to Birch, the trial court could, and did, infer it was merely balancing the transfers of 1932 and 1933. It was this purported indebtedness that was used by Birch as a basis for the representations made to Campbell concerning Birch‘s uncertain financial status. It was these representations upon which Campbell relied in entering into the compromise and lease modification agreements of August, 1935.
There is one other matter to which reference should be made. During the first part of 1935 Birch and a man by the name of Benson had offices in the same suite. Benson was assisting Birch in attempting to refinance some of his obligations, including the obligations on the lease and judgments owed to Campbell. The plaintiff testified that he first talked directly with Mr. Birch in March or April of 1935 concerning the proposed settlement. In that first conversation Birch, according to Campbell, made most of the representations forming the basis of this action. On at least one occasion Campbell talked with Mrs. Birch, and she told him that they were anxious to settle the dispute. The balance of the negotiations were carried on by Benson. Birch contends that
The deal between Benson and Birch was consummated on July 16, 1935. By that agreement the Birches transferred to Benson most, but not all, of their valuable assets, including the 100,000 shares of holding company stock. Benson agreed to discharge the liabilities against the properties transferred, and further agreed that when the holding company stock reached a net market value of at least $1,000,000 he would pay the Birches $500,000 cash. Coincidentally, Miss Minter canceled the various notes of the Birches purporting to represent the various debts owed to her by them, and accepted in lieu thereof the note of Benson for $162,574.66, payable ten years after date, to be secured by the holding company stock.
It was under these circumstances that in the middle of August, 1935, the compromise and lease modification agreements were entered into, with Benson handling the details for the Birches. At the request of Benson and with the approval of the Birches, the compromise was not handled in the normal way by entering a satisfaction of the existing judgments, but such judgments were assigned to Benson. The record shows that Benson then used the Campbell judgments to foreclose on the various equities retained by Birch in the few properties not already transferred to him in the July transactions. While the Benson-Birch agreement was still in effect Campbell brought an action against them to set it aside
From this evidence the trial court could, and apparently did, conclude:
- That the representations that Birch was facing bankruptcy and would be forced into bankruptcy if the Campbell dispute was not settled, and that Miss Minter was intending to foreclose against Birch were false. It is quite clear that by reason of the confidential relationship existing between Birch and Miss Minter, and their affection for each other, she would never have threatened him with foreclosure, nor would she have proceeded against him. The only reasonable inference from the evidence is that she knowingly permitted her name to be used by Birch to promote his enterprises and to protect his investments.
- That the reclamation bond transactions were outright sales and not loans, and that $80,000 of the indebtedness did not exist. It must be remembered that Birch failed to list this alleged liability in his financial statement of 1933.
- That even if this indebtedness did exist, it is a reasonable inference that it, as well as the $50,000 indebtedness, was canceled by the transfers made to Miss Minter by Birch in 1932 and 1933.
- That such indebtedness was fictitiously kept alive for the purpose of defrauding, among others, the plaintiff.
- That Miss Minter and Mrs. Birch knew what Mr. Birch was doing, and knowingly permitted their names to be used in the attempt to defraud Campbell by creating the false impression that substantially all the assets of the Birches were pledged to Miss Minter as security for debts which in fact did not exist.
Under these circumstances, the findings that the three appellants conspired to defraud, and did defraud Campbell,
“‘The law recognizes the intrinsic difficulty of proving a conspiracy. The allegations with reference to conspiracy are treated as matters of inducement leading up to a more particular description of the acts from which conspiracy may be inferred. . . . The conspiracy may sometimes be inferred from the nature of the acts done, the relation of the parties, the interest of the alleged conspirators, and other circumstances. . . .‘”
On the same page (301) the court continued as follows:
“In the present action, while plaintiff was unable to prove any formal agreement between defendants Arthur Hesse and Sidney Beach, nevertheless, there was before the court the entire transaction resulting in the cоnsummation of a flagrant fraud upon the plaintiff, in which transaction Sidney Beach participated as an intermediary. . . . These circumstances, coupled with the further fact that defendants Sidney Beach and Arthur Hesse were not strangers, but were on
more or less intimate terms, occupying the same office, were sufficient to warrant the inference drawn by the trial court that defendant Sidney Beach was a party to a conspiracy which had for its object the fraudulent conversion complained of by plaintiff.‘”
“In Beeman v. Richardson, 185 Cal. 280, at page 282 (196 Pac. 774, 775), the rule is stated as follows:
“‘The point in connection with the finding as to a conspiracy is that the representations were made by the defendant, Richardson, alone, and that there is no direct evidence that the other defendants agreed that they should be made, or knew at the time that they were being made. But direct evidence of that character could hardly be had in the very nature of things, unless one of the defendants should confess, and the fact must be determined by the inference naturally and properly to be drawn from those matters which can be, and are directly proven.‘”
If the inference that Birch paid all his obligations to Miss Minter is supported, and we think it is, then obviously Miss Minter knew that fact. With such knowledge, to have entered into the transactions above-described, makes her liable as a joint participant. The above reasoning likewise applies to Mrs. Birch. On this part of the case we conclude our discussion with the holding that under the evidence the inference of joint fraud was not unreasonable, and for that reason will not be disturbed on appeal.
