text:
    [L. A. No. 16865.
    In Bank.
    April 25, 1940.]
    CALIFORNIA-WESTERN STATES LIFE INSURANCE COMPANY (a Corporation), Respondent, v. PHILIP FEINSTEN et al., Appellants.

      L. E. Dadmun for Appellants.
    John J. Ford, Frank M. Benedict and Ford, Benedict & Ford for Respondent. . ’
   THE COURT.

This appeal was taken from a judgment entered in favor of plaintiff in an action brought by the plaintiff insurance company to have canceled the disability provisions of an insurance policy issued to defendant Philip Feinstein. The other defendants are beneficiaries under the life provisions of the policy.

The facts as found to be true by the trial court appear as follows: That on or about the 28th day of October, 1925, the plaintiff’s predecessor issued a life insurance policy in favor of defendant Philip Feinstein; that a premium which was due the plaintiff company on October 28, 1935, was not paid when due, nor during the grace period thereafter; that on November 28, 1935, by reason of such nonpayment of premium, the policy lapsed; that on or about December 30, 1935, the insured executed a written application for the reinstatement of said policy (which at that time included provisions for both total and permanent disability benefits); and that on January 10, 1936, the company purportedly reinstated the said policy.

It was further found that for the purpose of inducing the plaintiff to reinstate the policy the insured made false representations in the application therefor, to the effect that at the time he executed the same he had no “injury, deformity or symptoms of sickness” nor had he “consulted a physician for any ailments since said policy of insurance was issued”; that the representations were made with the intent that the plaintiff should rely and act thereon; and that the plaintiff, “relying solely upon the representations” made by the insured and without knowledge of the falsity of the representations, reinstated the policy. It also was found that the insured had declared in the application that he had carefully read each of the answers to the several questions; that they were each written as made by him and that each was “full, complete and . . . true when made”, although at that time he knew them to be false. Furthermore, in that connection it was found that if the insurer had known that the representations were false it would not have reinstated the provisions of the policy which related to total and permanent disability benefits, which had been set forth in a rider attached to the policy and designated “Special Benefits”.

It also appeared that on June 1, 1936, approximately five months after the policy had been reinstated, the insured made application for both total and permanent disability benefits under the policy, and in said application he disclosed the names of doctors with whom he had consulted both before and after he had executed the application for reinstatement. Upon receipt by the plaintiff insurer of the application for disability benefits, for the first time it learned of the falsity of the representations which the insured had made in his application for reinstatement of the policy. Thereafter, the insurance company brought the instant action to have rescinded those provisions of the policy which related to total and permanent disability benefits.

On the trial it was shown by uncontradicted evidence that on August 12, 1935, the insured had consulted Dr. Samuel Swezey, a physician and surgeon, with regard to certain physical ailments of which the insured complained at that time, and that thereafter he had undergone a series of twenty-six treatments by Dr. Swezey, the final of which occurred on October 16, 1935. It also appeared that in November, 1935, the insured had consulted an osteopathic physician for similar ailments.

However, in other respects, the evidence was sharply conflicting, as shown by the following resume: The insured testified that on December 30, 1935, at the time he executed the application for reinstatement, he was present at the office of his son, Jerry Feinstein (who also was engaged in the insurance business); that on that occasion Mr. Gerald Page, one of the insurer’s agents, brought the application form to that office and requested the insured to write his answers to the questions set forth therein; and that the insured thought the form was an application to change the premium payments on the policy. With regard to the first question which related to whether applicant had consulted a physician for any ailments since issuance of the policy, and whether he was then suffering from any illness, injury, etc., the insured testified that he had stated to Mr. Page that he had seen a doctor with reference to a cold and indigestion, and inquired “whether that meant anything”; and that Mr. Page, in effect, had replied that the company was not interested in minor ailments— that if the insured had riot been in a hospital nor had an operation he could write the answer “no” to the first question. • The insured further testified that after the application form had been filled in Mr. Page signed it (as a witness) and tooh it away with him. The foregoing testimony was corroborated by Jerry Feinstein who asserted he was present when the conversation last referred to took place, and that he had heard Mr. Page state that the application form was one which related to a change in the premium payments. It might here be stated that despite Philip Feinstein’s testimony that Mr. Page had told him that he could write the answer “no” to the first question, the insured did not at that time nor at any time thereafter fill in an answer to that question; in fact, it was conceded that that question remained unanswered until after the executed application had been returned to the plaintiff insurance company.

