SEVERANCE v. KNIGHT-COUNIHAN CO.
Appellant brought an action against respondent printing company to recover possession of certain personal property to which he claimed to be entitled under a written agreement by the terms of which he was given an option to purchase said property under certain conditions, one of which was the termination of his employment. The trial court found that the agreement upon which appellant's claim of title was based ‘was collusive and was drawn and signed by plaintiff and defendant for the purpose and with the intent to defraud creditors of defendant; that said agreement provides for a wholly inadequate and unfair consideration to be paid by plaintiff for said property; that said agreement was and is contrary to good morals and public policy, illegal, void and unenforceable.’ Judgment was entered accordingly and this appeal is from said judgment.
Appellant makes a vigorous attack upon the judgment as being unsupported by the evidence, and before discussing the specific contentions of appellant hereinafter set forth, we shall summarize the factual situation as shown by the evidence.
The agreement around which the controversy centers reads as follows:
‘Now This Agreement made and entered into this 16th day of February, 1938, by and between Alfred D. Severance, hereinafter called first party, and Knight-Counihan Company, a corporation, hereinafter called second party.
‘Whereas, first party is now employed by second party, and desires to continue in the employ of second party.
‘Whereas, second party is engaged in a general printing business and desires the services of first party.
‘Now, therefore, in consideration of the aforesaid, and the mutual covenants and conditions to be performed by the parties hereto, they agree as follows:
‘That as part of the consideration for the services rendered and to be rendered by first party to second party, and in addition to the salary received, and to be paid first party by second party, it is hereby understood and agreed that first party shall have the option and right to purchase, as hereinafter provided, all of the tariff pages set up and/or standing, whether completed or not, and used, or had been used, or to be used in connection with the business of second party.
‘That said option and right to purchase shall, and may be exercised within thirty days after the termination of first party's employment with second party for any reason whatever, or said option and right to purchase shall, or may be exercised within thirty days after written notice by second party to first party that there has been a substantial change in the management of second party, or that the business of second party has been consolidated with, or sold or assigned to another person, firm, copartnership, or corporation, or second party has, or is about to liquidate its business, and first party's option and right to purchase may be exercised by him upon the happening of any of the events mentioned aforesaid, even though second party fails to give such written notice.
‘First party shall at the time of the exercise of said option and right to purchase, give second party written notice thereof and shall have sixty days thereafter within which to pay second party as and for the full purchase price of said tariff pages, which shall be the then prevailing market price of all the metal contained in said tariff pages.
‘That second party shall not have the right, and hereby agrees not to sell or assign in any manner whatever said tariff pages, or the use thereof to any person, firm, copartnership, or corporation without the written consent of first party during the term hereof.
‘This agreement shall be binding upon the successors and assigns of second party and terminate at the death of the first party.
‘In Witness Whereof, the parties hereto have set their hands the day and year first above written.
‘A. D. Severance First Party
‘By Edward Counihan, President
‘Frank Stender, Secretary
‘Wm. C. Maurer.’
On January 21, 1943, appellant's employment was terminated by his resignation, and on January 29, 1943, he gave respondent company written notice of his election to exercise the option. The company refused to deliver the property and this action ensued.
The property involved consists of tariff plates, which are forms made up of type which has been cast and set, and they are kept standing in racks, each on an individual galley so as to be immediately available for printing tariff schedules as orders come in. Their value at the time plaintiff made his demand for them, as tariff pages—as standing and set up forms—was found to be $31,450; and the value of the metal contained in them, which by the terms of the agreement fixed the price plaintiff was to pay for them, was found to be $8,000.
At the trial only three witnesses testified: appellant on his own behalf; Edward Counihan, president and principal stockholder of the respondent company, who had signed the agreement for the company, and William C. Maurer, secretary of the company. Their versions of the circumstances surrounding the drawing and execution of the agreement, the discussions and conversations that led up to it and that were had on the occasion of its execution, and the purpose and intent that lay behind it, are in considerable conflict, as will be pointed out hereinafter; but there is no dispute as to the following facts.
