CAMPBELL v. BIRCH (1941)

This action arises out of a 99–year lease of real property located in the city of Los Angeles, which lease was executed on June 6, 1928, and provided that appellant A. Otis Birch should pay rental of $1,000 per month during the period covered by this action. Respondent in his trustee capacity prosecutes the action as the successor in interest of the original lessors, and seeks to recover the difference between the stipulated rental of the lease and a lesser amount which he alleges he was induced to accept by the fraud and deceit of the appellants, A. Otis Birch, his wife, M. Estelle C. Birch, and his cousin, Lula M. Minter, together with costs, expenses and attorney's fees as provided in the lease.

It is alleged, and admitted, that on August 1, 1935, there remained unpaid certain judgments amounting to $6,395.70 which had theretofore been recovered by respondent against appellant A. Otis Birch for rental due under said lease, and in addition there was due from said appellant on the said date the further sum of $3,016.89 for unpaid rent and interest thereon for the months of May, June and July of 1935, or a total of $9,413.59.

It is also alleged that just prior to August 1, 1935, appellants Birch made an offer to compromise said claims for the sum of $6,000 upon the condition that respondent “agree to a reduction in the rent provided in said lease for a period of five years”. Accordingly, on said August 1, 1935, respondent and appellants Birch executed a modification agreement providing that in lieu of the payment of $1,000 monthly instalments of rental required by the original lease, appellants should pay the sum of $500 per month for the period of August 1, 1935, to August 1, 1936, and for the four-year period thereafter ensuing appellants should pay a reduced rental pursuant to a graduated schedule agreed upon. Thereafter, the probate court granted respondent's petition for permission to accept said compromise and to execute said modification agreement.

The instant action was instituted on April 17, 1937, to recover the sum of $8,413.59 in damages, of which the sum of $3,413.59 was alleged to have been sustained by reason of the compromise and settlement of judgments and claims for rent, and of which the sum of $5,000 was alleged to have been sustained by reason of the modification agreement and the acceptance of a reduced rental for a period of ten months.

The gist of this action is fraud in inducing respondent to alter his position to his damage, it being alleged that prior to August 1, 1935, respondent had levied execution under some of the judgments above mentioned upon real property of appellant Birch, including that parcel known as 1144 South Broadway, Los Angeles, and that on or prior to October 15, 1934, appellants had entered into a conspiracy to defraud and deceive respondent; that in pursuance thereof and with the express intent to defraud and deceive respondent, appellants Birch executed a note for $15,000 secured by a trust deed naming Lula M. Minter as beneficiary, covering and purporting to be a lien upon the property situate at 1144 South Broadway; that said trust deed was fictitious and false and appellants Birch did not receive the $15,000 thereunder, nor a further advance of $10,000 under said deed of trust; that appellant Minter did not pay to appellants Birch said sums of $15,000 or $10,000 or any part thereof, and said note and trust deed were executed and recorded pursuant to the scheme and conspiracy of appellants to defraud and deceive respondent and to make the latter believe that A. Otis Birch was insolvent or nearing insolvency.

It was also alleged: “That between the dates of November 8, 1934 and August 1, 1935, the defendants * by words and acts lead this plaintiff to believe that the defendants were indebted to the defendant Lula M. Minter, in approximately the sum of 130,000, and that said sum was secured by a pledge of the stock of the Birch Holding Company, and that if this plaintiff insisted upon the collection of the judgments he had recovered against the defendant A. Otis Birch, and insisted upon the payment by said Birch of the monthly rental, as provided in the 99–year lease above mentioned, that the defendant Lula M. Minter would foreclose her pledge on the stock of the Birch Holding Company, as above set out, thereby causing the defendants A. Otis Birch and M. Estelle C. Birch to become insolvent. *

