BEELER v. AMERICAN TRUST CO

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District Court of Appeal, Third District, California.

BEELER v. AMERICAN TRUST CO.

Civ. 6693.

Decided: September 14, 1942

Brobeck, Phleger & Harrison, and M. B. Plant, all of San Francisco, and Carr & Kennedy, of Redding, for appellant. Carter, Barrett & Carlton, of Redding, Howard S. Clewett, of Paradise, and McGregor, McGregor & McGregor, of Santa Barbara, for respondent.

The American Trust Company has appealed from a judgment declaring that a deed to real property in Tehama County which is absolute on its face is a mere mortgage to secure an antecedent debt. The deed was accompanied by a verified affidavit of the grantor asserting that the deed was an absolute conveyance of the property and that it was not intended as a mortgage. Oral evidence of the grantor was received over the objection of the appellant, contradicting his own affidavit.

Prior to June 28, 1937, Henry Weiss owned a large tract of land in Tehama County, subject to a trust deed dated March 21, 1933, to secure two promissory notes for the aggregate sum of $74,000 due and payable July 28, 1937, at 5 1/2 per cent interest, held by the appellant bank. In October, 1936, notice of foreclosure and sale was served. At the request of Mr. Weiss, the sale was delayed to give him an opportunity to try to find a purchaser. In June, 1937, Weiss brought the respondent Beeler to see the appellant, saying he would purchase the ranch if the debt was discounted and reduced to a satisfactory figure. Mr. Hammond, the assistant vice president of the appellant bank, agreed to accept $55,000 in cash in lieu of the debt if that sum were paid within thirty days therefrom. June 28, 1937, Mr. Weiss deeded the ranch to the respondent. By the express terms of that deed the respondent Beeler assumed and agreed to pay the debt. Accompanying that deed, Mr. Weiss executed and delivered to the respondent a bill of sale of the personal property on the ranch. As part consideration for that deed the respondent then executed and delivered his promissory note payable to Weiss in the sum of $5,000.

On September 1, 1937, no part of said sum of $55,000 in satisfaction of the debt had been paid. On the last–mentioned date the appellant served upon the respondent and upon Mr. Weiss a second notice of foreclosure and sale. The debt had then increased to the aggregate sum of $81,000.

Subsequent to said notice and on September 22, 1937, the respondent visited the appellant and again urged it to accept in lieu of said debt a substantially–reduced sum and to continue to carry said indebtedness to be secured by mortgage, which the appellant refused to do. The appellant then consented to accept an absolute deed of conveyance to the real property in satisfaction of the debt, but offered to execute to the respondent a lease of the premises for a period of one year at a rental of $3,000 per annum on condition that the respondent pay all taxes and maintenance of the property, including therein an option to purchase said land at any time during the term of the lease for the sum of $60,000. This was agreed to by the respondent, who on September 27, 1937, executed and delivered to the appellant a deed of conveyance to said real property which was absolute on its face. At the same time the appellant executed a deed of reconveyance of the trust deed which it held as security for the payment of said indebtedness in which instrument the appellant acknowledged full satisfaction of the debt. Both of these documents were duly recorded. Accompanying said deed of conveyance and as a part of the same transaction, the respondent executed and verified his affidavit in which he acknowledged that said deed dated September 27, 1937, “is intended to be and is an absolute conveyance of the title to said premises to the grantee named therein, and was not and is not now intended as a mortgage, trust conveyance or security of any kind; that it was the intention of affiant as grantor in said deed to convey, and by said deed, this affiant did convey to the grantee therein all his right, title and interest absolutely in and to said premises; that possession of said premises has been surrendered to the grantee; that in the execution and delivery of said deed affiant was not acting under any misapprehension as to the effect thereof, and acted freely and voluntarily and was not acting under coercion or duress; that the consideration for said deed was and is the full cancellation of all debts, obligations, costs and charges secured by that certain deed of trust heretofore existing on said property. * * * This affidavit is made for the protection and benefit of the grantee in this deed, its successors and assigns.”

The respondent failed and neglected to pay the taxes on said property as agreed by the terms of the lease. In July, 1938, the appellant brought suit in unlawful detainer for the breach of the terms of said lease. On account of a defect in the notice of breach the suit was decided against the appellant.

