McALLISTER v. DRAPEAU (1938)

This is an action wherein plaintiffs seek to cancel a trust deed and note and to recover certain moneys paid on account of the interest and principal of said note.

The facts are as follows: Plaintiffs and respondents, Charles McAllister and Elnore McAllister, on the 27th day of March, 1929, obtained a loan from the California Security Loan Corporation (hereinafter referred to as defendant or appellant) on their home property in the sum of $11,050, secured by a note and trust deed. Various payments on account of said loan thereafter reduced the balance to $8,271.26.

On or about the 1st day of July, 1934, the amount of the loan having become past due and the foreclosure of the trust deed covering the property of plaintiffs being imminent, plaintiffs applied to the Home Owners' Loan Corporation (hereinafter referred to as the corporation) for a loan. The corporation requested that plaintiffs secure the written consent of the defendant to accept the bonds of the corporation. Defendant consented to take said bonds of the corporation on condition that plaintiffs also execute a note for $1,300, secured by a second trust deed on their home property, to the Title Guarantee and Trust Company as trustee in favor of said defendant as beneficiary, otherwise said defendant would proceed with the foreclosure under the original trust deed. Plaintiffs, in accordance with such arrangement, on or about the 16th day of July, 1934, executed a note for $1,300, secured by the second trust deed as aforesaid on their home property. Thereafter, on the 1st day of August, 1934, the defendant consented in writing (in the form which will hereinafter appear) to take said bonds of the corporation in the amount of $5,850, whereupon plaintiffs executed and delivered to the corporation a note in the sum of $5,984.38, secured by a first mortgage on their home property. The corporation then delivered to the defendant its bonds in the sum of $5,850. In connection with the transaction the corporation appraised the property at $8,650.

The execution and delivery by the plaintiffs to the defendant of the note and second trust deed were not made known to the corporation, and the corporation had no notice or knowledge of their existence either before acceptance of the consent of the defendant to take the bonds of the corporation or at any time thereafter, until shortly before the date of the commencement of the within action.

Plaintiffs paid to the defendant on account of said note and second trust deed a total of $275.

The complaint asked to have the second note and trust deed declared void, and sought the recovery of the $275 paid on account thereof. The judgment granted the relief prayed for although there was neither finding of fact nor conclusion of law that any fraud had entered into the transaction.

It is contended by appellant that it was the intention of the parties that the defendant should accept bonds from the corporation and a second deed of trust and note for $1,300 from the plaintiffs in exchange for the discharge of the original note and deed of trust; that it was error for the trial court to order the cancellation of said note and second trust deed and the repayment of the sums paid thereon on the grounds that said note and deed of trust contravened the Home Owners' Loan Act and was in violation of public policy; that the trial court was in error in granting to the plaintiffs any relief in connection with said note and deed of trust because said plaintiffs were in pari delicto and the court should therefore have left the parties in the position where it found them; and, finally, that a construction of the Home Owners' Loan Act of 1933 holding notes secured by second deed of trust to be void violates the constitutional provisions providing for due process of law.

Respondents, on the other hand, contend that the consent signed by defendant to take the bonds of the corporation was an accord and satisfaction, a release and a novation as to said note and second trust deed, and relieved the plaintiffs from any further obligations thereunder; that said “secret” note and trust deed were illegal and void under and by virtue of the express and implied provisions of the Home Owners' Loan Act; that an equitable defense cannot be interposed where a contract is illegal and void; and that the plaintiffs were not in pari delicto with the defendant.

Inasmuch as the controversy between the parties involves a consideration of the Home Owners' Loan Act of 1933, a brief synopsis of that act at the outset will be helpful. The preamble thereof is as follows: “An Act To provide emergency relief with respect to home mortgage indebtedness, to refinance home mortgages, to extend relief to the owners of homes occupied by them and who are unable to amortize their debt elsewhere, to amend the Federal Home Loan Bank Act, to increase the market for obligations of the United States and for other purposes.” Vol. 48, U.S.Stats. at Large, p. 128.

The Circuit Court of Appeals, Second Circuit, in United States v. Kay, 89 F.2d 19, describes the act as follows [page 21]: “The act was intended to supplement the Federal Home Loan Bank Act (47 Stat. 725, [12 U.S.C.A. § 1421 et seq. and notes]) by supplying direct relief to home owners. For this purpose, the Home Owners' Loan Corporation was organized with a capital stock which was not to exceed $200,000,000, and which was wholly subscribed for by the Secretary of the Treasury on behalf of the United States. To further finance its activities, the corporation was authorized to issue bonds originally in the amount of $2,000,000,000 but later increased to $4,750,000,000, the bonds to bear interest at 4 per cent. and to be guaranteed both as to interest and principal by the United States.^* For a period of three years after June 30, 1933, the corporation was authorized to exchange its bonds, in a limited amount, for mortgages and to pay, within limits, any accrued taxes, assessments, necessary maintenance and repairs, and incidental costs in cash. The maximum interest payable by the home owner is 5 per cent. If the mortgagee refuses to accept the bonds and the home owner is unable to obtain a loan through ordinary channels, the corporation is authorized to make limited cash advances at interest not to exceed 6 per cent. The corporation carries the indebtedness as a first lien for 15 years, amortized monthly, quarterly, semiannually or annually as necessity requires. Also, bonds may be exchanged and cash advanced to redeem foreclosed property. The act only deals with homes valued at not over $20,000 and no single loan, whether in bonds or cash, may exceed $14,000. In creating this governmental agency and investing it with the described functions, Congress relied on its power to tax, borrow, and appropriate public money. *”

