Clarence B. HARVEY and Stella M. Harvey, Plaintiffs and Respondents, v. Henry D. DAVIS and Sarah Davis, Defendants and Appellants.
Defendants Henry and Sarah Davis appeal from a money judgment in favor of plaintiffs Clarence and Stella Harvey.
Plaintiffs brought the instant action to recover $80,000 in damages allegedly sustained as the result of a transaction whereby plaintiffs exchanged two parcels of real property for certain promissory notes secured by second deeds of trust. The complaint named as defendants Henry and Sarah Davis, Oak-San Properties, Inc., Glen C. Rylee, Rylee Mortgage & Investment Co., Canary Construction Co., Inc., Portola Enterprises, and Joseph and Bobbie Strawther. The complaint contained three counts, the first sounding in fraud, the second alleging violations of certain Business and Professions Code sections relating to real property securities dealers, and the third stating a common count for money had and received.
After a nonjury trial, the court found, so far as pertinent, the following: that prior to February 7, 1963, plaintiffs Clarence and Stella Harvey, husband and wife, were the owners of two parcels of real property located in Los Gatos, California; that on November 2, 1962, plaintiffs gave Grant Rowe, a licensed California real estate broker, the exclusive right and authority to sell said real property on or before March 1, 1963; that on January 22, 1963, defendants Henry and Sarah Davis made a written offer, through plaintiffs' agent, Rowe, to exchange $80,000 in notes secured by deeds of trust to be approved by plaintiffs for the Los Gatos property; that on January 23, 1963, Rowe advised defendants Davis that plaintiffs were willing to enter into such an exchange; that on the same day, defendants Davis advised defendants Glen Rylee and Rylee Mortgage & Investment Co. that they were interested in purchasing any number of notes secured by deeds of trust up to a total face value of $80,000, subject to plaintiffs' approval, for the purpose of exchanging same for plaintiffs' Los Gatos property; that at all times between January 23, 1963 and March 1, 1963, defendants Rylee and Rylee Mortgage & Investment Co. were licensed by the State of California as real estate brokers; that said defendants held themselves out to plaintiffs and to defendants Davis as real property security brokers and dealers and actually engaged in said business in connection with the transaction with plaintiffs and defendants Davis; that between January 23, 1963 and February 17, 1963, defendants Rylee and Rylee Mortgage & Investment Co. negotiated with plaintiffs for the approval of 24 promissory notes made by defendant Canary Construction Co., Inc., as obligor, in favor of defendant Portola Enterprises, as obligee; that each such note was dated January 10, 1963, and was in the principal amount of $3,350, with 7,2 percent interest thereon; that each such note was one of a series of notes secured by a second deed of trust on a different lot in a particular subdivision located in Santa Clara County; that each such note was executed by defendants Joseph and Bobbie Strawther on behalf of defendants Canary Construction Co., Inc. and Portola Enterprises; that each of the deeds of trust securing the notes was executed after construction of an improvement to the underlying real property but before the first sale of said property so improved and was subordinate to another deed of trust on the property; that none of the notes were executed more than three years prior to being offered for sale; that on February 14, 1963, plaintiffs, acting through Rowe and through defendants Rylee and Rylee Mortgage & Investment Co., selected and approved the above-mentioned promissory notes and deeds of trust and caused defendants Davis to be notified; that on February 17, 1963, defendants Davis, in reliance upon plaintiffs' selection and approval of said notes and deeds of trust, purchased same for $52,000 and contemporaneously transferred them to plaintiffs in trade for the Los Gatos property; that defendants Davis were ‘principals' in said exchange, within the meaning of section 10237 of the business and Professions Code1 ; that none of the defendants delivered to plaintiffs the written statement required by section 10237.4 and containing the information specified in section 10237.5; that plaintiffs and defendants Davis had no personal dealings whatever with each other and that the approval of the promissory notes and deeds of trust was negotiated through Rowe and defendants Rylee and Rylee Mortgage & Investment Co.; that defendants Rylee and Rylee Mortgage & Investment Co. were not the agents of defendants Davis but were the agents of defendants Canary Construction Co., Inc., Portola Enterprises and Joseph and Bobbie Strawther and were paid by said defendants for services in connection with the sale of the notes and deeds of trust; that at no time did any of the defendants obtain a permit from the California Real Estate Commissioner to see said notes and deeds of trust to the public; that as a result of the exchange transaction, plaintiffs suffered money damages and injury in the amount of $79,196, such amount representing the $80,000 loss of their Los Gatos real property, decreased by the amount of $804 in interest which plaintiffs received on the one payment which was made on the notes transferred to them; that the date of plaintiffs' injury was February 18, 1963; that a reasonable fee for plaintiffs' attorney was $2,500; that except as above set forth, the allegations of ultimate fact contained in plaintiffs' complaint and defendants' answers were untrue.
