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District Court of Appeal, Third District, California.


Civ. 5482.

Decided: January 11, 1938

George F. Jones, of Oroville, Louis Ferrari and C. H. White, both of San Francisco, Rich, Weis & Carlin, of Marysville, and Keyes & Erskine, of San Francisco, for appellant. Arthur B. Eddy and Elmer W. Armfield, both of Woodland, for respondent.

This is an action against Robert J. Finney and the Bank of America, California Trust & Savings Association, as the successor of the Rideout Bank, to recover damages for fraud. After a trial by the court in which plaintiff recovered a judgment against the above defendants for $12,880, this appeal is taken by the bank.

From the amended complaint it appears that on December 27, 1920, and for several years prior thereto, plaintiff was the owner of two parcels of real property; one known as the Rutherford ranch, and the other as the Home place. The Home place was subject to a mortgage of approximately $9,000, held by the Rideout Bank, and the Rutherford ranch was subject to a deed of trust of $30,000, which deed of trust was held by trustees for a beneficiary other than the bank.

The husband of plaintiff died on April 8, 1923, and for many years prior to his death he had been mentally incompetent. Plaintiff had no training in business and financial matters, and was entirely unfamiliar with such matters, and during her husband's incompetency she managed the two ranches, with the advice and assistance of the manager of the Rideout Bank, in which institution she and her husband had for many years been depositors.

It is also alleged that on account of the plaintiff's inexperience and ignorance of business she constantly and continuously advised and consulted with the Rideout Bank with relation to all of her business and financial affairs, and relied wholly and exclusively on the bank for counsel and advice.

The complaint then alleges that on December 27, 1920, the plaintiff executed and delivered to defendant Finney an agreement, by the terms of which plaintiff agreed to sell to Finney the Rutherford ranch for $9,200, subject to the incumbrances, payable in three annual installments. Upon the execution of this agreement the plaintiff was to deliver to the Rideout Bank a deed thereof, with instructions to deliver the same to Finney upon full payment of the purchase price. In accordance with this agreement plaintiff deposited with the bank a deed to the Rutherford ranch, and the specified price having been paid in accordance with the terms of the contract, the deed was delivered to Finney.

When the foregoing agreement was executed the indebtedness secured by the deed of trust on the Rutherford ranch was past due and unpaid, and a portion of the indebtedness secured by the mortgage on the Home place was also overdue, and the balance payable on demand, which facts were known to Finney, and to L. C. Taylor who, for at least two years prior thereto, had been the manager of the bank, and who, as such manager, transacted for the bank its general banking business.

The complaint then alleged that the Rideout Bank, through its manager, Taylor, and for and on behalf of itself and Finney, undertook to fraudulently induce and coerce the plaintiff to execute the Finney agreement, and falsely and fraudulently represented to plaintiff as a fact, by way of pretended counsel and advice, that if she did not execute the Finney agreement and sell the Rutherford ranch to Finney, the bank would foreclose its mortgage on the Home place, and she would thereby lose her home, and that the holders of the deed of trust on the Rutherford ranch would then foreclose and take that property away from her before she could find buyers therefor; that it would be better for her to sell the Rutherford ranch for $5 an acre than to have that property taken from her by the holders of the deed of trust, and that it was to her best interest and advantage, in view of the circumstances, to execute said agreement, and that the consideration which she was receiving from Finney for the Rutherford ranch was fair. The complaint then alleges that plaintiff, relying upon said statements and representations and the advice and counsel of the bank, executed the Finney agreement and sold the Rutherford ranch to Finney for the sum of $23 per acre, whereas its reasonable market value at the time was $75 per acre.

It is also alleged that plaintiff continued to believe these representations until September, 1927, and at no time prior thereto had she any occasion to question the good faith thereof. However, in September, 1927, plaintiff alleges she obtained information that Finney had paid Taylor $2,500 to induce him, as manager of the defendant Rideout Bank, to make the representations to plaintiff. Prior to September, 1927, so it is alleged, plaintiff had no knowledge of the fraud and deceit practiced upon her. It was also alleged that in 1923, the Rideout Bank was sold to the Bank of Italy, and in 1930, the name of the bank was changed to Bank of America National Trust & Savings Association, and the present institution is the successor of the Rideout Bank.

The answer of the bank denies that a confidential relationship existed between the Rideout Bank and plaintiff, and denies that the bank, through Taylor, or at all, induced plaintiff to execute the Finney agreement. It also denies the allegations of the complaint relating to the discovery of the alleged fraud, and as a separate defense sets up the statute of limitations as a bar.

The court found all of the allegations of the complaint to be true, and also found that during intermittent periods of many months' duration for many years prior to the death of plaintiff's husband in April, 1923, he was incompetent and confined in a hospital, and that the Rutherford ranch at the time of the Finney agreement consisted of 1840 acres and had the value of $30 per acre.

From the evidence it appears that Taylor, during a portion of the time in question, was manager of the Gridley branch of the Rideout Bank and was employed to manage its banking business, and that Finney, a real estate operator, desiring to purchase the Rutherford ranch, agreed with Taylor to pay to him a secret commission if he would assist him in obtaining the deed from Mrs. Rutherford, and in accordance with this agreement Finney did pay to Taylor a secret commission of $2,500 for his services in obtaining the agreement.

