ROESCH ET AL v. DE MOTA ET AL

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

ROESCH ET AL. v. DE MOTA ET AL.

VICTOR LAND & MINERAL CO. v. DE MOTA ET AL.

Civ. 12427.

Decided: November 16, 1943

Cornish & Cornish, of Berkeley, and Maurice H. Roach, of Oakland, for appellants Roesch and others. Philip C. Boardman, of San Francisco, for appellant Victor Land & Mineral Co. Virgil M. Airola, of San Andreas, and Jesse H. Steinhart and John J. Goldberg, both of San Francisco, for appellants De Mota and others.

Plaintiffs brought this suit for an accounting and to enjoin a scheduled sale by the trustee under two deeds of trust covering certain gold mining property. Plaintiffs held beneficial interests in the mining property which were subsequent in right to the two deeds of trust. The two deeds of trust secured two promissory notes which admittedly exacted usurious interest. Joined as defendants with the trustee were Victor Land & Mineral Company, the original borrower and owner of the mining property, the Calaveras Central Mining Corporation, the transferee of Victor Land & Mineral Company, and the Calaveras Central Gold Mining Co., Ltd., the present lessee. For the purposes of this opinion there is no distinction between the latter two corporations and they will be referred to as Calaveras Central. The Victor Land & Mineral Company, hereinafter called the Victor Land Co., by way of cross–complaint, and Calaveras Central, by way of answer, admitted the allegations of the complaint and asked for the same relief as the plaintiffs against their co–defendants. Clara P. De Mota and Antonio Mota, the alleged owners of the notes, were not served nor did they appear. The trustee contested the amount which was alleged to have been paid under the notes, and for a separate defense alleged that none of the plaintiffs or his codefendants could assert the defense of usury. The trial court found that no payments had been made on the notes and as a conclusion of law held that the defense of usury was available to the “plaintiffs.” The trial court enjoined the defendant trustee from selling the land under the deeds of trust for amounts in excess of the face value of the notes plus charges and fees which were stipulated to upon the trial.

All the parties have appealed from the judgment in toto. The plaintiffs and the corporation defendants urge that the court erred in its finding that no payments had been made on the notes. The defendant and cross–complainant, Victor Land Co., urges that it was error not to conclude that the defense of usury was available to it as the original borrower who is still interested in property which secured the loan. The defendant trustee urges that the court erred in determining that the defense of usury was available to any of the plaintiffs. He also contends that the defense of usury was not available to either Victor Land Co., as cross–complainant, or to Calaveras Central. The questions presented by the contentions concerning the trial court's finding that no payments had been made and those concerning the defense of usury are governed by different sets of facts and will be treated separately. The parties stipulated that the three appeals would be heard on one set of briefs and one transcript.

(1) Concerning the finding of the trial court that no payments had been made upon the usurious notes:

One M. H. Manuel, the president of the Manuel Estate Company, which was the original payee of the notes secured by the deeds of trust, testified on the trial from a statement prepared by him at about the date he sold the notes that certain payments had been made between 1923 and 1928 on the note for $15,000 on account of interest and principal. This statement was prepared on or about September 15, 1928. It credited payments of interest and principal at various dates and debited the unpaid interest at 1% per month plus charges for insurance, taxes, attorney's fees, etc. At the time of the trial, April, 1941, Mr. Manuel had no independent recollection of the amounts credited and debited to the account of Victor Land Co. in the statement. He believed it was a correct statement of the amounts in his books, but he did not know whether his books were any longer available. This statement was admitted in evidence and no evidence was offered to contradict it other than the circumstances of its execution and the unsatisfactory recollection of Manuel concerning its veracity. With this evidence before it, the trial court found “That there is considerable doubt as to what if any payments were made on account of the aforesaid promissory notes or either of them and the Court therefore finds that nothing has been paid on account of the aforesaid notes or either of them.”

The plaintiffs and defendant corporations contend that the court cannot arbitrarily disregard this uncontradicted evidence. They assert that it is uncontradicted by any testimony and was introduced by the trustee himself. Therefore they contend that the court erred in finding that no payments had been made on the $15,000 note. They urge that full credit must be given to Mr. Manuel's statement, with the result that, assuming the defense of usury is available to them, all payments must be credited against the principal of the note and that the judgment should be corrected accordingly.