Appellant had been in the printing business for over 20 years, first as a compositor and typesetter, and later in business for himself. He left his business on April 29, 1936, and went to work for respondent company about May 15, 1936, as a salesman. He was offered the employment by Counihan, the president and general manager of the company, and was to be paid $400 a month if he could bring in 1000 pages of tariff work a year. He did not have any tariff business or any orders therefor at the time he went to work for the company; but the first year he brought in some 1500 pages, and later was successful in developing tariff business, which increased until it reached a volume of about 5000 pages and close ot $50,000 a year when appellant terminated his employment in 1943. About two years after entering respondent's employ, appellant became production manager and later vice president of the company, but he received no increase in his salary.
As to the circumstances under which the agreement was entered into, appellant testified that he had a conversation with Counihan two or three weeks before February 16, 1938, the date of the agreement, and the following took place: ‘* * * I went in to see Mr. Counihan, and I told him that I was concerned about my situation in the company; and he asked me why, and I told him that I knew that the sales were very badly down; I knew that the financial condition of the company was not sound, and also knew that there was considerable friction going on between the three principals, Mr. Counihan, Mr. Stender, and Mr. Knight, who at that time were the three stockholders, and I told him that I felt that I wanted some protection; that I did not feel that I wanted to continue in the employ of the company, and accumulate these pages of tariff and then if I was dismissed, or if I left the employ of the company, or if the company went into insolvency, or changed the management, or for any reason, that I would not longer be able to do that type of business, because the business is predicated upon standing pages, and whoever has the standing pages controls the sales volume. And I also told him I had the account for some fifteen to twenty years, and that I did not want to put my customer in the position of finding himself suddenly without all that standing type, which would put it to the expense of having to start it all anew, as well as the expense of having to read all of those pages over again, and that the most important part, the delivery, depends upon the standing pages, and if the printer had to set all of those pages anew it is almost impossible to make the delivery that is required of the correction pages.’
The agreement was drawn up by appellant's attorney and signed by the parties, and appellant testified that he retained his copy three or four weeks, and that then Counihan said he was afraid if the Zellerbach interests (the principal creditors) found out about it he would be subject to severe criticism, and suggested that the copies of the agreement be left with Maurer, then secretary of the company, in a safe in the latter's office.
In contradition of appellant's testimony, Counihan testified that he initiated the agreement; that he told appellant that ‘the creditors were hounding us, and I felt possibly that the creditors might take over the company, and figured that if they did, I would like to keep the company continuing, and possibly that we could save the tariff business by some method whereby I could let him have the tariff pages for the price of the metal, and continue the company in existence after the creditors foreclosed on us * * * we were attempting to save the tariff plates to continue the business; so the contract was for the price of the metal, rather than let the junk man have it; and continue the business and pay off the creditors with the same value in the metal as the junk man would have paid. The metal was not for him at all, it was for the little company to continue.’ He also testified that about the end of March or the first of April he called Maurer into his office and in the presence of appellant told Maurer that appellant and he had had some conversation, and had arrived at a method whereby in case the company was forced into liquidation by the creditors they would be able to start up again through the tariff plates; that the plan was to let appellant have the plates as metal, and they could start up again with the tariff business as a nucleus of the new business; and that he told Maurer that ‘these agreements were not in effect, and not to be effective unless the place was forced into liquidation and to take them and put them in the safe, a little private safe, that I used for my private papers, and in case the company was forced into liquidation, to give one to Mr. Severance and give one to me.’ Couniham further testified that about six months later, in August of 1938, he made new arrangements with the creditors, and the difficulties were overcome, so he took the copies of the agreement out of the safe; and when appellant asked for his copy of the agreement in January, 1943, he told appellant ‘there wasn't any agreement any more. The thing had passed for which the agreement was drawn up. The trouble was over. We were still running and were not liquidated, and that was all there was to it.’
