Vai v. Bank of America National Trust & Savings Ass'n

TRAYNOR, J.

I dissent.

I would affirm the judgment, for the findings of the trial court are supported by substantial evidence.

In March 1953 plaintiff and her husband executed a prop *345 erty settlement agreement dividing their community property. This agreement was not repudiated until plaintiff brought this action to rescind it shortly after Mr. Vai’s death in 1957. His will provides that the major part of his property be placed in trust for the support of his and plaintiff’s daughter, who is mentally arrested, and also for the support of plaintiff should she be in need and if sufficient assets are available. After the death of both the daughter and plaintiff the remainder is to go to certain charities.

The community property of the spouses consisted of real estate, cash and securities of the value of $1,270,000 and a half interest in Padre corporation, a family-owned winery. Under the agreement plaintiff received apartment houses worth $150,000 and cash in the amount of $27,000. Her husband agreed to pay all taxes and maintenance costs of the apartment houses for plaintiff’s life and guaranteed her a net annual income after income taxes of $6,000. In 1953 a commercial annuity equal to these two agreements would have cost at least $80,000. 1 She will also receive $42,000 and 47% shares of Bank of America stock pursuant to the agreement to divide evenly all after-discovered community assets. The total of these items is over $300,000.

Moreover plaintiff received an automobile, a release from a $300,000 continuing guaranty executed by her and her husband to secure loans by the Bank of America to the Padre corporation and a release from a $75,000 guaranty for other debts. The trial court did not assign a dollar value to these items. The rest of the community property, and the Padre stock went to the husband. Plaintiff’s husband also agreed, however, to pay all expenses for the support and care of their daughter. The trial court determined that the value of the obligation to provide for this care is between $515,000 and $615,000.

After deducting for the care of the daughter and the obligations assumed by Mr. Vai, the division of the community property was therefore as follows: plaintiff received property and agreements of the value of over $300,000, an automobile and a release from liability for the loans of Padre and other community debts. The husband received property of the value of approximately $350,000 to $450,000 and the Padre stock.

*346 This agreement was reached after negotiations in which the plaintiff was at all times represented by counsel of her own choice, and her counsel drafted the agreement.

Plaintiff contends that she and her attorney were induced to propose this agreement by misrepresentations of the value of some of the community assets and by the concealment of material facts regarding an offer to purchase El Camino Ranch, a 600-acre vineyard.

The trial court found that the agreement was fair and equitable, that there were no intentional misrepresentations, and that the concealment of the offer for the purchase of El Camino Ranch was not relied upon by plaintiff. In plaintiff’s view these findings are not supported by the evidence.

She contends that the evidence clearly proves that she did not receive half the community property and that therefore the agreement was not fair and equitable. There was other evidence, however, from which the court could infer that the agreement was fair and equitable.

The community property consisted in large part of vineyards and other investments in the wine industry. There was evidence that the wine industry was depressed at the time of the agreement. 2 Padre, the family corporation in which the community held a half interest, incurred losses of $955,000 during the five years preceding the negotiations. During the fiscal years 1951 and 1952, the two years prior to the negotiations, Padre’s losses were $339,494.40 and $196,746.75 respectively. Although its book value was $800,000, the corporation was torn by internal strife between the Vai brothers and was losing money at an alarming rate. There was also evidence that the community lemon orchards and vineyards were all operating at a loss. Moreover, some of the community securities were pledged for loans from the Bank of America.

Under the agreement plaintiff received all of the properties that interested her and that she asked for. She was relieved of any liability for the debts of the losing business enterprises and obtained many of the stable community assets. Mr. Vai received the home, which plaintiff disliked, that he and his daughter were occupying, the community securities, a lodge, *347 and the assets of speculative value. Plaintiff’s agreement appeared advantageous given the possibility that Padre, the vineyards and the citrus groves would continue to operate at a loss as in the preceding five years.

Plaintiff and her attorney were aware of this possibility. Her attorney advised her several times to demand some of the vineyards, but she refused to have anything to do with those “money losing vineyards.” What she wanted was the property that would provide for her security. Her attorney testified: “I went over the list of assets and valuations with her. She expressed to me the thought that what she wanted more than anything was security. I talked with her about the Alta Loma property and she told me that she didn’t want Alta Loma, that John was happy there, and apparently the daughter, Madeline, was happy there, and that she didn’t want any part of it. The same was true of Arrowhead.