It is undisputed that the Rutherfords had an account with the Gridley branch of the Rideout Bank, which was opened in 1917, and that Mrs. Rutherford had other accounts with the bank, such as guardian of her husband's estate, and that various transactions were had between the Rutherfords and the bank, and that they borrowed money from time to time to carry on their farming operations.

It is also in evidence that when Mr. Rutherford first became ill in 1910, Mrs. Rutherford went to the Gridley branch of the bank and told Mr. Biggs, who was then manager, that Mr. Rutherford was about to go to the hospital and that the management of the ranch would fall upon her. Mr. Biggs then told Mrs. Rutherford that he would help her manage her affairs, and to do nothing without first consulting him. This arrangement was carried on, and Mr. Biggs very honestly and efficiently and fairly counseled and advised Mrs. Rutherford in the operation of the ranches and the selling of the products therefrom during all the time that he was manager of the Gridley branch, and upon his leaving the bank the same arrangement was continued with Mr. Taylor, who continued to advise her in her business affairs.

Plaintiff contends that a confidential relationship was thus created between herself and the bank, and that such relationship existed when the fraud was committed and continued to exist until within three years of the commencement of this action, which was in November, 1927. Plaintiff further contends that when Taylor committed the fraud he was engaged in the discharge of his duties, in that at the time he was attempting to collect the indebtedness of plaintiff to the bank by threatening to foreclose the indebtedness on the Home place, and that therefore the bank was liable for all his acts.

The bank maintains that there was no confidential relationship between itself and plaintiff, and that Taylor in causing plaintiff to sell to Finney was acting beyond the scope of his authority, and that the bank therefore cannot be held liable for his fraud; and secondly, assuming that plaintiff had a cause of action against the bank, the claim is nevertheless barred by limitations. Appellants also contend that the failure of the court to find upon the issues raised by the plea of the statute of limitations was erroneous and that the judgment is not supported by the findings.

Let us first consider the contention that a confidential relationship existed between plaintiff and the bank.

The testimony of plaintiff shows that she was inexperienced in business matters, and that when Mr. Rutherford was taken sick, she, at the invitation of Mr. Biggs, the then bank manager, consulted him as to all business matters. There is no question but what Mr. Biggs treated Mrs. Rutherford with absolute fairness and discharged his trust with the highest integrity. When he was transferred to another bank in 1919 he introduced her to his successor, Mr. Taylor; told her he was the new manager, and told her she could discuss her affairs with him and that she could trust him. Under Taylor's administration she did consult him as to her business matters and followed his advice as she had that of Mr. Biggs.

There is no dispute between counsel that if an agent in the transaction of the business of the principal commits a fraud, the latter is liable; but we cannot find support here for the claim of plaintiff that the record discloses that Taylor was engaged in the transaction of the business of the bank when he committed the fraud. Plaintiff claims that when Taylor committed the fraud he was seeking to collect a debt due the bank, and was threatening plaintiff with foreclosure of the mortgage on the Home place in order to accomplish this purpose. It is true the complaint alleged that Taylor did so represent to plaintiff, but the complaint also avers that this representation was false and the court so found.

The fact is that when Taylor committed the fraud he was, as shown by plaintiff's own testimony, engaged in a conspiracy with Finney, to induce plaintiff to sell her property to Finney and had no relation to the performance of any duty to the bank. He was not serving the bank, but was advancing the selfish and personal interests of himself and Finney. There is no claim the bank profited to any degree in the secret commission, and there is no showing that the officers or directors of the bank knew of or ratified Taylor's fraud.

Taylor was employed as manager of the branch bank to conduct its general banking business. By banking business is generally meant the acceptance of money for deposit, the discounting of bills and notes, and the making and collection of loans, but it does not include the sale of the property of the customers of the bank as a broker for commission. If the bank had empowered its officers to engage in such a business so foreign to the generally accepted understanding of the activities of a bank, the burden rested upon plaintiff to establish that fact, which she failed to do. Perkins v. Pacific Fruit Exchange, 132 Cal.App. 278, 22 P.2d 535. It must also be recalled that the property sold to Finney was the Rutherford ranch, upon which the bank had no loan; its loan being on the Home place.

It cannot be held that the employees of a bank may act as counselors and advisors to its depositors or borrowers, and that the bank thereby becomes responsible for their acts. This would impose an unjust liability upon the bank. The interests of the bank as well as the interest of the public require that the liabilities of the bank be definitely known, and if the officers of a bank, by undertaking to act as investment counselors, could create a confidential relationship between the bank and its customers, and subject the bank to the obligations of a fiduciary, obligations and liabilities would thereby be imposed upon banks which might threaten their stability, and of which liability the public or a depositor could have no notice. We fail to see that there was any confidential relationship established between the bank and plaintiff.