Maurer testified that he became secretary of the company on March 1, 1938; that late in March or early in April of 1938 he was called into Counihan's office—Severance also being present—and Counihan told him that ‘he and Mr. Severance had been having a discussion concerning type metal and the possibilities of continuing the business and using the type metal as a nucleus; and that an agreement had been arrived at between Mr. Severance and Mr. Counihan to carry out that idea. However, the time had not yet arrived for the accomplishment of that purpose and that the agreements that had been arrived at were not effective because the time had not arrived, and that it was their decision to place the documents in my hands, in my possession, until such time as they would become effective, or their purpose be necessary.’ He further testified that if the company was forced into liquidation one copy of the agreement was to be delivered to Severance and one to Counihan; that he did not ‘believe’ anything was said by Counihan or Severance at the time the documents were delivered to him that Severance would be entitled to delivery of the document if he should leave the company. In 1941 he discovered that Counihan had taken the documents out of the safe without telling him, and when he asked Counihan why the documents had been taken out of his possession Counihan said that there was no reason for their existence any longer, ‘that the purpose of the document had not taken place.’
Appellant's first contention is that ‘there was no evidence, or sufficient evidence, that said agreement was collusive and drawn for the purpose of defrauding creditors.’ Appellant contends that Counihan's testimony was not entitled to any weight; that it was impeached by the testimony of appellant and by Counihan's own written statements contained in the agreement. Appellant asserts that the terms of the agreement are plain and unambiguous and that the testimony of Counihan cannot vary those terms.
Respondent in reply contends that the trial court's finding that the agreement was collusive and drawn with intent to defraud creditors is amply sustained by the evidence; that the testimony of Counihan and Maurer shows that such was the purpose and intent of the agreement; that the evidence showed that such an agreement, if carried out, would work to the disadvantage of the creditors because, in the event of liquidation, instead of getting the plates themselves, which could be sold for more than the price of the metal ($8,000), or could be used by the creditors to operate such a business, or sold to other printing concerns for the operation of a tariff business (their value as standing plates being $31,450), the creditors would find only a sixty-day receivable for the value of the metal. Respondent argues that this evidence did not violate the parol evidence rule because it did not change the wording of the agreement or vary its terms, but it did establish that the agreement was unenforceable under the law.
Respondent argues further that the very circumstances under which the agreement was entered into, and its terms, earmark it as one to defraud creditors. It points out that Severance had been in respondent's employ less than two years; that he had brought no tariff business with him, nor any plates, yet he was given an option to buy the plates for the value of the metal alone and was to have the option for his lifetime, and was not obligated to remain in respondent's employ for a single day, but could have resigned the day after the agreement was signed, exercised his option and acquired the plates for the value of the metal in them, which was about one-quarter of their value as standing plates.
It is a rule too well established to require the citation of authorities that when a judgment is attacked as being unsupported by the evidence, the power of the appellate court begins and ends with a determination as to whether there is any substantial evidence, contradicted or uncontradicted, which will support the conclusion reached by the trial court or jury. And when two or more inferences can reasonably be deduced from the facts, the reviewing court is without power to substitute its deductions for those of the trial court or jury. Bearing in mind this familiar rule, which, we are constrained to state, is too often disregarded by counsel in arguing conflicting evidence before an appellate court, we believe that the summary of the evidence hereinbefore set forth shows ample support for the trial court's finding that the agreement was collusive and was made in fraud of creditors.
As to the contention of appellant that the terms of the agreement are plain and unambiguous and could not be varied by the parol evidence of Counihan, we believe the true rule is expressed in 32 Corpus Juris Secundum, Evidence, § 935, page 857, as follows: ‘Hence, parol evidence is admissible to show conditions precedent, which relate to the delivery or taking effect of the instrument, as that it shall only become effective on certain conditions or contingencies, for this is not an oral contradiction or variation of the written instrument but goes to the very existence of the contract and tends to show that no valid and effective contract ever existed.’
In P. A. Smith Co. v. Muller, 201 Cal. 219, at page 222, 256 P. 411, at page 412, our Supreme Court said: ‘It is well settled by the decisions in many jurisdictions that evidence that parties never intended a writing to constitute a contract, but that in lieu thereof another contract was entered into between them, is not objectionable under the parol evidence rule. Such evidence does not change a written contract by parol, but serves to establish that such contract had no force, efficacy, or effect. [Citing cases.]’