In particular the act provides as follows:

“Sec. 4. (a) The Board is hereby authorized and directed to create a corporation to be known as the Home Owners' Loan Corporation, which shall be an instrumentality of the United States, which shall have authority to sue and to be sued in any court of competent jurisdiction, Federal or State, and which shall be under the direction of the Board and operated by it under such bylaws, rules, and the regulations as it may prescribe for the accomplishment of the purposes and intent of this section. The members of the Board shall constitute the board of directors of the Corporation and shall serve as such directors without additional compensation. *

“(k) The Board is authorized to make such bylaws, rules and regulations, not inconsistent with the provisions of this section, as may be necessary for the proper conduct of the affairs of the Corporation.” (Vol. 48, U.S.Stats. at Large, pp. 129, 132, 12 U.S.C.A. § 1463 (a, k)). (Italics added.)

The power of Congress to provide in the act for the authority of the board of directors therein recited is well settled. U.S. v. Grimaud, 220 U.S. 506, 521, 31 S.Ct. 480, 55 L.Ed. 563, 569; U.S. v. Shreveport Grain & Elevator Co., 287 U.S. 77, 85, 53 S.Ct. 42, 77 L.Ed. 175.

If the weight of authority is to be measured by the number of judicial decisions holding that a second mortgage or trust deed such as the one herein under consideration is void on the ground of public policy, then the weight of authority supports respondents' contention. A brief review of such decisions therefore becomes important. The facts in all of the following cases are similar in varying degrees to the facts in the case at bar.

Jessewich v. Abbene, 154 Misc. 768, 277 N.Y.S. 599, decided by the municipal court of New York, borough of Brooklyn, second district, on February 19, 1935, appears to be one of the first, if not the first, case purporting to construe the Home Owners' Loan Act of 1933. In that case the facts apparently were essentially similar to the facts in the case at bar except that the agreement to pay the difference between the original debt and the amount in corporation bonds was not secured by a mortgage or trust deed. The agreement to pay the difference was dated June 14, 1934. The court held [page 600]: “This agreement is illegal and void, being made in violation of a statute, and plaintiffs cannot recover thereunder. * Such contract is forbidden by the Home Owners' Loan Act and Information for Applicants to the Home Owners' Loan Corporation, dated September, 1934, which provides: ‘No loan will be made where a separate understanding or agreement, calling for any payments other than those required by the corporation, is made between the debtor and the holder of the mortgage.’ The court takes judicial notice of, and the parties hereto are bound by, this provision and the fact that the Home Owners' Loan Corporation, owned by the People of the United States, is strictly a relief agency to save homes from threatened or pending foreclosures, to save lifetime savings investments of home owners in distress, to save them from becoming paupers, and is the rehabilitating agency to guard and protect the small home owner by judiciously refinancing his obligations with enough to pay all the encumbrances on his home, but limiting the new mortgage to 80 per cent of its appraisal value for the property, so he can meet his amortized mortgage by monthly payments on principal with interest. * Collusive agreement between creditor and home owner creating on the owner occupied home encumbrances too heavy and terms too severe for the home owner to work out his problem would easily defeat the very purpose of this act, interfere by trickery with this corporation collecting its bonds, and the government's financial assistance would merely delay the inevitable foreclosure suit which it meant to prevent. The second mortgagee would thereby benefit by his own wrong, first, in being paid by the government the greater part of his second mortgage in its tax exempt bonds which it guarantees unconditionally both as to principal and interest; then by getting the defendant's homestead through foreclosure for the small balance due; and, lastly, by getting the benefit of the excellent first mortgage thereon, never intended for him. * In my opinion, the existence of such concealed, collusive agreement constitutes a conspiracy to defraud, a fraud and chicanery interfering with the governmental function of rehabilitation which is the purpose of the Home Owners' Loan Corporation *.” (Italics added.)