The court concluded as a matter of law that defendants Canary Construction Co., Inc. and Portola Enterprises were the alter ego of defendants Strawther; that defendants Canary Construction Co., Inc., Portola Enterprises, Joseph and Bobbie Strawther, and Rylee Mortgage & Investment Co., violated section 10238.3; that plaintiffs were entitled to recover judgment against all the defendants in the principal amount of $79,196; that plaintiffs were entitled to recover judgment against defendant Rylee Mortgage & Investment Co. and defendants Davis in the amount of $2,500 as attornry's fees, under section 10238.7.
Judgment was rendered in favor of plaintiffs and jointly and severally against all defendants except Rylee and Oak-San Properties, Inc. in the amount of $79,196, and against defendants Davis and Rylee Mortgage & Investment Co., in the additional amount of $2,500.
Defendants Davis point out that their liability to plaintiffs is predicated solely upon the hereinafter quoted section of the Business and Professions Code, since the trial court found that the fraud allegations of plaintiffs' complaint were untrue and stated, in its memorandum decision, that plaintiffs had ‘failed to establish by clear and convincing evidence that any of the defendants herein perpetrated any fraud or deceit as alleged in plaintiffs' first cause of action.’
The applicable sections of the Business and Professions Code, all of which were contained within article 6 thereof, provided in pertinent part as follows:
Section 10237: ‘A real property securities dealer within the meaning of this article is any person, acting as principal or agent, who engages in the business of:
‘(a) Selling real property securities to the public, * * *’ (Stats. 1961, ch. 886, p. 2330.)
Section 10237.1 provided that: ‘The term real property security as used in this article means: * * *
‘(b) One of a series of promotional notes secured by liens on separate parcels of real property in one subdivision or in contiguous subdivisions.
‘(c) * * * As used in this section ‘promotional note’ means a promissory note secured by a trust deed executed on unimproved real property, or executed after construction of an improvement of the property but before the first sale of the property as so improved, * * * and which is subordinate * * * to any other other trust deed on the property, except when such note was executed in excess of three (3) years prior to being offered for sale.
‘Subdivisions (b) and (c) of this section do not apply to a person who sells or exchanges a note or contract through a real property securities dealer.’ (Stats.1961, ch. 886, pp. 2331–2332.)
Section 10237.4 provided that: ‘Every real property securities dealer acting within the meaning of this article shall deliver to the purchaser a statement in writing, containing all of the information required by Section 10237.5, before the purchaser becomes obligated to complete the transaction.’ (Stats.1961, ch. 886, p. 2332.)
Section 10237.5 provided that the statement required by the preceding section must contain, among other items, available information relative to the ability of the person liable on the obligation to meet his contractual payments, the terms and conditions of the note being sold, the terms and conditions of all prior recorded encumbrances which constitute liens upon the property and a written statement of the dealer's considered opinion of the current fair market value of the property and of the equity therein securing the note or contract. (Stats.1961, ch. 886, pp. 2332–2333.)
Section 10238.3 provided that ‘No person shall sell to the public any form of real property security as defined in Section 10237.1 without first obtaining a permit from the commissioner.’ (Stats.1961, ch. 886, p. 2335.)
