BANK OF AMERICA NAT TRUST SAVINGS ASS v. PENDERGRASS (1934)

This action was instituted by the plaintiff to recover judgment on a promissory note in the sum of $4,750. Trial was had before a jury. The note was payable upon demand, and the complaint was a simple action based upon the promissory note. The defendants in their answer interposed two defenses, to wit: That the note was obtained by fraud, and also was secured by a chattel mortgage. The plaintiff introduced the note in evidence, and also the testimony of a witness to the effect that the note had not been paid. Following this, counsel for the defendants made an opening statement, at the conclusion of which the court directed judgment in favor of the plaintiff. From this judgment the defendants appeal.

The respondent objects to the consideration of the defendants' appeal on the ground that the appellants have not sufficiently complied with subdivision 3 of rule VIII of the rules governing appeals taken to this court, the point being urged that the briefs of appellants do not sufficiently comply with the rules just referred to in indicating the portions of the record upon which appellants rely for reversal.

The opening brief of appellants, while it sets forth the substance of the record, does not make specific reference to the reporter's transcript, but does refer to the pages of the clerk's transcript where the facts included in the opening statement are set forth in the answer filed by the appellants. The concluding brief of the appellants does specifically indicate the portion of the transcript where a complete report of the opening statement may be found. No difficulty having been experienced by the court in ascertaining the grounds upon which this appeal is based, and also in view of the fact that no trial was had upon the merits of this cause, and judgment having been entered against the defendants upon their opening statement, we conclude that the respondent's objection to a consideration of this appeal upon its merits should be disregarded.

The opening statement, while not referring to the pleadings, constituted an oral presentation to the court and jury of the defenses set up in the answer. While too lengthy to be set forth herein, we glean from the opening statement the following:

In 1928, the defendants took over a ranch near Oakdale in Stanislaus county for the purpose of growing lettuce seed thereon. The ranch was then subject to a trust deed securing a note in favor of the Bank of Italy subsequently becoming the Bank of America, in the sum of $20,000. From the time of taking over the ranch in 1928, appellants continued the operation thereof in the growing of lettuce seed and marketing the same in the southern portion of the state, particularly in the Imperial Valley. Financial transactions appear to have been had between the plaintiff and the defendants until January, 1932, at which time the $20,000 note, secured by a trust deed, remained unpaid, and another note in the sum of $14,997.40, unsecured, was held by the plaintiff, signed by the defendants. At this time negotiations were entered into between the defendants and the plaintiff, by and through its representatives, relative to the defendants continuing their operation of the ranch during the year 1932. At the time of the beginning of these negotiations it appears that the appellants had on hand personal property consisting of ranch equipment of the value of approximately $25,000, and also unsold lettuce seed in storage of the approximate value of $6,000.

The opening statement then sets forth that the plaintiff, by its representatives, promised the defendants that if they would execute a new note for $4,750, to be credited upon the $14,997.40 note to which we have referred, and would give a chattel and crop mortgage, which mortgages should secure the notes referred to, the plaintiff would not interfere with the operation of the ranch by the defendants during the year 1932, but would allow them to operate the ranch and make sales of lettuce seeds to prospective purchasers, contracting for the sale and delivery of the seeds in advance, turning the same over to the appellants. In consideration of this promise the defendants were to execute, and did execute, the note and mortgages which would cover all the property owned by the defendants, and which, up to that time, appears to have been unincumbered.

The opening statement then goes on to recite that the defendants made preparations to operate the ranch, to secure contracts for the seed to be raised, and further that the promises made by the plaintiff, through its representatives, were made without any intention on their part to keep and perform the same, and were fraudulently made for the purpose of securing the notes and chattel and crop mortgages mentioned in the opening statement. The opening statement of the appellants, in relation to the indebtedness of the mortgages, is in the following words and figures (after providing that the $6,000 worth of lettuce seed should be turned over to the appellants as security for the indebtedness), to wit: “That a new note was to be executed for the balance of the indebtedness above the $20,000.00 originally secured by the trust deed, and that the chattel mortgage was to secure not only this indebtedness above the $20,000.00, but was to cover the whole thing, $20,000.00 plus the balance of the indebtedness which at that time was about $14,750.00.” And further: “That this chattel and crop mortgage be executed by Mr. Pendergrass; that a new note in the sum of $4,753.00 be executed by Mr. Pendergrass, to be credited on a note that they already had of $14,753.00, that is, the balance due on it was $14,753.00; that those notes were to be secured by the chattel mortgage, by the pledge of the warehouse receipt of 6500 pounds of lettuce seed on hand, and by the assurance that the sales of the 1932 crop of seed would pass through the bank, and the moneys from the sales of the 1932 crop should all go to the bank in payment,” etc.

