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STOCK v. MEEK (1950)

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District Court of Appeal, Second District, Division 1, California.

STOCK v. MEEK et al.

Civ. 16928.

Decided: January 31, 1950

Desmond & Desmond, Long Beach, for appellant. Newton M. Todd, Fred A. Watkins, Long Beach, and James J. Baker, San Marino, for respondents.

In the early months of $1945 Mr. Glenn L. Meek, the defendant in this action, purchased the Palace Apartment Hotel in Long Beach, California. There were forty-six apartment units in the hotel. It was the purpose of the defendant to sell apartments to individuals on an ‘own-your-own’ plan.

Legal counsel was employed to petition the Corporation Commissioner for a permit to sell units to the public. An escrow and trust were set up, to convey title to purchasers of units, to pay expenses of the transaction, and finally, to distribute such profits as might result.

The defendant was advised that to obtain the permit, a second mortgage on the property would have to be paid. To raise money to do this he conveyed 15% interests in the profits to two of his friends, each of whom put $5,000 into the venture. But the defendant still had to have $10,000 more.

One of his friends suggested that the plaintiff, Edna Harriet Stock, might be induced to furnish this necessary $10,000. Defendant went to her and proposed that she loan him $10,000, for which he would give her his promissory note for $20,000, payable 365 days from date, without interest. Plaintiff said she would like to talk with an attorney about the proposition. So, she and defendant together consulted defendant's attorney. The attorney advised them that making a loan of $10,000 and taking a note for $20,000 was usury.

Nevertheless defendant and plaintiff went on with it; she loaned the money, and he made the note. The note was put into the trust, to be paid before the profits were distributed. In due time all of the apartments were sold, and all expenses paid, including $20,000 to the plaintiff. To evidence this payment she signed a memorandum ‘paid in full’ written across the face of the note.

The same parties had another business transaction. The plaintiff purchased from the defendant Space 101 in the same apartment house, for $9,000. Neither the pleadings nor the evidence are particularly clear as to what this ‘space’ consisted of. Apparently the plaintiff believed that the space could be closed off to the public, and apparently she later found that this could not be done, and it was therefore useless to her. She alleged in her complaint that the defendant represented to her that Space 101 could be closed off so that she would have exclusive use of it, and that she later discovered that this could not be done because of building and fire regulations of the city of Long Beach. Her attempts to prove these allegations at the trial were thwarted by the exclusion of all evidence relative thereto.

In any event, concluding that the space was not as it had been represented to her, and that it was useless to her, plaintiff rescinded the contract of purchase, and sued for recovery of $9,000. Also in her complaint was a common count for $9,000, for money had and received by defendant for her use and benefit.

Defendant answered, denying the allegations of the complaint, and counterclaimed for $10,000 overpaid on the note.

The issues were tried by the court without a jury, with the following result: Judgment (a) against the plaintiff for the recovery of $9,000 (leaving her with the apartment space); and (b) for the defendant and against the plaintiff for $10,000 on the counterclaim. From this judgment plaintiff appeals.

Two principal grounds for reversal are presented:

It was error for the trial court to sustain objections to evidence of conversations between the parties prior to plaintiff's purchase of the apartment house space, thus denying to plaintiff any opportunity to prove her cause of action for rescission, or on the common count, and

It was error to render judgment for $10,000 for the defendant, because the parties were in pari delicto in violating the usury laws of this state.

At the threshold of the case, defendant contends that the appeal must be dismissed because all of the questions have become moot. This contention is based upon the following facts appearing by affidavit: No bond for stay of execution of the judgment for $10,000 was filed. Defendant caused execution to be levied on property of plaintiff, including the aforesaid Space 101, and Apartment 702 in the apartment building. The two latter properties were sold on execution, and $3,000 paid to plaintiff for her homestead rights in Apartment 702. The defendant judgment creditor purchased Space 101 for $3,000.

After the execution sale, maintenance charges required for said Space 101 became delinquent, and the apartment house trustee sold it to the defendant judgment creditor for $1,000. Defendant later sold Space 101 to third parties, who are now owners and holders thereof.

Defendant asserts that plaintiff, being divested of ownership of Space 101, is out of court, because it is beyond her power to restore the consideration as to which she claims rescission; and, also, that having been paid $3,000 for her homestead rights in Apartment 702 she is estopped to further prosecute her appeal.

However, as the case is to be retried, it can well happen that the trial court may find that the plaintiff paid to defendant $9,000 for Space 101, and received nothing in return. As was said in Philpott v. Superior Court, 1 Cal.2d 512, 36 P.2d 635, 95 A.L.R. 990: The law implies a promise to pay, to prevent the unjust enrichment of the defendant. Also the complaint alleges plaintiff's offer to restore the consideration as part of her cause of action for rescission. This is sufficient to require trial of the case, especially when it may be found that the defendant himself made it impossible for the plaintiff to restore the consideration. And there is no merit to defendant's suggestion of plaintiff's estoppel to carry on the appeal.

