EVERLY ENTERPRISES INC SPECIALTY PRODUCTS CO v. ALTMAN

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

EVERLY ENTERPRISES, INC., a corporation, SPECIALTY PRODUCTS CO., a copartnership composed of John T. Clark and Betty Lee Morales, John T. Clark and Betty Lee Morales, individually, and Max Guttman, plaintiffs and Respondents, v. George T. ALTMAN and Security Title Insurance Company, a corporation, et al., Defendants,

George T. Altman, Appellant. George T. ALTMAN, Plaintiff and Appellant, v. EVERLY ENTERPRISES, INC., a corporation, SPECIALTY PRODUCTS CO., a copartnership composed of John T. Clark and Betty Lee Morales, John T. Clark and Betty Lee Morales, individually, and Max Guttman, Defendants and Respondents.*

Civ. 23874.

Decided: May 25, 1960

Lawrence William Steinberg, Beverly Hills, for appellant. Jos. M. Wapner, Los Angeles, for respondents.

George T. Altman appeals from an adverse judgment in a consolidated cause wherein respondents sought and obtained declaratory relief against him and he failed to obtain rescission and cancellation of certain instruments as prayed by him.

Prior to April 25, 1956, appellant Altman was the owner of 50 shares, being all the outstanding capital stock, of Everly Enterprises, Inc., a California corporation, hereinafter designated as Everly. The corporation owned the Wool Ranch in Riverside County which had proved an unprofitable investment and was badly in need of expensive improvements. Altman, a practicing attorney, not a farmer, was anxious to make a deal whereby someone would furnish the money necessary to rehabilitate the ranch and convert it into a profitable venture. He contacted John T. Clark and Betty Lee Morales, who were partners doing business as ‘Specialty Products Co.’ (hereinafter referred to as Specialty), and engaged in producing and marketing ‘organically grown’ crops. They became interested in taking over the property. A deal was made whereby they agreed to purchase half of Altman's stock (with an option to buy an additional 40 per cent or 20 shares) and to take a five-year lease of the real property for Specialty. But they demanded and received an agreement that there should be no personal liability upon their note for the unpaid balance of the purchase price, $12,250, which balance was to be and was secured by a fourth trust deed upon Everly's property running in favor of Altman, as beneficiary. The complaint in one of the consolidated actions now before us says, and the court found to be true, that ‘[o]n the statement of George T. Altman, who is an attorney-at-law and Vice President of Everly Enterprises, Inc., a California corporation, that the obligation of Specialty Products to George T. Altman, individually, as in the preceding paragraph set forth should be secured by a deed of trust on real property owned by the Everly Enterprises, Inc., and believing that the same was proper, plaintiff corporation Everly Enterprises, Inc., through its officers executed its promissory note in the sum of $12,250.00 with interest from April 1, 1956 at 5% per annum in favor of defendant George T. Altman, and to secure the same executed a deed of trust on real property owned by said corporation,’ except that the note was executed by Specialty rather than Everly. The trust deed was made by Everly as a lien upon its property to secure the debt owing to its vice president and stockholder, Altman. The sale of stock was effected through escrow and the five-year lease was thereafter executed. The partners in Specialty were not farmers and though they originally intended to operate the property, Specialty assigned the lease, which contained no covenant against assignment, to Max Guttman and Betty Lee Morales. They in turn made a sublease (or perhaps it was in legal effect an assignment) to Raymond R. Rummonds and Russell Rummonds, doing business as Rummonds Bros. Ranch. This was in June of 1956. Apparently the property increased in value from $80,000 at the time of its purchase in 1954 to $100,000 or more at the time of trial in 1958. Mr. Guttman testified: ‘Q What did he [Altman] say about Specialty? A Since I showed him in August of 1956, when I showed him the land, from that time on he started to tell me what a mistake he made. Q In what? A In giving away the property; he said giving away the property.’ On February 26 and 27, 1957, Altman gave notices to Specialty, declaring a rescission of the stock purchase and option contract and purporting to rescind the lease which had been made by Everly to Specialty. In general terms all notices claimed misrepresentations.