“That the various statements and acts of the defendants, and each of them, as above set out, as to the indebtedness between the defendants A. Otis Birch and M. Estelle C. Birch and Lula M. Minter, were false and said indebtedness was false and fictitious and non-existent in fact, which fact was known to the defendants, and each of them, and the statements and acts of the defendants, and each of them, were made and done for the purpose and express intent of deceiving the plaintiff. *

“That relying upon the statements and acts of the defendants * that (they) were indebted to Lula M. Minter in the sum of $130,000 and that said indebtedness was secured by a pledge of all of the stock of the Birch Holding Company, which company owned all of the property formerly owned by A. Otis Birch, and in fear that the defendant Lula M. Minter would foreclose her pledge upon said stock and for fear that the defendant A. Otis Birch would become insolvent, this plaintiff did, on or about August 20, 1935, accept said offer of $6,000 for his judgments and claims against the defendant A. Otis Birch, which claims at said time totalled the sum of $9,413.59, and further agreed to a modification of said lease, whereby he would accept a lower rental for a period of five years.” That had respondent known that the acts and statements of appellants as to the financial condition of the defendant A. Otis Birch were false and the alleged indebtedness of $130,000 existing in favor of appellant Minter was fictitious and false, “he would not have accepted said offer of settlement and would not have agreed to a reduction of rent under said lease.”

The trial court found in favor of respondent trustee in accordance with the allegations of the complaint, and judgment was thereafter entered against the three appellants for the sum of $8,413.59 by way of general damages, and for $313.35 for costs of suit; and against appellant A. Otis Birch for the sum of $375 by way of special damages, and for the sum of $878.85 as attorney's fees.

Appellants contend upon this appeal that the evidence is insufficient to support the findings and judgment.

It appears from the record herein that in 1928, when the lease from which this litigation arose was executed and its obligations assumed by appellant A. Otis Birch, his net worth was in excess of three millions of dollars; and that in October, 1934, appellant and his wife, M. Estelle C. Birch, formed three corporations, to-wit: (1) Birch Ranch & Oil Company, (2) Birch Securities Company, and (3) Birch Holding Company. They then vested in the Birch Ranch & Oil Company all of their interests and assets in the Conaway Ranch, the Birch Oil Company and the Birch–Royer Oil Company, and vested in Birch Securities Company ownership of the bonds of reclamation district No. 2035 on the Conaway Ranch which was located in Yolo county. Ownership of all of the stock of the Birch Ranch & Oil Company and of the Birch Securities Company was then vested in the Birch Holding Company.

By reference to a financial statement of appellant A. Otis Birch dated April 11, 1933 (Plaintiff's Exhibit 13), it appears that the Birch Oil Company which was thus transferred was valued at $500,000, that its property was clear and that 70% was owned by appellant A. Otis Birch; that the Birch–Royer Oil Company was valued at $300,000, its property was clear and 871/212% was owned by Mr. Birch. With respect to the Conaway Ranch, this statement recites: “Conaway Ranch, Woodlands, Calif., 22,000 acres, value $2,200,000; 2,000,000 bonds issued for reclamation work; $454,000 bonds sold, rest of bonds held by Mr. Birch and put up for security for loans. Some of bonds are with Citizens Bank.”

All of the stock of the Birch Holding Company was owned by appellants, A. Otis Birch holding 49% and M. Estelle C. Birch holding 51% thereof.

In October, 1934, at the time of the formation of these corporations and the vesting of ownerships, as above noted, appellants Birch executed and delivered to appellant Minter their promissory note for $130,000, and also delivered to her all of the stock of the Birch Holding Company, as security, and she took physical possession of the stock and held it until about the middle of July, 1935.

On August 1, 1935, or thereabouts, the agreement compromising respondent's accrued claims and reducing the rent under the lease was executed.

