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District Court of Appeal, Second District, Division 1, California.

HAGGE et al. v. DREW et al.*

Civ. 14707.

Decided: March 23, 1945

Buel R. Wood and Robert T. Linney, both of Los Angeles, for appellants. Samuel DeGroot and Aaron Sapiro, both of Los Angeles, for respondents.

The property involved in this litigation is situated in the San Fernando Valley, and consists of a considerable acreage suitable for subdivision for residential purposes. Title to the property was in a trustee in bankruptcy; the trustee sold it to the defendant, John Drew. The purchase price was $87,135, $20,000 in cash, the balance represented by defendants' promissory note, secured by a trust deed.

The trustee in bankruptcy and defendant agreed that the sale was for the purpose of subdivision and building of homes. In addition to the usual terms, the trust deed contained additional covenants requiring the defendant to subdivide and to build residences within a specified time. There was also a release clause applicable to lots and improvements to be sold to home purchasers. Such purchasers were to have a clear title, subject to a purchase-money mortgage or trust deed, for the greater part of the cost of lot and improvements. And the financing was to be done under the National Housing Act, which provides a method for such mortgages to be insured with the Federal Housing Administrator.

February 27, 1942, plaintiff H. H. Hagge and defendant John Drew entered into an agreement; plaintiff to buy the property and defendant to sell it. This agreement was in writing, executed by plaintiff and defendant and their wives. In discussing the agreement we will refer to it as the agreement of purchase and sale. And in this agreement the plaintiff was bound by the terms and conditions of the trust deed, except that times of payments upon deferred principal were somewhat later than like payments required to be made by the defendant under the trust deed.

There was, however, a considerable difference in the purchase price which defendant agreed to pay the trustee in bankruptcy and which plaintiff agreed to pay defendant. Defendant was to pay $87,135 to the trustee in bankruptcy; plaintiff agreed to pay defendant $174,270; $10,000 down and the balance as improved lots were sold. In other words, plaintiff's price was just twice defendant's, 29 days after defendant bought the property.

Following the execution of the agreement of purchase and sale plaintiff went upon the property, subdivided it, improved it with necessary streets, curbs and facilities to connect with public utilities, and built a number of homes—all financed in accordance with the National Housing Act, 12 U.S.C.A. § 1701 et seq.

During the progress of the work the plaintiff encountered difficulties. It was necessary for him to furnish public authorities a builder's bond conditioned upon the completion of streets, curbs, sidewalks, and facilities to connect with public utilities. The purchase and sale agreement provided that plaintiff and defendant were jointly to furnish such bonds, but under present day minuscule regulations enmeshing anyone attempting to do anything, plaintiff was advised that only the owner of the property could execute such bonds. Thus delay was occasioned.

And then, to crown it all, the plaintiff was advised by the lending authority of the discrepancy between the purchase price to him and that paid by the defendant to the trustee in bankruptcy.

Notwithstanding these things, the plaintiff went ahead, secured release of 206 lots, and built residences upon them. Thereafter he failed to comply with the terms of the agreement applicable to the balance of the property, and default was declared by defendant. Whereupon the plaintiff brought this action against the defendant alleging fraud in the inception of the agreement of purchase and sale.

The trial court found there was no fraud. Judgment followed for defendant. Plaintiff moved for a new trial, which motion was denied. Plaintiff also moved to vacate the judgment and to enter a different judgment, which motion was also denied. Plaintiff appeals from the judgment from the order denying his motion to enter a different judgment, and from the order denying his motion for a new trial.

A careful review of the record discloses that prior to the execution of the agreement of purchase and sale, all negotiations were conducted between agents of the defendant and plaintiff. There is no testimony of any fraudulent representation as to any fact entering into the transaction. The plaintiff was not advised of the purchase price paid the trustee in bankruptcy. No representation as to it was made to him or to his agent; neither he nor his agent made any inquiry about it.

Plaintiff has built his case primarily around the theory that there was fraud because in the agreement of purchase and sale the defendant represented in writing that he was then owner in fee simple of the premises, whereas he had only paid $10,000 down and there was an outstanding trust deed for the balance of $164,000. This theory falls, however, because an outstanding mortgage upon property does not necessarily mean that one does not have a fee simple title. In re Waltz, 197 Cal. 263, 240 P. 19.

But there are two reasons under either of which a new trial must be had in this action.

These concern the profit of $87,135 made by the defendant. That amount must be passed on to individual purchasers of homes in the tract. In the event such purchasers default in payment of purchase-money mortgages, and the properties cannot be sold for sufficient to pay the mortgages, the loss then falls upon the Federal Housing Administrator under the National Housing Act. If the profit is fair under the circumstances, then the defendant should prevail; if, on the contrary, the profit is inordinate, or unfair, then it may not be passed on, first to home purchasers, secondly to finance companies, and thirdly to a governmental agency. There is no finding as to this essential fact.