The next point urged for reversal by appellant is that assuming that Taylor was acting within the scope of his authority, nevertheless the claim of plaintiff was barred by the statute of limitations. The evidence shows that the alleged fraud was committed in December, 1920, and this action was not commenced until November, 1927. Subdivision 4, section 338 of the Code of Civil Procedure provides that an action for fraud is barred in three years, but that such action is not “to be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud.”

The facts constituting the fraud in the case at bar consisted of false representations made by Taylor to induce the plaintiff to sell her property at a price less than its real value. These false representations were that if she did not execute the Finney agreement and deed, the bank could and would foreclose its mortgage on the Home place, and the holders of the deed of trust on the Rutherford ranch could and would foreclose their security, and that it was to her best interests to sell, and that the consideration she was to receive was fair.

Whether or not the sale to Finney was to her best interest, and whether the consideration received by her was fair, and whether the holder of the deed of trust would foreclose if she did not make the sale, were matters of which the plaintiff could determine for herself by the exercise of ordinary diligence.

Plaintiff claims that she was excused from exercising due diligence because of the alleged confidential relationship between herself and the bank. However, we cannot find that there was any such relationship existing between herself and the bank, and secondly, assuming that such a confidential relationship did exist between plaintiff and the bank, that relationship ceased to exist more than three years prior to the commencement of the action.

Taylor ceased to be connected with the bank in December, 1921, although plaintiff continued to have a small account in the Gridley branch until 1925, and the bank continued to hold the mortgage on the Home place until the same year. Plaintiff testified that after Taylor left the bank she did not discuss her affairs with his successor but consulted Mr. Biggs; but concerning what matters, the record does not disclose. This would appear to be very slight evidence to establish the continuance of a confidential relationship. Also, there is no evidence that Taylor or any officer of the bank continued to misrepresent the value of the ranch or attempt to prevent plaintiff from learning the facts; in truth it does not appear that any one could have prevented plaintiff from ascertaining the real value of the ranch if she had attempted to do so.

While a confidential relationship may excuse a failure to use diligence in discovering a fraud, it does not give the right to shut one's eyes and do nothing, and particularly as here, where the fraud was in persuading plaintiff by false representation to sell her property below its fair price. The facts constituting this fraud were that Taylor induced plaintiff to sell her ranch at less than its real value. The payment of the commission to Finney was a motive for the fraud, but was not the fraud itself.

Plaintiff contends that where there is shown a confidential relationship the defrauded party is excused from any duty to investigate but may rest in the assurance growing out of that relation of trust and confidence. This, however, states the rule too broadly. A confidential relationship does not of itself excuse the one defrauded from exercising any diligence, but such a relationship may be considered in determining whether the party has exercised due diligence under the circumstances, in discovering the fraud. Simpson v. Dalziel, 135 Cal. 599, 67 P. 1080, 1081; Henigan v. Yolo Fliers Club, 208 Cal. 697, 284 P. 906. In Simpson v. Dalziel, supra, the court, sustaining a demurrer to the complaint, said: “The only excuse for what otherwise would appear to be gross negligence on the part of the plaintiff is that his confidence in this attorney was such that he had no reason to suspect and did not suspect that fraud was being perpetrated upon him. But this confidence did not absolve the plaintiff from the exercise of reasonable or ordinary care.”

In the case at bar plaintiff claims she had such confidence in the bank and its officers that she did not suspect Taylor; but that was the claim in the Simpson Case, supra. The slightest inquiry on the part of plaintiff would have disclosed the true value of the lands, and an inquiry of the holders of the liens on her land would have informed her as to their intentions. Natural curiosity as well as business prudence should have compelled her to make the inquiry, and her failure to make some investigation was, as said in the Simpson Case, supra, inexcusable negligence.

Also, between the sale of the property and the death of Mr. Rutherford in 1923, he was at home intermittently for months at a time, managing their affairs. It seems natural to assume that during these intervals he and Mrs. Rutherford must have discussed the sale of the ranch and its value.

Plaintiff cites several cases where fraud was done in secret and was kept concealed. Such was the situation in Shiels v. Nathan, 12 Cal.App. 604, 616, 108 P. 34; Victor Oil Co. v. Drum, 184 Cal. 226, 193 P. 243; Prewitt v. Sunnymead Orchard Co., 189 Cal. 723, 209 P. 995. Here the fraud was not and could not have been done in secret, and could not have been kept concealed.

Plaintiff attempts to weaken or distinguish the case of Phelps v. Grady, 168 Cal. 73, 141 P. 926, but it seems to us the principles there stated are entirely applicable to this case.

We are of the opinion from an examination of the record, and a study of the able and voluminous briefs of both parties that Taylor, when he committed the fraud, was engaged in a conspiracy with Finney to induce plaintiff to sell her property to Finney, and when doing this he was not engaged in the business of the bank, and therefore the bank cannot be held for the acts of one not engaged in the transaction of its business, and also, the claim of plaintiff is barred by the statute of limitations, and the trial court erred in failing to so find upon that issue.

For the foregoing reasons, the judgment is reversed.

Mr. Presiding Justice PULLEN delivered the opinion of the court.

I concur: THOMPSON, J.

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