Inasmuch as the foregoing opinion is cited in support of many of the decisions which followed, it should be noted at this point that the contract declared by the trial judge to be a secret collateral agreement was neither in fact nor in law forbidden by the Home Owners' Loan Act as recited in the opinion. Whatever (as referred to in the opinion) the “Information for Applicants to the Home Owners' Loan Corporation” amounted to, it was not then the law nor is it the law now. “Information for Applicants” is not a rule or regulation officially adopted by the corporation, and manifestly does not rise to the dignity of a statute. Moreover, assuming, but only for the sake of argument, that such could have been the law the trial judge then applied a regulation, according to the opinion, which did not go into effect until September, 1934, as controlling an act which took place on June 14, 1934. It should be noted, also, that there is nothing in the Home Owners' Loan Act or any of its rules or regulations which declares literally or inferentially that the purpose of the act is “to save lifetime savings investments of home owners in distress” and “to save them from becoming paupers”. Nor is there anything in the act, nor in any of the regulations, that such act is “the rehabilitating agency to guard and protect the small home owner by judiciously refinancing his obligations with enough to pay all the encumbrances on his home”. (Italics added.)

What appears to be the next case in chronological order is the First Citizens Bank & Trust Co. v. Speaker, 159 Misc. 427, 287 N.Y.S. 831, May 12, 1936, decided by the supreme court of Oneida county, New York, (the equivalent of the superior court of California). This case also considered a transaction involving Home Owners' Loan Corporation bonds, in connection with which the mortgagee accepted the bonds and also notes for the difference between the amount of the original debt and the bonds. The trial judge quoted from the Jessewich Case, supra, and added [page 834], “In the Jessewich Case, the court pronounced in clear language the policy of the government established for the public weal by the statute itself. The trend of judicial decisions interpreting transactions under the Home Owners' Loan Act is uniform in the recognition of the public policy ascribed to this statute in that case.” (No cases cited.) The trial judge concluded as follows: “In principle, if this action is permissible under the statute, then the authorized holder of a second mortgage could secretly take back a note payable the next day and immediately enforce this obligation to the utter destruction of the purpose of the statute. A survey of the transaction as a whole leads to the conclusion that to give validity to the note sued upon would be to sanction a violation of the spirit of the statute and contravene public policy.”

The supreme court of New Mexico, on July 20, 1936, had occasion to pass on a question somewhat similar to the issues involved in the within appeal, in Chaves County Building & Loan Ass'n v. Hodges, 40 N.M. 326, 59 P.2d 671. In that case, in a transaction involving the application of the Home Owners' Loan Act, the mortgagee signed a release dated October 14, 1933, identical in form with the release signed by the appellant herein. The court held that by the terms of the release the mortgagee accepted the bonds in full settlement of its claim and that such settlement was a valid accord and satisfaction and that no action would lie against the debtor to recover the balance. The Jessewich Case, supra, was also cited as authority. The court further observed [page 672], “It has been held that the courts should take judicial notice of the fact that the Home Owners' Loan Corporation is strictly a relief agency, organized to aid distressed home owners in saving their homes. The reduction in the amount of the home owner's debt (which, of course, can be accomplished only with the consent of his creditor) is the most effective aid, in most instances, which can be rendered to him. Merely to put off the evil day of foreclosure would fail to carry out the purposes of the act. If the debt is more than 80 per cent. of the value of the home, and the creditor refuses to discount his claim, the law affords no remedy. However, the creditor generally chooses to exchange his lien for a smaller sum in bonds. The Home Owners' Loan Corporation is interested in the reduction of the indebtedness of the home owner who procures a loan.” It should again be noted that there was nothing in the Home Owners' Loan Act, or in the rules and regulations of the corporation, which suggested that the Home Owners' Loan Corporation was interested in the reduction of the indebtedness, as such, of the home owner who procured the loan. The interest of the corporation in keeping the loan to the home owner within an amount which such home owner was likely to be able to pay was obviously for the expected benefit and protection of the corporation, and not, out of sympathy or for any other apparent reason, for the purpose of reducing the total indebtedness.

Incidentally, the words “mortgage” and “trust deed”, as well as their related terms, are used synonymously in the within opinion.

In Stager v. Junker, 188 A. 440, 14 N.J.Misc. 913, December 14, 1936, the supreme court of New Jersey declared void an agreement between the mortgagor and the mortgagee to protect the mortgagee against any loss sustained by reason of the sale of the bonds at market value, if such market value were less than the face value of the bonds. The decision recites the exact phraseology employed in the Jessewich Case, supra, the source of which phraseology is referred to in said last mentioned case as being contained in the “Information for Applicants to the Home Owners' Loan Corporation”, which information, as heretofore noted in substance, was of no legal importance. There is no reference in the Stager Case to the Amendments to the Home Owners' Loan Act, § 8(e), approved May 28, 1935 (vol. 49, U.S.Stats. at Large, pp. 293, 298, § 21, 12 U.S.C.A. § 1467(e), which amendment to the act specifically prohibits any contract representing the payment of any difference which may exist between the market value and the par value of the bonds. The Stager Case is of no particular importance except as an apparent example of the relation that the decisions all appear to bear to the Jessewich Case, supra.