The opening statement further shows that the mortgages referred to were executed by the defendants, and that the plaintiff failed to keep its promises, and within a short time after the execution of the mortgages proceeded to seize all the property covered thereby.

The answer as well as the opening statement alleges that the note sued upon in this action was and is secured by a chattel mortgage. Under the provisions of section 726 of the Code of Civil Procedure, if the allegations referred to set forth the true status, then and in that case the plaintiff's cause of action should have been abated. That section provides for only one form of action, specifying the procedure, to wit, the foreclosure of the mortgage, which was not followed in this case. The respondent seeks to avoid the force of this contention on the part of the appellants by referring to the mortgage itself, and contending that the note sued upon is not secured, basing its argument upon the fact that the answer of the defendants alleges that the note is secured by mortgage of a certain date, and recorded at a certain place in the official records of Stanislaus county. However, such a reference does not make the mortgage a part of the answer, and it was not made a part of the answer in this case; consequently, the contention of the respondent and the reply of the appellants in relation thereto constitute no part of the record of which this court can take notice. It does establish, however, the error of the court in disregarding this portion of the defendants' opening statement, because whether the note sued upon was or was not in fact secured by a chattel mortgage or a crop mortgage could only be determined by the introduction of the mortgage in evidence, which was not done. Both the appellants and the respondent lay down the premise that upon the consideration of this appeal, everything set forth in the opening statement must be considered as true. Therefore, it must be held upon this appeal that the note sued upon in this action was and is secured by a chattel mortgage.

As the cause must go back for further trial, it is necessary to pass upon the question of the introduction of oral testimony relative to the validity of the note sued upon and the chattel and crop mortgages referred to herein. In so doing it is only necessary to determine whether the opening statement presents a prima facie case. Subdivision 4 of section 1572 of the Civil Code defines “actual fraud” as “a promise made without any intention of performing it.”

In the case of California Credit & Collection Corporation (a corporation) v. Carpenter, 77 Cal. App. 18, 246 P. 126, 128, this court had occasion to pass upon the very question at issue herein. In that case the facts show that two notes, each for the sum of $250, had been obtained by fraudulent representations. It was there held that while a mere promise is not a representation, a promise made with the intention of not performing it constitutes a fraud, for which a contract may be rescinded or avoided. The representations in that case were outside of the promissory notes, and constituted no part thereof. In passing upon the question, this court used the following language, referring to the defendant: “In other words, he simply asks for defensive relief, in support of which he has set up fraud, or, in other terms, has set up fraud as a basis of a defense to defeat ‘an action brought to enforce an apparent obligation or liability.’ Toby v. Oregon Pac. R. R. Co., 98 Cal. 490, 498, 33 P. 550, 553. This is one of the three methods for relief or defense afforded defendants in cases of this character (Toby v. Oregon Pac. R. R. Co., 98 Cal. 490, 33 P. 550, supra; Field v. Austin, 131 Cal. 379, 382, 63 P. 692; J. B. Colt Co. v. Freitas, 76 Cal. App. 278, 244 P. 916), and where, as here, such defensive relief is sought, and no affirmative relief is asked, ‘it is not necessary for’ the defendant ‘to have exercised an existing right to rescind.’ Simon Newman Co. v. Lassing, 141 Cal. 174. 74 P. 761; 12 Cal. Jur. 786; J. B. Colt Co. v. Freitas, supra. Our views upon these questions are also fully covered in our opinion in the case of California Credit & Collection Corp. v. Goodin [76 Cal. App. 785], 246 P. 121, which was filed in this court March 8, 1926.” In both of these cases it was held that the fraudulent representations made at the time of the execution of the notes constituted a sufficient defense to the actions based thereon, and that the proof of the fraudulent representations went directly to the validity of the instruments themselves. The proof in this case consisted in large part of the oral testimony of witnesses as to the representations and promises made at the time of the execution of the notes.