In direct conflict with the testimony set forth by the insured concerning the time and place at which the application for reinstatement was made is that adduced by the plaintiff. In that regard Mr. Page gave positive testimony that he did not take the application form to Philip Feinstein in person; that not only was it sent to the latter through the mail but that it was returned to the company by mail; and that Mr. Page was not present on December 30, 1935, at the time or place mentioned by the insured in the presence of either Philip or Jerry Feinstein, or otherwise. Mr. Page further testified that after the application had been returned to the company he had examined and signed it and on discovering that the first question had not been answered he telephoned to Philip Feinstein and informed him of his failure in that regard; that he asked the insured what answer he desired to make to the said first question; and that he was told the answer would be “no”, whereupon Mr. Page wrote that answer in the blank space provided therefor. Another of the plaintiff’s employees, Mr. John A. Mason, who acted as cashier of the insurance company, testified that the executed application was returned to the office of the company through the mail on December 31, 1935. He also testified that the words “Received, December 31, 1935, Southern California Branch Office” which were shown to have been stamped on the back of the application form were imprinted thereon by a stamp which the plaintiff company was using at that time to record the date of receipt of incoming mail.

It further appeared that in filling in the blanks on the application form the insured gave an affirmative answer to the question “Did the attached application for reinstatement come to you by mail?” On the trial the insured was asked why he wrote the word “yes” as his answer to the question above quoted. He replied that Mr. Page had told him to answer that question in the affirmative. However, it was shown that that question appeared in a portion of the printed form of application which contained questions not intended to be answered by the applicant but which was designed for the notation of data to be made by the insurer after the executed application form had been returned to the latter. Also it appeared that the insured had not placed his signature on the line designated therefor in the application, but that he had placed it likewise in that portion of the application form which was not intended to be completed by the insured.

It is at once apparent that the conclusions to be drawn by the trial court from the testimony hereinbefore recited, together with the inferences which might have been drawn therefrom, became of paramount importance in the determination of the question of the right of the plaintiff insurance company to rescind the contract on the ground that it had been induced to reinstate the insurance policy by reason of the false representations made by the insured in the application for reinstatement. The trial judge, who saw the witnesses and heard them testify, believed the evidence adduced by the plaintiff, namely, that the application form had been executed by the insured at a time when Mr. Page was not present; that the insured had returned the same to the plaintiff through the mail; and that thereafter he had voluntarily authorized the writing of the answer “no” to the first question, as hereinbefore referred to.

The record shows that the trial court drew the following inferences from the evidence hereinbefore recited: That had Mr. Page been present personally when the application form was executed, he then and there would have required Mr. Feinstein to fill in the answer to the first question—and, therefore, that that answer would not have appeared on the form in Mr. Page’s handwriting; that he would have made certain that the signature of Mr. Feinstein was placed on the proper line designated therefor in the application form, and that he would not have permitted it to be placed in a portion of the form not intended to be used by the insured; furthermore, that had Mr. Page been present he would have examined the form and found that the insured had signed his name on the wrong line, and he would then have requested the latter to re-sign his name on the proper line. Also, with regard to the testimony of the insured that he thought the form which Mr. Page gave him was a form for change of premium payments, the trial court drew the inference that if Mr. Page in fact had been present he would not have made any statement to that effect—since the latter was shown to have been familiar with the various printed forms used by the insurer in its business and, therefore, he would not have represented that particular form to be anything other than what it was, inasmuch as no purpose would have been served at that time by the making of a misrepresentation in that regard. It further was shown that the insured had permitted the policy to lapse on other occasions in the past and as a consequence thereof in each such former instance, in accordance with the terms of the policy, the insured had executed a form of application for reinstatement practically identical in language with that here concerned; that, therefore, he could not be said to have been unfamiliar with the nature of the particular form which he executed on December 30,1935, and that, consequently, his statement that he thought the application form was one for change of premium payments was open to question.

Also, with regard to the fact that the insured wrote the answer “yes” to the printed question whether he had received the form of application through the mail,—aside from the fact that that question was not intended to be answered by the insured,—there appears to have been no reason at that time for the making of a false answer thereto. Therefore, the trial court might well have inferred that had Mr. Page been present he would not have told the insured to write the answer “yes” to that question, nor would he have permitted the insured to write anything whatever in the space reserved for data to be recorded by the insurer.

Other evidence, both written and oral, was adduced by the respective parties which tended to support that given by each on the question whether Mr. Page was present when the application form was executed and was therefore in a position to have advised the insured in the respects testified to by the latter, or whether in fact the insured executed the application form without such asserted advice and returned it by mail to the insurer. However, sufficient has been set forth hereinbefore to indicate that the evidence presented a clear and substantial conflict. Not only was the evidence elicited from each party diametrically contrary to that offered by the other on material questions, but in some respects the evidence thereon offered by each was in itself conflicting. Under those circumstances, it is a well-established rule that on a review of the evidence, together with the inferences which could have been drawn therefrom, the conclusion to be reached was solely for the trial court, who saw the witnesses and heard them testify, and that the findings made thereon by the trial court may not be disturbed.