Appellants next contend that there is no evidence of damage, or, in the alternative, that the trial court applied the wrong measure of damages. These contentions are based on the theory that respondent did not elect to rescind by first returning what he had received, but instead elected to stand on the contract and sue for the damage suffered. If respondent had rescinded, the measure of damages, so far as general damages are concerned, would have been the full amount of the debt owed by Birch to Campbell, and the full amount due on the lease. But, it is urged, when a defrauded plaintiff elects to stand on the contract and sue for damages, the measure of damages is different. It is urged that in such event proof must be made that the claims which were relinquished as a result of the fraud, were in fact collectible, and that, in this case, no such evidence was introduced, and no such finding made.
These contentions are unsound. They are given color only
Running through appellants’ argument on this point is the implication that there is something questionable about a defrauded plaintiff electing to sue for damages, rather than rescinding. There can be no doubt of the propriety of such procedure. In Bozarth v. Birch, 52 Cal. App. 55 (198 Pac. 222), in a case where the alleged fraud was strikingly similar to the one involved in the instant case, this same appellant urged that the sole remedy under such circumstances was to rescind, and cited Bancroft v. Bancroft, 110 Cal. 374 (42 Pac. 896), one of the cases relied upon in the present case. The court held that where a contract is secured by undue influence, the proper remedy of the injured party is to rescind, but where the defendant secures an advantageous contract by fraudulent representations, the injured party may elect to affirm the contract and sue for the fraud. The same rule was announced in Westerfeld v. New York Life Ins. Co., 129 Cal. 68 (58 Pac. 92, 61 Pac. 667), the main case relied on by appellants. See, also,
In support of their contention that before damages may be recovered in such an action there must be proof and a finding that the compromised or modified claim was in fact collectible, appellants place their main reliance on the Westerfeld case, supra. In that case the insurance company had issued a $10,000 life policy to Westerfeld containing a provision that at the expiration of five years the insured might surrender the policy and receive the then cash value. The complaint filed by the executors of Westerfeld‘s estate alleged that after four annual premiums had been paid an arrangement was entered into whereby a new policy was issued in place of the old one, and that it was agreed that the cash value of the old policy would be computed and applied to the fifth premium on the first policy, the surplus to be applied to future premiums on the second policy. Westerfeld died with both policies in his possession and, at the time of death, had received no notice of the cash surrender value of the first policy, which was sufficient to pay the fifth premium on the first policy and the first premium on the second. The executors demanded payment of the second policy. The theory was that the defendant was alleged to have made fraudulent
The defendant admitted making the representations but contended that they were true. They urged that it was a fact that the second policy never became effective and that the first one had lapsed. No rescission was had. The trial court instructed the jury that the measure of damages was the difference between the compromise payment and the face of the policy. In reversing the decision the court held that in such event, where the existence of the compromised claim is in dispute, if an action for fraud as distinguished from rescission may be maintained, which was doubted, it is incumbent upon the plaintiff in proving damages, to show that the compromised claim was in fact collectible.