“We discussed valuations somewhat in connection with the 600 acres [El Camino Ranch], She didn’t express either assent or disapproval of the $200 per acre figure that I had brought back to her she wanted the Parkside property and she wanted security.

“We then discussed what would give her that security and what she might expect out of it and I believe at that time we discussed taking the Parkside property together with the furniture and furnishings, a cash lump settlement payment, and support money for a period of limited years.

“It is my recollection that at that time we discussed the sum of $25,000 as being a cash payment in addition to the Parkside property plus $5,000 per year for five years, together with the payment of her expenses to date, and the Dodge automobile. In addition, it was still understood that Mr. Vai would be required to support the daughter.” At another point plaintiff’s attorney testified:

“A. Let me put it this way; there were certain assets which she could take that she didn’t have to gamble on as to their future worth.

“Q. Those were the assets that you managed to get for her? A. That’s correct. . . .

“ Q. At the time that you visited Mrs. Vai to sign the agreement you were well aware of the fact were you not, that Mr. Vai was going to get the majority of the assets. A. Dollar wise on the valuation that had been placed on them, yes. ’ ’

In evaluating the fairness of the agreement, the court could *348 consider that at the time of the settlement plaintiff and Mr. Vai were 66 and 71 years old, respectively, that they had a common heir, their daughter, and that plaintiff was willing to accept less than half the community property if she were given the stable rather than the speculative assets.

The finding that there was no intentional misrepresentation is supported by substantial evidence. Mr. Bodkin, decedent’s attorney who was present during all of the negotiations, testified that no representations were made as to the value of Padre. There is evidence that plaintiff’s attorney had a current statement of Padre’s position and it is admitted that he had a 1950 Dun & Bradstreet report fixing the value of Padre at over $1,000,000. Plaintiff and her attorney were told that the Padre Company was heavily indebted, had been losing money for years, that substantially all the company’s assets were “in hock,” that the company owed money to the Vai brothers for back salary and that the company was in danger of insolvency. The trial court found that these representations were true. This finding is supported by evidence that Padre owed the Bank of America $480,000, that Padre lost over $950,000 during the last five years, that the wine industry was seriously depressed, that in 1952 payments of salary to John Vai and his brother had been reduced from $3,000 a month to $200 a month at the “suggestion” of the Bank of America, Padre’s principal creditor, that at the time of the property agreement the salary payments to the Vai brothers were only $500 a month, that the cashier of Padre had written cheeks for over $40,000 but was unable to release them to the payees because of lack of funds, and by the testimony of a Bank of America official that substantially all the assets of Padre were “in hock.”

Plaintiff contends that the evidence is undisputed that during the negotiations Mr. Vai received an offer to purchase El Camino Ranch for $575,000 and that this offer was intentionally not communicated to plaintiff. The trial court found that decedent received such an offer and did not communicate it to plaintiff. The court also found, however, that there was no intentional concealment of the offer. This finding is supported by the evidence. Mr. Bodkin testified that he had no knowledge of the offer, and the court could infer, as it did, that Mr. Vai was not aware of his duty to reveal this offer.

Plaintiff contends, however, that even if there were no in *349 tentional misrepresentations of the value of the community property and no intentional concealment of the offer to purchase El Camino Ranch, the decedent was nevertheless guilty of constructive fraud since he owed a fiduciary duty to his wife as to the community property under his control and was therefore under a duty to state the correct value of all the community property and to reveal the offer to purchase El Camino Ranch. Plaintiff contends that the husband is a trustee for the wife as to the community property and that he must reveal to the wife the true value of all the property and correct any misapprehensions that she or her attorney may have.

The fiduciary relationship arising from our community property system is not that of a trustee and beneficiary of an express trust. A trustee has no interest in the assets of the trust and may not assume a position in conflict with the interest of the beneficiaries. Each spouse, however, has a half interest in the community property and upon division of such property the spouses are in a position adverse to each other. Moreover, the liability of a husband for management and spending of community assets is markedly dissimilar to those of a trustee of an express trust. (See Civ. Code, § 172.)

