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District Court of Appeal, Fourth District, California.

BACON et al. v. BACON et al.

Civ. 3569.

Decided: May 23, 1947

Siemon, Maas & Siemon, Alfred Siemon, Walter L. Maas, Jr. and Bennett Siemon, all of Bakersfield, for appellants. Matt Wahrhaftig and McKee, Tasheira and Wahrhaftig, all of Oakland, and Kendall, Howell & Deadrich, of Bakersfield, for respondents.

This is an action for an accounting, to cancel a certain assignment to Joseph Wahrhaftig, an attorney at law who represented the Bacons in litigation, and to compel the reconveyance of properties to plaintiffs. Defendants had judgment and this appeal followed.

For brevity we will refer to Joseph C. Bacon as Joseph, to Robert H. Bacon as Robert, to Thomas P. Bacon as Thomas, to Joseph Wahrhaftig as the attorney, and the assignment or agreement between Thomas P. Bacon and Joseph Wahrhaftig as the assignment.

Joseph, Robert and Thomas were the sons of Frank C. Bacon, deceased, whose estate was probated in Los Angeles County. Under the decree of distribution they, with others, received various undivided fractional interests in certain of the properties of the estate. They each received interests in Sections 21, 27 and 35, Township 28 South, Range 20 East, M.D.B. & M. in Kern County, containing about 1920 acres of land. This was prospective oil bearing land and furnishes the chief cause of this litigation. The various percentages of ownership in this property are stated as follows: Joseph, 13.96; Robert, 28.04; Thomas, 23.12; Ida Bacon, 2.91; Pearl Bacon, 3.485; Faith Bacon, 3.485; Dorothy Morris, 4.166; J. Burris Mitchel and B. Milo Mitchel, 4.166; Ashby Downs Orphanage of Bristol, England, 4.166; McAuley Cremorne Mission, 4.166, Bible Rescue Mission, 4.166, and Salvation Army, 4.166.

Joseph had fractional interests in properties in three other counties in California which do not require particular notice at this time although these interests and their disposition should receive consideration in any future accounting.

On November 28, 1938, Joseph executed a general power of attorney appointing Thomas his attorney in fact, but limited to his ‘entire right, title and interest in and to the real and personal property * * *’ distributed to him in the probate proceeding of the estate of his father. On December 17, 1938, he conveyed the same property to Thomas.

On March 16, 1942, Thomas and Joseph executed an agreement by which it was established that Thomas held the property conveyed to him by Joseph and a small interest owned by Dorothy Morris in trust for them. On the payment to him of $1,000 Thomas agreed to reconvey to Joseph and Dorothy Morris the interest in the properties conveyed to him by Josephy when a certain quiet title and partition action involving the Kern County property was settled and terminated. This agreement authorized Thomas to lease the Kern County property for oil for the benefit of all co-owners and provided that Joseph and Dorothy Morris should benefit and be entitled to receive back their respective proportionate shares ‘free and clear of any claim of’ Thomas and receive their respective proportionate shares of all net bonuses, rents, royalties or other values as their respective interests bear to the whole estate. This instrument concludes as follows: ‘It is further agreed by the parties hereto that this agreement settles all of their differences and disputes of every kind and character and this agreement supersedes all other agreements between the parties and is binding upon the parties and their Administrators, Executors, heirs and assigns and personal representatives.’

Plaintiffs argue that the quoted paragraph revoked the general power of attorney given Thomas by Joseph. From the view we take of the case we regard this question as unimportant at this time because the duties and obligations of an agent and a trustee do not differ materially as they are involved here.

On December 1, 1943, Robert conveyed his interest in the Kern County property to Thomas. From other documents there would seem to have been another prior conveyance of this interest.

On December 17, 1942, Robert and Thomas executed a contract reciting the conveyance of Robert's interest to Thomas in consideration of Thomas paying a judgment against Robert in the sum of $1,782, and advancing the necessary legal expenses and costs to clear the title or effecting the partition, sale or lease of the Kern County property. Thomas agreed to reconvey the property on repayment by Robert of the money expended by Thomas in paying the judgment ‘and the pro rata costs and legal expenses contracted or expended in connection with said property.’

Another agreement between the same parties bears date of the 1st day of December, 1943, in which Thomas agreed to hold the interest of Robert in the Kern County property in trust for him. Thomas agreed to reconvey the property to Robert, upon demand, upon the termination of the action already mentioned; that in so reconveying, the property would be free from any claim or demand of Thomas ‘except the actual costs and legal fees involves in said partition and quiet title proceeding.’ The document empowered Thomas to lease the Kern County property for oil ‘and enter into agreements for the operation of said property under such lease for the benefit of all co-owners of said property.’

Thomas negotiated the sale of a two per cent of Robert's landowners royalty to T. E. Adams for $10,000 out of which he paid the amount of the judgment already mentioned. We presume the balance was paid to Robert as there is no complaint made concerning that transaction.