In Cook v. Donner, 145 Kan. 674, 66 P.2d 587, 110 A.L.R. 244, by the supreme court of Kansas, April 10, 1937, the validity of a second note and mortgage executed in connection with a Home Owners' Loan Corporation loan was in issue. It appears that the mortgagee signed the same form of release as was signed by the mortgagee, defendant, in the case at bar. The court held that said second note and mortgage were out of harmony with the statute and rules authorizing the work of the Home Owners' Loan Corporation, showed bad faith, were against public policy, and therefore were null and void. The date of the release does not appear in the opinion. This case cites and quotes from the Jessewich Case, supra, the First Citizens Bank Case, supra, and the Stager Case, supra, and points out that [page 591]: “Many of the decisions specifically classify the work of the Home Owners' Loan Corporation as an emergency relief, and state that to sanction a violation of the spirit of the statute and rules would be against public policy.”

In Ridge Inv. Corporation v. Nicolosi, 193 A. 710, 15 N.J.Misc. 569, the supreme court of New Jersey, on July 23, 1937, held on the issue as to the validity of the second note and mortgage executed under the circumstances herein under consideration, as follows: “We are unable to agree with the contention of the appellants that agreements for payments over and above the amount of the Home Owners' Loan Corporation mortgage are entirely void and illegal. The most favorable view of the statute and the cases thereunder cited would be that fraudulent agreements, made in collusion to induce the granting of the mortgage loan by the corporation, are unenforceable. As stated, the factual finding here is that there was no fraud or collusion, and that the arrangement was openly made with the knowledge of all parties, including the representative of the corporation.”

In Bay City Bank v. White, 283 Mich. 267, 277 N.W. 888, the supreme court of Michigan, on February 24, 1938, held the second note and mortgage valid in a transaction involving the Home Owners' Loan Corporation where the second note and mortgage were secured by other and different property than that upon which the loan was secured from the corporation. Nevertheless the court cited and quoted from the Jessewich Case, supra, and as well cited the First Citizens Bank Case, supra, the Stager Case, supra, and the Ridge Investment Case, supra, but distinguishes these cases by pointing out that the transaction before the court so far as the plaintiff was concerned was in no way characterized by fraud, secrecy or collusion.

In a later case, Meek v. Wilson, 283 Mich. 679, 278 N.W. 731, the supreme court of Michigan, April 4, 1938, declared such a second note and mortgage, similar to the others herein mentioned, having been given in contravention of public policy should be set aside. In this case the court with regard to the Home Owners' Loan Act observes [page 734]: “Its purpose was not to assist holders of liens against the property, but to enable owners of homes to save their homes from foreclosure by advancing on first mortgages, sums to be used to pay off liens and to lighten the burdens of the home owners. Any benefit that might accrue to lienholders would be incidental. The H.O.L.C., in refinancing a home owner's obligations, sought to readjust them in accordance with his ability to make payments. The salutary effect of such a readjustment would be nullified if a lienholder were permitted, without regulation, to defeat the purpose of the Home Owners' Loan Act. An agreement exacted by a lienholder which tends to counteract the relief of the home owner sought by the act is contrary to the purpose of the act and to the regulations adopted thereunder. * Since the exacting of the second mortgage was contrary to the purpose of the act and to the regulations, it is contrary to public policy and unenforceable.” The decision cites all of the cases hereinbefore reviewed.

The superior court of Pennsylvania considered the same question in Anderson v. Horst, 200 A. 721, in an opinion dated July 15, 1938, in which case the mortgagee had signed, on October 7, 1933, a release and an agreement to accept bonds of the Home Owners' Loan Corporation. In an action to foreclose the second mortgage the mortgagor defended on the ground that said second mortgage was in violation of the provisions of the Home Owners' Loan Act. In declaring the note and second mortgage void the court observed [page 722]: “The purpose of the Act was, by agreement of the parties, to create a novation and reduce the principal of the mortgage debt and the interest, and extend the term of the mortgage, so as to permit the home owner to remain in possession and by monthly payments, not considerable in amount, liquidate both principal and interest within fifteen years. * The purpose and intent was to relieve pressing conditions and give the home owner a chance to work out his salvation. This could not be accomplished if following the refunding, and as a condition for the mortgagee's consent to it, the home owner should be burdened by a re-assumption of the debt, or part of it, which had been settled and released. * We are of opinion, therefore, that an agreement between the mortgagee and the home owner, made without the approval of the Corporation, by which the home owner assumes or agrees to pay all or any part of the mortgage debt which had been settled and released by the refunding effected by the Corporation, is void as against public policy and will not be allowed to be enforced by the mortgagee. * This construction of the Act, and its effect upon subsequent agreements in conflict with or violation of its terms, is in accord with the great majority of the cases where the question has arisen.” (Citing all of the cases hereinbefore reviewed, excepting only the Meek Case, supra.) In particular the opinion quotes from the Stager Case, supra, which as heretofore pointed out followed the Jessewich Case. In connection with a consideration of the foregoing decision, (the Anderson Case), attention is directed to the fact at this point that there is no provision in the Home Owners' Loan Act, nor in any of the rules and regulations adopted by the board of directors of the corporation, declaring the purpose of the act to be “to create a novation and reduce the principal of the mortgage debt”.