“It may be conceded to be the law of this state that a finding which is contrary to the uncontradicted evidence of a witness cannot stand, unless there are other facts or circumstances in the case casting doubt upon its accuracy. But the qualification is as important as the rule, and, given any facts or circumstances reasonably calculated to cast doubt on the testimony, the jury's action in disbelieving it cannot be interfered with on appeal.” Jewell v. Bell, 120 Cal.App. 682, 684, 8 P.2d 223, 224. We must examine Mr. Manuel's testimony and his statement in the light of these principles before we can say as a matter of law that the court could not disregard them in its findings. Mr. Manuel had no present recollection of the figures in the statement, hence his testimony on the stand was of no probative force on the issue of whether in fact the payments were made. Although no objection to its introduction was interposed, the statement was but secondary evidence which is not of the same quality as the primary evidence of those who received and paid the alleged amounts. Lacrabere v. Wise, 141 Cal. 554, 556, 75 P. 185. The officers of the appellant corporations who would have made the supposed payments did not testify nor was an explanation of their absence offered, nor of their failure to produce the books of account showing what payments were made. The court heard Mr. Manuel's testimony and was in a better position to determine the weight to be accorded his statement, written more than twelve years before. The appellants on the issue of whether payments had been made or not had the burden of proof. The lower court may not have believed that plaintiffs and defendant corporations had carried that burden from the evidence produced. Although such evidence might support a finding in accord with its contents, we can not say as a matter of law that the court was bound to find in accord with its contents. Nor can we say as a matter of law that standing alone the statement prepared by Mr. Manuel was sufficient to carry the burden of proof where the other circumstances of the case are considered. Those cases cited by plaintiffs and defendant corporations are not in point as they involve the sufficiency of secondary evidence to support a finding, and not whether uncontradicted secondary evidence in view of all the circumstances may be disregarded by the court in making its findings.

Finally, the plaintiffs and defendant corporations contend that the trial court and the trustee are bound by the uncontradicted statement in Manuel's handwriting that certain payments were made upon the notes because the trustee introduced the statement in evidence without qualification. They make this assertion on the theory that by the introduction of the statement the trustee vouched for its accuracy and veracity in all respects and in the absence of contradictory testimony, the trial court was bound to find in accord with it. The appellants overlook that the record discloses that Mr. Manuel was first made the appellants' witness and upon examination each alleged payment was elicited in the following manner:

“Q. Now, Mr. Manuel, consulting that statement again, could you tell me whether or not any payment was made on or about the first of March, 1926? A. Well, according to the statement here, it is $300. * * *

“Q. Now, referring to that statement, Mr. Manuel, can you tell whether or not any payment was made on or about the first of April, 1926, and if so, how much? A. $300 etc.” Prior to those questions and answers it had been made clear that Mr. Manuel had no independent recollection of the transactions involved and was testifying solely from what appeared on the statement. Upon cross–examination and after Mr. Manuel had been made the trustee's own witness the trustee introduced the entire statement in evidence. It would be an extremely unjust state of affairs if the plaintiffs were allowed to introduce parts of a statement by the above method of oral reading into the record and then prohibit the opponent at his peril from putting the whole document into the record so that the court could ascertain its true weight in the light of the verification attached, giving due weight to the charges which were also part of the statement which the plaintiffs carefully did not put into the record by their method of examination. Further it should be noted that no California authority has been cited for the proposition that a party “is bound” by the documentary evidence which he produces whether the court believes it or not. Cf. Bank of British Columbia v. Frese, 116 Cal. 9, 47 P. 783; Long Beach Brick Co. v. De Dodson, 104 Cal.App. 99, 285 P. 382; 32 C.J.S., Evidence, § 1040, pp. 1113, 1114. When a negative finding of this character is made against the party upon whom rests the burden of proving the issue, the appellate court will treat it in the same light as if it were a direct finding that the party had “failed to prove” the issue. Thus, though slight evidence, supported by the inferences applicable, will support an affirmative finding on the issue, we do not disturb the judicial conscience of the trier of the facts, whether it be court or jury, unless we can say that the evidence received compels the conclusion that the issuable fact has been satisfactorily proved. Having reached this conclusion, it is unnecessary to discuss the contention of these appellants regarding the propriety of certain charges for attorneys' fees appearing in the statement.