The fiduciary relationship between spouses arises from the confidential relationship between them and from the control that one spouse exercises over the community property. When a confidential relationship exists the spouses are held to a very high degree of fiduciary duty (Burrows v. Burrows, 136 Cal. App. 323, 327, 329 [ 28 P.2d 1072 ]) and no spouse will be permitted to gain any advantage from the trust and confidence placed in him or her by the other. Even when the confidential relationship is destroyed by dispute between the spouses, as the court found was the case between plaintiff and Mr. Vai, the spouse controlling the community property still owes a fiduciary duty to the other spouse. This duty, however, is analogous to the duty, not of a trustee to a beneficiary, but of one partner to another during the dissolution of a partnership. (Cf. Lynam v. Vorwerk, 13 Cal.App. 507, 509 [ 110 P. 355 ].)

The fiduciary relationship of partners extends to the dissolution of the partnership (Page v. Page, 55 Cal.2d 192, 194 [ 10 Cal. Rptr. 643 , 359 P.2d 41 ] ; Laux v. Freed, 53 Cal. 2d 512, 522 [ 348 P.2d 873 ]). Partners negotiating for the division of the partnership assets may nevertheless take positions consistent with their own interest and in conflict with *350 those of the copartners. A partner is under a duty, however, to make all the facts available to any copartner and to disclose all facts peculiarly within his own knowledge. (Arnold v. Arnold, 137 Cal. 291, 296 [ 70 P. 23 ]; Reed v. Wood, 190 Okla. 169 [ 123 P.2d 275, 278 ]; Law v. Law [1905], 1 Ch. 140, 157; see Colton v. Stanford, 82 Cal. 351, 372, 380, 388 [ 23 P. 16 , 16 Am.St.Rep. 137 ]; Crane, Partnerships, 360; Story, Partnerships, 303; 120 A.L.R. 724 , 737.) “As to the confidential relation of partners, the general rule is, that it exists only as to the current business of the partnership, and that when they come to contract with each other for a dissolution of the partnership they stand at arm’s length. It may be conceded that this rule is subject to the qualification that in negotiations for a dissolution each partner must deal fairly with his copartners, and not conceal from them important matters within his own knowledge touching the business and property of the partnership.” (Arnold v. Arnold, supra, at p. 296 ; accord: Arnold v. Maxwell, 223 Mass. 47 [ 111 N.E. 687, 689-690 ].)

Likewise in negotiations for a property settlement agreement, each spouse may take a position that favors his or her interest and is opposed to the interest of the other spouse. The duty owed between spouses in negotiating property settlement agreements has been frequently defined by this court and the District Courts of Appeal. (Collins v. Collins, 48 Cal.2d 325, 331 [ 309 P.2d 420 ] ; Jorgensen v. Jorgensen, 32 Cal.2d 13, 22 [ 193 P.2d 728 ]; Estate of Cover, 188 Cal. 133, 144 [ 204 P. 583 ] ; Hensley v. Hensley, 179 Cal. 284, 287 [ 183 P. 445 ] ; Champion v. Woods, 79 Cal. 17, 20-21 [ 21 P. 534 , 12 Am.St.Rep. 126 ]; Estate of Bialy, 169 Cal.App.2d 479, 491-492 [ 337 P.2d 511 ] (hearing denied); Cameron v. Cameron, 88 Cal.App.2d 585, 593-597 [ 199 P.2d 443 ] (hearing denied); Migala v. Dakin, 99 Cal.App. 60, 64 [ 277 P. 898 ] (hearing denied); Chadwick v. Chadwick, 95 Cal.App. 690, 700-701 [ 273 P. 86 ]; see 1 Armstrong, California Family Law, 574, 576; Black, Rescission and Cancellation, §54.) In each of these cases the court held that, after the destruction of the confidential relationship, spouses negotiating a property settlement agreement deal with each other at “arm’s length,” with the exception stated in Jorgensen v. Jorgensen that each spouse must reveal information peculiarly within his or her own knowledge such as the existence of community property.

