SPENCER v. NELSON et al.
Plaintiff brought this action for declaratory relief. At the first trial, judgment went for defendants. Thereafter, the court granted a new trial on the sole issue of ratification. Plaintiff appealed from the order granting the new trial, contending that the new trial should have been granted on all issues. This court, holding that the issues were separable, affirmed the action of the trial court. Spencer v. Nelson, 84 Cal.App.2d 61, 190 P.2d 40. On the new trial, by stipulation, the record of the first trial was considered. Additional evidence was produced, and judgment again went for defendants. Plaintiff appeals.
Principally—sufficiency of the evidence (1) as to the finding that in the execution of the contract upon which the action is based plaintiff overreached defendants; (2) as to the finding that defendants did not ratify the contract. The determination of this latter question depends mainly on the effect of the relationship of attorney and client, if it then existed, on the later failure of defendants to inquire as to their rights. An additional question is: Is there ‘law of the case?’
The action involves the validity of a contract entered into between the parties on September 5, 1942. The findings at the first trial were to the following effect: The contract was executed when an attorney-client relationship existed between the parties and when they were not at arm's length. Plaintiff did not give them disinterested advice nor advise them to get independent advice. Defendants did not act with full knowledge of their rights of liabilities nor fully understand the legal effect of the contract. The transaction and the consideration were neither fair nor equitable. While plaintiff occupied the relation of attorney toward his clients he acquired an advantage to their detriment by reason of the contract. The assets acquired by plaintiff were of the reasonable value of $100,000. As part of the purported consideration, plaintiff agreed to cancel an indebtedness of defendants to him which was thereafter fixed at $10,000.
On the issue of ratification—the judge of the second trial found as follows: From the execution of the contract to August, 1945, defendants believed it to be an enforceable agreement. They knew of its contents, the meaning of its language, and how the contract purported to bind them, but they did not realize all of its implications and eventualities and had received no independent advice concerning it. All this time they worked according to it and the relation of attorney and client existed. Approximately one and a half years after its execution there existed feelings of hostility between the parties. Until late in August, 1945, defendants had no knowledge of a right to disaffirm, nor had they made any inquiry concerning such right. At no time did they relinquish this right nor ratify, confirm or waive such right.
In considering the sufficiency of the evidence there must be borne in mind the well known rule that it is not a question of how this court would decide the case in the first instance, but whether there is substantial evidence, including the reasonable inferences to be drawn therefrom, to support the trial court's findings. There is substantial evidence to support the following facts:
Defendant Ted Nelson1 was 35 years old, a high school graduate, and had been employed as a welder at Mare Island for about five years prior to 1942. In about 1940 he invented a stud welding device for welding studs to metal plates, which proved to be a great time saver over other methods. He patented this device and commenced manufacturing it on a small scale in an enlarged garage back of his home in Vallejo. Plaintiff was about 37 years old. He had had considerable experience in both business and accounting. He then studied law and commenced practice in 1937. At the time of the contract plaintiff was a partner in an Oakland law firm and claims that his own earnings were about $1500 per month. In the early part of 1942 defendant's device had become highly important in war production and the government threatened to take over its manufacture if he did not expand. The Navy suggested that he obtain an RFC loan for this purpose. It was necessary for him to incorporate to do so. One of his employees suggested plaintiff, whom defendant did not know, as a good attorney to take care of the incorporating. Defendant employed plaintiff who incorporated the Nelson Specialty Welding Equipment Corporation, and for the next several months handled various executive, administrative and legal matters for defendant. All of the stock in the corporation was issued to defendant. His patents were not transferred but were licensed to the corporation under a license agreement prepared by defendant's patent attorney, Evans. (Incidentally, at all times thereafter except as herein set forth, all patent matters were handled by Evans, and not by plaintiff. However, Evans did not advise defendant concerning his relations with plaintiff or on business matters of either defendant or the corporation.) At plaintiff's suggestion a new location for the plant was determined upon, plaintiff selecting the site, obtaining the necessary priorities and employing the architect.