Shortly before this, to-wit, on July 16, 1935, appellants A. Otis Birch, M. Estelle C. Birch and one Stanley C. Benson, executed an instrument by which it was agreed that appellants Birch “will arrange with Lula M. Minter so that she will release the $25,000 lien she has upon the Broadway property which you (Benson) just purchased, which amount is represented by a $15,000 note secured by a second trust deed, and $10,000 additional advance according to the terms of the note and trust deed. This $25,000 is to be added to our present liability to Miss Minter in the sum of $130,000 as security for the payment of which she holds all of the capital stock of the Birch Holding Company. The Birch Holding Company owns all of the issued and outstanding stock of the Birch Ranch & Oil Company and Birch Securities Company.

“We hereby transfer, sell and assign the entire issued and outstanding capital stock of the Birch Holding Company, to-wit, 100,000 shares, which we own, to you, subject to our present indebtedness of $130,000 to Miss Minter, the $25,000 additional to be added as above mentioned, about $76,000 which we now owe Mrs. Conaway, (the payment of our obligation to Mrs. Conaway being also secured by the Birch Holding Company stock after Miss Minter is paid) and subject also to our right to additional sums which we may be able to borrow from Miss Minter and Mrs. Conaway from time to time, but the maximum for which the Birch Holding Company stock will be held by Miss Minter will be $200,000, and the maximum to Mrs. Conaway $150,000, and they are to be so notified by you and ourselves. *

“You (Benson) hereby assume and agree to pay as soon as possible all liabilities of the corporation, also what we personally owe the Citizens National Trust & Savings Bank, California Trust Company, California Bank of Los Angeles, the Hopkins family, and all deficiencies which may be obtained on our notes secured by trust deeds or mortgages on property which we still own or which we have owned and either lost or sold. Any refinancing you may find it necessary to do in order to pay these liabilities or indebtedness, or to operate those corporations, or their properties, shall be done in such manner that we will have no personal liability. *

“You and Mr. Birch are to work actively to enhance the value of all assets, lessen the liabilities and expenses, assist in all refinancing, and put the affairs of the corporations and properties in the best condition possible, financially and otherwise, but in so doing, we are not to assume any personal liability. Mr. Birch is to continue to manage the properties of the corporations, subject to the direction and control of the respective Boards of Directors.

“Our present liabilities to any of the corporations for cash advances and otherwise are to be cancelled immediately.

“If and when the corporations and their properties and liabilities are refinanced and reorganized, and you and we agree that the capital stock of the Birch Holding Company has a net market value of at least $1,000,000 you are to pay us the sum of $500,000 in cash.” (Italics added.)

On July 16, 1935, coincident with the execution of the foregoing instrument, the appellant Minter delivered to appellants Birch their note in her favor for $130,000 and the note and trust deed for $25,000 also in her favor, released the Birches from all personal obligation to her and accepted in lieu thereof the personal note of Stanley C. Benson for $162,574.66 in her favor, dated July 16, 1935, payable ten years after date. This note provided that Benson should pledge and deposit with the payee thereof (appellant Minter) 100,000 shares of the capital stock of the Birch Holding Company “as collateral security for the payment of this note and of all other obligations of the undersigned (Benson), and also other obligations which may be incurred by A. Otis Birch and M. Estelle C. Birch, as hereinafter more particularly mentioned, in favor of the payee or the holder hereof. *”

This personal note of Benson also provided: “This obligation is made and given by the undersigned, Stanley C. Benson, in favor of the payee, Lula M. Minter, to replace the obligation which A. Otis Birch and M. Estelle C. Birch now have to the said payee, Lula M. Minter, in a sum equivalent to the principal of this note, and from which they are hereby fully released by the payee.”

In connection with this last mentioned transaction, appellant Minter testified in a deposition given by her on November 7, 1936, that the stock she had held of the Birch Holding Company was returned by her to appellant A. Otis Birch on July 16, 1935, and that it was reissued and returned to her in the name of Mr. Benson.