And in Texas Co. v. Berry Garage, 121 Cal.App. 455, at page 459, 9 P.2d 241, at page 242, the court said: ‘* * * oral evidence is competent to prove that a purported written contract was executed as a mere artifice to affect the relationship or conduct of third parties, and that it was mutually understood between the contracting parties that it was not intended to become binding upon them. Under such circumstances, the reception of oral evidence does not have the effect of varying the terms of the written instrument, but rather tends to prove the invalidity of the challenged document. [Citing P. A. Smith Co. v. Muller, supra.]’
Appellant also contends that even if the agreement was made for the purpose of defrauding creditors, as found by the court, he may nevertheless recover, because the action herein was not brought by the creditors but by one of the parties to the agreement. He cites, among other authorities, Darrah v. Lang, 119 Cal.App. 552, 554, 6 P.2d 989, at page 990, wherein the court quoted from Bump on Fraudulent Conveyances, 4th Ed., 461, sec. 449, as follows: ‘The title of a fraudulent grantee is not only good against the debtor, but it is also good against all parties except creditors and their representatives. It is voidable only at the suit of creditors, and if no creditor interposes and complains, the transfer is as binding and effectual to pass the title as if made with the best intents and for the most innocent and commendable purposes.’ (Italics added.) Respondent points out that in this and the other cases cited by appellant the title had already passed to the grantee, and the court, in effect, left the parties where it found them; it did not give title to either party, but held that the transfer already made was binding on the parties.
Whatever may be the rule in some jurisdictions, we are convinced that the rule established in California and in the great majority of jurisdictions is that a party to an executory contract or conveyance which is fraudulent as to creditors cannot invoke the aid of a court to enforce its terms.
In the early case of Ager v. Duncan, 50 Cal. 325, the court said, at page 327: ‘It does not appear that Quigley had any creditors to be defrauded. On the contrary, the inference from the seventh finding is that he had none. But if it be assumed that he had creditors, and that the note was given for the purpose of concealing from them the fact that he had an interest in the copartnership, the findings show that Quigley and the plaintiff were in pari delicto in the fraudulent intent. The contract is executory, and the action is to enforce payment of the note given with this fraudulent intent. In such cases it is immaterial by which of the parties the fraudulent nature of the contract is disclosed to the court. As soon as the fraud is made to appear by either of the parties, the court will refuse to interfere, and leave them as they were. In other words, it will not enforce a contract founded on the mutual turpitude of the parties to it. And for the same reason, if the contract has been executed, the court will not aid either party to escape its consequences.’
The leading case in California upon this point is Hays v. Windsor, 130 Cal. 230, 62 P. 395, in which Ager v. Duncan, supra, is cited and approved. Hays v. Windsor is very closely in point with the instant case, and was an action to recover possession of a crop of grain sold under a bill of sale to plaintiff but possession being retained by defendants. Plaintiff testified that the transaction was in fraud of creditors, and defendants testified it was to protect the crop so the creditors could be paid after the crop was harvested. On appeal the judgment in favor of defendants was affirmed, the Supreme Court stating, at page 234, of 130 Cal., at page 396 of 62 P.: ‘No consideration was paid for the bill of sale, and if there was fraudulent intent in making it, shared in by all the parties thereto, they would be in pari delicto, and what was said in Ager v. Duncan, 50 Cal. 325, would apply: ‘In such cases it is immaterial by which of the parties the fraudulent nature of the contract is disclosed to the court. As soon as the fraud is made to appear by either of the parties, the court will refuse to interfere, and leave them as they were. In other words, it will not enforce a contract founded on the mutual turpitude of the parties to it. And for the same reason, if the contract has been executed, the court will not aid either party to escape its consequences.’ If the facts warrant the conclusion that defendants had no fraudulent intention of defeating payment to their creditors, but really intended by the transaction to make payment more certain, then the fraud and deception was on the part of plaintiff alone, and the rule laid down in Vitoreno v. Corea, 92 Cal. 69, 28 P. 95, would apply. It was there held that two persons may concur in an illegal act without being deemed in pari delicto. In the case cited the court said: ‘In this case the defendant alone was guilty of the fraud. He cannot avail himself of his own fraud as a defense. ‘For no man shall set up his own iniquity as a defense, any more than as a cause of action.’'—quoting Lord Mansfield in Montefiori v. Montefiori, 1 W.Blk. 364. Whether, therefore, plaintiff and defendants were equally guilty of fraudulent intent, or whether defendants were innocent of such intent and plaintiff alone was guilty, plaintiff cannot recover. See the subject discussed in Bump, Fraud. Conv., §§ 442–444, and cases there cited.'