On October 19, 1938, the respondent brought this suit to declare that his deed of conveyance to the appellant was a mere mortgage to secure the antecedent debt. In the complaint in this suit it is alleged that the appellant agreed to reduce the debt amounting to $81,000 to the sum of $60,000 to be paid at the rate of 5 per cent interest per annum within the period of one year as provided by the terms of the lease and that the appellant accepted the deed of conveyance as a mere mortgage to secure that debt.

To this complaint the appellant filed an answer and cross–complaint denying the material allegations of the complaint and asserting that the deed was intended to be and is an absolute conveyance of the real property and not a mere mortgage to secure an antecedent debt.

The court adopted findings favorable to the respondent in every particular. Judgment was accordingly rendered against the appellant, determining that the deed of conveyance was intended to be and is a mere mortgage to secure the indebtedness for the agreed amount of $60,000, together with interest at the rate of 5 per cent per annum, according to the terms expressed in the lease. From this judgment the American Trust Company has appealed.

The question to be determined is whether there is substantial evidence to support the findings that the deed of conveyance of September 27, 1937, from C. W. Beeler to American Trust Company was absolute in effect or whether it was intended by the parties thereto as a mere mortgage to secure the payment of only the sum of $60,000, together with interest thereon, and whether the court erred in permitting the respondent to vary the terms of his written and verified declaration accompanying the deed to the effect that said conveyance was deemed to be absolute and that it was not the intention of the parties that it should become a mere mortgage to secure the payment of the indebtedness.

Several issues which have been elaborately argued by respective parties are not necessary to determine, in view of our conclusion that the grantor's unqualified declaration in his verified affidavit accompanying the deed, that it was intended to be an absolute conveyance of the land in full satisfaction of his debt and on the contrary that it was not intended as a mortgage to secure the payment of that debt, in the absence of fraud or mistake, is conclusive of that issue and estops the grantor from denying that fact.

In the absence of language to the contrary employed in a deed, it is presumed to be an absolute conveyance of the land described therein and not a mere mortgage to secure the payment of a debt. Woods v. Jensen, 130 Cal. 200, 203, 62 P. 473. Since owners of land have frequently executed deeds, absolute in form, and have delivered them with the mutual understanding between the parties that they were intended to become mere mortgages to secure antecedent debts, an exception to the well–established rule of evidence with respect to varying the terms of written instruments has developed, permitting proof of that intention to be established by parol evidence. But, to overcome the presumption that a grant, bargain and sale deed, in the absence of language to the contrary, is intended to be an absolute conveyance of the land, the proof that it is mutually understood by the parties to be a mere mortgage to secure a debt must be clear, satisfactory and conclusive. Goodfellow v. Goodfellow, 219 Cal. 548, 554, 27 P.2d 898; Wehle v. Price, 202 Cal. 394, 397, 260 P. 878; Woods v. Jensen, supra. To convert a deed which is absolute in form into a mortgage it is not enough to prove merely that the grantor intended it as security only of a debt, but it is necessary to show that both the grantor and the grantee so understood the transaction. Davis v. Stewart, 31 Cal.App.2d 574, 577, 88 P.2d 734; Wehle v. Price, supra.

There is sound reason for the rule that when a deed is silent with respect to the intention of the parties regarding its character, parol evidence may be received to show that it was mutually agreed that it should be considered to be a mere mortgage to secure an antecedent debt, but when the deed is accompanied, as a part of the same transaction, by a contemporaneous written instrument in which the intention of the parties in that regard is clearly expressed, in the absence of fraud or mutual mistake, the language of the accompanying written document may not be changed or varied by oral testimony in conflict therewith. People ex rel. Ford v. Irwin, 18 Cal. 117; Bilbo v. Ball, 194 Iowa 875, 188 N.W. 753, 760; Annotation, 111 A.L.R. 448.

