Beeler v. American Trust Co.

TRAYNOR, J.,

Dissenting. The evidence in this case is insufficient, in my opinion, to uphold the trial court’s finding that defendant, with a deed of trust on real property worth over $135,000 securing an indebtedness of $81,232.90, entered into an agreement to reduce the indebtedness to $60,000 and to accept an inarticulated mortgage in place of its deed of trust.

*30 Since a mortgage secures an obligation it cannot be proved that a conveyance is intended as a mortgage if there is no liability “independent of the conveyance and contract of conveyance, which the grantee can enforce against the grantor.” (4 Pomeroy, Equity Jurisprudence, [Symons’ fifth ed., 1941] § 1195, p. 579; Holmes v. Warren, 145 Cal. 457 [ 78 P. 954 ]; Chapman v. Hicks, 41 Cal.App. 158 [ 182 P. 336 ]; see 17 Cal.Jur. 783.) The only debt in the present case was that represented by Weiss’s promissory notes, and no relation was established between these notes and the deed, option, and lease. The amount payable by plaintiff to exercise the option was different from the amount due on the notes, and the rent payable until the exercise of the option was different from the interest prescribed by the notes. The only evidence regarding the notes in the disputed transaction shows that they were to be cancelled when plaintiff executed his deed to defendant. Both defendant’s officers and plaintiff testified to that effect. When plaintiff’s deposition was taken before the trial, plaintiff was asked, “Now, was anything said about the disposition to be made of Mr. Weiss’s notes during that conversation?” and answered, “Well, it was to be that when I gave them the deed to the property, why, then they would cancel—well, that was automatically wiped out, the indebtedness that Mr. Weiss owed them.” Plaintiff also testified, “As far as the notes, I know when they took a deed to the property and reconveyed it that these notes and the mortgage would be wiped out, if the deed was standing in the bank’s name.”

Plaintiff testified unequivocally on that occasion that the notes were to be cancelled. His later testimony was inconsistent. At times he did not recall clearly what, if anything, was said about the notes. When asked whether there was a discussion as to the satisfaction or cancellation' of the notes, he replied, “Well, there might have been some little discussion but it didn’t impress me very much at all that I can remember. There might have been some.” At times he adhered to his earlier testimony that the notes were to be can-celled or satisfied. He was asked, “Wasn’t the substance of that discussion this, that when you gave them the deed to the property they would cancel, that is, wipe out, the indebtedness that Mr. Weiss owed them?” He replied, “That was my impression. It would be, naturally. When they took it, *31 they would have to wipe that out in order to give me a new mortgage. That was probably said, yes. ’ ’ He was also asked, “They were going to take that deed in lieu of the indebtedness?” and answered, “I said that voluntarily, Mr. Plant, that I assumed that is what they were doing it for and I still assume that is why they would take the deed.” Yet, when asked, “Isn’t it a fact that you knew when they took the deed from you they were going to cancel your indebtedness?” plaintiff replied, “No, I didn’t know that.”

Plaintiff, in taking the position that the notes were to be cancelled but that somehow the debt was not, appears to have been influenced by the belief that some obligation against him existed apart from the notes. When confronted with his earlier testimony, he did not repudiate it but said, “Yes that was my .testimony, because I was assuming the indebtedness.” Plaintiff’s brief suggests that the assumption agreement with Weiss created “an independent contract obligation that was to continue,” and that “the Weiss indebtedness was to be satisfied and his own continued.”

The only liability plaintiff agreed to assume, however, was the indebtedness represented by Weiss’s promissory notes and secured by the deed of trust. There was but one indebtedness, and while plaintiff became primarily liable therefor and Weiss secondarily liable under the assumption agreement, its satisfaction would necessarily end both liabilities. Plaintiff’s testimony cannot be construed to suggest that this indebtedness was to be satisfied as to Weiss, but continued as to plaintiff, for in his answer to a suit brought by Weiss he declared that “he did fulfil and carry out the terms of his agreement regarding the payment of said obligation against said property and did procure the same to he released and satisfied in full.” What the trial court found, moreover, was not that the deed was taken as security for some independent obligation arising from the assumption agreement but that it was executed pursuant to an agreement that the “trust deed indebtedness and interest” i.e., the Weiss indebtedness, should be reduced and the deed taken as security for the reduced indebtedness. The contention that the Weiss indebtedness was to be satisfied and the deed taken as security does not support the finding but impeaches it. The finding cannot be sustained unless it can be concluded that plaintiff *32 and defendant’s officers understood that the Weiss notes were to continue in effect.