Thereupon Everly, Specialty and Guttman, filed on May 14, 1957, a declaratory relief action (superior court #679,618) against Altman and Security Title Insurance Company, the trustee named in the said trust deed; they therein sought, inter alia, a cancellation of the trust deed and a determination of the continuing efficacy of the option to buy more stock from Altman. He answered and interprosed a counterclaim alleging fraud in obtaining the stock purchase and option and the lease from Everly to Specialty, also praying that he be declared the owner of the 25 shares of stock previously sold to Specialty, that the option be declared rescinded, the writing delivered to him, and for general relief.

On the same day an action was brought by Altman against Everly, Specialty and Guttman (#689,130 in the superior court) containing substantially the same allegations and prayer as the counterclaim filed by him in the other action.

The cases having been consolidated for trial and tried together, the court found that there was no fraud in the transaction, that Altman was not entitled to rescind, that Everly received no consideration for the trust deed securing the Specialty note to Altman, that a reconveyance to Everly be made, and ‘[i]n lieu of said note, plaintiff Specialty Products should be ordered to execute a new note for $12,250.00, payable to defendant George T. Altman on the same terms and conditions as contained in the original note of $12,250.00, save and excepting that the same need not be secured.’ A single judgment was entered accordingly and Altman appeals from the same.

Altman's opening brief contains the following declaration: ‘Insofar as any appeal by appellant Altman against Everly Enterprises in either of these actions in concerned, appellant Altman herein does not pursue, and specifically abandons, said appeals insofar as they are directed against everly Enterprises. This appeal is solely against Morales and Clark, individually and as Specialty copartners and Guttman and not against Everly Enterprises.’ Upon the predicate that the invalidity of the trust deed is thus finally established, counsel argues that there has been a failure of consideration in that the security for the unpaid balance of the purchase price of the 25 shares of stock proved to be non-existent; that therefore appellant had a good cause for rescission which was wrongfully denied him by the lower court. Counsel relies upon cases to the effect that partial failure of consideration, such as failure of one party to perform an executory promise made to the other, affords good ground for rescission, but they are not controlling here. More pertinent are the following cases: Giovannoni v. Bartmann, 59 Cal.App. 651, 660, 221 P. 844; Bole v. Lovejoy, 138 Cal.App. 211, 216, 31 P.2d 1074; Sutro v. Rhodes, 92 Cal. 117, 124–125, 28 P. 98; Harvey v. Dale, 96 Cal. 160, 161, 31 P. 14; O'Sullivan v. Griffith, 153 Cal. 502, 506, 95 P. 873, 96 P. 323.

In the Harvey case, supra, defendant pleaded failure of consideration in an action upon a note which had been given for the purchase of certain bonds. It was contended that the failure of the corporation to take certain steps required by statute rendered the bonds void. The court said, 96 Cal. at page 161, 31 P. at page 14: ‘But as this question is not involved in determining the correctness of the judgment appealed from, it would not be proper to enter into its discussion, especially as the corporation and other bondholders who are directly interested in the question are not before the court. In Sutro v. Rhodes, 92 Cal. 117, 28 Pac.Rep. 98, it was held that where one had sold certain county bonds that were invalid by reason of their having been issued without authority, such invalidity did not constitute a failure of consideration, and that the purchaser could not maintain an action to recover from his vendor the money which he had paid for the bonds, referring in support thereof to section 1774 of the Civil Code, and Otis v. Cullum, 92 U.S. 447. Upon the principles of that case, we must hold that the defendant herein cannot resist the payment of the note sued upon. He got from the plaintiff exactly what he intended to buy and did buy, viz., one of the bonds of the corporation. He had the same opportunity as the plaintiff to ascertain the steps that had been taken by the corporation in the issuance of the bonds, and, whether he made such examination or not, he bought subject to the rule of caveat emptor, and assumed all the risk of its invalidity when he accepted the bond in exchange for his promissory note.’

Giovannoni v. Bartmann, supra, 59 Cal.App. at page 661, 211 P. at page 848, quotes Black on Rescission and Cancellation, as follows: “Where a party obtained what he contracted for, he cannot avoid his contract on the ground that what he received is less valuable than he supposed or that it has no value at all, unless he shows fraud or mistake as to the subject matter of the contract.”

Although the instant case does not involve the sale of an existing instrument we deem the principle of the cited cases applicable.