(2) Concerning the conclusion of the trial court that the defense of usury was available to plaintiffs:

The two questions presented by this portion of the appeals before us concern the propriety of the trial court's conclusion that the defense of usury was available to plaintiffs and was not available to defendant and cross–complainant Victor Land Co.

In order to determine the merits of the trustee's and cross–complainant's appeals concerning these questions it is necessary to elaborate on the manner in which Calaveras Central became the owner of the mining property and to present the facts upon which the trial court based its conclusions. Victor Land Co. executed the two notes, which exacted usurious interest, for the principal sums of $15,000 and $4,500 in 1923 and 1925 respectively. In 1926 creditors were pressing the Victor Land Co. and proceedings were under way to foreclose the deeds of trust which secured the notes, the company being in default. In these circumstances the Victor Land Co. entered into an agreement with one Harry Sears to whose rights and obligations thereunder Calaveras Central succeeded.

By this agreement the Victor Land Co. granted and gave to Sears “the exclusive option to purchase and acquire in the times (four months) and for the considerations and upon the terms and conditions” stated therein, all its mining property situated near the town of Angels Camp, Calaveras County. In the event Sears, “his heirs, successors or assigns” elected “to purchase” the property, he was to organize a new corporation with an authorized capital stock of 1,000,000 shares of the par value of one dollar per share, to which corporation it was contemplated this agreement would be assigned. In return for a conveyance of the above mining property to this corporation, Victor Land Co. was to receive 150,276 shares of the new corporation's paid up nonassessable stock, this stock to be held in escrow for one year pending the sale of treasury stock to finance the new corporation. Further considerations named in the agreement flowing to the Victor Land Co. were that Sears agreed to “pay and discharge or secure the complete release * * * of all indebtedness now owing by the (Victor Land Co.) * * * to the Manuel Estate Company * * * and being the indebtedness now due and owing upon two promissory notes * * *; that there is now accrued and unpaid upon said promissory notes not only the full amount of the said principal sums of said indebtedness but also interest thereon in accordance with the terms and conditions of said respective * * * notes together with costs, charges, expenses, insurance premiums, taxes, charges for attorneys' fees * * * and other miscellaneous expenses incurred by the said Manuel Estate Company in proceedings taken to enforce the terms of the said trust deeds * * * which proceedings for enforcement and sale are now pending and in progress.” Sears further agreed to discharge or pay specific indebtedness to the Utica Mining Co. and “to pay or to secure the release and discharge of (Victor Land Co.) of and from all of the indebtedness, liabilities or obligations of whatsoever kind due or owing at the date hereof.”

Paragraph four of the agreement recited that the Manuel Estate Company's proceedings to enforce the two deeds of trust were pending and that other creditors might also proceed against the property. It then provided that all such proceedings were at Sears's own risk and “that there is no duty imposed upon or to be undertaken by (Victor Land Co.) to avoid any of such actions.” However, Sears was to have “the right to negotiate with any of the said creditors to settle, discharge, compromise, or in any other manner adjust the creditors' claims or any of them, so as to avoid any proceedings that may otherwise be taken by the said creditors against the (Victor Land Co.). * * *”

Sears's rights under this agreement were assigned to Calaveras Central upon its assumption of the liabilities thereunder imposed by Sears. The mining property was conveyed by Victor Land Co. to Calaveras Central. To Victor Land Co. were issued 150,276 shares of stock, and the rest of the authorized stock was issued to Sears in consideration of his assignment of his rights under the contract. In the contract between Sears and Calaveras Central whereby the assignment was made the indebtedness to the Manuel Estate Co. was specifically mentioned “together with accrued interest thereon” and Calaveras Central assumed “all the indebtedness mentioned.”

Victor Land Co. did not allege that it still owned the stock in Calaveras Central which was distributed to it under the 1926 agreement. There is no evidence or finding that Victor Land Co. still owns the stock. Therefore we need not decide whether Victor Land Co. could have asserted the defense of usury by reason of its contention that it was an original borrower who still retained an interest in the property as a stockholder in Calaveras Central. The defendant trustee was not attempting to get a deficiency judgment. No interest has been shown to exist in the original borrower which it had to protect. Hence the court was correct in determining that only the plaintiffs, if any, had the right to assert the defense of usury.