The evidence establishes without contradiction that it was intended that these notes be cancelled. Pursuant to that understanding plaintiff executed the deed to defendant. Defendant marked the large note cancelled and wrote off the smaller note at a loss, insisted upon receiving plaintiff’s affidavit that the deed was executed in full satisfaction of the indebtedness, and recorded the reconveyance reciting full satisfaction of the indebtedness. Once these steps were taken the bank was powerless to enforce payment of the notes. The only reason in the majority opinion for holding that the debt survived this operation is that the notes could not be can-celled without delivery to Weiss or to plaintiff. It is settled, however, that the parties to a note can extinguish the obligation thereof by accepting something other than the performance promised. (Civ. Code, §§ 1521, 1522; Silvers v. Grossman, 183 Cal. 696 [ 192 P. 534 ]; B. & W. Engineering Co. v. Beam, 23 Cal.App. 164 [ 137 P. 624 ]; see Brannan’s Negotiable Instrument’s Law, [Beutel’s sixth ed., 1938] § 119 (4), pp. 963, 964.) It has always been clear that the obligation of a note can thus be terminated without delivery. (See cases cited in Brannan, pp. 962, 964, supra.) Plaintiff’s obligation was terminated when defendant accepted the deed in satisfaction of the notes. The Colorado (Wittman v. Pickens, 33 Colo. 484 [ 81 P. 299 ]), the New Mexico (Hanna v. McCrory, 19 N.M. 183 [ 141 P. 996 ]), and the Montana (First State Bank of Hilger v. Lang, 55 Mont. 146 [ 174 P. 597 , 9 A.L.R. 1139 ]), cases, which constitute the sole authority cited for a contrary conclusion, actually establish only that delivery of the notes is essential if the creditor proposes as a gift to free the debtor.

Thus, even if this were an ordinary civil case where only a preponderance of evidence is required, the evidence is insufficient to support the finding that the trust deed indebtedness, i.e., the Weiss indebtedness, should be reduced and the deed taken as security for the reduced indebtedness, and is likewise insufficient to support the contention that Beeler’s agreement to assume the Weiss indebtedness created an independent contract obligation or that the cancelled notes remained in effect. This is not an ordinary civil case, however, for, as the majority opinion concedes, it was incumbent upon plaintiff to support his contention by evidence, “clear, satis *33 factory and convincing; explicit, unequivocal and indisputable.” (Wehle v. Price, 202 Cal. 394, 397 [ 260 P. 878 ]; Goodfellow v. Goodfellow, 219 Cal. 548, 554 [ 27 P.2d 898 ].) While it rests primarily with the trial court to determine whether the evidence is clear and convincing, its finding is not necessarily conclusive, for in cases governed by the rule requiring such evidence “the sufficiency of the evidence to support the finding should be considered by the appellate court in the light of that rule.” (Sheehan v. Sullivan, 126 Cal. 189, 193 [ 58 P. 543 ]; see, also Moultrie v. Wright, 154 Cal. 520 [ 98 P. 257 ].) In such cases it is the duty of the appellate court in reviewing the evidence to determine, not whether the trier of facts could reasonably conclude that it is more probable that the fact to be proved exists than that it does not, as in the ordinary civil case where only a preponderance of the evidence is required, but whether the trier of facts could reasonably conclude that it is highly probable that the fact exists. When it holds that the trial court’s finding must be governed by the same test with relation to substantial evidence as ordinarily applies in other civil cases, the rule that the evidence must be clear and convincing becomes meaningless. There is a contradiction in thus destroying the vitality of the rule while affirming its soundness. If, as in my opinion, the rule is sound, this court has erred in its pronouncements (see 25 Cal.Jur. 248; 2 Cal.Jur. 921) declining to accept responsibility for its enforcement. (See my dissenting opinion in Stromerson v. Averill, 22 Cal.2d 808, 817 [ 141 P.2d 732 ].)

The doctrine that a deed may be shown to be a mortgage was originally an equitable one. It is also to be recalled that in equity cases the appellate court would review the facts de novo. Although the question whether the evidence establishes that a deed was intended as a mortgage is now decided by the jury in this state (Locke v. Moulton, 108 Cal. 49 [ 41 P. 28 ], see contra, Reilly v. Cullen, 159 Mo. 322 [ 60 S.W. 126 ]) the jury’s determination must be supported by clear and convincing evidence. It is doubtful whether the rule that it is a question for the jury whether a deed was intended to be a mortgage would have been adopted without the protection afforded by the rule requiring the evidence to be clear and convincing. Thus, in considering a similar problem with *34 respect to the reformation of contracts, Judge Cardozo, for the New York Court of Appeals, declared: “Juries may-find it difficult to apply the presumption that preliminary treaties are merged in the written contract if they are permitted to consider such treaties as evidence of mistake. Against these and like dangers, there are two methods of relief. One is suggested by the provision of the statute that ‘the court in its discretion may order one or more issues to be separately tried. . .’ The other is found in a strict enforcement of the rule that reformation must be refused unless the case in support of it is ‘of the clearest and most satisfactory character. ’ . . . Judgments for reformation have been reversed even in this court for failure to obey it.” (Susquehanna S.S. Co. v. A. O. Andersen & Co., 239 N.Y. 285, 296 [ 146 N.E. 381 ].)