Appellants contend that under the provisions of the policy that relate to “paid-up” and “automatic extended insurance”, after three full years’ premiums have been paid, a forfeiture of the policy (including both life and disability insurance) could not have been declared because of the insured’s failure to make the premium payment before termination of the grace period. It here may be said that the validity of the life provisions of the said policy are not being questioned. However, respondent points to certain language of the life policy as well as to that appearing in the provisions of the disability insurance which, it contends, shows conclusively that the provisions for ‘ ‘ automatic extended insurance ’ ’ were intended to apply only to that part of the policy that relates to life insurance, as distinguished from the provisions of the rider which cover the “Special Benefits” or disability insurance. One of the provisions of the rider is as follows: “If at any other time than at the end of the original premium payment period this policy shall be continued under any paid-up or extended insurance provisions thereof, these ‘Special Benefits’ shall thereupon become null and void and all liability of the Company under the same shall cease.” In that regard respondent cites the case entitled Henricks v. Metropolitan Life Ins. Co., 7 Cal. (2d) 619 [61 Pac. (2d) 1162], in which the court was construing section 450, Civil Code (now section 10151, Ins. Code), and in which case it was pointed out that the section was designed to prevent the loss of the reserve to the insured (in the event of nonaetion on the part of insured) where a life insurance policy had lapsed by reason of nonpayment of a premium after three full years’ premiums had been paid thereon. In that case it was held that under the language of the code section and “by the great weight of authority . . . double indemnity benefits are not carried over to nonforfeiture insurance”. Furthermore, in the instant case, the provisions with regard to paid-up insurance state that after three full years’ premiums shall have been paid on the said policy, the company “will grant to the Insured an amount of paid-up life insurance, not less than the cash value, if any, will purchase ’ ’. And in that part of the policy relating to “automatic extended insurance”, it is provided that after premiums have been paid thereon for three full years, in event of nonpayment of premium before date when due, the full amount of insurance under the policy will be automatically extended from said due date “as term insurance” for such period as the cash value of the policy, if any, less any indebtedness thereon, “will purchase as a net single premium at the then attained age of the Insured, according to the American Experience Table of Mortality”— which calculation obviously would not be used in connection with disability insurance. It is also stated in the last-mentioned provision that in lieu of such “automatic term insurance”, upon proper request therefor by the insured, the company “will endorse on the policy the amount of paid-up life insurance which the excess of the cash value of this policy, if any, over such indebtedness will purchase at the then attained age of the Insured on the mortality and interest basis heretofore designated, or will pay said excess in cash”. (Emphasis added.) From the foregoing it is clear that the provisions of the policy here concerned which relate to automatically extended insurance may not be held applicable to the “Special Benefits” (disability) insurance.

Appellants further argue that even assuming that there was a breach in the insurance contract by the failure of insured to pay the premium which fell due on October 28, 1935, the company “continued to recognize the existence of the policy as in force until October 9, 1936”, and that such conduct on the part of the insurer constituted a waiver of the breach. However, in making that contention appellants apparently have overlooked the force and effect of the fact that by virtue of its having required,—pursuant to its right in that regard,—shortly after November 28, 1935, that the insured execute an application for reinstatement, the respondent necessarily had recognized the lapsing of the policy as of that date. Under the facts hereinbefore stated, it therefore cannot seriously or successfully be contended that respondent “continued to recognize the existence of the policy as in force” from October 28, 1935, until October 9, 1936. Obviously, the fact that following lapse of the policy the insurer required the insured to execute an application for reinstatement would negative any asserted claim by the insured that the insurance company had waived its right to recognize the policy as having lapsed. The evidence shows that on December 2, 1935, and again on December 13, 1935, the insurer mailed a letter to the insured concerning a proposed plan to change the method of payment of the premiums, and that in each of those letters the insurer urged a reply ‘1 by return mail in order to keep the policy in force”, but that the insurer received no reply to either of those letters. The most that can be said concerning the effect of .those letters is that, before exercising its right to require the insured to file an application for reinstatement, the insurer was extending to the insured a reasonable opportunity to keep the policy in force, which 1 was made conditional upon its receipt of a prompt reply from the insured. It also appears that on December 27, 1935, the insurer again wrote to the insured stating that on December 26, 1935, it had received from him the “Blue Note” (in accordance with the plan of premium payment theretofore used by the parties), but advising the insured that since the grace period had expired on November 28, 1935, it would require him to sign ‘‘the attached health certificate” (application for reinstatement). As hereinbefore has been indicated, the insured was familiar with the procedure of the insurance company in the matter of requiring the filing of an application for reinstatement following lapse of the policy for nonpayment of premiums. The evidence does not show that the insurer misled the insured into believing it had waived the lapsing of the policy (McDanels v. General Ins. Co., 1 Cal. App. (2d) 454, 460 [36 Pac. (2d) 829]), nor that the company was lax in the matter of exercising its right to compel the insured to make an application for reinstatement. Nor may it be said that the insurer could have waived its right to rescind, on the ground of false representations made by the insured in his answers to the questions as set forth in the application for reinstatement, until the insurer had become aware of the falsity of those representations. (McDanels v. General Ins. Co., supra; Schick v. Equitable Life Assur. Soc., 15 Cal. App. (2d) 28, 34 [59 Pac. (2d) 163].) It was only after the insured had filed his claim for disability payments in June, 1936, at which time an investigation was made with regard to the ailments for which he had undergone treatment by a physician, that the falsity of the representations which the insured had made in the application for reinstatement was disclosed. On that state of the record it cannot be said that the insurer had waived any of the rights which it subsequently asserted against the insured.