The plaintiffs rest their right to assert the defense of usury upon the right of Calaveras Central to raise the defense which originally inured to Victor Land Co. It is their position that the right to assert the defense passed to Calaveras Central either by operation of law or by contract.

The appellant–trustee contends that because the agreements between Victor Land Co., Sears, and Calaveras Central resulted in a sale of the mining property to Calaveras Central, the defense of usury was lost to the purchaser. The plaintiffs and defendant corporations take the position that the contract between Sears and Victor Land Co. and the subsequent assignment and conveyance to Calaveras Central were but the means of consolidation and merger. They assert that Calaveras Central is in exactly the same position as Victor Land Co. was originally with respect to the assertion of the defense of usury. With this position we can not agree. The contract between Sears and Victor Land Co. denominates the transaction a purchase. The plaintiffs in their complaints alleged that Calaveras Central purchased the mining property. The trial court found that Calaveras Central was organized “to purchase, own and operate” the mining property. The terminology of the agreements were those of bargain and sale. And in the light of the provision that Victor Land Co. was to receive only a small interest in Calaveras Central, approximately 15%, we can not say that Calaveras Central is but the alter ego of Victor Land Co., and therefore in the same position, in order to bring this case within the rule laid down in Western States Acceptance Corp. v. Frank D. Tuttle, Inc., 210 Cal. 51, 290 P. 574.

The cases relied upon by plaintiffs and defendant corporations to bring this case within that rule are distinguishable on their facts. In Greengard v. Katz, 270 Ill.App. 227, 235, the court states that the basis of its decision was that “there was, in fact, no sale by the mortgagors to the defendant, the Prairie Garage, Inc. The parties who owned the 99–year lease and the garage, and who were operating it, merely changed the form of the interest which they had from a personal interest in the property to a corresponding proportionate interest in the same property in the corporation.” (Emphasis added.) Calaveras Central was organized to operate the mining property conveyed to it by Victor Land Co. This property constitutes the principal property of Calaveras Central. The Victor Land Co. has not the same proportionate interest in the property when given only 15% of the capital stock in the new corporation. In the other case relied on by plaintiffs and defendant corporations, Chas. S. Riley & Co. v. W. T. Sears & Co., 154 S.C. 509, 70 S.E. 997, 1001, the court found that the case presented a situation where “with the consent of all the parties, the corporation was substituted as successor to the original parties.” Here as late as 1928 the Manuel Estate Company as payee of the two notes treated Victor Land Co. as the principal obligor and there is no possible basis on which a novation can be said to have taken place prior to the effective date of the obligations under the notes as in Chas. S. Riley & Co. v. W. T. Sears & Co., supra.

Further it should be noted that to allow plaintiffs to assert the defense of usury benefits creditors only so far as the record shows, and not the original borrower. The allowance of the defense would be but a mere windfall to those people. This result clearly illustrates the reason why a purchaser who takes property subject to a mortgage without more may not assert the defense of usury. Read v. Mortgage Guarantee Co., 11 Cal.App.2d 137, 142, 53 P.2d 377, and cases there cited. The theory behind the rule is well stated in Trusdell v. Dowden, 47 N.J.Eq. 396, 399, 20 A. 972, 973, where it is said: “the purchaser, by taking title subject to the mortgage, and retaining, out of the price he agreed to pay, sufficient money to pay the mortgage, places himself in a position where he cannot allege usury without attempting to keep back part of the money which he agreed to pay for the mortgaged lands. Having retained enough of the purchase money to pay the mortgage, under a promise that he would apply the money to the payment of the mortgage, it is plain that, if he were allowed to make the defense of usury, and should make it successfully, he would defraud both his grantor and the mortgagee. He would be permitted to speculate on a violation of law that had done him no harm, and to keep back money to which he has no right whatever, and to do so in direct violation of his promise.”

In applying this reasoning to the contract between Sears and Victor Land Co. it appears that under the terms of the contract there are specific promises to pay the mortgage debt here in question together with accrued interest thereon according to their terms. This promise is repeated in the agreement between Sears and Calaveras Central. This assumption is stated to be part of the consideration for the transfer of the mining property. It may be inferred therefore that the price of 150,276 shares of the par value of $1 per share was paid only for the equity of redemption of Victor Land Co. in the property. The fact that these shares were to be held in escrow for 1 year as part of the contract does not weigh against this interpretation, nor is it a factor in determining whether the contract contemplated a consolidation or merger and not a purchase in the light of the language and actions of the parties throughout.