By September, 1942, the business had grown to such proportions that defendant was bogged down in a mass of administrative detail. He wanted to be free to concentrate his efforts on the production and engineering part of the business. Attorney Evans suggested that he hire an office manager for $600 or $700 per month. Defendant told plaintiff of Evans' suggestion. Plaintiff then told defendant to follow plaintiff's advice in all business matters and not to let Evans or any other attorney ‘up-set’ him. The next day plaintiff and defendant took a trip to Hanford to check into the nondelivery of certain machines needed in the business. They discussed the need of someone experienced in business, administrative, and accounting matters to assist defendant. Plaintiff told defendant of his background in these matters. Defendant then asked plaintiff to give up his law practice and to come to work for him. Plaintiff stated that he had a good law practice and he doubted very much if defendant could afford to pay him what would be necessary to get him to give it up. Defendant asked plaintiff to give the matter consideration and plaintiff agreed to think it over. There is considerable conflict between the parties as to what happened next, plaintiff contending that they went on to Los Angeles from Hanford and continued to discuss the matter at great length (a registration card shows that they did go on to Los Angeles). Defendant contends that nothing further was said about it until the day following their return from Hanford when plaintiff presented the contract to him at the plant, and that none of the details set forth in the contract had been discussed at all. Plaintiff testified that they had been discussed and that defendant wanted only an oral contract, but finally suggested that it be in letter form. Plaintiff's secretary testified that plaintiff drew the contract with great care, making three drafts of it before being satisfied. Although the agreement starts out ‘In order that our understanding may be made a matter of record’ defendant testified that the proportions in the contract had never been discussed. When the contract was presented plaintiff thoroughly read and explained it to defendant. Plaintiff did not urge defendant to sign. Defendants knew the terms but did not know their significance. At no time did plaintiff suggest that defendants obtain independent advice concerning the contract.
The contract provided: ‘In consideration of the services rendered by you [plaintiff] and for other and valuable consideration’ defendants assign to plaintiff 166–2/323 shares (one-third) of the capital stock of the corporation plus one-third of all shares ‘which might hereafter be issued to us' for any consideration other than cash; one-third of all inventions and discoveries (plus all patents, royalties, rights and benefits thereon and therefrom) made or hereafter to be made by ‘either of us' during the entire time that plaintiff and defendant are connected with the corporation. All stock of all parties then issued or thereafter to be issued is placed in a voting trust to be voted as a unit. In directing the vote plaintiff has an equal voice with defendant. Provision is made for arbiters in case plaintiff and defendant cannot agree. Plaintiff and defendant are each to receive a salary of $1000 per month. When salaries are changed, the salaries of each shall be equal. If the corporation shall pay a bonus to defendant, plaintiff shall receive one-half such bonus. The stock shall never be voted in any manner to reduce plaintiff's stock to less than one-third of the capital stock nor deprive plaintiff of the right to receive one-third of all bonuses, profits, or other net income of the corporation, except bonuses to employees. The agreement inures to the benefit of and is binding on the heirs, executors and assigns of the parties. It was signed by both defendants. Below their signature plaintiff signed a statement that the foregoing agreement is in accordance with his understanding and is the sole agreement of the parties.
During the half hour discussion of the agreement before its signing defendant called plaintiff's attention to the fact that it nowhere provided that plaintiff was to devote any time to the business. Thereupon plaintiff wrote on the back of it a promise to devote his entire time and efforts to ‘the furtherance of our mutual interests in connection with’ the corporation, except that he should have time to finish up law cases then in his office, at an estimate of an average of not more than one hour a day. It stated that it would be necessary for him to try several cases in the next six months and to take that time away from his work for the corporation. ‘I shall maintain my identity as an attorney in Oakland, California, but will not practice law in any manner to interfere with my efforts on your behalf.’ Both parties performed under the contract. Shortly after plaintiff started to work he raised his and defendant's salary to $3000 retroactive to September 1. $2000 of each month's salary was put back by each into the business. Plaintiff contends that defendant was receiving a salary of $3000 per month in September, 1942. However, the evidence supports defendant's testimony that he was not. Plaintiff paid no money for the agreement. At all times plaintiff maintained a law office on Oakland and was listed in the phone directory as an attorney, although there is no evidence that he practiced law at all, except for finishing up a few matters as provided in the agreement and taking very little time.
Defendants knew the terms of the contract, the proportion of the stock, royalties and patents plaintiff was to receive, the fact that plaintiff and defendant were to be together as long as the business existed, that plaintiff had given up his law practice for which defendant was giving him an interest in the business for as long as it was carried on. But defendants did not know the full significance and effect of the contract. They did not realize how binding the contract would be and defendant believed that if the parties could not agree ‘some means of provision would be made for dissolving this agreement and he could go his way and I go mine.’
