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District Court of Appeal, Second District, Division 2, California.

STOCKWELL et al. v. McALVAY et al.†

Civ. 10856.

Decided: May 14, 1936

Joseph L. Lewinson and Morris E. Cohn, both of Los Angeles, for appellants. Newby & Newby and Dee Holder, by Dee Holder, all of Los Angeles, for respondents.

This is an appeal by defendants from a judgment in favor of plaintiffs setting aside a sheriff's sale of stock of Consumers Salt Company.

A statement in some detail of the complicated affairs of the parties is necessary to an understanding of the problem before us. Plaintiffs V. E. Stockwell and B. C. Stockwell are husband and wife. Defendants Irwin and Rose are attorneys for defendant McAlvay. On June 19, 1925, McAlvay obtained a judgment against V. E. Stockwell in the sum of $16,000, based upon charges of fraud in the sale of real estate. After the accrual of the cause of action upon which the last–mentioned judgment was based, and after suit had been threatened, V. E. Stockwell transferred his residence property to his wife. In a separate action in the superior court a judgment was rendered on April 13, 1926, in which the court held that the deed was “executed by said V. E. Stockwell with intent to delay and defraud his said creditor, said B. D. McAlvay.” In that action the court further ruled that title to the property was in the trustee in bankruptcy hereinafter referred to. Execution was issued on the judgment of June 19, 1925, and on October 1, 1925, the sheriff levied upon 225,000 shares of stock of the salt company, shown by the records of the company to be in the name of B. C. Stockwell. Defendant V. E. Stockwell had caused the stock to be transferred to his wife's name on July 9, 1925. The stock was sold by the sheriff to McAlvay on November 17, 1925, for the sum of $50. It is not charged that the sale was not made in accordance with law. Between October 1, 1925, and November 17, 1925, certain negotiations were conducted by and between Attorney Rose for McAlvay and Attorney Newby for V. E. Stockwell. On October 22, 1925, V. E. Stockwell verified a petition to be filed in bankruptcy proceedings, appending thereto a list of his property, but without including the 225,000 shares of stock levied upon or the residence property. This petition was exhibited by Newby to Rose on October 28, 1935, with the assertion that Stockwell had stated that the list included all of his property. Rose was informed that Stockwell did not wish to commence bankruptcy proceedings, but that he would do so unless McAlvay accepted the property mentioned in the list in satisfaction of the judgment. Rose undertook to investigate the properties listed, and not being satisfied with the value of the properties, he ordered the sale to proceed. On the day immediately after the sale V. E. Stockwell filed a petition in bankruptcy in which he scheduled the properties mentioned in the list which had been exhibited to Rose, not including the residence or the shares of stock sold by the sheriff. On November 19, 1925, V. E. Stockwell was adjudged bankrupt, and on December 17, 1925, Kyle Grainger was appointed trustee.

McAlvay commenced an action on November 27, 1925, under the provisions of section 328 of the Civil Code, as it was then in force, to quiet title to the shares of stock. Compliance was made with the requirements of the statute. The salt company and Mrs. Stockwell were made defendants. V. E. Stockwell filed no pleading in the action, but he appeared as a witness for his wife and testified that he did not own or claim any interest in the stock. Upon the first trial of the quiet title action judgment was rendered against McAlvay, but his motion for new trial was granted and upon a second trial judgment was rendered, September 16, 1927, in which it was held that B. C. Stockwell had no interest in the stock and that it was the property of McAlvay. This judgment was affirmed on appeal. McAlvay v. Consumers' Salt Company, 112 Cal.App. 383, 297 P. 135, 139. The reviewing court, after discussing the charge of inadequacy of price in connection with the evidence in the case, said: “No fraud and no unfairness except as to the amount paid is urged against the plaintiff, and the testimony was not such as to compel the finding that the price paid rendered the transaction unconscionable. Such was not the view of the trial court, and no reason appears for disturbing its conclusion.”

The trustee in bankruptcy took no action to recover the shares of stock. McAlvay filed with the trustee his claim based on the judgment of June 19, 1925, with a credit of the amount paid for the stock at the sheriff's sale. Mrs. Stockwell from her separate funds deposited with the trustee the sum of $25,000 and authorized the trustee to pay from this deposit all claims against the bankrupt estate including fees of the trustee. From this sum all claimants, including McAlvay, were paid in full. The sum deposited was more than sufficient to pay all claims and expenses. By agreement between Mr. and Mrs. Stockwell all of the assets were to become the property of Mrs. Stockwell.