A somewhat comprehensive but not unlimited research reveals but one case holding to the contrary of the above decisions. In Romano v. Magliulo, 154 Misc. 814, 278 N.Y.S. 986, March 18, 1935, the municipal court of New York, borough of Brooklyn, eighth district, upheld a judgment for services rendered in connection with the securing of a home loan, which contract for services it was contended by defendants was in violation of the Home Owners' Loan Act. In construing the act the court observed [page 990]:

“We come now to the portion of the services rendered after the acceptance of the application. This service consisted in negotiations to induce the holders of the mortgages to reduce the amount of their claims and resulted in a saving to the defendants of about $1,200. The freedom of contract is guaranteed by the Fifth Amendment to the Constitution, which includes the right to engage in honest and useful work or profession for compensation. [Citing cases.] The power of Congress to limit or curtail those rights is confined to cases where a sound public policy requires the protection of certain classes of individuals or the funds appropriated by Congress for their use. This is why limitations on the amount to be charged by attorneys under the Pension Act of June 27, 1890 (26 U.S.Stat. at Large, 182 [section 4 of the act, 38 U.S.C.A. § 324]), and under the Omnibus Claims Act of March 4, 1915 (38 U.S.Stat. at Large, 962), * have been sustained. [Citing cases.]

“The Home Owners' Loan Act 1933 makes no provision for the outright payment of money to any particular class. It simply provides a means for loaning money to home owners to an amount not exceeding 80 per cent. of the appraised value and in no case more than $14,000 on any one parcel of property. The loan bears interest and has to be repaid within a definite period of time. The loans are not limited to those who are improvident or incapable of properly protecting their own interests. The benefits of this act are open to all those who, because of the financial emergency, are unable to amortize their debt elsewhere. Public policy, therefore, does not require that this class of citizens be protected against extortion or improvident bargains. Indeed, the type of person who owns his own home is usually well able to make contracts and to fully protect his rights. This is not a case, therefore, where Congress may interfere with the guaranties under the Fifth Amendment [U.S.C.A. Const.Amend. 5].”

The foregoing decisions may be regarded as representing the weight of authority, unless due to some deficiency or fault therein they lose that value as authority which would otherwise attach in the absence of such deficiency or fault. The dates of such decisions, as well as the dates of the releases or agreements providing for the additional security, are included for convenience in considering such decisions in the light of the rules and regulations of the corporation which, together with their effective dates, will hereinafter appear.

Returning now to a consideration of the facts in the case in general, and in particular to a consideration of the release and agreement to accept bonds hereinbefore referred to, such release, by reason of its importance, is herewith set forth in full. It is on a form supplied by the corporation.

“Mortgagee's Consent to Take Bonds”

“To Home Owners' Loan Corporation:

“The undersigned is a holder of a first mortgage or other obligation, which constitutes a lien or claim on the title to the home property of Charles and Elnora McAllister located at 1171–731/212 E. 49th Street, Los Angeles, California, the sum of $_, including unpaid balance of principal and interest, to date.

“Being informed that said owner has made application to Home Owners' Loan Corporation to refund his said indebtedness, the undersigned has considered the method of refunding mortgages provided in Home Owners' Loan Act of 1933, as passed by Congress and approved by the President, and the undersigned hereby consents, if said refunding can be consummated to accept in full settlement of the claim of the undersigned the sum of $5850.00, face value of the bonds of Home Owners' Loan Corporation, to be adjusted with not exceeding $25 cash and thereupon to release all the claim of the undersigned against said property. We agree to accept Bonds in conformance with Home Owners' Act Amendment of April 28, 1934.

“It is understood that the Home Owners' Loan Corporation will incur trouble and expense in connection with its effort to refund the indebtedness of said home owner, and this consent is executed in consideration of the same and shall be binding for a period of 30 days from date, and thereafter until 10 days written notice shall have been given to the State manager of the Corporation.

“This, the 1st day of August, 1934.

“California Security Loan Corporation

“By E.E. Anderson

“Secretary.

“315 E. Colorado Street, Pasadena.”

(Italics added.)

From a reading thereof it is at once evident that the release is required by the corporation for the benefit and protection of the corporation. At most it is but a declaration or offer which, if acted upon by the corporation, forecloses the mortgagee from thereafter asserting any claim as against the corporation on account of the original debt. It should be noted that the word “debt” is not used. It recites “The undersigned is a holder of a first mortgage or other obligation, which constitutes a lien or claim on the title”, and further recites “* if said refunding can be consummated to accept in full settlement of the claim of the undersigned the sum of $5,850.00”. (Italics added.) To construe such words to mean that the mortgagee intended thereby to cancel the entire debt clearly adds something to the writing which it does not contain. The obvious purpose of the requirement was to enable the Home Owners' Loan Corporation to acquire a first lien. As between the original mortgagor and the mortgagee, the release clearly signified no other purpose and could have no other legal effect, for obviously it was the intention of both such mortgagee and the mortgagor to secure the balance due on the original debt, which intention was conclusively established by the execution of the second note and trust deed.