With reference to the agreement of July 16, 1935, between the Birches and Benson, and the Benson note to Minter providing for pledge of and deposit by Benson of the Birch Holding Company stock to Minter, the stock was not returned to Miss Minter as collateral security for the said Benson note, but instead the Birches and Benson executed an instrument denominated a voting trust agreement designating the Birches as trustees and Benson as beneficiary, and providing that all of the stock of the Birch Holding Company, comprising 100,000 shares, should be deposited with the trustees, who were vested with “all of the powers, rights and privileges of a shareholder of the corporation”, and also the power to “vote for, do or assent, or consent to, any act or proceeding which the shareholders of said company might or could vote for, do or assent, or consent to.” At the same time, to-wit, on July 16, 1935, appellants Birch executed a purported trustee's certificate certifying that they had received from Stanley C. Benson certain certificates issued in their names evidencing ownership of 100,000 shares of the capital stock of the Birch Holding Company, and reciting that these shares were to be transferred on the books of said corporation to appellants Birch, as trustees, and to be held by them under the so-called voting trust agreement of July 16, 1935. Neither this certificate nor the voting trust agreement made any mention of Lula M. Minter or the fact that said stock had been pledged to her as collateral security for the Benson note.

Respondent Campbell testified that early in the spring of 1935 (prior to the execution of the various instruments between the Birches, Minter and Benson dated July 16, 1935), appellant A. Otis Birch came to his office and informed him that “his financial condition was such that he did not have funds available to pay the rent (of the 99–year lease) and he would have to have a modification; that he simply could not go on. That he owed lots of money * (to appellant Minter) $130,000 on a note she held the stock of the Birch Holding Company as security for, and that he owed her $25,000 on a second mortgage (trust deed) on the Broadway property.” Said witness testified he talked to Mrs. Birch on the telephone and she told him they were “very anxious to settle this case and get together and make a settlement rather than to go to court to fight about it.” He also talked to Mr. Benson who told the witness Campbell that he was acting as intermediary between Mr. Birch and Miss Minter and that he (Benson) “thought he would be able to get her (Minter) to cooperate and not close out Mr. Birch in the event that we could make some kind of a settlement on this lease. * He also told me that he personally knew that this was a good mortgage—this second mortgage for $25,000, she had really loaned him (Birch) the money, and that he knew that the $130,000 was actually loaned, in his opinion. Finally, Mr. Benson and I worked out a modified agreement”, which was consummated on August 1, 1935.

When respondent Campbell was asked if he relied upon the statements of Birch and Benson to the effect that if the modification agreement was not made that Miss Minter would take some action against the Birch properties, said witness replied: “Yes, I believed * that Mr. Birch on August 1st really owed Miss Minter $130,000 on the property which was what I considered the fact * and I believed that all I could do would be to attach the stock in order to collect any money, and that Miss Minter would come in with a $130,000 mortgage, and take it away from me, because I could not pay off that large amount of a loan, as well as relying upon the fact that Mr. Birch had said unless he did get relief he would have to go into insolvency, or bankruptcy, or something.” Respondent also testified that he had a title search made and was informed that the second mortgage of $25,000 in favor of Minter was a matter of record. Upon cross-examination, respondent stated that Mr. Birch gave him a financial statement signed by him in April, 1933, so that respondent was familiar with the amounts then owed by said appellant Birch, and that it was in March of 1935 at a supplementary proceeding that he first heard that Miss Minter was holding certain stock as security for certain loans she had made to appellant Birch; that when Mr. Birch came to his office in the spring of 1935 and stated that he was unable to borrow from the banks and had to borrow from his relatives, respondent “believed that * until I found that Lula M. Minter was not holding the stock of the Birch Holding Company.” He said he made this discovery when Miss Minter made a deposition on November 7, 1936, at which time she stated “she was holding the stock of the Birch Holding Company under the name of Stanley C. Benson.” Continuing on cross-examination, respondent stated that certain statements made by appellant A. Otis Birch during the course of supplementary proceedings in May of 1935 induced him to make the agreement of August 1, 1935, such statements being to the effect that said appellant owed a great deal of money; that he was living by borrowing from his relatives; that he was practically broke; and that the only available funds he had were those borrowed from his relatives. Certain statements made by said appellant at a supplementary proceeding had in July of 1935 also constituted an inducing factor for the agreement of August 1, 1935, as well as telephone conversations which he had with Mrs. Birch.