Appellants next contend that the representations made by the insured in the application form were not material representations in that the illness for which insured had received the several treatments in the fall of 1935, assertedly, was not of a substantial character and, consequently, that a failure on his part to disclose such illness did not constitute fraud. However, a reading of the application shows that the insured was not questioned with respect to the gravity of the illness, if any, for which he had consulted a physician. The question presented was “Have you consulted a physician for any ailments since the above-numbered policy was issued? List below all details in regard thereto ...” That question merely called for information relating to simple matters of fact within the knowledge of the insured. It has been held that answers to written questions set forth in application forms relative to insurance are generally deemed material representations (Pierre v. Metropolitan Life Ins. Co., 22 Cal. App. (2d) 346 [70 Pac. (2d) 985]; Iverson v. Metropolitan Life etc. Co., 151 Cal. 746, 749 [91 Pac. 609, 13 L. R. A. (N. S.) 866] ; Westphall v. Metropolitan Life Ins. Co., 27 Cal. App. 734 [151 Pac. 159] ; McEwen v. New York Life Ins. Co., 42 Cal. App. 133, 146 [183 Pac. 373]); and that in the making of a false representation which is material to the risk the presence of an intent to deceive is not essential. (Telford v. New York Life Ins. Co., 9 Cal. (2d) 103, 105 [69 Pac. (2d) 835].) The materiality of a representation is to be determined “solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries”. (Ins. Code, sec. 334.) In the present case it also appears from one of the provisions of the policy that following default in the payment of a premium the policy might be reinstated “upon production of evidence of insurability satisfactory to the Company”. (Emphasis added.) In the ease of Greenburg v. Continental Cas. Co., 24 Cal. App. (2d) 506 [75 Pac. (2d) 644], the court was construing a provision of an insurance policy which was practically identical in language with that just referred to, and it was there held that by making that language a part of the contract the parties had agreed to place on the insurer the responsibility of the determination of the question whether the “evidence of insurability” was satisfactory. (See, also, Columbian Nat. Life Ins. Co. v. Morey, 26 Fed. (2d) 580, 582, C. C. A. 1st, 1928.) Moreover, the record shows that evidence was elicited on the part of the insurer to the effect that where an insured sought reinstatement and was found to have been of the age of insured herein and to have shown the symptoms manifested by him at the time he consulted Dr. Swezey, in accordance with a practice or custom in existence among life insurance companies, such a disclosure would have led either to a rejection of the application for reinstatement or to an investigation of the underlying causes which gave rise to the symptoms reported. Much of the medical evidence adduced by the insurance company in the present case was to the effect that the symptoms shown by the insured at the time he consulted Dr. Swezey in August, 1935, were possible indications of a heart condition such as the insured claimed to have been suffering from in June, 1936. Therefore, under the circumstances hereinbefore recited, it may not be said that the information which the insurer sought to obtain by the questions set forth in the application form was not material to the risk.

Appellants also contend that the court erred in its rulings on the admissibility of evidence presented by insurance experts on behalf of the respondent insurer. This court finds no error in that regard. The questions propounded to those witnesses did not call for an opinion on the question whether the undisclosed facts here in issue were material to the risk. The witnesses were merely asked relative to a usage or custom of insurance companies in the matter of rejecting a risk had the companies been apprised of facts such as here were concealed. (Boyer v. United States F. & G. Co., 206 Cal. 273 [274 Pac. 57].)