Thomas reconveyed the remaining interest to Robert but subject to the contract and assignment to the attorney which will be considered later.

The title to the Kern County property was clouded in several ways. Thomas finally succeeded in obtaining title as trustee to various interests so that with his own he held legal title to 91.66 per cent of the ownership. He employed the attorney to bring an action to quiet title and partition the Kern County property. The attorney associated with him a firm of Bakersfield attorneys as local counsel. It was stipulated at the trial that the files in that action might be considered and referred to by counsel and the trial judge in the instant case. They were not introduced in evidence so they are not before us but we may assume that the action was brought to a successful conclusion.

R. E. Bering and T. E. Adams were partners in the business of acquiring and developing oil properties. They became interested in the Kern County property involved here and unsuccessfully spent time and money in attempting to clear the title so they could obtain an oil lease on it. They were so desirous of obtaining such a lease that they finally concluded negotiations with Thomas for one. He was represented throughout these proceedings by the attorney who was familiar with the various ownerships and knew that Thomas was acting as trustee in representing various owners of fractional interests.

The first document in point of time we have before us concerning these negotiations is a contract between Thomas and Bering and Adams dated February 20, 1942. It recited that Thomas was then the legal owner of 66.43 per cent of the total ownership of the property; that the parties were desirous of entering into an oil lease on the property. It was agreed (1) that Bering should pay Thomas ‘the sum of $5000.00, and by execution of this agreement Bacon acknowledges receipt of said sum’; (2) that Thomas should execute an oil and gas lease on the property to Bering on what ever interest in the property he had or should thereafter acquire; (3) that Thomas should forthwith at his own cost and expense institute and prosecute an action to partition or quiet title to the property. The other provisions of the contract are unimportant here.

While the purpose of the $5,000 payment was not stated in the contract Bering testified that it was paid solely for the purpose of paying the expenses of partitioning or quieting title to the Kern County property; that if all the money was not used for that purpose neither he nor Adams would be entitled to any repayment if satisfactory title was obtained for the purposes of their lease. This testimony as to the purpose of the payment was exactly corroborated by Thomas and the attorney. The three witnesses testified that no bonus or anything of value was paid for the lease subsequently executed under the date of December 2, 1943.

An oil well was drilled on the property to a depth of something over 11,000 feet where an oil sand was found. Owing to mechanical difficulties the well was not placed on production but it is suggested that the drillers would continue their operations and probably could bring in a producing well.

The attorney brought the action to partition and to quiet title to the Kern County property. While Thomas was the plaintiff in that case the attorney was fully aware of the fact that he was trustee for plaintiffs and other persons so the attorney occupied the position of representing the interests of not only Thomas but the various beneficiaries under the trust. He admitted as much while a witness during the trial. Therefore he owed the beneficiaries the same duty and obligation that he owed Thomas.

Thomas expended $5,184.89 as expenses and attorneys fees in the Superior Court action. Of this amount the attorney received $500 listed as ‘Pro rata of expense of trip East to see New York and Chicago charities,’ and $3,500 attorneys fees. Plaintiffs attack the second item as an unreasonable fee not supported by the evidence.

The oil lease provided for a 1/616 royalty; that 1/24124 of all royalties and rents be paid to J. Burris Mitchel and B. Milo Mitchel and that 23/242324 thereof be paid to the attorney ‘for the credit of the other Lessors executing this lease in proportion to their interests * * *.’

Under date of January 25th, 1944, Thomas and the attorney entered into what is termed an ‘operating agreement.’ After numerous recitations, this agreement provided:

‘Now, therefore, first party (Thomas) hereby authorizes second party (the attorney) to deduct from all royalties he receives, 5% of such gross amount, if paid in cash, or 5% of the gross amount resulting from the sale of oil and/or gas if paid in kind as full compensation for his services in supervising the operation under the terms of said lease for the collection and distribution of royalties in cash or in kind.

‘Second party agrees to devote the necessary time and effort to the best of his ability, supervise the operation under the terms of said lease and to collect and distribute the royalties therefrom for the benefit of first party and the trust interest held by first party in cash or in kind for said compensation of 5%.’ Plaintiffs attack this assignment as unauthorized and unwarranted.

It is clear that Thomas was trustee for plaintiffs here. We do not need to decide the question of whether or not he was also attorney in fact for one or both of them as in either instance he occupied a position of trust with similar duties and obligations resting upon him. The attorney was not only counsel for Thomas but, knowing of the trust relationship, he also represented the beneficiaries under the trust.

‘Confidential relations are presumed to exist between * * * principal and agent * * * attorney and client * * * trustee and cestui que trust, * * *’ 12 Cal.Juris. 713, Par. 7, and cases cited. The relation of attorney and client is of the most confidential character and demands full disclosure and absolute fair dealings on the part of the attorney. Foster v. Young, 172 Cal. 317, 156 P. 476; Cox v. Delmas, 99 Cal. 104, 33 P. 836.