It is obvious that the rule of the Westerfeld case only applies where the compromised claim is disputed, either as to its existence or as to its amount. Not only does the case expressly so hold, but in Taylor v. Hopper, 207 Cal. 102 (276 Pac. 990), the case was so interpreted. In that case it was stated (page 105):
“The case of Westerfeld v. New York Life Ins. Co., 129 Cal. 68 (58 Pac. 92, 61 Pac. 667), relied upon by appellant, is not helpful to her cause for that case holds that for the plaintiff to maintain such an action as we are here considering, the compromise sought to be avoided must have been of an undisputed claim. In the decision of the court commissioner, adopted by the court, it was said: ‘Cases of that nature (where one who seeks to rescind a compromise agreement on the ground of fraud is not required to restore the money he has received) arise when a party has been led by fraudulent contrivance to accept less money than was due him on an undisputed claim, as in Gilson etc. Co. v. Gilson, 47 Cal. 597.’ The compromise made in the case before us was of a disputed claim, unliquidated in amount and there is no practicable measure of damages for the action sought to be maintained. The demurrer, therefore, was properly sustained without leave to amend.”
In the case at bar the claims compromised were not disputed either as to amount, or as to their existence. Over
Appellants also urge that certain alleged rights obtained in the compromise by respondent were not taken into consideration in determining the damages. Thus it is urged that Mrs. Birch guaranteed the reduced rental due under the lease as modified for five years, and it is urged that the trial
Appellаnt A. Otis Birch complains of that portion of the judgment which allows respondent as against this appellant $375 for investigation expense and $878.85 by way of attorney‘s fees. These amounts were allowed against this defendant under a provision of the original lease, which remained unchanged by the modification, and which reads as follows:
“It is hereby agreed between the parties hereto that Lessee shall pay all reasonable costs, expenses and attorney‘s fees incurred by or against Lessors in any litigation between the parties hereto or persons claiming under them, arising out of or in connection with this lease or the construction or enforcement thereof, in case the Lessors or parties claiming under them shall prove successful in such litigation. . . .”
The judgment against all three defendants is in the total amount of $8,413.59. According to the findings, $5,000 of this amount is for the difference between the reduced rentals and the amount called for in the lease. The balance was for the difference due under the lease and the amount of the compromise. All claims forming the basis of the judgment “arose out of and in connection with the lease” as provided in the lease agreement. It was therefore proper for this allowance to be made.
For the foregoing reasons the judgment appealed from should be, and hereby is, affirmed.
Gibson, C. J., Edmonds, J., and Traynor, J., concurred.
CARTER, J., dissenting.—I dissent.
I am unable to agree with either the conclusion reached in the majority opinion or the reasoning upon which it is based. As the conclusion reached therein is based upon inferences drawn from certain facts, I will first state the facts as disclosed by the record.
On August 20, 1935, after considerable negotiating between the parties, plaintiff entered into an agreement with defendants A. Otis Birch and M. Estelle C. Birch, his wife, dated August 1, 1935, whereby the indebtedness of said defendant A. Otis Birch amounting to $9,412.59 was settled for the sum of $6,000, and it was further provided that the rental under said lease be reduced for the ensuing five years on a graduated scale. Commencing August 1, 1935, the rental was reduced from $1,000 to $500 per month. This agreement was performed by defendant and he thereafter paid plaintiff the reduced rental agreed upon for the period commencing August 1, 1935, to May 1, 1936.
Plaintiff thereupon commenced this action alleging that defendants A. Otis Birch and M. Estelle C. Birch, who are husband and wife, induced plaintiff to execute the settlement agreement by means of false and fraudulent representations as to the financial condition of said defendant A. Otis Birch. Lula M. Minter was joined as a defendant on the ground that she participated in the conspiracy to defraud complained of by plaintiff.
The complaint alleges that defendants falsely and fraudulently represented to plaintiff and he was thereby led to believe that at the time said agreement was executed and for some time prior thereto defendant A. Otis Birch was in an unsafe and dangerous condition financially; that he was indebted to defendant Minter in the sum of $25,000 represented by a note secured by a trust deed on certain real property owned by defendant A. Otis Birch; that he was also indebted to defendant Minter in the sum of $130,000 secured by a pledge of 100,000 shares of stock, being the entire capital stock of the Birch Holding Company, which in turn held
During the course of the trial plaintiff‘s counsel conceded that if the indebtedness from Birch to Minter actually existed, plaintiff could not prevail in this action.