In 19 California Jurisprudence, p. 1008, § 159, the text reads: “Whether the instrument be negotiable or non-negotiable as between the original parties and parties taking notice of existing equities, fraud may be pleaded as a defense. Where fraud is set up, of course, it cannot prevail unless the facts are sufficient to establish the defense.” This statement of the law is supported by the citation of numerous authorities in the footnotes. See, also, the case of Williams v. Hasshagen, 166 Cal. 386, 137 P. 9, where fraud in the procurement of a promissory note was held established by the oral testimony introduced in that case.

The same ruling was had in the case of Grinnell v. Hill, 1 Cal. App. 492, 82 P. 445. A promissory note was involved in that action, and the defense that it had been obtained by fraudulent promises was held established.

In 8 C. J. p. 780, that the defense of fraud may be interposed, is supported by the following statement: “While an unconsummated intent to fraudulently convert a note is no defense to an action thereon, yet as between the original parties to a bill or a note, or as against a holder who is not a bona fide holder in due course, fraud, in the consideration or in the procurement of the bill or the note is ordinarily a defense.” The citations supporting this statement of the law are too numerous to be set forth herein.

This court, in the case of Bouey v. Porterfield, 96 Cal. App. 674, 274 P. 766, 767, in an action brought to rescind a contract on the grounds of fraud, held as follows: “Mere failure to perform a promise made in good faith does not constitute actionable fraud. However, a promise made without any intention of performing it is actionable fraud” (citing the authorities to which we have hereinbefore referred).

In 12 California Jurisprudence, p. 735, in considering a promise as actionable fraud, the law is thus stated: “Again, where, by reason of a promise, one has been induced to change his condition and relations, so that it is impossible to place him in status quo, a failure to fulfil the promise works a fraud and entitles him to equitable relief, if such relief will work no injustice on innocent third parties. Although, as we have already seen, a mere promise does not amount to a false representation, nevertheless if the promise be accompanied with statements of existing facts which show the ability of the promisor to perform his promise, and without which the promise would not be accepted or acted upon, such statements are denominated representations, and, if falsely made, are grounds for avoiding the contract, though the thing promised to be done lies wholly in the future.” See, also, Matteson v. Wagoner, 147 Cal. 743, 82 P. 436; Martin v. Lawrence, 156 Cal. 191, 103 P. 913.

It appears from the answer in the case at bar that damages are not sought for, but only cancellation of the note and mortgages, just as was upheld by this court in the cases of California Credit Corporation v. Carpenter, and California Credit Corporation v. Goodin, supra.

We agree with counsel for the respondent that by reason of the fact that the opening statement of the appellants makes no reference to the pleadings, only the opening statement can be considered by this court in the determination of this appeal; but, as above stated, all the facts and reasons which necessitate a reversal appear in the opening statement, which must be considered as true and sufficiently proven.

We have carefully examined the cases of Pierce v. Avakian, 167 Cal. 330, 139 P. 799, McArthur v. Johnson, 216 Cal. 581, 15 P.(2d) 151, and Lindemann v. Coryell, 59 Cal. App. 788, 212 P. 47, and other cases relied upon by the respondent, where it is held that oral testimony cannot be admitted to change the terms of a promissory note. These cases all exclude the subject of fraud in the procuring of a promissory note as constituting a defense to the action. The opinion in most of the cases specifically states that no question of fraud or mistake is presented for consideration. In the case at bar, as we read the opening statement, no attempt is made to change or controvert the written instruments, but only the question of fraud in their procurement, which goes directly to the right to maintain an action thereon. This distinction appears to have been entirely overlooked. The opening statement in this case sets forth, substantially, that certain promises were made by the representatives of the respondent, without any intention of performance; that the defendants believed the promises to be true, relied thereon, and were induced thereby to change their status by executing the notes and mortgages referred to and creating a lien upon their property which did not theretofore exist.

The foregoing summary, presented more in detail in the opening statement, we think presented a prima facie case under subdivision 4 of section 1572 of the Civil Code, and the oral testimony as to questions of fraud inducing the execution of a note and mortgages may be introduced in evidence.

For the reasons given, it must be held that the order for a directed verdict was erroneous, and the judgment must be, and the same is hereby, reversed.

Mr. Justice PLUMMER delivered the opinion of the court.

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