The $10,000 referred to in the findings apparently came out of a $25,000 bill for plaintiff's services prior to the agreement and salary thereafter. Defendant testified that he knew nothing of this and that there had been no agreement that plaintiff was to pay any money consideration. Defendant endorsed the $10,000 check. Although the court found that it was consideration, plaintiff testified that it was paid as a bookkeeping item for tax purposes. During the three years following, plaintiff devoted his entire time and attention to the business. He became secretary and executive vice president of the corporation, took over the administrative business of the corporation, and executed with defendant personal guarantees of corporate indebtedness. He put back into the business the sum of $160,000, which was a substantial part of his receipts from the business, including the receipts by his family to whom transfers of interests were made, apparently for tax purposes. The business was expanded to a nationwide scale, probably due in large measure to plaintiff's initiative and efforts. Defendant, too, worked hard, improved his patents. It is not necessary to detail the work done by plaintiff or the expansion of the business. The evidence justifies the conclusion that plaintiff pulled his own oar and rendered yeoman service, and that the success of the business was due to the combination of defendant's patents, his engineering and production abilities, and plaintiff's initiative, executive ability and effort. The relationship of the parties subsequent to the signing of the contract will be discussed under ‘Ratification.’
In considering the evidence it is well to bear in mind the principles applicable to a contract between attorney and client. ‘* * * inasmuch as the relation of attorney and client is one wherein the attorney is apt to have very great influence over the client, especially in transactions which are part of or intimately connected with the very business in reference to which the relation exists, such transactions are always scrutinized by courts with jealous care, and are set aside at the mere instance of the client, unless the attorney can show by extrinsic evidence that his client acted with full knowledge of all the facts connected with such transaction, and fully understood their effect. * * * If on his own account he has any transaction with his client about the subject of the litigation, he must with respect to such transaction be able to give, and must give, to his client all that reasonable advice against himself that he would have given him against a third person.’ 3 Cal.Jur. p. 623. “* * * Not only must the attorney offer clear and satisfactory evidence that the transaction between himself and his client was fair and equitable and no advantage was taken by him, but he must also offer proof that the client was fully informed of all matters relative to the transaction and was so placed as to be able to act understandingly and to deal with the attorney at arm's length.” Carlson v. Lantz, 208 Cal. 134, 138, 280 P. 531, 533. The client is entitled to advice independent of that of the attorney. Id., 208 Cal. at page 140, 280 P. 531; 5 Am.Jur. 288. Although that fact alone is not conclusive, it is a circumstance to be considered, as is the presumption which arises from the contract that there was a good and sufficient consideration. Munfrey v. Cleary, 75 Cal.App.2d 779, 785, 171 P.2d 750; Donovan v. Security-First Nat. Bank, 67 Cal.App.2d 845, 853, 155 P.2d 856. The burden of proof is always upon the attorney to show that the dealing was fair and just and that the client was fully advised. 3 Cal.Jur. 624, § 35. Bailey v. Security Trust Co., 179 Cal. 540, 177 P. 444, cited by plaintiff, has no application to this case. There the plaintiff charged misrepresentations by his attorney through which the latter obtained an option to purchase plaintiff's stock at a price which the court held was not its fair value. However, at the trial plaintiff did not testify. The attorney did, denying any misrepresentations and claiming that the client was in no wise deceived. The court held that there is no rule which prevents dealings between attorney and client in the absence of unfaith or unfairness on the part of the attorney, and that the mere fact that the sale price was less than the fair value did not overcome the showing of fairness made by the attorney and not denied by the client. Marlenee v. Brown, 21 Cal.2d 668, 134 P.2d 770, differs from the case at bar in that the trial court had found all issues in favor of the attorney and even doubted that the attorney had gained an advantage over the client. In Munfrey v. Cleary, supra, 75 Cal.App.2d 779, 171 P.2d 750, the trial court found that the deed from client to attorney was freely and voluntarily executed and delivered for a ‘good and valuable considerations' and with full knowledge of its contents and ‘legal effect.’ 75 Cal.App.2d at page 782, 171 P.2d 751. Therein the case differs from ours. Moreover, the court held that the question of whether the presumption that arises when an attorney deals with his client is overcome by the evidence is one for the trial court.