The reason for this relaxation of the rule precluding parol evidence to vary the terms of a written instrument accompanying a deed has been accounted for by stating that since a deed is unilateral in nature and contemplates the performance of an antecedent agreement, the real intentions of the parties with respect to the purpose and character of the instrument should be permitted to be shown. Strictly speaking, a mortgage is not a conveyance of the legal title to land, but is merely a transfer of the equitable title to secure a debt. Since deeds are frequently given for the purpose of securing debts only, when the instruments contain no language specifically refuting that fact, as an exception to the parol evidence rule, oral testimony may be received to show the mutual intention of the parties on the theory that the circumstances surrounding the transaction are competent for that purpose. We assume that if the language of the deed specifically declares that the instrument shall be deemed by the parties thereto to be an absolute conveyance and not a mere mortgage to secure an antecedent debt, the grantor will be estopped from orally contradicting that acknowledged fact, in the absence of proper allegations and proof that the deed was procured by fraud or mutual mistake. Third St. Imp. Co. v. McLelland, 23 Cal.App. 369, 137 P. 1089. Certainly when a deed which is absolute in form is accompanied by an executed and sworn statement of the grantor, as a part of the same transaction, indicating that it was the intention of the parties to consider the deed an absolute conveyance and not a mere mortgage to secure an antecedent debt, in the absence of fraud or mutual mistake, that verified written instrument may not be disputed or changed by oral evidence received over objection and in absolute conflict therewith. Such procedure would destroy all barriers with which the law has surrounded written instruments to protect them against fraud and chicanery.

In the present case the court clearly erred in overruling appellant's objections to the respondent's oral testimony contradicting his own verified written declaration which was executed and delivered contemporaneously with the deed, as a part of that transaction, clearly asserting in language which is neither doubtful nor uncertain, that the deed was deemed by both parties to be an absolute conveyance of the land, and not a mere mortgage to secure indebtedness. Fraud with respect to the procuring of neither the deed nor the accompanying affidavit was alleged or proved. Fraud was not an issue in the case. A cancellation or modification of the terms of the written instrument was not sought. In view of the clear declarations of that written instrument, the respondent should be estopped from denying its terms by mere oral testimony in conflict therewith. The introduction of that parol evidence was a violation of the well–established rule against varying the terms of written instruments. It was incompetent. The language of the written instrument is controlling in that regard. There is therefore no competent evidence in the record to sustain the findings of the court to the effect that the deed was intended to be a mere mortgage to secure a debt of $60,000. It becomes necessary to reverse the judgment on that account.

Regarding the application of the rule that parol evidence may not be received to vary or dispute the terms of a written instrument concerning the purpose of executing a deed, the heading to an elaborate annotation of authorities on that subject appears in 111 A.L.R. p. 448, at page 459, correctly stating the law as follows:

“The American decisions (with the exception of that class of cases dealt with in III a, supra) justify the general conclusion that where a memorandum of agreement executed prior to, or contemporaneously with, a conveyance of land, shows without ambiguity the purpose for which the deed is given, and directly, or in necessary effect, negatives the existence of any indebtedness on the part of the grantor to be secured by the deed, parol evidence to show that a mortgage was intended is not admissible.

“Since a deed implies an antecedent contract for the giving thereof, which is not incorporated in the deed, the contract may be inquired into for the purpose of construing the character of the deed as an absolute conveyance, or as a mortgage. If such contract is oral, it is necessarily proved by parol evidence; while if in writing it is proved by the writing. ‘If by the express terms of the written contract an absolute sale of property is disclosed, parol evidence is not admissible to show that the intent of the parties was something else.’ ” (Italics added.)

The purpose and limitations of the parol evidence rule under the circumstances above referred to, are aptly stated in the case of Bilbo v. Ball, supra [194 Iowa 875, 188 N.W. 760], as follows:

“The rule invoked herein in its primary form is that a deed absolute on its face may be shown by parol evidence to have been mutually intended as a mortgage, provided the evidence is clear and satisfactory to that end. This rule may be regarded as in the nature of an exception to the parol evidence rule, or its consistency therewith may be maintained in argument, as it often is on the theory that a deed is unilateral; that it is the performance and consummation of an antecedent contract; that it implies an antecedent contract which is not incorporated therein; and that therefore such contract may be inquired into for the purpose of construing the character of the deed.

“This opens the door to the proof of such prior contract, whether it be written or oral. If oral, it is necessarily proved by parol evidence; if in writing, it is proved by the writing. Whereas it is true, therefore, that a deed absolute on its face may be by parol evidence explained as a mortgage, it is not true that the same rule applies to a written contract between the parties. Where such written contract purports to state the mutual undertakings of the parties thereto, it cannot, in the absence of fraud, mistake, or ambiguity, be contradicted or varied by parol evidence. If by the express terms of the written contract an absolute sale of property is disclosed, parol evidence is not admissible to show that the intent of the parties was something else.” (Italics added.)