In view of the conclusions reached herein it becomes unnecessary to discuss other contentions made by counsel.

The judgment is affirmed.


source: Caselaw Access Project

author: EDMONDS, J.

license: Public Domain

text:
    [Crim. No. 4276.
    In Bank.
    April 26, 1940.]
    In the Matter of the Application of ROLAND A. FULLER for a Writ of Habeas Corpus.

      Alfred Jay Luke for Petitioner.
    A. D. Schaffer and Anthony Podesta, as Amici Curiae, on Behalf of Petitioner.
    Marshall Hickson, City Attorney (San Marina), for Respondent.
    Earl Warren, Attorney-General, Thomas Coakley, Deputy Attorney-General, A. S. Montague, Meserve, Mumper & Hughes, Ray L. Herndon, Ralph E. Hoyt, District Attorney (Alameda County), J. F. Coakley, Chief Assistant District Attorney, Cecil Mosbacher and Stanley C. Smallwood, Deputies District Attorney, Cross & Brandt, Christopher M. Bradley and Alex Sherriffs, as Amici Curiae, on Behalf of Respondent.
   EDMONDS, J.

The constitutionality of legislation known as The Small Loan Act (Stats. 1939, chaps. 953 and 1045) is challenged by the petitioner in this proceeding. He alleges that he has been arrested and detained for violations of these statutes, which were passed at approximately the same time and are substantially identical, and seeks his release upon a writ of habeas corpus.

According to the petitioner, as a broker he negotiated an unsecured loan of $50 in return for a fee of $2.50, and as a lender he made an unsecured loan of his own money in the amount of $50 at a rate of interest of 8 per cent per annum without any additional charges. Both transactions are alleged to have been entered into by him in the regular course of his business, and without his having applied for or obtained either the broker’s or the lender’s license required by the statutes which are now in effect because, as he asserts, these laws impinge upon the due process, equal protection, and privileges and immunities clauses of the federal Constitution and corresponding provisions of the California Constitution.

The legislation under attack expresses the purpose of the State of California to supervise the small loan business. Each of the statutes includes regulations with which lenders and brokers making or negotiating loans of $300 or less are required to comply. Such regulations may validly be imposed if they constitute a reasonable exertion of governmental authority for the public good. If there is a proper legislative purpose, a law enacted to carry out that purpose, if not arbitrary nor discriminatory, must be upheld by the courts. (Wholesale Tobacco Dealers’ Bureau, etc., v. National Candy & Tobacco Co., 11 Cal. (2d) 634 [83 Pac. (2d) 3, 118 A. L. R. 486] ; Max Factor & Co. v. Kunsman, 5 Cal. (2d) 446 [55 Pac. (2d) 177]; Nebbia v. New York, 291 U. S. 502 [54 Sup. Ct. 505, 78 L. Ed. 940, 89 A. L. R. 1469].)

It is a matter of common knowledge that persons who have no banking credit and require small loans to pay debts, meet taxes, or provide funds for emergency needs, have always found difficulty in obtaining money unless they paid a very high interest rate, amounting, in many cases, to oppression. Such borrowers are often ignorant and usually in immediate need. They are, therefore, likely to be willing, and in fact are often forced by their unfortunate circumstances, to accept whatever terms the lenders may ask. Reported decisions show rates exacted from needy borrowers ranging as high as 1300 per cent. (Tennessee Finance Co. v. Thompson, 278 Fed. 597 [260 per cent]; Cotton v. Cooper, (Tex. Civ. App.) 160 S. W. 597 [360 per cent] ; State v. Hurlburt, 82 Conn. 232 [72 Atl. 1079] [650 per cent] ; Willson v. Fisher, 75 Misc. 382 [135 N. Y. Supp. 532] [1300 per cent].) California conditions are graphically set forth in a recent report to the legislature. (Assembly Interim Committee Report on Investigation of Small Loans, Journal of the Assembly, 1935, volume 1, page 1297.)

The first real start toward legislation to curb the operations of persons making small loans was commenced by the Russell Sage Foundation, which in 1907 undertook to make a scientific study of the problem. In 1916 it issued the first draft of a Uniform Small Loan Law. Six successive drafts have been made, the latest, designated as the Seventh Draft, having been issued recently. The California legislation of 1939, so far as to most of its basic features are concerned, is patterned after the Sixth Draft which was published in 1935. Forty-one states have now recognized the necessity for protecting borrowers of small amounts from imposition and extortion. Of this number 36, including California, have laws substantially similar to one of the drafts of the Uniform Small Loan Law.