There is substantial evidence to show that not only did plaintiff fail to advise defendant fully as to the full effect of the contract but discouraged defendant from seeking any independent advice concerning it; and that the contract was highly advantageous to plaintiff. He was obtaining one-third of the stock of the corporation, one-third of defendant's patents and royalties, which one-third was of the then value of $100,000 (defendant believed at the time that it was worth one million, dollars), and those thereafter to be obtained as long as the parties were associated together; an equal control through the voting trust of the corporation, and an equal salary with defendant. For all this, plaintiff first attempted to have defendants sign a contract which did not bind plaintiff to devote any particular time or render any particular service to the business. For all this, defendant was to receive only the cancellation of a $10,000 indebtedness, and plaintiff's services, which, however, were to be compensated for, regardless of their character, on the same basis as defendant's services. Again, plaintiff's title to stock, patents and royalties, including the latter which might thereafter be obtained by defendant, was not dependent upon any particular length of service with the company. It was transferable and inheritable even though plaintiff might not remain long with the company or his services be unsatisfactory. At the very least, in the event of a short service by plaintiff, it would have taken a law suit to determine what would become of plaintiff's interests. While it is true that plaintiff was giving up a lucrative law practice, that fact in no wise detracts from the fact that the contract was considerably one-sided. Plaintiff himself said that ‘the business had unlimited possibilities and was a good deal and ought to make a fortune.’ The evidence supports the conclusion that while defendant at all times knew the terms of the contract, he did not know or understand its full meaning and effect.
While it is true that defendant's patents had not been tested and there was competing equipment on the market, that there were serious problems of production to be solved and uncertainties as to labor and materials, that there were income and other taxes and renegotiation to be considered, the evidence shows, as stated by the trial court, that without the investment of a single dollar plaintiff obtained a one-third present interest in, and a one-half control of, an extremely valuable going concern, which owned and controlled a most valuable invention of vital worth to the war effort and whose present and potential value was well known to plaintiff. This brings us to the claim of——
The evidence pertinent to this issue follows. As soon as plaintiff assumed the administration of the business the salaries of plaintiff and defendant were raised to $3000 per month. Within four months plaintiff and his family had received $24,000 in royalties and similar amounts every six months. Plaintiff advised defendant for income tax purposes to transfer some of defendant's interests to his family. Plaintiff made such a transfer to his own family. Most of the receipts by both parties were put back into the business. The operations of the enterprise were expanded to a nationwide scale. Sales organizations and field representatives were established throughout the country. A separate corporation was formed in New Jersey to handle eastern production and sales. A partnership in which the parties were the principal partners was organized in Chicago. Plaintiff went abroad to establish marketing channels. There were many problems which were handled by plaintiff or under his supervision, such as priorities, negotiation, taxation, wage ceilings, production planning, advertising, personnel promotional work and accounting. Defendant, too, was equally busy in handling the production and engineering end of the business. Defendant, even up to about the time of the split, stated that plaintiff had done a good job and had contributed considerably to the success of the enterprise. Defendant let plaintiff run the administrative end of the business, signing, many times without reading them, checks which had been prepared through plaintiff's direction. The same is true of minutes of the corporation. The relationship of the parties was extremely friendly for about a year after the signing of the agreement; then, as defendant expressed it, the friendly relationship gradually changed although the business relationship continued and defendant continued to give plaintiff practically free reign in the administrative end of the business. In spite of the fact that defendant's relations with plaintiff had become very strained, defendant continued to work under the contract, because the business was going along satisfactorily and he believed the contract to be ‘a legal and binding document.’ Originally the two men occupied the same office. Later, however, plaintiff made an office for defendant in the shop portion of the plant and required defendant to use it and told defendant he would not have any interference from him in plaintiff's end of the business. About May of 1945 plaintiff presented defendant with a new agreement dated back to December, 1944, for the Chicago partnership which had been formed by an agreement dated December 28, 1943. In examining the new agreement defendant noticed that the interests of the parties were expressed therein as 50–50. He then learned for the first time that the interests had been so expressed in the 1944 agreement which he and his wife had signed. Defendant insisted that the new agreement be changed to provide the interests as 1/313–2/323 in accordance with the contract of 1942. Plaintiff changed it. Defendant desired that the corporation go into the production of sailplanes. This plaintiff urgently opposed, on the ground that it would not pay. (His prediction proved correct. After plaintiff was ousted from participation in the business, the corporation did start producing sailplanes and lost considerable money as a result.) In July, 1945, there was a telephone conversation between plaintiff in New York and defendant at the San Leandro plant in which defendant informed plaintiff of his intention of going ahead with the sailplane production in spite of plaintiff's opposition. Defendant did not like plaintiff's vulgar reply. Shortly thereafter, in August, 1945, while talking to Attorney Evans concerning patent matters, defendant told him of the situation between him and plaintiff. Evans advised him to consult an attorney in general practice. Defendant did, and for the first time learned that the contract was voidable. On September 5 defendant notified plaintiff of his intention to disaffirm the contract. Negotiations for settlement were had but were unsuccessful. Thereupon plaintiff filed this action for declaratory relief.