The first reason referred to is this: There is a well settled exception to the general rule in the law of frauds that a party entering into a bargain is not bound to tell everything he knows to the other party even if he is aware that the other is ignorant of the facts. The general rule is stated in Bacon v. Soule, 19 Cal.App. 428, 126 P. 384; Heydenfeldt v. Osmont, 178 Cal. 768, 175 P. 1.

The exception is that ‘if a fact known by one party and not the other is so vital that if the mistake were mutual, the contract would be voidable, and the party knowing the fact also knows that the other does not know it, non-disclosure is not privileged and is fraudulent.’ Rest. Contracts, Sec. 472, Clause b.

The exception has been applied in California in Clauser v. Taylor, 44 Cal.App.2d 453, 112 P.2d 661, and Rothstein v. Janss Investment Corp., 45 Cal.App.2d 64, 113 P.2d 465, where it was held to be the duty of a seller to disclose a filled-in condition of land.

The second reason requiring a new trial is that if the profit involved is inordinate or unfair, it is against public policy to enforce the contract. The entire transaction is part and parcel of the administration of the Federal Housing Act in a time of war. And also the improvements were made with federal priorities for the building of homes for war workers. The building project is manifestly dependent upon priorities, because its only purpose was to build homes for was workers—priorities which no private enterprise may secure for any private purpose. It thus becomes evident that if the profit of defendant was inordinate or unfair, any contract respecting it would be unenforceable for reasons of public policy.

This principle is being applied by the courts more and more in the development of the modern law of contracts, when contracts contravene or tend to defeat the purpose of a public statute. 17 C.J.S., Contracts, § 271, p. 655. In California its application has been aptly set forth by our Supreme Court in McAllister v. Drapeau, 14 Cal.2d 102, where, at page 108, 92 P.2d 911, at page 915, 125 A.L.R. 800, referring to administration of the Home Owners' Loan Corporation statute, it is said: ‘It is obvious, from a reading of the statute and the rules and regulations above quoted, that the main and controlling purpose of the act was to assist small home owners who, because of the then existing financial conditions, faced loss of their homes through inability to meet the charges due on mortgages on their home property. It is to be noted that the act places no compulsion, direct or indirect, on the creditor. The creditor had complete liberty of action. If he refused to accept the offer of the H.O.L.C. as to the amount of bonds and cash it would advance to refund the debt, there was nothing the H.O.L.C. or the debtor could do about it. It was contemplated, however, that many creditors would, and experience under the act proved that many did, accept a reduction in the amount of the existing loan in order to secure liquid assets such as bonds of the H.O.L.C. rather than foreclose on the property and have to hold it until conditions in the real estate market improved. The act provides that such reduction should be passed on to the home owner, the debtor. The rules and regulations contemplated that under some circumstances it would be to the interest of the home owner to give a second mortgage to the creditor to secure a part of the refunded debt, but such rules and regulations provided that the H.O.L.C. would not refund the first mortgage if the creditor demanded a second unless the financial ability of the debtor and the financial arrangements were such that the debtor would have a reasonable opportunity to pay off both mortgages. Obviously, before these facts could be ascertained, a full disclosure of the amount and the terms of the proposed second lien would have to be made to the H.O.L.C. The securing of a second lien by the creditor without such disclosure is clearly in violation of the letter and spirit of the statute and regulations. This is demonstrated not only by the terms of the statute and the regulations, but also by the language of the agreement above quoted which all creditors were required to sign wherein the creditor represented and agreed that he was accepting the bonds ‘in full settlement of the claim of the undersigned’.' See also: Woods v. Kern County Mutual Building & Loan Ass'n, 34 Cal.App.2d 468, 93 P.2d 837; Richard R. Adams Co. v. Pacific States Savings & Loan Co., 34 Cal.App.2d 723, 94 P.2d 370.

Moreover, it becomes a question of fact whether the profit of the defendant resulted in over-valuing the property here in question, when all parties were aware it was to be passed upon for security for loans under the Federal Housing Administration. Sec. 1731, 12 U.S.C.A., Banks and Banking, makes it a felony to wilfully over-value any security for the purpose of influencing in any way the action of the administration of the Federal Authority.

‘As a general rule it may be said that when it appears there has been a violation of a statute primarily designed for the protection of the public with a penalty prescribed for the violation thereof, such penalty is the equivalent of an express prohibition—that a contract made contrary to such statutory requirements is void and no action may be brought to enforce it. Berka v. Woodward, 1899, 125 Cal. 119, 57 P. 777, 73 Am.St.Rep. 31, 45 L.R.A. 420; Citizens State Bank v. Gentry, 1937, 20 Cal.App.2d 415, 67 P.2d 364; Wise v. Radis, 1925, 74 Cal.App. 765, 242 P. 90.’ Gatti v. Highland Park Builders, Inc., Cal.App., 155 P.2d 656, 658.

The judgment is reversed; the attempted appeals from the order denying motion to enter a different judgment and from the order denying motion for a new trial are, and each of them is, dismissed.

DRAPEAU, Justice pro tem.

YORK, P. J., and WHITE, J., concur.

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