PAPINEAU v. SECURITY FIRST NAT BANK OF LOS ANGELES (1935)

Stripped of all verbiage, and stated in plain language, the theory upon which this case was tried, and the issues presented by the pleadings and the testimony, involves just one issue, to wit: Whether an assignment of a one-tenth interest in a certain trust made by the defendant, Vincent P. Ganahl, on the 23d day of July, 1925, or a certain other assignment of the same interest, dated July 18, 1929, should take precedence. This issue involves inquiry as to the validity of the assignment dated July 23, 1925, and the sale of the one-tenth interest made in pursuance thereof.

On the 7th day of October, 1916, Mrs. Louise Ganahl and nine other persons, including Ernest Ganahl and Vincent P. Ganahl, made, executed, and delivered to the German-American Trust & Savings Bank of Los Angeles, a certain instrument of trust, whereby certain property set forth in the record, aggregating in value many thousands of dollars, was placed in the possession, custody, and control of the German-American Trust & Savings Bank, as trustee, certain real and personal property. This instrument of trust named Louise P. Ganahl, Rose E. Donovan, Ernest Ganahl, and Mrs. Louise Ganahl as executive committee of said beneficiaries to act in behalf of all the beneficiaries named in the trust instrument. Ernest Ganahl was appointed agent of the trustee to collect the rentals of the property mentioned in the trust, and generally to care for and have the custody of the real property and the improvements thereon, as set forth in the instrument of trust. The defendant, Security-First National Bank of Los Angeles, a corporation, has succeeded to the interest of the German-American Trust & Savings Bank, and during all the times mentioned in this action was and still is the trustee, and acting under said trust instrument.

On the 23d day of July, 1925, Vincent P. Ganahl borrowed from the Security Trust & Savings Bank of Los Angeles, a corporation, the sum of $5,000, and to secure the payment thereof within the time mentioned in a promissory note evidencing that sum, executed and delivered an assignment of his one-tenth interest in and to the trust above mentioned. The assignment, in part, reads as follows: ‘This assignment, made this 23d day of July, 1925, between Vincent P. Ganahl, assignor, Security Trust & Savings Bank, a corporation, of Los Angeles, California, trustee, and Security Trust & Savings Bank, trustee under Trust G–759, payee * * * Said assignor, by these presents, hereby does assign, transfer and set over unto said trustee, in trust, with power of sale, his entire undivided beneficial interest in and to the trust, evidenced by certain declaration of trust issued by Security Trust & Savings Bank, trustee, under its Trust G–579; subject, however, to all terms and conditions of said declaration of trust; together with a like interest in and to the proceeds and avails arising or growing out of said Trust; the trustee thereunder hereby being authorized to pay and turn over unto said payee all moneys and benefits growing out of the interest hereby assigned.’ The instrument of assignment specifically mentions that it is given to secure the payment of the $5,000 borrowed money, and certain costs and expenses mentioned in the assignment.

Following certain business negotiations culminating the entering into of an agreement of purchase by Vincent P. Ganahl with the plaintiff, for certain property located at Lake Arrowhead, in San Bernardino county, for the sum of $40,000, to secure the payment of which Vincent P. Ganahl, on the 18th day of July, 1929, executed and delivered to the plaintiff a certain instrument of assignment whereby he transferred all his reversionary interest, consisting of a one-tenth interest in and to the trust first mentioned herein, to the plaintiff as security for the payment of said $40,000, and authorized the Security-First National Trust & Savings Bank, as trustee, to pay over to the plaintiff all moneys, property, and benefits growing out of, or arising by reason of, his reversionary interest in and to said trust. On the 18th day of July, 1929, the Security-First National Trust & Savings Bank acknowledged receipt of the original of said assignment in the following words and figures: ‘The receipt of the original of this assignment is hereby acknowledged this 18th day of July, 1929. (Signed): Security-First National Trust & Savings Bank, By E. B. Pentz, Assistant Trust Officer.’

The $5,000 borrowed by the defendant, Vincent P. Ganahl, as aforesaid, not having been paid, the defendant bank in this action, as a trustee under the assignment made by Vincent P. Ganahl, dated July 23, 1925, proceeded to, and did, on the 17th day of January, 1931, sell, all and singular, the interest of the said Vincent P. Ganahl in and to the trust first mentioned herein, at which sale the defendant, Ernest Ganahl, became the purchaser upon his bid of the sum of $5,392.83.

The court found, as set forth by the respondents, that neither the defendant, Security-First National Bank of Los Angeles, nor any of its officers or agents, made any false, fraudulent, or untrue statements whatever to the plaintiff; likewise, that neither said bank, nor any of its officers, falsely, fraudulently, or otherwise concealed any matters of fact concerning said trust, or the assignment of said one-tenth interest made by the said Vincent P. Ganahl; and further found that the plaintiff had not been injured by any of the acts or conduct, statement or representations on the part of the defendants. The court further found that the officers of the defendant bank, at the time of the assignment, executed and delivered by Vincent P. Ganahl, informed the plaintiff of the prior assignment. It may be here noted that the plaintiff offered testimony controverting the finding just mentioned.