In answer to the question, “Now, when did you first come to the conclusion, Dr. Campbell, that the statements that were made by Mr. Birch in the month of March, 1935, to the effect that he owed Miss Minter $130,000 were untrue, give me the date, approximately.”, the respondent answered: “Well, it was right after Miss Minter's deposition of November 7, 1936, when I had a court order for a handwriting expert to examine the stock, and when they came to court to produce the stock, she did not have it, and that is when I first saw that they were telling things that were not true.”

Continuing: “Q. What stock did you request? A. The Birch Holding Company.

“Q. What date was that again, please? A. November 7, 1936.

“Q. * Well, Dr. Campbell, didn't you know, as a matter of fact, that Miss Minter was not supposed to have the stock at that time in accordance with the contracts that had been made, did you not know that the stock was being held in a voting trust at that time? A. When—that is when I first found it out; I did not know that.

“Q. Did you not know that Miss Minter in November of 1936 was holding what was known as a voting trust certificate for those shares of stock? A. No, not until I came up to the court on the court order to produce the stock, and they did not have the stock, and they produced this trust certificate in lieu of it, that was the first thing I knew about it.

“Q. Now, when did you first learn that a contract had been made between Mr. Birch, Mrs. Birch and Mr. Stanley Benson on the 16th of July, 1935? A. I learned that at a supplementary proceeding of Mr. Birch when we started to question him, we had a judgment against him and—

“Q. (Interrupting) About what date was that, please? A. The transcript is there.

“Mr. Tipton: About September 22nd, 1936.

“By Mr. Murphy: Was that the first time you knew that such a contract had been made? A. Yes. *

“Q. Do you know, Dr. Campbell, whether when Mr. Otis Birch was talking to you in the early month of March, 1935, whether it was a fact that at that time Miss Lula M. Minter was holding all of the stock of the Birch Holding Company as security for the payment of the $130,000 note? A. I knew it only as Mr. Birch said so, * I did not doubt it at all. He said she had it, and I believed she did. *

“Q. * Dr. Campbell, I am going to ask you a question point blank: What did you find out was untrue in November of 1936? * A. Miss or Mrs. Minter stated she was holding the stock of the Birch Holding Company in the name—the stock was in the name of Stanley C. Benson, and that was not true. The stock has never been in the name, so they say, of Stanley C. Benson, and she was not holding the stock.

“Q. By Mr. Murphy: And you learned that when? * A. November the 7th, 1936. *

“Q. Yes. So as to understand it correctly, this statement that Miss Minter was holding stock in the name of Stanley C. Benson was not one of the statements which induced you or assisted in inducing you to make the contract of August 1, 1935? A. I did not even know of it at that time. *

“Q. But what was there that happened on November 7, 1936, that led you to believe that the statement made by Mr. Birch on May 7, 1935 to the effect that he had given to Miss Minter the Birch Storage stock as security for a loan was not true? * A. It is my remembrance Miss Minter said he gave her the stock.

“Q. All right. Did the fact that Mr. Birch told in a supplementary proceeding on May 7, 1935, that he had put up the Birch Storage stock with Miss Minter as security induce you or assist in inducing you to make the contract of August 1, 1935? A. Yes. *

“Q. Now, don't you know, as a matter of fact, Mr. Campbell, and didn't you know on November 7, 1936, that it was a fact that on July 16, 1935, a contract was made between Mr. Benson and Mr. Birch and Mrs. Birch by which the stock which stood in the name of Mr. Birch and Mrs. Birch in the Birch Holding Company was issued to them as trustees, and that they as trustees executed a voting trust certificate with Stanley C. Benson, and issued to Stanley C. Benson a voting trust for all these shares of stock, which voting trust certificate standing in the name of Stanley C. Benson was endorsed by Stanley C. Benson to Miss Minter, and that she held the voting trust certificate as a pledge to secure the $130,000 note? A. I found that out when I subpoened the stock into court for examination, and she did not have the stock; it was through your office, or your assistant brought up this other agreement, and that is the first I ever knew of it.”