*351 The Collins decision is not based solely upon waiver by the wife of the fiduciary duty of the husband. It recognizes that after the destruction of the confidential relationship between wife and husband the spouses may take positions consistent with their own interest, unlike the trustee, who has no interest in the property that he is administering. We stated in Collins that “when the parties to a marriage are negotiating a property settlement agreement with recognition that their interests are adverse and are dealing at arm’s length, neither spouse owes to the other the duty of disclosure which he or she would owe if their relation remained in fact a confidential one.” (Collins v. Collins, 48 Cal.2d 325, 331 [ 309 P.2d 420 ].) Likewise in Jorgensen v. Jorgensen we stated that although a spouse must reveal facts peculiarly within the spouse’s knowledge, such as the existence of property, [a] husband at the time of divorce or separation is entitled to take a position favorable to his own interest in claiming as his separate property assets that a court might hold to be community property. Confronted with the assertion by the husband that certain assets are his separate property the wife must take her own position and if necessary investigate the facts.” (Jorgensen v. Jorgensen, supra, at p. 22 ; see also Black, Rescission and Cancellation, § 54.) When a spouse is given full access to the information necessary to negotiate a property agreement, an error of judgment by the spouse or her attorney is not ground for rescission. (Cameron v. Cameron, supra, 88 Cal. App.2d 585, 595 .)

In the present case the trial court’s finding that plaintiff had access to all of the information except the offer to purchase the El Camino Ranch is supported by the testimony of both plaintiff’s attorney and decedent’s attorney. Plaintiff’s attorney made substantial investigations of his own. He testified that he had reports from Dun & Bradstreet stating that the net worth of Padre as of 1950 was $1,107,000; he also had a Dun & Bradstreet report on Mr. Vai individually; he had reports from a private detective and from a title company; he had the property he was primarily interested in (Parkside Apartments) appraised; he suspended investigation only after he had obtained such information as he thought necessary. Mr. Bodkin testified that plaintiff’s former attorney received a current statement of the position of Padre and was urged to make appraisals of all the property. He was also given a list of assets that except for some inadvertent omissions listed *352 all of the community assets. Moreover, all books were open to his inspection. Plaintiff was therefore neither actually nor constructively defrauded as to the value of the community property.

There was a duty, however, to disclose the offer to purchase the El Camino Ranch. This offer was peculiarly within decedent’s own knowledge and the failure to disclose it was a breach of duty. (Jorgensen v. Jorgensen, supra, 32 Cal.2d 13, 21; see Arnold v. Arnold, supra, 137 Cal. 291, 296 ; Reed v. Wood, supra, 190 Okla. 169 [ 123 P.2d 275, 278 ]; Law v. Law, supra [1905], 1 Ch. 140, 157; Crane, Partnerships, 360; Story, Partnerships, 303; of. Civ. Code, § 1573.) If the lack of knowledge of the offer affected the dealings of the parties, plaintiff would be entitled to rescission or in the court’s discretion to damages resulting from the failure to disclose the offer. (See Arnold v. Maxwell, supra, 223 Mass. 47 [ 111 N.E. 687, 690 ] ; Turner v. Otis, 30 Kan. 1 [ 1 P. 19 , 21] ; 5 Williston, Contracts, 4192-4193.)

The court found, however, that plaintiff failed to prove that she would not have entered into the agreement had she known of the offer. Under such circumstances a contract cannot be rescinded. (Colton v. Stanford, supra, 82 Cal. 351 ,. 399; Oppenheimer v. Clunie, 142 Cal. 313, 318-319 [ 75 P. 899 ]; Greenawalt v. Rogers, 151 Cal. 630, 635 [ 91 P. 526 ].) Likewise, damages will be denied to a plaintiff who fails to prove that he relied on the misrepresentation. (Hobart v. Hobart Estate Co., 26 Cal.2d 412, 422, 444-447 [ 159 P.2d 958 ]; cf. Civ. Code, § 1568.)

Reliance is an essential element not only of intentional fraud but of constructive fraud arising from a breach of fiduciary or other duty. (Hobart v. Hobart Estate Co., supra [breach of duty by officer of a corporation owing fiduciary duty to stockholder]; Colton v. Stanford, supra, 82 Cal. 351, 399-401 [dealings between business associates owing fiduciary duties to each other]; Hensley v. Hensley, supra, 179 Cal. 284, 287 [property settlement agreement]; Verdier v. Verdier, 133 Cal.App.2d 325, 328 [ 284 P.2d 94 ] [property settlement agreement] ; Pinney & Topliff v. Chrysler Corp., 176 F.Supp. 801, 803 .)