In Cox v. Schnerr, 172 Cal. 371, 156 P. 509, 512, it is said:

‘The burden of proof usually rests upon the person asserting fraud; but, when one bases a claim upon a contract obtained from a person to whom he stands in a relation of trust and confidence, it becomes his task to prove that he exhibited that uberrima fides which removes all doubt respecting the fairness of the contract. * * *

‘In every transaction of this kind, one who holds such confidential relation will be presumed to have taken undue advantage of the trusting friend, unless it shall appear that such person had independent advice and acted not only of his own volition but with full comprehension of the result of his action.’

In Young v. Young Holdings Corp., Ltd., 27 Cal.App.2d 129, at page 149, 80 P.2d 723, at page 734, is the following: ‘Therefore an agent will not be allowed to deal in his own behalf with his principal with reference to the subject-matter of the agency, unless he makes full, complete, and honest disclosure of the truth of the transaction. He is bound to treat with his principal concerning the property over which he has been vested with authority in the utmost good faith, and so religiously does equity require adherence to this rule that a transaction between them as to the property whereby the agent acquires the ownership thereof is, upon its face, deemed by law to be fraudulent. * * * In Rubidoex v. Parks (48 Cal. 215), the court (we quote the syllabus) lays down the rule as follows: ‘The agent and principal are not absolutely prohibited from dealing with each other in respect to the subject-matter of the agency or trust; but in all their dealings with each other, the utmost good faith is required, and the burden of proof is on the agent to show affirmatively that he acted in good faith, fairly and honestly.’ (Italics ours.)'

There is no evidence in the record that the fee charged by the attorney in the partition and quiet title action was fair, equitable or just, or was reasonable compensation for his services. There is no finding to that effect. Therefore defendants failed to meet the burden of proof placed upon them by the existence of the confidential relationship.

Counsel for defendants seek to justify the fee on quite a different ground. They argue, and the trial court agreed with them, that the $5,000 was a donation by Bering and Adams made for the sole and specific purpose of clearing title to the oil property; that it was all expended for that purpose; that it is no concern of plaintiffs how the money was expended as they had no interest in it except to benefit by having title to their property cleared.

The simple answer to this argument is found in the findings and judgment. Thomas claimed to have expended more than $5,000 in paying the expenses of the litigation including the $3,500 attorney fee. The trial court so found and rendered judgment against each plaintiff for his proportionate share of the overplus. Thus plaintiffs are directly interested in the expenditures made and particularly in the attorney's fee, being the largest item, for if the attorney's fee be excessive, and it had been substantially reduced, no such judgment could have been rendered against them.

Further, the $5,000 was not paid to Thomas simply because his name was Thomas P. Bacon, but rather because he was an owner of a fractional interest in the land and also because he held the legal title as trustee to other fractional interests including plaintiffs'. Thus the duty to economically and reasonably administer the fund rested upon him. The burden of proving that he so administered it rested upon him and he failed to meet this burden of proof. Had the expense of clearing the title been less than $5,000, the claim that the balance would belong to Thomas individually would have come with bad grace as it would have permitted him individually to profit from the trust relationship. According to the testimony of Bering neither he nor Adams had any claim on any balance remaining after title was cleared.

There is neither finding nor evidence that the nature of the agreement between Thomas and the attorney was communicated to plaintiffs or either of them or that five per cent of the royalties was a reasonable, fair or just compensation for the services rendered and to be rendered by the attorney.

The evidence in the record shows that the service rendered up to the time of trial were meager. They consisted of thirteen telephone calls to Bakersfield and Los Angeles (defendants claim others but did not particularize them), one trip to Los Angeles, one trip to Bakersfield, and a trip to the Bacon Hills District all to learn of the progress of the drilling operations. The attorney testified that the substance of the information thus obtained by him was communicated to Robert and Thomas.

There is nothing to indicate that the attorney had any special knowledge of the operation of drilling an oil well or that his investigations were prompted by anything other than curiosity and the hope of a person who expected to share in the royalties. There is nothing to indicate that these investigations had any value to the landowners. Thus defendants failed to carry the burden of proof imposed upon them by their confidential relationship with plaintiffs in respect to the fairness of this royalty contract.

Defendants point out that the question of the confidential relationship and presumptive fraud was first raised in the reply brief of plaintiffs and urge that we may overlook it. We are familiar with this rule and realize that it furnishes an easy way to avoid deciding an important and controlling phase of the appeal. We also are aware that the rule is not mandatory and is not always followed. The question of presumptive fraud is so obvious and so vital to a fair determination of the rights of the parties that we prefer to consider it in an equity case of this kind.

The judgment is reversed.

MARKS, Justice.

BARNARD, P. J., and GRIFFIN, J., concur.