The court found that at all times from the making of the contract until August, 1945, the relationship of attorney and client existed between plaintiff and defendants. The evidence shows that plaintiff as well as being secretary and executive vice-president of the corporation also acted as its attorney. Defendant had no personal attorney other than plaintiff until around the middle of 1945. Shortly after the execution of the contract plaintiff advised defendant for tax purposes to transfer certain of his interests to his wife and children and supervised the making of the transfers. Each became the trustee for the other's children, and this relationship continued at all times. Plaintiff also commenced court proceedings for the change of defendant's name. In 1943 plaintiff represented defendant and the latter's mother in the legal details of a sale of Eureka property. In June, 1943, plaintiff advised defendant concerning certain licensing agreements between defendant and the corporation. Plaintiff prepared the Chicago partnership agreements, the last being prepared in the spring of 1945
Contentions of the Parties
Plaintiff contends that if defendants were overreached by plaintiff in the contract, defendants understood the contract fully from its inception and accepted during the three year period the benefits of plaintiff's performance thereunder, particularly during the last one and a half years during which the court found there existed feelings of hostility between the parties, thereby ratifying the contract. Defendants contend that while they at all times knew the terms of the contract they did not understand fully their significance and that although in their personal relations they became hostile towards each other, the relationship of attorney and client continued and because of that and the circumstance that defendants still relied on plaintiff in most of their business relationships, defendants are excused from not making inquiry concerning their legal rights. The evidence supports the conclusion that at no time during the three year period did defendants fully understand the significance of the contract. Also it supports the further conclusion that in spite of the personal hostility between them, defendants until about the middle of 1945 still considered plaintiff their lawyer and that of the company, and had full confidence in plaintiff's business judgment and advice.
Section 19 of the Civil Code provides: ‘Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact.’ (Emphasis added.) “Where no duty is imposed by law upon a person to make inquiry, and where, under the circumstances, ‘a prudent man’ would not be put upon inquiry, the mere fact that means of knowledge are open to a plaintiff, and he has not availed himself of them, does not debar him from relief when thereafter he shall make actual discovery. The circumstances must be such that the inquiry becomes a duty, and the failure to make it a negligent omission.' * * *
‘* * * ‘* * * It is only where the party defrauded should plainly have discovered the fraud except for his own inexcusable inattention that he will be charged with a discovery in advance of actual knowledge on his part.’ * * *
‘Another pertinent factor is that there was a fiduciary relationship between the parties at the time of the fraudulent representations. Although the general rules relating to pleading and proof of facts excusing a late discovery of fraud remain applicable, it is recognized that in cases involving such a relationship facts which would ordinarily require investigation may not excite suspicion, and that the same degree of diligence is not required. In Rutherford v. Rideout Bank, 11 Cal.2d 479, 486, 80 P.2d 978, 117 A.L.R. 383, it was said that because of such a relationship plaintiff could not be charged with lack of diligence even though an inquiry would have disclosed the true value of the property involved.’ Hobart v. Hobart Estate Co., 26 Cal.2d 412, 438, 439, 440, 159 P.2d 958, 972. Emphasis added.
‘* * * no act will be held as an act of confirmation by a court of equity unless it was done with a knowledge of the legal and equitable rights of the parties whose rights are sought to be concluded by such act.’ Turnley v. Nixon, 112 N.J.Eq. 116, 163 A. 800, 804. ‘A party who is entitled to set a transaction aside cannot be charged with * * * confirmation, unless there has been knowledge of all the facts and perfect freedom of action. Acts which might appear to be acts of acquiescence will not be held to be such if the client is ignorant of the circumstances.’ Id. 163 A. at page 804.
When parties are in a confidential relationship the victim of the fraud may justifiably rely upon the good faith of the guilty party, even though there may be circumstances which would put a prudent man on inquiry if the parties were dealing at arm's length. Barron Estate Co. v. Woodruff Co., 163 Cal. 561, 576, 129 P. 351, 42 L.R.A.,N.S., 125. Where there is a confidential relationship ‘one can act upon the presumption that there exists no intention to cheat or defraud him’. Laraway v. First Nat. Bank of La Verne, 39 Cal.App.2d 718, 728, 104 P.2d 92, 100; Anderson v. Thacher, 76 Cal.App.2d 50, 70, 172 P.2d 533. ‘The doctrine of waiver or ratification is founded upon the fact of knowledge of all the facts, and not upon negligence.’ Most Worshipful Grand Lodge Free & Accepted Masons v. Hayes, Tex.Civ.App.1935, 82 S.W.2d 411, 414.