The findings of the trial court followеd substantially the allegations of the complaint, and judgment was entered for plaintiff against all of the defendants for $8,413.59, and against defendant A. Otis Birch individually for $375 expenses preparing for trial and $878.85 attorney‘s fees.
Defendants’ main contention in support of their appeal from the judgment rendered against them is the insufficiency of the evidence to support the findings of the trial court upon which the judgment is based.
The evidence produced by plaintiff as to the misrepresentations alleged to have been made by defendants was as follows: Plaintiff testified that in 1933 defendant, A. Otis Birch, furnished him with a financial statement showing various assets and liabilities; that during the period from March to July, 1935, at a time when said defendant was in default under the lease and had not paid the judgments for rent, two supplementary proceedings were conducted by plaintiff in aid of the enforcement of the judgments against said defendant; that during such proceedings and also in conversations be-
“I believed . . . that Mr. Birch on August 1st really owed Miss Minter $130,000.00 on the property, which was what I cоnsidered the fact . . . and I believed that all I could do would be to attach the stock in order to collect any money, and that Miss Minter would come in with a $130,000.00 mortgage and take it away from me, because I could not pay off that large of a loan, as well as relying upon the fact that Mr. Birch had said unless he did get relief he would have to go into insolvency, or bankruptcy, or something.”
In regard to the basis for this action, plaintiff testified:
“Q. And one of the reasons you filed it (the action) was because you felt she (Minter) did not have enough money to
It follows therefore that the representations upon which plaintiff must rely to support the judgment are those concerning the indebtedness to Minter and the pledge of stock and trust deed securing it. The evidence establishes that such representations were mаde and that plaintiff relied thereon and was thereby induced to execute the settlement agreement. It may be inferred from the circumstances that they were made by Birch for the purpose of inducing plaintiff to act upon them.
It is, however, necessary in order for plaintiff to make out a case, to prove that those representations were false. Defendants assert that plaintiff not only failed to prove the falsity of the representations complained of but that the evidence establishing the truth thereof stands uncontradicted. In order to have a clear understanding of the facts relating to the transactions between the Birches and Miss Minter it is necessary to review the history of these transactions. According to the evidence, A. Otis Birch commenced borrowing money from his cousin, defendant Minter, and her relatives many years before this controversy arose. Various transactions were had between them in which sums were borrowed and partly repaid, including the sale by Birch to Minter of bonds in a reclamation district which Birch agreed to repurchase from her at face value. There were periodic settlements between them of their accounts. During that time and up to 1930, Birch had assets amounting to several million dollars in value. In an adjustment between them in about Octоber, 1934, various obligations were aggregated and adjusted, the upshot being that Birch gave Minter his note for $130,000 and pledged to her as security 100,000 shares of stock of the
It is plaintiff‘s position that several inferences may arise from the various transactions engaged in by the Birchs and the foregoing events which support the judgment. Among others he refers to the Benson-Birch agreement in which it was recited: “You know we had many financial difficulties; that we formed three corporations last October (the Birch Companies) for reasons with which you are familiar; that we transferred certain assets to these corporations subject to the assumption by them of certain liabilities; that we retained considerable real estate, and we have been making strenuous efforts to refinance all of our obligations. You yesterday purchased at an execution sale three parcels of real estate formerly owned by us.” This is followed by provisions to the effect that in the refinancing plan the personal liability of the Birchs is not to be incurred. Plaintiff asserts that from that agreement the inference follows that the three Birch Corporations were formed and the stock of the Birch Holding Company pledged to Minter to avoid liability and defraud creditors. In my opinion that inference does not follow. The personal liability referred to was that which might occur while Benson was endeavoring to refinance Birch‘s liabilities and adjust his financial difficulties. It was personal liability in the future not the past which was referred to in the agreement. One of the main lawful reasons for incorporating a business is to avoid the risk of personal liability. Therefore it cannot be said that the formation of the corporations supports plaintiff‘s case. That was entirely legitimate. In any event it must not be lost sight of that the action here is for damages for alleged fraudulent representations, to wit: that the Birches were indebted to Minter. No issue is presented by the pleadings regarding the use of the corporate entities for fraudulent purposes.