Respondents' contention, therefore, that the release constitutes an accord and satisfaction is refuted by the record. There is nothing in the release from which it can be inferred that the mortgagee intended to extinguish the obligation, and it is difficult to understand how the mortgagor can conscientiously assert such an intention on the part of the mortgagee after paying interest for a year and a half on the note secured by the second mortgage. Respondents' contention, therefore, that the above mentioned release or consent “to take the bonds of the H.O.L.C. was an accord and satisfaction, a release and a novation as to said note and trust deed, and relieved the McAllisters (respondents) from any further obligations thereunder”, may be disregarded as trifling.

Nor is there any mention in the release, or elsewhere in the evidence, of any intention on the part of the corporation that the mortgagee, by accepting bonds of the corporation, should cancel the balance due from the mortgagor on the original debt. If there can be any question as to the intention and attitude of the corporation in this regard such intention or attitude must be ascertained from the act itself, as well as from a consideration of the rules and regulations regularly adopted by the board of directors, in addition to a consideration of the release signed by appellant. The rules and regulations officially and regularly adopted by said board of directors of the corporation pertinent to the issues herein involved, at the expense of brevity, are herewith recited in full:

“(2) Homes, Mortgages and Other Obligations and Liens

“(b) Second Mortgages, Etc.

“The Corporation may take up second mortgages or other inferior liens, provided the same is done along with the first mortgage and the total is within the Act. The Corporation has no means of preventing the home owner from undertaking to pay any indebtedness he may owe over and above that refunded by the Corporation and has no means of preventing his giving a second mortgage or other security for any such indebtedness. However, State Managers are directed, as a matter of policy in dealing with home owners, to decline to conclude a refunding of a portion of the indebtedness against the home where the home owner is proposing to give a second mortgage for any excess indebtedness he may owe unless such second mortgage financing is so arranged that the home owners will have a reasonable probability of being able to carry his first mortgage to the Corporation and the second mortgage indebtedness.” (Italics added.) (The foregoing was adopted September 8, 1933.)

“(11) Bond Exchanges.

“(c) Excess Claims or Payments:

“In the case of bond exchange loans, if the home owner owes more than 80 per cent of the value of his premises he may remain indebted for that portion that the Corporation cannot refund, provided the Corporation secures a first lien, and he may secure the excess indebtedness with a second lien. However, such refunding will not be carried through unless such excess indebtedness is placed on a payment basis so that the home owner will have a reasonable opportunity to pay the same and meet his obligations to this Corporation. The Corporation will not proceed to refund indebtedness for mortgagees who insist upon more in face value of bonds or who insist upon any other consideration (such as second mortgage, cash or other consideration) than the net amount owing to such mortgagee, together with accrued (sic) interest to date of exchange. The Corporation will not participate in any refunding where, by any means, the indebtedness of the home owner is increased or the home owner is being called upon to pay more than his debt with interest.” (Italics added.) (The foregoing was adopted November 3, 1933.)

“Whereas it is the policy of Home Owners' Loan Corporation to endeavor to make complete settlement in the refunding of home mortgage indebtedness in all cases where such is possible, and

“Whereas second mortgages for excess indebtedness over and above that which the Corporation can refund are permitted only in limited cases and then only on a basis so that the Home Owner will have reasonable probability of being able to pay his full obligation to the Corporation and meet the terms of such second mortgage indebtedness, and

“Whereas it is necessary for each case to be considered on its merits and in the light of all the circumstances of the property involved and the applicant, therefore

“Be it resolved by the Board of Directors of Home Owners' Loan Corporation that the following principles be followed in all cases where the corporation can refund only a portion of the indebtedness against a home:

“(1) If the home owner's income is so reduced that he is unable to meet full amortization payments from the beginning on his obligations to the Corporation, the second mortgage shall not require any principal payments prior to June 13, 1936, and payments thereafter shall be on a schedule which the home owner may reasonably be able to meet.

“(2) In all cases where the home owner is able to meet his full amortization payments to the Corporation from the beginning and is able to make additional payments from the beginning on the second mortgage, then the second mortgage may be amortized from the beginning, provided the payments thereon are not in excess of what the home owner may be reasonably able to pay and at the same time keep his obligation to the Corporation, making full amortization payments.

“(3) In cases where the home owner is a man of substantial means or is a man with substantial prospective income but is temporarily distressed so that it is proper for the Corporation to refund his indebtedness, any second mortgage indebtedness may be placed on any reasonable basis.” (Italics added.) (Effective January 9, 1934.)