This, then, calls for review of the rulings of the court sustaining objections to testimony proffered by the plaintiff in support of her causes of action for rescission of the contract, and for recovery under the common count. Counsel for plaintiff made an offer of proof as follows:

‘Mr. Brawell: Since objections were made to the introduction of certain evidence and conversations, at this time I desire to state to the Court and offer, and we are able to offer the following evidence: A conversation took place in August, 1945 in which conversation the defendants Meeks stated and represented to the plaintiff in this action, Mrs. Stock, that that part of Space 101 described as B in Exhibit 1 could be closed off and locked and that that part, the doorway at A, in Plaintiff's Exhibit 1, could be closed off and locked, and all apace in 101 could be private and no one could enter. In October, 1945, we also are able to introduce a conversation between plaintiff and defendant Meeks, a similar statement, and assurance, and on November 7, 1945, a similar conversation took place and likewise in November, 1945 a similar conversation took place and thereafter various conversations took place between the plaintiff and the Meeks to the effect that the space I have referred to could be cut off, the door placed thereon, and Space 101 will be entirely a private property and no one else will be permitted to enter. * * *

‘* * * that the plaintiff had confidence and trusted in the defendant, in making those statements and otherwise she would not have purchased the property and after she purchased or determined, and was advised by the Fire Department, and it was pointed out to her that she could not do so, because of the fire restrictions * * *’

The evidence offered was competent and material to the issues of rescission and money had and received, and should have been received and considered by the trial court.

Sec. 1689 of the Civil Code provides that a contract may be rescinded if the consent of the party rescinding was given by mistake, or through the fault of the party as to whom the rescission is urged, or if the consideration becomes entirely void from any cause, or fails in a material respect. In an action in rescission it is no defense that misrepresentations complained of are oral and are not included in the contract itself. If this were so it would not be possible to avoid a written contract for misrepresentations inducing it. Mooney v. Cyriacks, 185 Cal. 70, 195 P. 922; Bechtold v. Coney, 42 Cal.App. 563, 183 P. 841; Peterson v. Wood, 119 Cal.App. 731, 7 P.2d 359; United Inv. Co. v. Los Angeles Interurban R. Co., 10 Cal.App. 175, 101 P. 543.

In addition to fraud, the evidence offered was competent to prove mistake and failure of consideration.

It is error to sustain objections to testimony which would tend to establish plaintiff's right to recover. Morrison v. Mutual Life Ins. of N. Y., 15 Cal.2d 579, 103 P.2d 963.

With reference to the judgment for the defendant for $10,000: In the recent case of Carter v. Seaboard Finance Co., 33 Cal.2d 564, 203 P.2d 758, is to be found a comprehensive and authoritative history of usury, and of the development of California law relative thereto. In 1934 the people of this state adopted a Constitutional Amendment, Art. XX, Sec. 22, which fixed the maximum permissible interest rate for money loaned at 10%. This restriction does not apply to certain financial institutions named in the amendment, as to which maximum rates of interest may be fixed by the Legislature. However, the parties to this action do not come within the exceptions.

Act 3757, Deering's General Laws, provides that the person who pays any greater interest than that permitted by law may recover treble damages, provided such action shall be brought within one year after such payment. (Emphasis added.) The note here under consideration is dated February 1, 1945, and is endorsed ‘paid in full Jany. 12, 1946.’ The complaint was filed March 26, 1947.

In view of the lapse of time, it is difficult to see upon what legal theory judgment was rendered against the plaintiff for $10,000. A suit for the penalty provided by the usury act must be begun within one year after the payment of the usurious interest. Ames v. Occidental Life Ins. Co., 210 Cal. 271, 291 P. 182. At most the defendant in this case had the naked right of a set off of the item against a principal debt, if any. Ames v. Occidental Life Ins. Co., supra.

A debtor for whose benefit the law is made may waive usury, and if he pays the interest he cannot recover it. Matthews v. Ormerd, 140 Cal. 578, 74 P. 136, and see note in L.R.A.1918B, at page 589.

Having come to this conclusion, it is unnecessary to decide whether defendant may or may not recover, applying the rule of in pari delicto. Under the usury law of California, the parties to a usurious transaction are not regarded as in pari delicto. Westman v. Dye, 214 Cal. 28, 4 P.2d 134. But under the facts in this case it is doubtful if the defendant would be permitted to use the statute as an engine to perpetrate an injustice. Van Noy v. Goldberg, 98 Cal.App. 604, 277 P. 538.

Both parties agreed to violate the usury law. The defendant was a businessman and should have known what usury was. He was advised by his own attorney that this particular transaction was usury. He proposed it; it was consummated under his direction and supervision; he made no objection to the payment of the note in the escrow which he himself set up; and he urged usury, as a defense for the first time in litigation with the plaintiff over another matter.

Generally, where an illegal contract is entered into voluntarily and the turpitude of the parties is mutual, they will be left by the courts where they find themselves. Equity will not aid one party or another to an illegal transaction when they stand in pari delicto. Colby v. Title Ins. and Trust Co., 160 Cal. 632, 117 P. 913, 35 L.R.A.,N.S., 813, Ann.Cas.1913A, 515.

In Babu v. Petersen, 4 Cal.2d 276, 48 P.2d 689, the parties conspired to violate the alien land laws of this state, and were in pari delicto. In such circumstances the law left them where it found them.

In New Jersey it has been held that where all of the parties to a usurious contract were in pari delicto none could recover. Ryan v. Motor Credit Co., 130 N.J. Eq. 531, 23 A.2d 607.

In construing the California Corporate Securities Act, Gen.Laws, Act 3814, our courts have held that while the buyer of corporate securities generally is not in pari delicto with the seller, Tatterson v. Kehrlein, 88 Cal.App. 34, 263 P. 285; Miller v. California Roofing Co., 55 Cal.App.2d 136, 130 P.2d 740, nevertheless, in proper cases, the doctrine is applicable. Miller v. California Roofing Co., supra; Campbell v. Julian Merger Mines, 111 Cal.App. 649, 295 P. 1040; Domenigoni v. Imperial Live Stock & Mortgage Co., 189 Cal. 467, 209 P. 36.

The judgment is reversed and the appeal from the order denying motion for new trial is dismissed.

DRAPEAU, Justice.

WHITE, P. J., and DORAN, J., concur.

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