In Hobart v. Hobart Estate Co. we reversed a judgment for damages for fraud by a fiduciary because the issue of justifiable reliance was taken from the jury by erroneous instructions of the trial court. Likewise in cases identical with the *353 present case, this court and the district courts of appeal have held that proof of reliance on the alleged misrepresentation of a spouse is necessary to rescind a property settlement agreement. (Hensley v. Hensley, supra, 179 Cal. 284, 287 ; Verdier v. Verdier, 133 Cal.App.2d 325, 328-329 [ 284 P.2d 94 ].) When an inadvertent omission to disclose facts that there is a duty to disclose or an erroneous statement by a fiduciary does not influence plaintiff’s conduct, rescission of a settlement agreement is properly denied. (Civ. Code, §§ 1689, 1567 and 1568; 1 Harper and James, The Law of Torts, p. 603; Prosser, Torts, § 89; Pomeroy, Equity Jurisprudence, § 890; Fleming, Torts, pp. 656-657; Rest., Contracts, §§ 471c, 476b, 476c; Rest., Restitution, § 9b.)

The court’s finding that plaintiff would have entered into the contract even had she been informed of the offer to purchase the El Camino Banch is supported by substantial evidence. Plaintiff’s former attorney when asked if, at the time he made the property settlement offer, he had sufficient information upon which to base such offer, testified: “Well, I felt that I had sufficient information at that time to enable me to negotiate a settlement that would be satisfactory to my client without further investigation as to the value of the San Bernardino County property. I thought that perhaps the valuations placed on the land by Mr. Vai might be low in some instances, but on the other hand, Mrs. Vai at that time had expressed to me a desire that she did not want to participate in the Arrowhead, the Alta Loma, or the El Camino properties and therefore under the circumstances I felt that the assets and the support which she might acquire under the terms of the letter of the 9th would possibly be beneficial to her.”

The attorney further testified that he realized that El Camino Banch “had a potential future value in excess of anything that we had discussed,” that he advised plaintiff in attempt to secure a part of the vineyard lands in San Bernardino County, but that she indicated that she did not want any interest in the vineyards, but wanted other assets to compensate for them.

From the foregoing testimony the court could infer that plaintiff would have entered into the agreement even had she known of the offer for El Camino Banch. This inference is particularly reasonable since the offer to purchase El Camino Banch provided for only a small down payment and a large purchase-money trust deed to secure the remainder of the pur *354 chase price. Such a transaction entailed a considerable risk that the price of the land would not be paid if the vineyards continued to be unprofitable. The testimony of plaintiff’s attorney indicated that plaintiff was not interested in taking such risks and that she wanted the stable community property assets even at the expense of securing considerably less than half the community property. Moreover, the offer to purchase the ranch was for the fair market value of the property. Such offer therefore neither enlarged nor diminished the value of the community property.

Plaintiff contends that even if she is not entitled to relief under the ordinary rules regulating property settlement agreements between spouses her husband nevertheless assumed special duties toward her. Previous to the property settlement agreement plaintiff attempted to take her husband’s deposition. Mr. Vai, however, was ill and unable to give the deposition. His attorney therefore suggested that the deposition be postponed and promised to supply all information requested by plaintiff.

The evidence supports the trial court’s finding that Mr. Vai was ill at the time the deposition was to be taken and that he supplied all the information requested. There was no further request for a deposition. Plaintiff's attorney indicated that he had obtained all the information he required. The promise to supply all the information requested without formal depositions did not place decedent in any special position of trust. Moreover, the trial court found that plaintiff did not in fact place confidence in her husband but independently investigated the facts in which she was interested.

Schauer, J., concurred.

Respondents’ petition for a rehearing was denied August 23, 1961. Fourt, J. pro tem., * participated in place of McComb, J., who deemed himself disqualified. Traynor, J., and Schauer, J., were of the opinion that the petition should be granted.

This figure is based on an interpretation of the agreement least favorable to plaintiff. Under other interpretations it would be far greater.

Wine was selling for $0.35 a gallon at the time of the property agreement. Plaintiff's witness, a wine broker, testified that “normally the price is considerably higher . . . [t]oday the same wines are worth $0.75 a gallon” and in 1950 the price of the same wines was as high as $0.95 a gallon.

Assigned by Chairman of Judicial Council.