So grave is the danger that deeds will be erroneously found to be mortgages that some states have refused to apply the doctrine that a deed may be shown to be a mortgage except upon proof of fraud or mistake (see Jackson v. Maxwell, 113 Me. 366, 368 [ 94 A. 116 ]), while others have held that the doctrine will not be applied unless the grantor’s testimony is corroborated by independent testimony. (Stitt v. Rat Portage Lumber Co., 96 Minn. 27, 32 [ 104 N.W. 561 ].) The solution adopted in this state of requiring clear and convincing evidence requires not simply that the appellate courts go through the form of recognizing the rule, but that, like the appellate courts of many other states, they accept responsibility for its enforcement. (Susquehanna S.S. Co. v. A. O. Andersen & Co., 239 N.Y. 285, 296 [ 146 N.E. 381 ]; Allison Bros. Co. v. Allison, 144 N.Y. 21, 33 [ 38 N.E. 956 ]; Nevius v. Dunlap, 33 N.Y. 676, 680 ; Baird v. Baird, 48 Colo. 506, 517 [ 111 P. 79 ]; Rasch v. Rasch, 278 Ill. 261, 271 [ 115 N.E. 871 ]; Jackson v. Maxwell, 113 Me. 366, 368 [ 94 A. 116 ]; Frohlich v. Aikman, 194 Mich. 569, 573 [ 161 N.W. 867 ]; Baum v. Ward, 131 Ark. 593 [ 199 S.W. 529 ]; Nicolls v. McDonald, 101 Pa.St. 514 ; Pancake v. Cauffman, 114 Pa.St. 113 [ 7 A. 67 ]; Jeffcoat v. Wingard, 110 S.C. 482 [ 96 S.E. 908 ]; Page v. Page, 132 Va. 63 [ 110 S.E. 370 ]; Salas v. Olmos, 47 N.M. 409 [ 143 P.2d 871, 874 ].) The United States Supreme Court recently reaffirmed its responsibility for enforcement of the rule in Schneiderman v. United States, 320 U.S. 118, 124 [ 63 S.Ct. 1333 , 87 L.Ed. 1796 ], where it declared: “For *35 though we assume, without deciding, that in the absence of fraud a certificate of naturalization can be set aside under § 15 as ‘illegally procured’ because of the finding as to attachment [to the principles of the Constitution] would later seem to be erroneous, we are of the opinion that this judgment should be reversed. If a finding of attachment can be so reconsidered in a denaturalization suit, our decisions make it plain that the Government needs more than a bare preponderance of the evidence to prevail. The remedy afforded the Government by the denaturalization statute has been said to be a narrower one than that of direct appeal from the granting of a petition. Tutun v. United States, 270 U.S. 568, 579 [ 46 S.Ct. 425 , 70 L.Ed. 738 ]; cf. United States v. Ness, 245 U.S. 319, 325 [ 38 S.Ct. 118 , 62 L.Ed. 321 ], Johannessen v. United States states that a certificate of citizenship is ‘an instrument granting political privileges and open like other public grants to be revoked if and when it shall be found to have been unlawfully or fraudulently procured. It is in this respect closely analogous to a public grant of land . . . ’ 225 U.S. 227, 238 [ 32 S.Ct. 613 , 56 L.Ed. 1066 ]. See also Tutun v. United States, supra. To set aside such a grant the evidence must be ‘clear, unequivocal, and convincing’— ‘it cannot be done upon a bare preponderance of evidence which leaves the issue in doubt.’ Maxwell Land-Grant Case, 121 U.S. 325, 381 [ 7 S.Ct. 1015 , 30 L.Ed. 949 ]; United States v. San Jacinto Tin Co., 125 U.S. 273, 300 [ 8 S.Ct. 850 , 31 L.Ed. 747 ]; cf. United States v. Rovin, 12 F.2d 942, 944 . See Wigmore, Evidence, (3d ed.) § 2498. This is so because rights once conferred should not be lightly revoked. And more especially is this true when the rights are precious and when they are conferred by solemn adjudication, as is the situation when citizenship is granted. The Government’s evidence in this ease does not measure up to this exacting standard. ’ ’