Section 10239.4 provided that ‘Every person sustaining an injury resulting from a transaction subject to this article which was in violation of the provisions of the article may recover in a civil action against the real property securities dealer the amount of the damages with interest at 7 percent per annum from the date of the injury, and shall be entitled to be awarded a reasonable attorney's fee.’ (Stats.1961, ch. 886, p. 2337.)
Defendants assert that the validity of the judgment against them is entirely dependent upon the correctness of the court's finding that they were ‘real property securities dealers,’ as said term is defined in section 10237. Their argument is that the only violations which they were found to have committed consisted of their failure to deliver to plaintiffs the written statement required by section 10237.4 and their failure to obtain the permit required by section 10238.3. They also content that section 10237.4 is by its terms applicable only to a ‘real property securities dealer.’ Although section 10238.3 applies to any ‘person’ selling real property securities to the public, defendants deny that this difference in wording is of any real benefit to plaintiffs, since section 10239.4 authorizes the recovery of damages in civil action only against a ‘real property securities dealer’ who has violated one or more of the provisions of article 6 of the Business and Professions Code. In any event, defendants deny that they were subject to the requirements of either section 10237.4, 10238.3 or 10239.4, since there is no evidentiary support for a finding that the sale to plaintiffs constituted a sale ‘to the public’ within the meaning of the applicable sections. We agree.
In Mary Pickford Co. v. Bayly Bros., Inc. (1939) 12 Cal.2d 501, 514, 86 P.2d 102, 108, defendants contended that they were not subject to the Corporate Securities Act because they had not ‘sold to the public’ certain certificates of beneficial interest. The court, in rejecting this argument, pointed out that defendants had solicited and taken subscriptions for the certificates in question and that the persons to be solicited had been selected at random. The court went on to state: ‘This method certainly constituted an offering to the ‘public’. Corpus Juris states that the word does not have a fixed or definite meaning; in one sense ‘the word does not mean all the people, nor most of the people, nor very many of the people of a place, but so many of them as contradistinguishes them for a few’. 50 C.J. 844, 845. Webster's New International Dictionary, Second Edition, gives among other definitions of the word, ‘a particular body or section of the people; often specifically, a clientele’. While the group solicited by defendants in this case was a comparatively small one, it nevertheless constituted the ‘public’ so far as the purposes of the Corporate Securities Act are concerned. Sales were made in pursuance of a general plan to dispose of a substantial portion of the beneficial interest in the trust for the purpose of raising capital to carry out the venture. This, in the absence of a permit, constituted a violation of the Corporate Securities Act [citations].'
Defendants contend that the evidence and the court's factual findings therefrom establish that they at no time undertook to sell real property securities to the general public or any particular body or section thereof, but that, to the contrary, they obtained the notes and deeds of trust for the sole and express purpose of transferring them to plaintiffs in exchange for the Los Gatos property and never at any time offered to sell them to any segment of the public or, indeed, to any person. They deny that an isolated transaction of this nature can be deemed to constitute a sale to the public, within the meaning of the applicable code sections, and assert that the judgment against them must be reversed for this reason.
Plaintiffs attempt to rebut this argument by relying upon the following evidence allegedly establishing that defendants Davis were ‘engaging in the business of selling real property securities to the public’; that the Davises initially contacted plaintiffs by answering a newspaper advertisement; Henry Davis proposed the exchange of a package of second deeds of trust for plaintiffs' property; Henry Davis was aware of Rylee Mortgage & Investment Co. as a possible source of such a package because of a prior experience with another such package submitted by said company; Henry Davis sought out Rylee and requested that he supply deeds of trust with a face value of $80,000 which could be purchased at a substantial discount; Henry Davis purchased the notes and deeds of trust to be transferred to plaintiffs and further agreed to purchases eight additional deeds of trust to complete the transaction with Rylee; Henry Davis directed Rylee to find buyers for the eight additional deeds of trust purchased by him; Henry Davis knew nothing about plaintiffs and never met them prior to the completion of the exchange transaction; Henry Davis demonstrated familiarity with second deeds of trust and the effect of mechanics' liens thereon; when the Davises exchanged the deeds of trust for plaintiffs's property, they were acting not only for themselves but for Oak-San Properties, Inc., a corporation.