The character of the hostility between the parties must be considered. Mostly it was disagreements over policies; they would not speak to each other for weeks at a time. The arrangement of their occupying adjoining desks was changed when plaintiff, over defendant's objection, had an office constructed for defendant in the shop. However, these facts did not cause defendant to lose confidence in plaintiff both as a business man and an attorney. ‘Our friendship as pure friends no longer existed, but it did not affect our business operations.’ They did not always agree but defendant still permitted plaintiff to run the administrative end of it as originally planned and each remained trustee for the other's children. Up until the spring of 1944 defendant signed documents, letters and checks prepared under the direction of plaintiff, generally without reading them. Thereafter he paid more attention to them and on occasions examined the files on plaintiff's desk. However, he testified that this was so he would know what was going on. Prior to that time he kept in touch with what plaintiff was doing in the administrative end by discussions with plaintiff. In paying more attention to what he was signing and in getting copies of all letters written by plaintiff (as he did of all letters written by others in the company) it did not necessarily mean he no longer trusted plaintiff, but that he wanted to know what the company was doing, so that if he disagreed with any of the policies inaugurated by plaintiff he could do so. ‘Differences might have existed without destroying confidence in each other's honesty and integrity.’ Shiels v. Nathan, 12 Cal.App. 618, 108 P. 34, 40. There husband and wife had had ‘differences' and separated on the very date the contract was entered into, relying upon the husband's representations. In Ramos v. Pacheco, 64 Cal.App.2d 304, 309, 148 P.2d 704, it was contended that by reason of respondent's fear of appellant induced by his threats against her the confidential relationship ceased to exist. The court held that this did not destroy the confidential relationship. The question of whether the situation should have put defendant on inquiry is one of fact for the trial court. We cannot say as a matter of law that during this period anything occurred which should have made defendant suspicious that he had been overreached. A reasonable interpretation of the hostility is that it indicated at most that plaintiff was standing strictly on his rights under the contract but gave no indication to defendants that the contract itself was not binding. Nor was it such that we can say as a matter of law that it overcame the confidential relationship which in spite of it still existed between plaintiff and defendants and therefore put defendants on inquiry as to the validity of the contract. The language of Anderson v. Thacher, supra, 76 Cal.App.2d 50, 70, 172 P.2d 533, 544, is applicable here. ‘Under the facts of the instant case it can not be said that plaintiff's conduct in the light of her own intelligence and information was manifestly unreasonable. * * * Defendant Thacher cannot be heard to complain that plaintiff reposed too much confidence in him. * * * The law does not applaud fraud and condemn the victim thereof for his credulity. * * *
“The courts will not lightly seize upon some small circumstance to deny relief to a party plainly shown to have been actually defrauded against those who defrauded him on the ground, forsooth, that he did not discover the fact that he had been cheated as soon as he might have done. It is only where the party defrauded should plainly have discovered the fraud except for his own inexcusable inattention that he will be charged with a discovery in advance of actual knowledge on his part. The present case is not of that character.' * * * Courts rather will hold that one can act upon the presumption that there exists no intention to defraud him.'
In Rutherford v. Rideout Bank, 11 Cal.2d 479, 80 P.2d 978, 117 A.L.R. 383, in order to gain an advantage for a friend, the manager of the bank in which plaintiff was a depositor and whom she constantly consulted on business affairs, made misrepresentations which caused her to sell her ranch to the banker's friend for less than its true value. It was not until approximately seven years later than plaintiff discovered the fraud. In the meantime plaintiff had made no effort to ascertain the truth of the representations. In holding that this fact did not bar her action for damages the court said that in view of the confidential relationship between plaintiff and the bank manager she could not be charged with lack of diligence in not making independent investigation either at the time or afterward.
Plaintiff relies on certain cases enunciating the principle that where an attorney openly assumes a hostile attitude towards his client, the latter may no longer rely upon the confidential relationship to excuse acting to protect his own rights. Cooley v. Miller & Lux, 156 Cal. 510, 105 P. 981; Boardman v. Crittenden, 52 Cal.App. 438, 198 P.2d 1020. In both cases the attorney was openly hostile to his client in the very inception of the contract upon which the respective action was based. In Black v. Riley, 20 Cal.App. 199, 202, 128 P. 764, 765, the court said: ‘It is only when he openly assumes a hostile attitude that his transactions with his client will be free from the presumption of undue influence on the part of the attorney.’ There was nothing in the unfriendly attitude of the parties which caused defendant to have any suspicion that the inception of the contract could be attacked by him, nor until the very end did the parties deal with each other at arm's length.