The California case of People ex rel. Ford v. Irwin, supra, is in exact accordance with the limitations of the rule as stated above. That decision has never been modified or changed in our state. It appears to be decisive of that issue in the present action. In that case, one Arnold owed the plaintiff, Ford, $8,600. Arnold conveyed the real property in question by grant, bargain and sale deed, to Ford, who, at the same time delivered to Arnold a written agreement to reconvey the property, in which it was stated that,

“This shall only be treated as a contract to convey, and not as an acknowledgment that said conveyance from Arnold and wife to myself was intended as a mortgage.”

Litigation subsequently ensued, in which it was contended the deed was a mere mortgage to secure the debt. The trial court so held. On appeal the Supreme Court reversed the judgment and held that the above–quoted language of the agreement accompanying the deed was controlling to the effect that the deed was intended by the parties thereto to be an absolute conveyance of the land and not a mere mortgage to secure the debt.

The Supreme Court said that, except for the controlling language of the written agreement above quoted, there was adequate oral evidence to sustain the trial court's findings that the deed was intended as a mortgage. But the court said as a basis for reversing the judgment:

“In the absence of the contract the inference that the debt was extinguished upon the execution of the deed would necessarily prevail; and when we look to the contract, we find that so far from removing this inference, it contains an express provision confirming and sustaining it.”

Applying the foregoing language to the present case there can be no doubt that the written unilateral agreement of the grantor, Beeler, accompanying the execution and delivery of the deed, as a part of that transaction, precluded him from subsequently contending that the deed was intended by the parties thereto to be a mere mortgage to secure the antecedent debt and not an absolute conveyance of the land.

The respondent is mistaken in asserting that the Ford case did not contain oral evidence in conflict with the accompanying written agreement. The court specifically declares that except for the written agreement the deed might be held to be a mere mortgage, but that the language of that contract is controlling in that regard, and precludes that construction of the instrument.

The record is replete with documentary and oral evidence, independently of the respondent's accompanying affidavit, indicating that it was definitely understood by the parties to the deed that it was to be considered an absolute conveyance and not a mere mortgage to secure a debt. The land belonged to Henry Weiss who owed the bank $74,000. To secure payment of that debt, Weiss executed a deed of trust to the bank. He was unable to pay the debt and was in default with respect to accrued interest. After negotiations with the bank and a delay of nine months, during which he sought unsuccessfully to sell the land, he conveyed title to the respondent, Beeler, who merely gave him his promissory note for $5,000, and assumed the mortgage. Beeler did not even pay that note, but was sued by Weiss for the amount. The bank refused to extend or renew the loan to Beeler. The debt had increased until it amounted to over $82,000. Beeler finally executed to the bank a grant, bargain and sale deed, absolute on its face, accompanied by his verified affidavit declaring unequivocally that the deed was intended to be an absolute conveyance and not a mere mortgage to secure the debt. At that time the bank executed and recorded a reconveyance of its trust deed reciting full satisfaction of the debt. The bank then executed a lease upon the property for one year for a rental of $3,000 per annum, with the provision that the lessee should pay all taxes and assessments and cost of upkeep of the property. The respondent failed to pay the first installment of taxes. The lease contained an option permitting the lessee to purchase the property at any time within the term of the lease for $60,000. The bank entered upon its books a memorandum of full satisfaction of the debt by its acceptance of the deed from Beeler. These, and many other facts disclosed by the record, strongly indicate, independently of the respondent's affidavit, that the parties did not mutually agree or intend that the deed should be accepted as a mere mortgage to secure the former debt.

For the reason that the court erred in receiving oral testimony over the objections of the appellant, impeaching the unqualified declarations of the grantor in his verified affidavit accompanying the deed in question, and that, in the absence of that incompetent evidence, the findings that the deed was intended as a mortgage, are not supported by any substantial evidence, the judgment is reversed and the court is directed to render judgment quieting title to the land described in the pleadings in favor of the appellant, American Trust Company, a corporation.

THOMPSON, Justice.

ADAMS, P. J., concurred.