Plaintiff reasons that because there was no endorsement as security for the Benson note to Minter of the trustees’ certificate (representing stock in the Birch Holding Company) which arose out of the Benson-Birch agreement of July 16, 1935, and no evidence of its transfer to Minter except her evidence that the stock was delivered to her after July 16, 1935, issued in Benson‘s name, the court was justified in
Plaintiff urges and the majority opinion agrees that from the foregoing transactions it may be inferred that defendants were engaged in a scheme whereby they could reduce their liabilities, reduce their obligations under the lease in which plaintiff was the lessor, and put their property out of the reach of their creditors. From the entire record I cannot agree that such an inference reasonably follows. Rather, the plain purpose seems to have been an honest endeavor on the part of the Birches to alleviate a serious financial involvement to the ultimate benefit of both themselves and their creditors. But even if such an inference may be drawn, it is not sufficient to support the judgment because this is not an action to set aside conveyances as having been made with the intent to defraud creditors. As we have seen, it is an action for damages for fraudulent representations; the gist of such representations are that the Birches were indebteded to Minter in the total sum of $155,000 and that the same was secured by liens on real property and corporation stock. It does not follow from a general scheme to reduce their liabilities that the indebtedness to Minter was fictitious or false.
With respect to the falsity of the representations concerning the indebtedness to Minter there is evidence heretofore-
In regard to the transfer of the securities being made in consideration of Minter‘s promise to devise her property to Birch, we have the uncontradicted evidence that said transfer was not made in payment of the debt; that it was a sale to Minter for which she paid the purchase price. In order to escape the effect of that evidence, the majority decision relies upon two propositions: first, that the trial court could have disbelieved defendants’ evidence on the subject; and second, that an inference of payment arose from the transfer of the securities. With the first I agree, but where does that leave us?
It is also pertinent to observe that even if it be assumed that the debt was paid by the stock transfers prior to 1934, we have the notes themselves which were executed after those transfers. Such instruments are presumed to be supported by adequate consideration. (
In this connection it should be noted that the majority
In addition to the foregoing, it must not be forgotten that in an action for damages for fraud the burden of proof of all of the elements thereof, including the falsity of the representations, rests upon the one asserting the fraud. (McEwen v. New York Life Ins. Co., 42 Cal. App. 133 (183 Pac. 373); Moore v. Giffen, 110 Cal. App. 659 (294 Pac. 730);
The undisputed evidence in the record discloses that during the three or four years immediately preceding August 1, 1935, defendant A. Otis Birch became seriously involved financially and his obligations increased to such an extent that he was having great difficulty in meeting them; in fact, plaintiff had recovered two judgments against said defendant for rent which had accrued under the lease in question and plaintiff had been unable to enforce satisfaction of these judgments. Plaintiff does not seriously question the fact that Miss Minter was financially able to make the loans to defendant A. Otis Birch which formed the basis of the representations which plaintiff now asserts were untrue. There was no direct evidence offered to contradict the testimony of defendant A. Otis
Of course, if the evidence is insufficient to establish the fraud on the part of Mr. Birch, then Minter and Mrs. Birch necessarily are not liable. But assuming it is sufficient, there is a total lack of evidеnce to charge Minter and Mrs. Birch with Mr. Birch‘s fraudulent representations. It is conceded in the majority opinion that neither Mrs. Birch nor Minter made any representations to plaintiff, fraudulent or otherwise. In regard to Mrs. Birch, there is no evidence that she had any knowledge that the indebtedness to Minter was fictitious or that any representations were made by her husband in connection therewith. The sole evidence in the record touching upon her connection with the transaction is that she knew nothing about Birch‘s business transactions; and that she was anxious to have the transaction settled. Surely, that is not sufficient to support a judgment against her.
The basis stated in the majority opinion for holding Minter liable as a conspirator is that she must have known that the indebtedness between her and Birch was fictitious. She made no representations, had no knowledge of any being made, or of the settlement transaction between Birch and plaintiff. There is no showing of any plan, or scheme, or agreement between Birch, Minter and Mrs. Birch to engage in a conspiracy to defraud plaintiff. It is essential to establish a conspiracy that a common plan and design for concerted action be proved. There is no evidence of such an agreement.
For the foregoing reasons, I believe that the judgment should be reversed.
Shenk, J., and Curtis, J., concurred.
Appellants’ petition for a rehearing was denied April 2, 1942. Shenk, J., Curtis, J., and Carter, J., voted for a rehearing.