Between the dates of the first and second trials of the quiet title action, plaintiffs commenced the present action, October 27, 1926, and prayed that the sale of November 17, 1925, “be set aside as fraudulent.” Some of the stock had been transferred to Rose and Irwin and they were made parties defendant. In the original complaint it was alleged that the shares were the “sole and separate” property of Mrs. Stockwell. Upon the trial in June, 1932, the complaint was amended and the allegation made that the stock was the property of “plaintiffs.” The allegations upon which plaintiffs obtained judgment are, in substance, that the attorney for McAlvay falsely pretended to be investigating the value of the properties listed in the bankruptcy petition which had been exhibited to him, that he thereby prevented V. E. Stockwell from taking steps to prevent the sale and from filing the bankruptcy petition before the sale of the stock, and that the sale was conducted without notice to plaintiffs. Counsel for both parties earnestly assert that their conduct was entirely proper. Some of the specific findings are favorable to defendants, but the general findings on the issue of fraud are in accord with plaintiff's allegations. The court also found that the stock at the time of the sale was of the value of not less than $60,000.

The briefs contain much discussion concerning the conversations and negotiations prior to the sale and the findings made thereon, but we consider it inappropriate to set these matters forth at great length. The question is raised whether McAlvay was bound by the acts of his attorneys during the negotiations. Mr. Newby argues that McAlvay was bound by the acts of his attorneys but that V. E. Stockwell was not so bound. He states on one page of his brief that: “The transaction complained of in the instant case was the fraud of appellants Irwin and Rose and the responsibility of McAlvay for that fraud to the extent of the benefits which he received from it.” On another page that: “The final and conclusive answer to the whole defense, based upon said equitable maxim, is that defendants were not in the transaction upon which the instant suit is based, dealing with Stockwell personally at all. On the contrary, they were dealing with an independent person, to–wit, Nathan Newby, who trusted them and relied upon their acts and was misled thereby.” And on another page: “Of course the fraudulent execution sale had then taken place and Newby very keenly resented the fact that he had been overreached in that matter.” The rule of responsibility applies alike to both of the litigants. Under the circumstances shown in evidence both parties were unquestionably responsible for the acts of their attorneys.

The main contentions of defendants are: That plaintiffs must be denied relief because they come to a court of equity with unclean hands; that the judgment in the quiet title action is res judicata, that said action was in rem, and that the two Stockwells having conspired and co–operated together V. E. Stockwell is bound by the judgment; that the trustee in bankruptcy alone had authority to sue to set aside the sheriff's sale; that the action is barred by the statute of limitations and by laches; and that the evidence does not support the findings which in turn are insufficient to sustain the judgment. Our determination of the first of these contentions disposes of the appeal and makes unnecessary a discussion of the other questions involved.

An examination of the complicated facts of this litigation discloses the familiar case of a judgment debtor attempting to evade a court judgment by placing his property in the name of his wife. No other reasonable conclusion can be reached. By fraudulent methods Mr. Stockwell persistently attempted to prevent his judgment creditor from receiving that which the court had awarded. In so doing he brought himself to a position of financial loss, a position which resulted from his own unfair conduct and from which a court of equity is prevented from extricating him by the fundamental rule that he who applies to the court must do so with clean hands. He fraudulently transferred his residence property and corporation stock to his wife; he verified a false statement of his assets and caused it to be exhibited to counsel for his creditor with the threat that if the false list of property be not accepted he would file a petition in bankruptcy; although solvent at all times and possessed of ample means to pay his debts, he fraudulently filed a petition in bankruptcy and fraudulently omitted to list all of his property in the bankruptcy proceedings; all of which was done in an effort to defeat the McAlvay judgment. Mr. Stockwell failed in his effort to induce McAlvay by use of the fraudulent bankruptcy petition to accept a portion of his property in settlement and now asks the court to relieve him from the consequences of his own fraudulent conduct in causing the stock to be placed in his wife's name. This a court of equity will not do. As well stated in Allstead v. Laumeister, 16 Cal. App. 59, 116 P. 296, 298: “The harshness of such consequences falls upon one who would fraudulently conceal his property so as to escape the just demands of those having a claim upon it. * * * A court of conscience cannot consistently with the very principles which have occasioned its existence lend its aid to relieve a party from the results of his own fraud.” See, also, Powell v. Bank of Lemoore, 125 Cal. 468, 58 P. 83; Clark v. Bell (1905) 40 Tex. Civ.App. 39, 89 S.W. 38; Dunne v. Cunningham, 234 Mass. 332, 125 N.E. 560.

Part of the stock sold at sheriff's sale was transferred by McAlvay to Irwin, who in turn pledged the stock as security with one Henry Merton. Mr. Merton has not been made a party to this action. Nevertheless the court adjudged that certificate No. 53 for 112,500 shares issued to and held by Henry Merton “be declared null and void” and Merton was commanded to deliver the certificate to the clerk of the court. This part of the judgment was manifestly erroneous. The rights of Merton as an innocent holder for value must be protected, and in any event the court was without jurisdiction to order him to deliver the certificate without his being made a party to the litigation.

The judgment is reversed.

WOOD, Justice.

We concur: CRAIL, P. J.; McCOMB, Justice pro tem.

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