Prior to 1905, the legislature of California had laid restriction only upon pawnbrokers. The constitutionality of that act, passed in 1861, was sustained in the case of Jackson v. Shawl, 29 Cal. 267, and later in Ex parte Lichtenstein, 67 Cal. 359 [7 Pac. 728, 56 Am. Rep. 713], These decisions, in effect, hold that the pawnbroking business is properly subject to regulation under the police power and that legislation directed solely against it is not based upon an unreasonable classification.

In 1909 the legislature enacted the Personal Property Brokers’ Act (Stats. 1909, p. 969) which defined personal property brokers as those lending money on the security of personal property or wage assignments, and prohibited such persons from charging over 5 per cent per month. Later this amount was reduced 2 per cent. It also required lenders to furnish borrowers with a complete statement of the loan terms and made a violation of the act a crime. These provisions are typical of similar laws enacted in other states. As amended (Stats. 1911, p. 978), the legislation was fully sustained against constitutional objection in Eaker v. Bryant, 24 Cal. App. 87 [140 Pac. 310], and In re Stephan, 170 Cal. 48 [148 Pac. 196, Ann. Cas. 1916E, 617]. In each of these cases the maximum charge provision and also the classification of personal property brokers as the sole object of legislation was specifically and unqualifiedly upheld.

In 1918, by an initiative measure known as the Usury Law, the people of this state limited the total amount which a lender may receive as profit on a loan to a stated maximum and also curtailed the charges and expenses of loan brokers. (Stats. 1919, p. lxxxiii.) However, this court held that it does not restrict the lender’s right to charge for certain services rendered by him. (Wallace v. Zinman, 200 Cal. 585 [254 Pac. 946, 62 A. L. R. 1341].) The legislation enacted by the people was followed by the Personal Property Brokers’ Act (Stats. 1931, p. 558) which required those engaged in the business of procuring such loans for borrowers to secure a license and restricted the charges which might be made for them by allowing a maximum interest rate of 3y2 per cent per month upon secured loans of $300 or less. The licensing provisions of this act were upheld in the ease of In re Halck, 215 Cal. 500 [11 Pac. (2d) 389], although the interest rate provisions were later held to be invalid because in conflict with the Usury Law, supra. (Beneficial Loan Soc., Ltd., v. Haight, 215 Cal. 506 [11 Pac. (2d) 857].)

Later the constitutional objections sustained by this court were removed by an amendment to the Constitution adopted in 1934 (art. XX, see. 22), which specifically exempts personal property brokers from the operation of the Usury Law and gives the legislature power to prescribe methods of regulation and rates. This power was exercised by the enactment of the laws now under attack which provide that “no person shall engage in the business of making or negotiating, for himself, or another, loans of money, credit, goods, or things in action, in an amount or of the value of three hundred dollars or less, without first obtaining a license from the Commissioner of Corporations” and that “No licensee . . . shall make any loan of three hundred dollars, or less, and eon-tract or receive thereon interest at a rate exceeding 10 per centum per annum computed on the unpaid balance of the loan, which said interest shall not be paid, deducted or received in advance nor compounded.” (Stats. 1939, chap. 953, secs. 4 and 16; chap. 1045, secs. 4 and 16.) These statutes also provide for the supervision and examination of the business carried on by persons making such loans.

The small loan business is one which under present economic conditions fulfills the need of many people who require a small amount of money to tide them over times of temporary distress. Unquestionably it cannot be subjected to unreasonable regulation. However, a lawful occupation may be regulated for the protection of the public but the degree of such regulation must be commensurate with the evils to be remedied. One of the most common means of regulation is a requirement that persons engaging in a business must obtain a license so to do, and such a requirement has been uniformly upheld when based upon a reasonable classification.

Thus the Supreme Court of the United States, in upholding a statute requiring the licensing of those engaged in private banking, stated that “ . . . the power of the State to make the pursuit of a calling dependent upon obtaining a license is well established, where safety seems to require it, and what we have said before sufficiently indicates that this calling is one to which the requirement may be attached ’ ’. (Engel v. O’Malley, 219 U. S. 128, 137 [31 Sup. Ct. 190, 55 L. Ed. 128].) Also in LaTourette v. McMaster, 248 U. S. 465 [39 Sup. Ct. 160, 63 L. Ed. 362], the court pointed out that insurance is affected with a public interest, and those engaged in procuring it for the public may be required to secure a license. Such a requirement has also been upheld in California. (In re Weisberg, 215 Cal. 624 [12 Pac. (2d) 446] ; Riley v. Chambers, 181 Cal. 589 [185 Pac. 855, 8 A. L. R. 418] ; In re Bickerstaff, 70 Cal. 35 [11 Pac. 393] ; Aaroe v. Crosby, 48 Cal. App. 422 [192 Pac. 97].)