“d. Liens Ineligible for Refinancing

“(1) Incidental Agreements.—The Corporation will not refund any indebtedness where the mortgagor is required to pay more than he owes, through agreements either to pay future interest to the original mortgagee, or to absorb any loss of interest by the original mortgagee, or to guarantee any difference between the face value of the bonds plus accumulated interest thereon and the market value of the same, or to cover any assumed loss on account of acceptance of the bonds of the Corporation by the mortgagee. The Corporation will not become a party to any contract between a mortgagor and a mortgagee in reference to indebtedness refunded by the Corporation.

“(2) Second Mortgages.—Where the full amount of the indebtedness against the property cannot be refunded by the Corporation, the mortgagee or other lien holder will be permitted to take a second mortgage or second deed of trust if the amount of such second mortgage or deed of trust does not exceed the difference between the Corporation's appraisal and the amount of the Corporation's first mortgage. In no case shall the second trust or second mortgage to such other mortgagee or lien holder be in terms which would cause the mortgagor's payments to the Corporation to be a hardship, or deprive the mortgagor of reasonable opportunity (sic) to pay such second mortgage or second trust.” (Italics added.) (The foregoing was adopted October 10, 1934.)

Before continuing with a consideration of the intention of the corporation as to the release and agreement to accept bonds of the corporation, attention will be directed to certain phases of the act and to the rules and regulations adopted by the board of directors, which should be emphasized. First, the act itself declares its purpose, as hereinbefore set forth and referred to as the “preamble”. Second, the board of directors is without power to change, alter or modify the purpose of the act, but has only such power and authority as the provisions of section 4 of the act, supra, 12 U.S.C.A. § 1463, confers; the board of directors was given power to prescribe by-laws, rules and regulations as specified therein “for the accomplishment of the purposes and intent of this section” and “to make such bylaws, rules and regulations, not inconsistent with the provisions of this section, as may be necessary for the proper conduct of the affairs of the Corporation”. (Italics added.) Third, the act contains no provision declaring any violation of the rules and regulations adopted by the board of directors, on the part of anyone participating either directly or indirectly in the application for a home loan, to be an offense either penal or moral. Fourth, the Home Owners' Loan Corporation, although declared in the act to be an instrumentality of the United States, nevertheless, so far as the rights of the parties involved in the within appeal are concerned, is a private corporation, subject to the same right to sue or be sued in either the federal or state courts, as any other private corporation.

Summarizing in substance and effect the rules and regulations of the corporation hereinbefore set forth, it will be noted that the corporation asserts no authority to prevent the home owner from “giving a second mortgage” or other security for any such indebtedness, but to the contrary, permits the home owner to “secure the excess indebtedness with a second lien” provided the corporation secures a first lien. The corporation declared it to be the policy which at most is but the practical application of business judgment, in dealing with home owners to avoid refunding transactions involving second mortgages unless it appeared reasonably probable that the home owner could carry both mortgages. Such was the state of the law when the transaction involved in the within appeal was consummated. Later, to-wit, on October 10, 1934, the regulations were modified as hereinbefore noted to provide that the “lien holder will be permitted to take a second mortgage or second deed of trust if the amount of such second mortgage or deed of trust does not exceed the difference between the Corporation's appraisal and the amount of the Corporation's first mortgage”.

By taking the foregoing rules and regulations into account in connection with a consideration of the release signed by appellant, it is evident that the corporation had no intention of exacting from the mortgagee the cancellation of the entire debt. There is nothing either in the act itself, or in the rules and regulations, indicating an intention or purpose on the part of the corporation to condemn and to mulct the mortgagee, or to exact or expect from such mortgagee either unwillingly or willingly a contribution to charity. To the contrary, both the act and the regulations respect the liberty of contract as well as vested property and contractual rights. There is no intimation of an attempt to assist in the evasion of a lawful debt and this is as it should be, for any other policy would be inconsistent with common honesty and decency. The corporation had the right, as its declared policy provided, to inquire into the ability of the mortgagor to carry both the first and second mortgage, a question which addressed itself to the judgment of those officials of the corporation called upon to determine such questions. The failure of the corporation so to do is no concern of the mortgagors, who are the plaintiffs in the within litigation. There is no evidence in the record that the corporation has complained, and it should be emphasized that the corporation is not a party to the within action. Moreover, in this connection it should be noted that it has never been the policy of the law, when parties are dealing at arm's length and in the absence of fraud, to inquire into the wisdom of a bargain.

The corporation, the mortgagors, and the mortgagee were all dealing at arm's length and there was no duty, either legal or moral, upon the part of the mortgagee to inform the corporation of an intention to secure the balance due on the original debt. The attempt, therefore, of the plaintiffs and respondents herein to base a cause of action on the alleged failure of the mortgagee to perform some duty assertedly owed to the Home Owners' Loan Corporation is unavailing. The major transaction was that which took place between the corporation and the home owner; the release of the original mortgage, to accommodate them, was incidental and in that regard there is no evidence in the record even tending to establish bad faith on the part of the mortgagee.