One searches the record in vain for clear and convincing evidence that the deed in this case was intended to be a mortgage. The majority opinion relies largely on plaintiff’s testimony. That testimony was impeached, however, because of the interest of the plaintiff, and because it was inconsistent with his sworn affidavit. The story told was, moreover, an incredible one; that purely for bookkeeping purposes the bank entered into an agreement to accept an inarticulated *36 mortgage in the sum of $60,000 in lieu of a deed of trust on real property worth over $135,000 securing an indebtedness of $81,232.90.

Plaintiff’s contention rests upon inferences that he seeks to elicit from evidence relative to the circumstances under which the deed was delivered and to the subsequent conduct of the parties. This evidence does not warrant plaintiff’s inferences. It is described in the majority opinion as “entirely consistent with the view that defendant bank, while in fact agreeing on a loan secured by a mortgage, was desirous, for reasons of certain interdepartmental requirements connected with its routine bookkeeping procedure, of giving the transaction a different appearance by recording it as an absolute transfer of title.' ’ It is not enough for the evidence merely to be consistent with plaintiff’s contention, however, for it is wholly consistent with the agreement set forth in the writings. The burden was on plaintiff to prove that it was highly probable that the deed was not what it purported to be. He did not sustain this burden by evidence that at best is simply consistent with the deed’s being something else, but which is just as consistent with its being what it purports to be. (Goodfellow v. Goodfellow, supra; Wehle v. Price, supra; Woods v. Jensen, supra.)

Plaintiff infers from the fact that the $3,000 rental specified in the lease was equivalent to 5 per cent of the option price of $60,000, that the rental was actually interest, and the option price actually an indebtedness. Such a rental is bound to be a percentage of the option price and is apt to fall within the normal range of interest returns on investments equivalent to that price. It would be as arbitrary, however, to transmute a rental into an interest charge because it produced the same return as to transmute a dividend from stock into interest from a bond. There is nothing in the mathematical relation between the two figures that gives any clue to what they represent; the substance of the relationship is not found in the sums. It is to the terms of a transaction that one must look, and not to the sums involved, since transactions may differ widely in nature, however alike may be the sums they involve.

Plaintiff contends that Mr. Kennedy, the bank’s representative, agreed to have an appraisal made of a tract of land that plaintiff owned in Paradise, California, to guide *37 the bank in taking it in either “to reduce the debt” or “as additional security,” and infers that if the security was “additional” the deed in question was a mortgage. By plaintiff’s own testimony, however, the conversations regarding the Paradise property were concerned with the possibility of defendant’s taking it as part of the option price. In the negotiations of September 22nd he asked if defendant would take the Paradise property to reduce the indebtedness. Kennedy replied that the bank could not do so, but that if plaintiff gave the bank the deed and took back a lease and option, the latter would examine the property to determine whether it would be acceptable as part payment of the option price or as additional security for a part thereof. This suggestion obviously contemplated the possibility that the parties might later enter into an arrangement enabling plaintiff to exercise his option by paying only part of the price in cash. Following Elberg’s visit to the property Kennedy told the plaintiff that the bank could not take it outright, but might take it as additional security. It cannot reasonably be inferred even from plaintiff’s own testimony that defendant regarded the indebtedness as subsisting and contemplated the Paradise property as additional security for that indebtedness rather than for the option price.

Plaintiff relies upon the testimony of his banker, Mr. Brown, for support for his contention. Brown merely testified, however, that he was present during the first part of the conversation of September 22nd, but left before its conclusion; that respondent asked for another extension of time; that Kennedy replied that back-interest would have to be paid up “before any discussion of that sort”; that there was some discussion as to whether the deed of trust covered all of the property to which plaintiff had title, and that “just as I left they had sent for the certificate or for the deed of trust.” There is nothing in this testimony to suggest that defendant agreed to reduce the indebtedness and accept the deed as security for the lower amount.

The exception in the title policy of “any rights of C. W. Beeler who is in possession” is invoked to uphold the contention that the deed was simply a mortgage. It was defendant’s lease and option, however, that necessitated this exception. Before the transaction was closed, defendant was advised by Mr. McGlyn, an officer of the Tehama County *38 Title Company, that plaintiff’s affidavit put an end to his interest, in the property. Plaintiff replied that he had an option. McGlyn later advised the Title Insurance and Guarantee Company by telephone that defendant had a lease and option and would remain in possession of the property, and that company thereupon obtained defendant’s confirmation of these facts and its consent to the exception in the title policy.