On page 440 of Bump on Fraudulent Conveyances it is said: ‘The same principles of policy which require that a fraudulent transfer shall be held valid as between the parties, also demand that no aid or relief shall be granted for the enforcement of any agreement arising out of a fraudulent transaction. The suppression of fraud is far more likely in general to be accomplished by leaving the parties without remedy against each other, and thus introducing a preventive check naturally connected with a want of confidence and a sole reliance upon personal honor. Any other doctrine would, moreover, destroy the rule itself, for parties could evade it by means of an agreement made at the time of the transfer.’ On page 447 it is said: ‘The principles upon which a specific performance of an agreement to reconvey is refused apply also to an action at law upon such an agreement, or upon a note given as the consideration for a fraudulent transfer. There is a marked and settled distinction between executory and executed contracts of a fraudulent character. Whatever the parties to an action have executed for fraudulent purposes, the law refuses to lend its aid to enable either party to disturb. Whatever the parties have fraudulently contracted to execute, the law refuses to compel the contractor to execute or pay damages for not executing. In both cases it leaves the parties where it finds them.’ And on page 449 it is said: ‘The principles of the law which prohibit any action upon a fraudulent executory contract apply equally to the grantee.’
In Moore on Fraudulent Conveyances, at page 638, it is said: ‘The law will not lend its aid to a party seeking to set aside his own fraudulent conveyance. Neither law nor equity will relieve either of the parties to a fraudulent transfer from the consequences of their own acts, as against the other, nor aid them against their own wrong, nor will the courts allow such a transfer to be attacked and impeached, or rescinded, at the instance of either of the parties, * * * whether the relief is sought as a direct cause of action or by way of defense, when none of the creditors seek the aid of the court.’ And at page 642: ‘It is not necessary that it should appear that some particular creditors were intended to be defrauded, and that some particular creditors, were in fact, defrauded, but if the intent of the parties was to defraud creditors, the court will not interfere to aid the parties to the fraudulent transaction.’
In Colby v. Title Ins. & Trust Co., 160 Cal. 632, at page 640, 117 P. 913, at page 916, 35 L.R.A.,N.S., 813, Ann.Cas.1913A, 515, it is said: ‘It is true that, as a general rule, equity will not aid one party or another to an illegal transaction where they stand in pari delicto, but will leave them just where it finds them, to settle these questions without the aid of the court. This rule is universally recognized, and a few of the many authorities announcing it, are Pomeroy's Eq.Jur., (3d Ed.) pp. 659, 667, 1703; Atwood v. Fisk, 101 Mass. 363, 100 Am.Dec. 124; Ager v. Duncan, 50 Cal. 325; Hays v. Windsor, 130 Cal. 230, 62 P. 395; Chateau v. Singla, 114 Cal. 91, 45 P. 1015, 33 L.R.A. 750, 75 Am.St.Rep. 63, cited by respondent.’
It should be borne in mind that in the instant case, under the findings of the court, appellant and respondent were in pari delicto, and under the California cases hereinbefore cited, which have not been overruled or distinguished by any later cases, we believe that it must be held that upon the facts found by the trial court, and supported by the record, appellant is not entitled to recover possession of said personal property under said written agreement. Furthermore, we believe that the rule adopted in California is not only supported by the weight of authority but is supported also by considerations of sound public policy.
Appellant also contends that the trial court's finding that said agreement ‘provides for a wholly inadequate and unfair consideration’ is unsupported by the evidence. However, in view of the fact that we have hereinbefore held that the finding of the trial court that the agreement was ‘collusive and for the purpose of defrauding creditors' was supported by the evidence, and that therefore appellant could not invoke the aid of the court to enforce its terms, we deem it unnecessary to discuss this contention.