Upon the findings, the substance of which we have just mentioned, it is contended that the respondents must prevail. This contention, however, overlooks the fact that there is no finding made by the court, nor was there any testimony introduced to which our attention has been called, or which we have been able to discover by an examination of the record, conforming to, or tending to conform or comply with, the requirements of section 2235 of the Civil Code, which reads: ‘All transactions between a trustee and his beneficiary during the existence of the trust, or while the influence acquired by the trustee remains, by which he obtains any advantage from his beneficiary, are presumed to be entered into by the latter without sufficient consideration, and under undue influence.’ There is not a word of testimony in the record that we have been able to discover indicating that the assignment made by Vincent P. Ganahl, on the 23d day of July, 1925, to the German-American Trust & Savings Bank, to the interest of which the defendant bank in this case has succeeded, and also to the performance of the obligations of which the defendant bank has assumed, was made upon sufficient consideration, and not under undue influence.

That the obtaining of the note and assignment was an advantage secured by the trustee is certainly not open to question. In this particular the following language from the case of Metropolis, etc., Savings Bank v. Monnier, 169 Cal. 592, 147 P. 265, 268, is applicable: ‘The relation of attorney and client is of a fiduciary character, and the Civil Code (section 2235), clearly provides that all transactions between a trustee and his beneficiary during the existence of the trust, by which he obtains any advantage from his beneficiary, ‘are presumed to be entered into by the latter without sufficient consideration, and under undue influence.’ This does not mean that a trustee may not deal with his beneficiary. But, if he does deal with him in such manner as to obtain an advantage, the trustee has the burden of showing by evidence that the transaction was fair. Certainly the obtaining of a note for $20,000, secured by mortgage, is an advantage, and the attorney, or those claiming under him, cannot safely rest, as they did in this case, without affirmative proof of the facts surrounding the transaction. On the question of the applicability of the presumption declared by section 2235, it is sufficient to refer to Cooley v. Miller & Lux, 156 Cal. 510 [512, 523], 105 P. 981, and authorities there cited. See, also, Cooley v. Miller [168 Cal. 120], 142 P. 83, 88.'

The purchaser of the one-tenth interest in the trust made by the sale of the trustee was expressly named as the agent of the trustee in the trust agreement executed and delivered as first herein stated. He was also one of the executive committee for the benefit of the beneficiaries named in said trust agreement. He was charged with looking after the properties mentioned therein, and the profits arising therefrom for the benefit of the beneficiaries, which, of course, included the interest of Vincent P. Ganahl, named in the trust agreement as one of the beneficiaries.

This brings all the actions of Ernest Ganahl within the terms and provisions of section 2219 of the Civil Code defining what constitutes a trustee. He had all the information as to the value of the trust, and he stood in the relation of confidence as to the property of said trust, as well as having control thereof.

The record shows that at the time of the sale made by the bank as trustee, and the purchase of the one-tenth interest by Ernest Ganahl, the plaintiff in this case appeared and protested against the sale, claiming his right thereto by reason of the assignment made to him on July 18, 1929. The purchase by Ernest Ganahl invokes the application of the rule set forth in section 2229 of the Civil Code, to wit: ‘A trustee may not use or deal with the trust property for his own profit, or for any other purpose unconnected with the trust, in any manner.’ We may here state that there is testimony in the record to the effect that the property included in the trust agreement was of the value of at least $170,000, estimated by some of the testimony to be worth a great deal more, but assuming that that figure is approximately correct, the one-tenth interest would be worth at least the sum of $17,000, of which Ernest Ganahl, as the agent of the trustee in charge thereof, must be held to have had full knowledge.

While the sale which we are considering was made by a trustee to the agent of the trustee, and the transfer was made by the trustee to its agent, we think the following rule set forth in the case of Differding v. Ballagh, 121 Cal. App. 1, 8 P.(2d) 201, 203, applicable: ‘When a trustee attempts to transfer to himself, as an individual, property of the trust, the transaction is void. The rule is thus stated in 25 California Jurisprudence, 136: ‘If, acting in his fiduciary capacity, the trustee has assumed to deal with himself as an individual, the transaction will be held to be invalid. The rule is absolute; it does not depend upon any showing of bad faith on the part of the trustee, or injury to the trustor or principal. While issues in respect of the fairness of the transaction may be determinative of the controversy in the absence of any fiduciary or trust relationship, when this relationship is disclosed, any inquiry in this respect is at an end.’' This rule is found approved in 25 California Jurisprudence, page 136.