Voluminous records consisting of checks, notes, bank statements, deeds, trust deeds, mortgages and other legal documents were introduced in evidence by appellants to show a course of dealing between A. Otis Birch and Lula M. Minter for many years prior to the execution of the 99–year lease which forms the basis of the instant litigation. Appellants maintain that by means of these records they proved the existence of a bona fide obligation between themselves beginning as early as 1897 and steadily growing until 1934 when A. Otis Birch was indebted to Miss Minter in the sum of $130,000; that the representations made to respondent, and which he claimed induced him to enter into the compromise agreement and reduce the rental under the lease, were true; consequently, the findings as to false representations, intention to defraud and as to the existence of a conspiracy are not supported by the evidence.

It is a noteworthy fact that when appellant Birch arranged to have Mr. Benson take over the stock of the Birch Holding Company and to refinance his business and assume his great load of liabilities, no mention was made of the 99–year lease, and when examined under section 2055 of the Code of Civil Procedure by counsel for respondent, Mr. Birch admitted that during the time when he was seeking a modification of the terms of the lease and a compromise agreement with respect to the judgments held against him by respondent, he never mentioned to the latter his negotiations with Benson. He also admitted that under the agreement with Benson and the arrangement with Miss Minter, his obligation of $130,000 and interest thereon was released on July 16, 1935; that he had no agreement, either oral or written, with Miss Minter by which he agreed to pay her the $130,000 which was assumed as an individual obligation by Benson; and that on August 1, 1935 when the compromise and modification agreement was consummated with respondent, he (Birch) did not owe Miss Minter anything. Appellant Birch further testified that he and Benson continued to operate the Birch companies under the agreement with Benson until November 27, 1937.

As hereinbefore stated, the gist of this action is fraud in that appellants deceived respondent and induced the belief, contrary to the facts, that they were insolvent or would forthwith become insolvent and all of their assets would be taken from them by Lula M. Minter through foreclosure of her liens thereon, and that relying upon such belief respondent discounted his existing claims and reduced the rental under the 99–year lease, all to his damage.

A review of the voluminous record in this case conclusively establishes the fact that appellants Birch were not insolvent and that they never even slightly approximated that status. Moreover, the evidence, only a small portion of which is recited in this opinion, clearly indicates that appellants suppressed the true state of facts concerning their affairs, and that this was one means by which they induced respondent to change his position.

In actions based upon fraud, issues as to the falsity of representations made, their materiality and plaintiff's reliance upon them are questions of fact for the trial court. (See 12 Cal.Jur. 835, and authorities there cited.) Even though this court might not agree with the conclusions reached by the trial judge in the instant case, it is powerless to interfere because it is obvious that there is substantial evidence to support his findings of fact.

With appellants' contention that attorney's fees and expenses were improperly awarded herein, we cannot agree, for the reason that it was provided by the 99–year lease from which this litigation stems that “It is hereby agreed between the parties hereto that lessee shall pay all reasonable costs, expenses and attorney's fees incurred by or against lessors in any litigation between the parties hereto or persons claiming under them, arising out of or in connection with this lease or the construction or enforcement thereof, in case the lessors or parties claiming under them shall prove successful in such litigation.”

Appellants complain of two errors in the admission of evidence. The evidence referred to was of such character that appellants suffered no prejudice through its introduction; consequently, if any slight error resulted therefrom, it would be insufficient upon which to base a reversal of the judgment herein.

For the foregoing reasons, the judgment appealed from is affirmed.

YORK, Presiding Justice.

We concur: DORAN, J.; WHITE, J.