Appellant's final contention is that ‘There is no evidence that the agreement was contrary to law as to good morals, was against public policy, was illegal, was void or was unenforceable.’ This contention is really interwoven with the contention that there was no evidence that the agreement was collusive and drawn for the purpose of defrauding creditors, because the basis of the finding that the agreement was contrary to good morals and against public policy is that it was collusive and for the purpose of defrauding creditors. Therefore, what we have hereinbefore stated covers this final contention of appellant.
In view of the foregoing, our conclusion is that the findings of the trial court are supported by the evidence, and that upon such findings the court correctly held in favor of respondent.
The judgment is affirmed.
The problem here involved is not complex. The proceeding is one at law to recover possession of certain personal property. The basis of the plaintiff's claim is a written contract, drafted by an attorney, under the terms of which it is not disputed that plaintiff is entitled to the property. The defendant comes into court, admits that through its president and secretary it executed the contract, does not claim that the plaintiff practiced any fraud or duress upon it, but says, in effect, that it wants to evade the transaction because it was a part of a crooked and fraudulent scheme conceived and initiated by its president to fraudulently defraud its creditors. The trial court has found that this is so. It has also found that plaintiff knew of this scheme and was a participant in it. The plaintiff denied this and told a simple straightforward and reasonable story as to the circumstances under which the contract was executed. Fraud must always be proved by clear and convincing evidence. While the evidence on behalf of defendant is not clear and convincing to me, and while, in fact, in my opinion, the evidence greatly preponderates in favor of plaintiff, the trial court has found in favor of defendant on this issue. While there is a difference of opinion in this state as to whether the trial or appellate court is to determine whether substantial evidence is clear or convincing (Beeler v. American Trust Co., 24 Cal.2d 1, 147 P.2d 583), I approve and am bound by the majority rule announced in that case, that that question is for the trial and not for the appellate court. Therefore, in this case, as an appellate judge, I am bound by the finding that plaintiff knew of defendant's fraudulent scheme and was a knowing participant therein.
The majority opinion holds that, when a fraudulent and dishonest debtor enters into such an executory contract with a third person, the third person cannot enforce the contract in a law action against the fraudulent debtor. This holding is based on the theory that the parties are in pari delicto, in which event the courts will leave the contracting parties where it finds them.
There can be no doubt but that there is authority, and substantial authority, to support the holding in the majority opinion, but it is equally true that there is strong, and in my opinion much more convincing, authority that permits the third person to enforce such an executory contract against the fraudulent debtor. The two rules, amply supported by cases from various states, are stated as follows in 37 C.J.S., Fraudulent Conveyances, § 269, p. 1103:
‘There is a lack of harmony in the decisions, even within the same jurisdiction, as to whether a party to an executory contract or conveyance which is fraudulent as to creditors can invoke the aid of the courts to enforce it. By some decisions a distinction is recognized between executed and executory contracts, and it is held that notwithstanding an executory contract is invalid as in fraud of creditors it is nevertheless enforceable by the parties thereto, and that too, although the party with whom the contract was made participated in the fraud. Some of these decisions make a distinction between an illegal contract in the strict sense of the term, and one which is fraudulent as respects creditors, the former being altogether void and the latter void only as against persons hindered, delayed, or defrauded.
‘In direct conflict with the foregoing view, many decisions hold that the courts will not aid a party to an executory contract or conveyance in fraud of creditors to enforce it, but will leave the parties where it finds them, and that both parties being in pari delicto either party may set up the illegality of the contract as a defense even though it is the result of his own turpitude. * * *’
The problem is also discussed in 27 Cor.Jur. p. 659, § 431, where in fn. 62 some 31 cases from 15 different jurisdictions are cited in support of the rule that: ‘In quite a number of decisions a distinction is recognized between executed and executory contracts, and it is held that notwithstanding an executory contract is invalid as in fraud of creditors it is nevertheless enforceable by the parties thereto * * *.’
Just what the rule is in California is a matter of dispute. The majority opinion cites Ager v. Duncan, 50 Cal. 325, and Hays v. Windsor, 130 Cal. 230, 62 P. 395, in support of its holding that the doctrine of in pari delicto is applicable. The cited cases undoubtedly support this view, but what was said in the Ager case was clearly dicta and was adopted without noting that in two earlier California cases the contrary view was expressed, without adequate discussion, and without any recognition of the existence of the contrary view. The Hays case simply quoted the Ager case without question.