The second count of the complaint charges the violation of the Small Loan Act in that Fuller, as a broker engaged in the business of negotiating loans to be made by a lender, charged an amount in excess of 2% per cent per month on the unpaid principal balance of a loan of fifty dollars. This brings him within the provisions of the act which prohibit an interest charge of more than 10 per cent per annum, and also denies a licensee the right to “contract for or receive any service or expense charges beyond the actual outlay” and limits the aggregate amount of such interest and charges to 2% per cent per month on loans of less than $100 and 2 per cent on any remainder of an unpaid balance of principal in excess of that amount. As against this charge of the complaint, the petitioner contends that the provisions of the act restricting the amounts which a lender may collect are unconstitutional and void.

The principal contention of the petitioner in this regard is that the Usury Law, supra, and the 1934 amendment to the Constitution operate as a prohibition upon the power of the legislature to enact the statute he is charged with violating. More specifically, he claims that the Small Loan Act is invalid because in conflict with the Usury Law.

However, an analysis of the earlier legislation shows conclusively that the petitioner’s claims are entirely unfounded. The title of the Usury Law, supra, describes it as an act “relating to the rate of interest which may be charged”, providing penalties for violations, and repealing acts and parts of acts in conflict therewith. In section 1 of the act, the legal “rate of interest” is fixed at $7 per $100 per annum, but a “rate of interest” not exceeding $12 per $100 per annum may be agreed upon. The following section prohibits anyone from directly or indirectly taking or receiving any greater sum for a loan than at the rate of $12 per $100 per annum, forbids the compounding of interest, and finally declares any agreements in conflict with its provisions shall be void as to any agreement therein contained “to pay interest” and no action “to recover interest in any sum” shall be maintained and the debt cannot be declared due until the full contract period has elapsed.

Other provisions authorize the recovery of treble the amount of interest paid in excess of that allowed by the act, and also make it a misdemeanor to exact more than 5 per cent on sums under $1,000 and 3 per cent on sums over $1,000, in full for all fees, appraisals, and other enumerated charges.

Both the title of the act and its first section refer to “the rate of interest” which may be charged, and speak of interest alone. Section 2 does not, at the outset, refer to “interest” but to “receiving in money, goods or things in action, or in any other manner whatsoever, any greater sum or any greater value . . . than at the rate of twelve dollars upon one hundred dollars for one year”. But in the following sentence, the People declared that any agreement to pay interest “in conflict with the provisions-of this section” shall be null and void. Very probably, the use of the words “money, goods or things in action, or in any other manner whatsoever”, were intended to forestall any possible claim on the part of lenders that the receipt of merchandise or considerations other than money, would not constitute a payment of “interest” within the meaning of the act. Otherwise the words would be meaningless and in direct conflict with the title, which refers only to “interest”, and to section 1 of the act where the same maximum amount allowable is referred to as “interest”. Accordingly, there is no possible justification for the claim made by petitioner that section 2 of the Usury Law refers to anything other than “interest”.

It is true that the latter portion of section 3 of the Usury Law, supra, specifically refers to charges other than interest and purports to limit the amount of such charges. These provisions were, however, held unconstitutional in the case of Wallace v. Zinman, supra, and if the People in adopting the Usury Law intended to limit certain charges other than interest, they did not succeed in so doing. It operates only as a limitation upon the “interest” which may be charged by the lender, and does not exclude, regulate, or limit other charges which may be made in connection with a loan transaction. (Haines v. Commercial Mtg. Co., 200 Cal. 609 [254 Pac. 956, 255 Pac. 805, 53 A. L. R. 725]; Wallace v. Zinman, supra.)

These deficiencies in the Usury Law left a large field for the operation of unscrupulous persons who, operating as brokers, could impose whatever charges they saw fit. Unquestionably the practices which developed led the legislature of 1931 to amend the Personal Property Brokers Act, supra, so as to limit the total charges which could be imposed on loans of $300 or less to 3% per cent per month, and to require all persons engaged in such business to be licensed. The rate provisions of this act were held unconstitutional because in conflict with the 1918 initiative Usury Law, but the court limited its decision in the following significant language: “We are not intending to hold that the Usury Law prevents a classification, as made by the act, of brokers according to the amount involved and the nature of the security taken. . . . Nor are we intending to hold that a statute which allows the legal rate fixed by the Usury Law and yet limits the service or expense charges to the actual outlay, and not to exceed a definite limit, would be in conflict with other provisions of the Usury Act. The Usury Law does not purport to fix or limit the legitimate expense or service charge that may properly be borne by the borrower”. (Beneficial Loan Soc., Ltd., v. Haight, supra, at p. 517.)