It is clear that appellant received just what he contracted for,—a lien upon the land of the corporation to secure a debt owing to him by a third person, another stockholder. He was a practicing attorney; the other persons were laymen. When they sought immunity to personal obligation upon their note appellant told them that their debt should be secured by the property of Everly, and believing that the same was proper they concurred in the execution by Everly of a trust deed upon its real property to furnish the security sought by appellant. An attorney entering into such a deal is charged with notice of any legal infirmity that there might be in the transaction; the laymen participants had no reason to know whether it was valid or invalid; they were justified in relying upon appellant in that respect.

No suggestion is made by counsel for either side that this is a case for application of the alter ego doctrine or that of Elsbach v. Mulligan, 58 Cal.App.2d 354, 368–369, 136 P.2d 651. Nor do counsel advert to the fact, which affirmatively appears, that this trust deed was made with the express consent and active participation of all the stockholders, directors and officers of the corporation, and was probably valid for that reason. See, Sargent v. Palace Cafe Co., 175 Cal. 737, 739, 167 P. 146; Tevis v. Beigel, 174 Cal.App.2d 90, 344 P.2d 360; Garretson v. Pacific Crude Oil Co., 146 Cal. 184, 188, 79 P. 838.

Counsel for both sides present the matter upon the hypothesis that the trust deed was made without consideration and was invalid. If that be so, then it follows that appellant cannot take advantage of the infirmity in the instrument which was the result of his own legal wrong. ‘No one can take advantage of his own wrong.’ Civ.Code, § 3517. Cf. Beck v. West Coast Life Ins. Co., 38 Cal.2d 643, 645, 241 P.2d 544, 26 A.L.R.2d 979.

Certainly no one has been defrauded here. Appellant has expressly abandoned his appeal with respect to Everly, thus consenting to the decree of invalidity of the trust deed. Respondents' brief says: ‘The Corporation did raise that question. While we sincerely believe that the Court did not err in its judgment concerning the fourth deed of trust, nevertheless, should this honorable Court feel that the corporation, in executing the deed of trust, did without legal corporate power and in accordance with legal principles, and that appellant Altman should have the benefit of that security, then, of course, we would have no objection to having that portion of the judgment reversed, with instructions denying the corporation, a co-plaintiff in the trial court, any relief pursuant to its said cause of action. * * * We take this position because of a sense of fairness and fair play. We not only attempted prior to the litigation to bend over backwards to be fair with appellant Altman, but even throughout the trial, and now in this court. We have never sought, nor do we now seek, an advantage. If we have been subjective in this matter, it has only been because of a complete desire for self preservation in this transaction and to protect ourselves against unfair dealing. We have never refused to pay Mr. Altman what is due him. We do not seek something for nothing. All we have ever demanded of Mr. Altman is that he be a man of his word and we, of course, will do likewise. We want to be treated equitably and are willing to do equity.’

Appellant argues that the assignment of the lease by Specialty to Guttman and Morales was invalid. The point is raised for the first time on appeal, which is contrary to permissible practice. Moreover, the lease contains no covenant against assignment and therefore as matter of law is assignable. Chandler v. Hart, 161 Cal. 405, 415, 119 P. 516; 30 Cal.Jur.2d § 214, p. 362. Appellant was soon advised of the assignment, made no objection and dealt with the assignees in such manner as to effect a waiver of any objection that he might have had. ‘It is settled in this state that a party benefited by a clause against assignment in a contract or lease may waive his right thereunder by dealing with an assignee with regard to the contract or lease, with knowledge of the assignment.’ Trubowitch v. Riverbank Canning Co., 30 Cal.2d 335, 342, 182 P.2d 182, 187.

Appellant cannot prevail upon the claim that there is no evidence to support the findings that ‘[n]one of the plaintiffs in Case 679,618 or defendants in 689,130 at any time made any false or fraudulent representations to defendant Altman in Case 679,618 or plaintiff Altman in Case 689,130, and that he was never defrauded by any or all of the defendants in 689,130 or plaintiffs in 679,618 out of the value of anything’; and ‘Defendant Altman did not at any time rely upon any representations of any of the plaintiffs or defendants in the consolidated actions.’ The evidence is ample in this respect.

Judgment affirmed.

ASHBURN, Justice.

FOX, P. J., and HERNDON, J., concur.