Henigan v. Yolo Fliers Club, 208 Cal. 697, 698, 284 P. 906, cited by plaintiff, was a case where the court held that the appellant should have discovered the fraud of his confidential agent at least three years prior to suit for the reason that ‘facts abundant came to the notice of appellant that could not but have aroused an inquiry as to the true facts.’ 208 Cal. at page 703, 284 P. at page 908. In considering the contention that appellant was excused from making inquiry by the confidential relationship, the court pointed out that that relationship had long since terminated. It then, referring to Simpson v. Dalziel, 135 Cal. 599, 67 P. 1080, said that the confidential relationship between attorney and client did not excuse the duty to follow up the lead to full knowledge as to the conduct of such attorney, ‘which inquiry was required by known facts.’ 208 Cal. at page 704, 284 P. at page 909.
Simpson v. Dalziel, supra, 135 Cal. 599, 67 P. 1080, was an action to recover a balance of certain moneys which plaintiff's attorney had collected for him five years before. In affirming an order sustaining without leave to amend the demurrer to the complaint on the ground that it appeared that the action was barred by the statute of limitations, the court pointed out that it appeared from the complaint that at no time had the plaintiff ever inquired of the attorney what amount he had collected for him, and held that the lack of such care and diligence did not stop the running of the statute. Such an inquiry would have been consistent with his confidence in the attorney. Natural curiosity and business prudence would have compelled such inquiry. The case holds that confidence in an attorney does not absolve a plaintiff from the exercise of reasonable or ordinary care.
Under all of the circumstances of this case we cannot say as a matter of law that because of the type of hostility which grew up between the parties defendants failed to exercise such care as a reasonably prudent person would have exercised under like circumstances. ‘Appellants contend that the means of knowledge is the equivalent of knowledge. Appellees concede that appellees or the owners had the means of discovering the inadequacy of the selling price. But it is of no consequence that the facts disclosing the fraud could have been discovered had an investigation been undertaken sooner. Appellees or the owners were not bound to make an investigation until they had knowledge of facts of such a character as to put them upon a duty of inquiry. * * * Moreover, in view of the fact that the confidential relationship between appellants and the owners of the property continued within three years of the bringing of the suit, lack of diligence was not present in failing to make an independent investigation * * *.’ Anglo California Nat. Bank v. Lazard, 9 Cir., 106 F.2d 693, 704.
Plaintiff contends that there can be no rescission because the parties cannot be restored to the status quo, citing Solorza v. Park Water Co., 86 Cal.App.2d 653, 195 P.2d 523; Lupton v. Domestic Utilities Mfg. Co., 173 Cal. 415, 160 P. 241; and Black on Rescission, vol. 1, p. 3. Restoration of the status quo is not always required. In Spencer v. Deems, 43 Cal.App. 601, at page 605, 185 P. 671, at page 672, the court quoted from Green v. Duvergey, 146 Cal. 379, 389, 80 P. 234: “It is not an invariable rule that the rescission of a contract obtained by fraud will be denied merely upon the ground that the parties cannot be placed in statu quo. If equity can still be done between the parties, courts will grant relief to the defrauded party.” Here the trial court expressly retained jurisdiction for the purpose of doing equity between the parties.
Plaintiff contends that defendants did not rescind promptly and therefore are barred from relief. Assuming that such question can be raised by a plaintiff in an action for declaratory relief under the contract, the evidence supports the conclusion that the notice was timely given. Within approximately a month of the time defendants made inquiry and learned the full effect of the contract and their right to disaffirm, they acted. Thereafter, for a period of approximately four months, negotiations for settlement went on between the parties. The acts of defendants and the corporation in issuing salary checks of $1000 (they reduced the salary from $3000) in plaintiff's name but holding up the delivery thereof, and the other acts during that period, could not constitute a ratification. Plaintiff was expressly on notice that defendants were repudiating the contract, but were maintaining the status quo during the period of negotiation for settlement.