No support for plaintiff’s contention can be found in the discussion regarding the sixty-dollar internal revenue stamp. The stamp was already on the deed and the title company had been instructed to bill defendant for its cost so there is no reason why McGlyn should have asked plaintiff whether he refused to put the stamp on. In any event whatever views plaintiff may have expressed to McGlyn about the deed’s being merely a means of refinancing, there is no claim that he communicated his views to defendant. (See Brant v. California Dairies, Inc., 4 Cal.2d 128 [ 48 P.2d 13 ].)

Plaintiff relies heavily upon the finding of the trial court that when the deed in question was executed, the property had a market value of more than $135,000, and a rental value of more than $7,500, figures that substantially exceeded the option price and the rental fixed in the lease. Such an excess in conjunction with other circumstances is often indicative of a security transaction, for the greater the valuation in relation to the indebtedness, the more unlikely the owner is to sell the property to cancel the indebtedness. In this case, however, the parties themselves, whose valuations alone are pertinent (Tetenman v. Epstein, 66 Cal.App. 745 [ 226 P. 966 ]), did not attach so high a value to the property. Even if they had, it is inconceivable that the bank would voluntarily have reduced an indebtedness so amply secured, and relinquished, to its own disadvantage, a deed of trust for such a mortgage. (See Robinson v. Barnard, 5 Cal.App.2d 396, 400 [ 42 P.2d 711 ].)

There is nothing in the evidence of conduct subsequent to the transaction to establish that the deed was taken as security rather than in satisfaction of the indebtedness, or that plaintiff had anything more than a lease and an option. Plaintiff’s repair of the fences and removal of the walnut trees following the flood of the Sacramento River in 1937 do not signify that the bank regarded him as the owner of the *39 property. He was bound by the terms of his lease to repair the fences, and he removed the walnut trees only after obtaining defendant’s consent. Even if the improvements were more extensive than the lease required they do not signify ownership, for they would redound to the advantage of the plaintiff if he exercised the option. The evidence of the leases by the plaintiff likewise fails to establish him as the owner of the property, for his lease from the bank permitted him to make subleases, and it was a matter of indifference to the bank whether the instruments executed by the plaintiff and his lessees took the form of leases rather than subleases.

Even assuming that a debt still existed, and that the deed was intended to secure it, there is no evidence that the debt was $60,000 and not $81,232.90, the amount due when the deed was executed. It is contended that it was agreed that the debt should thus be reduced at the conference between plaintiff and the bank officials. Plaintiff, however, testified without contradiction that it was then agreed that the notes be cancelled. Following the conference, the deed, the lease containing the option, and the affidavit were executed as formal memorials of the agreement then made. While parol evidence is admissible to show that a deed is a mortgage, it is not admissible to vary the terms of a written contract so as to transform it from a complete to a partial cancellation. (Cal. Code Civ. Proc., § 1856; see 10 Cal.Jur. 916, 924.) The majority opinion holds that the notes were not discharged, because they were not delivered to Weiss or to plaintiff. Yet the larger note was cancelled, the smaller one was written off as a loss, and satisfaction of both was recorded pursuant to the understanding of plaintiff and defendant. Despite these facts it is held that without delivery of any note, the debt is reduced to $60,000, the amount of the larger note. It is pertinent to inquire how the smaller note is then discharged without delivery.

Moreover, the supposed agreement to release plaintiff from a liability of over $21,000 was clearly without consideration and is unenforceable. (Scheeline v. Moshier, 172 Cal. 565 [ 158 P. 222 ] ; see 6 Cal.Jur. 179.) If the deed was given merely as security it represented less than defendant already had. The deed of trust contained the usual power of sale and other provisions for defendant’s protection and was not subject to the 1933 amendments restricting the right to judg *40 ment for a deficiency. (Cal. Civ. Code, § 2924%; Cal. Code Civ. Proc., § 580(a).) Regarded as security, the deed was less advantageous to defendant, less burdensome to plaintiff. It conferred no power of sale and would have to be foreclosed by court proceedings, thereby leaving plaintiff with a right to redeem. It contained no provisions for defendant’s protection and was subject to the 1933 amendments. As security, therefore, the deed, far from being of advantage to the defendant, was of advantage to plaintiff. Since the alleged agreement was oral, and it appeared upon the face of the complaint that there was no consideration, a special plea by defendant of lack of consideration was unnecessary. (Acheson v. Western Union Tel. Co., 96 Cal. 641 [ 31 P. 583 ] ; see 2 Cal.Jur. 257.)