Referring again to the cases hereinbefore cited as authority in support of respondents' contentions, and considering them in the light of the rules and regulations of the corporation hereinbefore set forth—what justification can there be for the reference in those cases to second mortgages as “being made in violation of a statute” and “forbidden by the Home Owners' Loan Act”? Moreover, what justification can there be for a reference to the acts of the mortgagee in that connection as “trickery”, “fraud and chicanery”, “conspiracy to defraud”, “interfering with the governmental function of rehabilitation”, and “bad faith”, and reference to the contract as a “collusive agreement” and “against public policy”? It is worthy of note that in none of the cited cases does it appear that the rules and regulations of the Home Owners' Loan Corporation, as hereinbefore set forth, are taken into account.

With regard to the doctrine of “public policy”, the Supreme Court of California has observed: “What is the ‘public policy’ of a state, and what is contrary to it, if inquired into beyond what its constitution, laws, and judicial decisions make known, will be found to be matter of great vagueness and uncertainty, and to involve discussions which scarcely come within the range of judicial duty and functions, and upon which men may and will differ.” Wells, Fargo & Co. v. Enright, 127 Cal. 669, 673, 60 P. 439, 441, 49 L.R.A. 647. And again: “The power of the courts to declare a contract void for being in contravention of sound public policy is a very delicate and undefined power, and, like the power to declare a statute unconstitutional, should be exercised only in cases free from doubt.” Stephens v. Southern Pac. Co., 109 Cal. 86, 89, 41 P. 783, 784, 29 L.R.A. 751, 50 Am.St.Rep. 17. “The power to invalidate agreements on the ground of public policy is so far reaching and so easily abused that it should be called into action only in case[s] where the dangerous tendency clearly and unequivocally appears from the contract itself. Courts are reluctant, therefore, to declare a contract void as against public policy, and will refuse to do so, if by any reasonable construction it may be upheld.” Maryland C. Co. v. Fidelity, etc., Co., 71 Cal.App. 492, 497, 236 P. 210, 213. It has been affirmed, too, that “Before a court should declare a contract not malum in se opposed to sound public policy, it must be entirely satisfied that the public will be substantially benefited, and that such advantage is not merely theoretical or problematical.” Cox v. Hughes, 10 Cal.App. 553, 563, 102 P. 956, 960. And, finally, “* if there is one thing more than another, which public policy requires, it is that men of full age and competent understanding shall have the utmost liberty of contract, and that every contract, when entered into fairly and voluntarily, shall be held sacred and shall be enforced by the courts of justice.” Northwestern M.F. Ass'n v. Pacific Co., 187 Cal. 38, 44, 200 P. 934, 937.

Referring again, and in conclusion, to the Home Owners' Loan Act a consideration of its provisions scarcely warrants the inference that the act originated out of sympathy for the home owner; it is more reasonable to assume that its adoption was deliberately calculated on the basis of knowledge and experience. The home owner has long been regarded as a social, economic and political bulwark of national existence, and the argument that governmental assistance made available to tide such a class over a critical period would from a practical standpoint alone redound to the public good, may be difficult to rebut. Indeed, for the sake of argument it may be conceded, but from such concession it does not necessarily follow, that the Home Owners' Loan Act contemplated the benefit of one class at the expense and sacrifice of another.

From the foregoing the conclusion is inevitable that the mortgagee's consent to take bonds did not constitute a cancellation of the balance due on the original debt; that the second deed of trust and note were in entire accord with the Home Owners' Loan Act as well as with the rules and regulations adopted by the board of directors of the Home Owners' Loan Corporation; that said second trust deed and note were valid in every respect; that the mortgagee owed no duty to the Home Owners' Loan Corporation to inform such corporation of an intention to secure the balance due on the debt by means of a note and second trust deed; that no fraud or deceit was practiced by the defendant and appellant in connection with the transaction; that the doctrine of “public policy” is not applicable; and that the acts of the mortgagee in thus securing the balance due on the debt gave rise to no cause of action on any basis to cancel the note and second trust deed.

This being merely a suit asking that the note and second trust deed be declared void and praying that the said note and second trust deed be ordered delivered up and canceled, and asking for recovery of $275 heretofore paid on the said note, it is ordered, for the foregoing reasons, that the judgment appealed from be, and it is, reversed, and the court below is instructed to enter a judgment in accordance with the prayer of the amended answer, to-wit, “that plaintiffs take nothing by their complaint on file herein and that the answering defendants recover their costs of court incurred herein.”

FOOTNOTES

FOOTNOTE.  Bonds issued prior to April 27, 1934, or issued thereafter pursuant to commitments outstanding on that date, were guaranteed only as to interest.

DORAN, Justice.

We concur: YORK, P.J.; WHITE, J.