Defendants' right to avoid the contract is not based, as contended by plaintiff, solely on lack of knowledge of their legal rights. Hence cases like Bancroft v. Woodward, 183 Cal. 99, 190 P. 445, and the quotation from section 484, Restatement, Contracts, and the other cases cited by plaintiff, holding that the power of avoidance for fraud is lost if the injured party after acquiring knowledge of the fraud manifests to the other party an intention to affirm the transaction, even though he is ignorant of the law when he made the manifestation, do not apply. Here defendants did not acquire knowledge of the fraud. As pointed out heretofore, when a party is put on notice of fraud it is his duty to inquire as to his legal rights. After such duty arises and he fails to exercise it, his ignorance of his legal rights will not excuse his failure to inquire, but the determination of when defendants were put on notice under the circumstances of this case was for the trial court.
Law of the Case
In the decision on the prior appeal of this case, 84 Cal.App.2d 61, at page 63, 190 P.2d 40, at page 41, we said: ‘However, on the retrial he may be able to prove that when defendants had knowledge of the writing of September 5, 1942, they consented to and worked under the terms of the agreement. If such evidence is forthcoming, plaintiff will be entitled to a judgment enforcing the provisions of the agreement of September 5, 1942.’ Plaintiff contends that this statement establishes the law of the case, and hence all he had to show was that defendant had knowledge of the contract. This statement could not possibly be one intended to limit the new trial merely to a consideration of whether defendants had knowledge of the contract for several reasons: (1) There never was any contention at the first trial or at any other time that defendants did not have knowledge of the contract in the sense that they knew that they had signed it and knew of its terms. Therefore, this court could not have intended to send the case back for the trial of an issue which was conceded. (2) It is obvious, too, that the statement was not for the purpose of laying down a rule in the case but was a part of the discussion to show that the issue of ratification was separable from the other issue which the court had determined. (3) The court had not been asked to define the issue of ratification; there was no discussion concerning definition, and the court was not attempting to define it. The sole question before the court was whether the issue of ratification was severable from the issue of fraud in the inception of the contract. ‘* * * it is well settled that dicta do not become the law of the case.’ Tomaier v. Tomaier, 23 Cal.2d 754, 757, 146 P.2d 905, 909. (4) The word ‘knowledge’ is italicized, indicating that something more was intended than mere acquaintance with the terms of the contract. (5) Were knowledge all that was required, the court's prior language, 84 Cal.App.2d at page 63, 190 P.2d at page 41, ‘but statements or acts tending to ratify the execution * * * stand as separate issues' would have no meaning.
Reserved Power of the Court
In both judgments the court reserved jurisdiction ‘and control over this cause and to that end it may make and enter all orders and decrees from time to time as are or shall be necessary for it to do and administer further equities between the parties arising from their previous association and relationship, independently however, of any claims or rights arising from or under the said written instrument dated September 5, 1942, which said written instrument, and all rights arising thereunder, the court hereby reaffirms are and were null and void; subject further however to the duty of the court to carry out such directions or modifications of this judgment, as may be finally given or ordered by any appellate court upon appeal from this judgment.’ Plaintiff contends that it is practically impossible for the court to restore the status quo and do equity to plaintiff. As before stated, the fact that the status quo cannot be restored, if such be the case, will not cause a denial of relief, if equity can be done between the parties. Green v. Duvergey, supra, 146 Cal. 379, 389, 80 P. 234; Metropolis Trust & Savings Bank v. Monnier, 169 Cal. 592, 599, 147 P. 265. We see no reason why equity cannot be done here. The powers of a court acting under section 1060 of the Code of Civil Procedure, the declaratory relief section, are broad and extensive. Adams v. Cook, 15 Cal.2d 352, 362, 101 P.2d 484. The evidence shows that plaintiff rendered a valuable service. He gave up a lucrative law practice and devoted his entire time to the business. Its success was partially due to his efforts, even though the record indicates he made a number of mistakes. He put back into the business a considerable portion of his income from it. The questions concerning taxes paid by plaintiff and his family on salary put back into the company, plaintiff's renegotiation liability, if any, and the other questions suggested by plaintiff, can easily be determined. Undoubtedly plaintiff is entitled to a determination of the reasonable value of his services and in making such determination all these matters will be taken into consideration by the trial court. They are for the trial court rather than for this court. This is an action for declaratory relief. The court declared that the contract is void. The evidence supports that conclusion. The court may now do equity and declare the further rights of the parties independently of the contract.
The judgment is affirmed.
1. As most of the conversations and actions took place between plaintiff and defendant Ted, ‘defendant’ as used herein will refer to Ted unless otherwise noted.
BRAY, Acting Presiding Justice.
FRED B. WOOD, J., and DONOVAN, J. pro tem., concur.