When the evidence above summarized is viewed in the light most favorable to plaintiffs, it still falls far short of establishing that defendants Davis were selling real property securities to the public. Indeed, the bulk of the evidence relied upon has little or no real bearing upon that issue. The fact that defendants initially contacted plaintiffs through a newspaper advertisement placed by the latter's real estate broker shows that plaintiffs, not defendants, were extending an offer to the public in general. The fact is that defendants proposed exchanging a package of deeds of trust for plaintiffs' property only after plaintiffs's agent indicated that such an exchange would be favorably considered and that plaintiffs would accept the notes and deeds of trust subject to their approval. This evidence clearly demonstrates that defendants were making a specific offer to exchange notes and deeds of trust for specific property to the owners of the property. The making of this offer obviously does not show that defendants were interested in selling the deeds of trust to the public at large or that they would even have purchased same for any purpose other than as a means of exchange for plaintiffs' property. The evidence that defendants were aware of the Rylee Mortgage & Investment Co. as a possible source of a package of deeds of trust does show that defendants had had some prior experience with securities of this nature. However, the evidence relied upon by plaintiffs consists solely of Henry Davis' testimony that on an unspecified date in the past, another mortgage company had submitted to him a parcel of notes and deeds of trust obtained from the Rylee Mortgage & Investment Co. Plaintiffs have directed this court's attention to no testimony that the deeds of trust previously submitted to Davis were purchased by him for purposes of resale to the public. The evidence in question is thus wholly insufficient to show that defendants were in the business of selling real property securities to the public or that they had done so on any single occasion in the past. Plaintiffs' reliance upon the fact the defendants agreed to purchase eight additional deeds of trust from Rylee is also misplaced. Henry Davis' testimony in this regard was to the effect that Rylee was unwilling to sell him less than an entire package consisting of the twenty-four deeds of trust to be transferred to plaintiffs and eight additional deeds of trust. Davis stated that he did not want to purchase the additional deeds of trust but did so in order to obtain the deeds of trust for plaintiffs. He agreed to take the additional deeds of trust only upon the understanding that they would remain in escrow until Rylee found purchasers for them. Plaintiffs have failed to suggest any reason why defendants' willingness to take to eight additional deeds of trust, in order to procure the twenty-four for plaintiffs, should render the sale to plaintiffs a sale to the public. The only other evidence upon which plaintiffs rely to establish that the sale to them was a sale to the public consists of the fact that defendants never met plaintiffs and chose to deal through their authorized agent, Rowe; that defendants were more experienced in real property transactions than plaintiffs and knew of the possible effect of mechanics' liens on the second deeds of trust (in this connection, we note that when Davis was asked by the title insurance company to execute a waiver with respect to mechanics' liens and he was hesitant to do so, he was advised by the title company that the plaintiffs had already signed a waiver of such protection and that Davis had no choice but to execute the waiver); and that defendants were acting on behalf of Oak-San Properties, Inc., which according to the testimony of Henry Davis, was a newly created corporation solely owned by himself and his wife. These facts obviously would not support a finding that the sale to plaintiffs was a sale to the public.
In the light of the foregoing, defendants Davis were not subject to the requirements of section 10237.4, 10238.3 or 10239.4 in connection with the exchange transaction subject of the instant action and since the judgment against them was based solely upon their alleged violations of said sections, it must be reversed.
The purported appeal from the order denying defendants Davis a new trial is dismissed; the judgment against defendants Davis is reversed; in all other respects the judgments is affirmed. Appellants to recover costs on appeal.
1. Unless otherwise indicated, all subsequent references herein to code sections are to the Business and Professions Code.
SHOEMAKER, Presiding Justice.
AGEE and TAYLOR, J., concur.