The earliest case that I have found where the point was discussed is Smith v. 49 & 56 Quartz Mining Co., 14 Cal. 242. In that case Smith sought to secure possession of certain stock in the possession of defendant. One of defendant's defenses was that the contract was in fraud of creditors. The court based its decision on several grounds. At page 247 of 14 Cal., it is stated: ‘The position taken by the Appellant, that the plaintiff here cannot recover in this action because the assignment or sale of stock was made to defraud the creditors of Smith, cannot be maintained. * * * But even if fraudulent as to the creditors of Smith, who do no seem to be complaining here, it was good between the parties—as a note given for the purchase money of land fraudulently conveyed * * *.’
The same conclusion was arrived at in Davis v. Mitchell, 34 Cal. 81 (overruled on other grounds McBride v. Fallon, 65 Cal. 301, 4 P. 17). At page 89, of 34 Cal. it is stated: ‘If the transaction between him and Thomas, of which the note in suit was a part, was a fraudulent transaction as against the creditors of Thomas, he could neither aver nor prove the fraud in defence of the action. Mitchell could no more show the fraud in defence of an action upon the note than Thomas could show it in an action to recover back the property. To such an action and such a defence the Courts will not listen, but, in the language of Mr. Justice Baldwin, in Abbe v. Marr [14 Cal. 210], ‘will shut their doors in the faces of the intruders.’'
Thus there are two Supreme Court cases supporting the majority opinion, and two supporting the views expressed in this dissent. Neither set of cases cites the contrary cases, nor is there an adequate discussion in any of them as to the basis of the rule adopted. The reasons I believe that compel an adherence to the enforceability doctrine were not at all referred to in the Ager or Hays cases. For this reason these two cases, particularly in view of the holdings in the Smith and Davis cases, cannot be considered binding authorities on this court. It is well settled that decisions that fail to consider a point cannot be considered an authority on that point. Oakland Pav. Co. v. Whittell Realty Co., 185 Cal. 113, 195 P. 1058. Thus, this court is free to adopt whichever view it may consider best.
There are several arguments that seem to me to be unanswerable that support the view that such contracts should be enforceable by the third person. In the first place the doctrine of in pari delicto presupposes, by very definition, that the parties are in equal fault. Here on one side we have a corporaton that admittedly, by the testimony produced by it and relied upon by the majority to justify an affirmance, proved that its president conceived and initiated a plan to defraud the corporation's creditors. According to its president this contract was executed pursuant to that plan. On the other side we have the plaintiff, an employee, whose efforts admittedly built up and maintained this phase of the corporate business. He is induced by the president of defendant to enter into the contract in question. Are these two parties in equal fault? Can there be any doubt but that the party that conceives and initiates the plan to defraud his creditors is much more morally reprehensible than the third person who is induced by the fraudulent debtor to become a party to the contract? There can and should be but one answer to these questions—the parties are not equally at fault—the crooked and fraudulent debtor is much more at fault than the third person. This being so the parties are not in pari delicto. It is elementary law that the doctrine has no application unless the parties are equally at fault. See many cases collected and commented upon 6 Cal.Jur. p. 157, § 109.
There is another factor that compels the conclusion that such contracts should be enforceable by the third person. Public policy requires that contracts in fraud of creditors should be discouraged. The rule of the majority opinion encourages such contracts. Under that rule a fraudulent debtor can enter into a contract in fraud of his creditors knowing that the worse that can happen to him is, that if the creditors discover the fraud, they can reach the property—a right they would have had had the contract not been executed. Under the rule amounced by the majority the third person cannot enforce that contract so that no penalty at all is exacted, no restraint at all is placed upon, the fraudulent debtor. But if such contracts could be enforced by the third person a real restraint against such contracts would exist. Any fraudulent debtor would hesitate before entering into such a contract if the third person could enforce it. It follows that, even if the parties were in pari delicto (which they are not), the public policy in favor of preventing such contracts being much stronger than the policy that the judicial hands should not be tainted by enforcing them, the first policy must prevail.
I believe that the judgment should be reversed.
SCHOTTKY, Justice pro tem.
WARD, J., concurs.