Finally, the plaintiffs and defendant corporations urge that, even assuming that Calaveras Central is to be considered but a purchaser of the property, the contract by its terms gives Sears the right to assert the defense of usury which right passed to Calaveras Central by the assignment. They rely on paragraph four of the contract which gives Sears “the right to negotiate with any of the said creditors to settle, discharge, compromise or in any other manner adjust the creditor's claims. * * *” It is true that in order to afford the oppressed borrower the full protection of the usury laws, he must be allowed to sell his mortgaged property with the defense of usury attached. However, we do not believe that Victor Land Co. intended to grant the right to assert the defense of usury to Sears, and the question of intention is the all important one here. We reach this conclusion partly because of the concession of all the parties in the briefs that, during all these transactions had prior to the year 1927, they did not contemplate that the obligations were usurious and that that subject did not enter into their negotiations. In fact it was not until our supreme court in that year rendered the opinion in Haines v. Commercial Mortg. Co., 200 Cal. 609, 254 P. 956, 255 P. 805, 53 A.L.R. 725, that promissory notes calling for interest at one per cent a month compounded were recognized as illegal within the Usury Law.

Standing alone, the broad language of the sentence of the contract could be interpreted in the way contended for. But if such interpretation is made it is inconsistent with the express assumption of the obligation with interest in the prior paragraphs. To resolve the inconsistency it is necessary to resort to fundamental concepts underlying the interpretation of contracts. “An agreement should be interpreted as a whole and the meaning gathered from the entire context, and not from particular words, phrases, or clauses. * * * All provisions should, if possible, be so interpreted as to harmonize with each other. * * * No word should be rejected as mere surplusage if the court can discover any reasonable purpose thereof which can be gathered from the whole instrument. An interpretation which gives reasonable meaning to all its provisions will be preferred to one which leaves a portion of the writing useless or inexplicable.” 12 Am.Jur. 772. Applying these principles to the contract before us, it appears that the assumption of the obligations and the recitals of in what they consisted, including interest, expenses, etc., are mere surplusage under the respondents' view of the contract. With this result we can not agree. Paragraph four taken as a whole was intended to give Sears the right to forestall the creditors' proceedings which were pending and might be pending. The language was apt to grant such rights. It contemplated negotiation and settlement rather than litigation. Apter words would have been used had the parties intended to assign personal defenses which did not follow the land per se. Reading the contract as a whole, we also find that personal duties of Victor Land Co. were expressly denied. The purpose of the grant is shown in the recital of the pending proceedings and expressly, “so as to avoid any proceedings that may otherwise be taken.” Consequently, in order to give effect to the express assumption of the obligations, it is necessary to construe the clause granting Sears the right to compromise and adjust the creditors' claims not to include the right to the assertion of the defense of usury. This view is further fortified by the whole contract's terms concerning the bargained for consideration of Victor Land Co. Victor Land Co. would not bargain for the specific assumption of a debt and on the other hand grant the right to defeat that debt. In reaching this result, no provision of the contract is mere surplusage, and all the provisions, when read in their entirety, harmonize. From the record before us it appears that all the plaintiffs' rights in and to the property itself accrued subsequent to this agreement and conveyance of title to the mining property thereunder to Calaveras Central in 1927. Plaintiffs' right to assert the defense of usury depends on Calaveras Central's right to assert the defense in the first instance. Having concluded that Calaveras Central never had the right, it follows that the trial court erroneously concluded that plaintiffs, whose rights would be derivative, could assert the defense of usury.

By reason of these conclusions it becomes unnecessary to discuss the contentions of the parties with respect to a release of all claims and demands subsequently executed by Calaveras Central to defendant trustee and the owners of the notes. That part of the judgment enjoining the sale of the property for a sum in excess of the face value of the notes, plus the stipulated attorneys' and trustee's fees, is reversed and the cause is remanded for further proceeding in accordance with the views expressed herein. In all other respects the judgment is affirmed. The appellant–trustee to have his costs.

NOURSE, Presiding Justice.

SPENCE, J., and DOOLING, Justice pro tem., concur.