The respondent bank, in simply offering testimony that the assignment made by Vincent P. Ganahl on the 23d day of July, 1925, was made in consideration of a loan of $5,000, stopped short of complying with the requirements of section 2235, supra. Just as said in the case of White v. Warren, 120 Cal. 322, 49 P. 129, 52 P. 723, 724: ‘Defendant, in offering evidence tending to prove the money to be a gift from the wife, and resting his case at that point, rested too soon. Such evidence, standing alone, compassed his defeat, for by reason of the evidence the presumption of undue influence arrayed itself against him.’ See, also, the case of Wehner v. Wehner, 68 Cal. App. 789, 230 P. 458, and cases cited in that opinion. It is not a question of actual fraud, but whenever a transfer or assignment is made by a beneficiary to a trustee, it becomes incumbent upon the trustee to introduce testimony showing that there was a sufficient consideration, and that there was exercised no undue influence. In other words, that the transfer and assignment was the free and voluntary act of the beneficiary. The defendant bank in this case has set up his assignment, made of his one-tenth interest by Vincent P. Ganahl, which, of course, under the system of pleading followed in this state, was automatically denied. Sterling v. Smith, 97 Cal. 343, 32 P. 320.

The contention made by the respondents, in substance, that the $5,000 was loaned by the defendant bank as a bank, and not as a bank acting as trustee under the trust assignment mentioned in this opinion, and that the bank as an individual identity separated itself into two separate capacities, and with its right hand handed out $5,000 to the beneficiary, and with its left hand received from the beneficiary an assignment in which it was named as trustee and empowered to act as trustee, is wholly untenable.

The record shows that when the agent, Ernest Ganahl, turned over the purchase price, it was credited to the Ganahl trust.

A sufficient answer, also, to the foregoing contention of the respondents, is found in 26 Ruling Case Law, page 1325, § 189, from which we quote the following: ‘Nothing in the law of fiduciary trusts is better settled than that the trustee shall not be allowed to advantage himself in dealings with the trust estate. He shall not be allowed to serve himself under the pretense of serving his cestui que trust. The most usual way in which evasions of this salutary rule are attempted is in purchases of the trust estate or by or in the interest of the trustee. That such purchases shall not be allowed the realization of their purpose is the universal holding of the courts, except with the express consent or under a special permission given by a court of competent jurisdiction. This wise and salutary rule, designed to protect the weak and incompetent from the encroachments and overreachings of the artful and the powerful, is founded upon two principles. The one is, that the trustee has no right to derive any benefit or advantage from the trust fund; but all his skill and labor in the management of it must be directed to the advancement of the interest of his cestui que trust, and the other is that a trustee will not be permitted to create in himself an interest opposite to that of the party for whom he acts.’

In support of the rules which we have heretofore stated, we may also cite the following cases: In re Frazin & Oppenheim (C. C. A.) 181 F. 307; Mamlock v. Williams, 55 Cal. App. 175, 202 P. 927; City of Fort Bragg v. Brandon, 41 Cal. App. 227, 182 P. 454; 2 Pomeroy Eq. Juris., § 958.

Not having introduced any testimony relative to the sufficiency of the consideration, or that the assignment it received was not executed under undue influence, it follows that the burden of proof cast upon the respondent bank by section 2235, supra, has not been sustained; and the findings referred to in respondents' brief, of which we have made mention, without there being further testimony and further findings, are insufficient to sustain the judgment of the court in this case.

As the case must go back to the trial court for further hearing, it is unnecessary to mention further points urged by the appellants.

We find nothing in the record which sustains the appellant's contention that the oral testimony introduced tended in any way to controvert any of the written instruments. The fact that Vincent P. Ganahl had made an assignment to the trustee of his interest in the trust estate as collateral security for the payment of an obligation did not prevent him from making a subsequent assignment of the same interest. The legal effect, if both instruments were valid, would be that the first assignment would carry sufficient of his interest to discharge the first obligation, and that the second assignment would convey to the assignee named therein the residue of his interest. That each assignment purported to convey the whole interest is wholly immaterial. Being made to secure the payment of money, the instant the obligation was discharged, for the payment of which the assignment was made, all the overplus of the assignor's interest would revert to him and be subject to further disposition.

Evidence that the plaintiff had a judgment against Vincent P. Ganahl, we think admissible, not for the purpose of binding the other respondents, but for the purpose of showing, among other things, the insolvency of Vincent P. Ganahl, and the right of the plaintiff to subject the onetenth interest in the trust estate referred to herein to the payment of the indebtedness of Vincent P. Ganahl to the plaintiff.

We find nothing in the question of estoppel, as it does not sufficiently appear that the plaintiff relied upon or was misled by any statements of any of the officers of the respondent bank.

By reason of failure to sustain the burden of proof placed upon the respondents by section 2235, supra, and the authorities herein cited, the judgment of the trial court must be, and the same is hereby, reversed.

Mr. Justice PLUMMER delivered the opinion of the court.

We concur: PULLEN, P. J.; THOMPSON, J.