This construction of the Usury Law recognizes and applies the general rule that the word “interest”, while broad enough to cover “bonus”, “commission”, or any other form of “compensation” paid to the lender for the use of money, does not include brokerage or other compensation paid to a third person, or expense items such as appraisals, recording fees, insurance, or similar charges. Such charges are proper subjects of regulation, and, unquestionably, one purpose of the Small Loan Act was to limit the amounts which may be exacted therefor. The legislation to accomplish this does not conflict in any manner with the Usury Law, which restricts legislative action only as to interest and still leaves the legislature supreme in all other fields of loan regulation.

The effect of the constitutional amendment of 1934 upon the Usury Law was to reduce the maximum permissible interest rate from 12 per cent to 10 per cent, but not to otherwise affect its requirements as to those classes, of lenders which were specifically exempted from that regulation. (Penziner v. West Coast Finance Co., 10 Cal. (2d) 160 [74 Pac. (2d) 252].) As to the exempted groups, the legislature was reinvested with the same control over them as it had prior to the enactment of the Usury Law.

But, says petitioner, the Small Loan Act authorizes greater charges than permitted by the Usury Law and the constitutional amendment. This contention is entirely untenable. The act limits interest to the 10 per cent maximum fixed by the Usury Law, and the term “interest” includes all amounts received by the lender under any other name as compensation for his own services, with the sole exception of amounts received for legitimate items of expense. Such items are not covered by the Usury Law, and in the absence of other legislation would be unlimited. The Small Loan Act simply limits the amount which borrowers may be charged for such items.

Petitioner also claims that the act is unconstitutional since it deprives a lender of the right to collect legal costs authorized by the Usury Law. Agreement with this contention would require a construction that the failure of the Usury Law to limit charges was intended as a prohibition against any limitation being imposed upon charges. The decision of this court in Beneficial Loan Soc., Ltd., v. Haight, supra, is a complete answer to this assertion.

Another of petitioner’s points is that the penalty provisions of the Small Loan Act conflict with the Usury Law, since they render void contracts for interest and charges made in violation of the act, whereas the penalties of the Usury Law apply only where excessive interest has been actually paid and received. But the penalty provision of the Usury Law voids the interest whether collected or not, while that of the Small Loan Act voids “interest and charges”. Since “charges” are not affected by the Usury Law and the legislature still retains full authority and control over “charges”, a provision that charges made in violation of its requirements shall be void cannot be construed as a violation of the Usury Law, which applies only to interest.

The petitioner also complains that the act discriminates between lenders charging different rates of interest because the maximum limitation on the aggregate amounts which can be charged borrowers does not take into consideration variations in interest charges. He claims that because of this fact the act does not limit “charges” which can be imposed upon borrowers, as these will vary according to the rate of interest charged, and that therefore the provision with reference to the maximum amounts which can be charged borrowers is indefinite and uncertain and allows an arbitrary charge.

To dispose of this contention it is only necessary to point out that the act does not permit or authorize a variation in the “charges” but specifically limits them to “actual outlays”, and that any variation in total charges imposed upon borrowers would result only where the “actual outlays” amounted to less than the interest actually charged and the maximum total which could be charged such borrowers under the act. That this might occur as the result of a voluntary-reduction in the rate of interest charged by. the lender from the maximum allowed is, of course, obvious, but absolutely immaterial.

Petitioner’s claim that the act permits interest in excess of the constitutional limitation is based upon the provision that a month shall be any period of thirty consecutive days, from which he argues that twelve months would be three hundred sixty days; that 10 per cent for three hundred sixty days is greater than 10 per cent for three hundred sixty-five days, as required by the Constitution; and that the rate provision is therefore void as allowing a greater rate of interest than allowed by the Constitution. This argument is completely answered by the law’s provisions.

The first paragraph of section 16 of the act pertains to “interest”, and limits interest to “10 per cent per annum”, which is the same limitation fixed by the Constitution. The second paragraph limits “charges” which may be imposed in addition to interest, and provides that the aggregate total of interest and charges shall not exceed 2% per cent per month on the first $100 of any loan and 2 per cent per month on the remainder of such loan. This percentage could, of course, have been fixed at any figure which the legislature deemed advisable, since, as heretofore pointed out, this operates simply as a limitation upon the amount of “charges” which can be collected in addition to the interest.

The thirty-day month provision contained in the third paragraph expressly applies to “charges and interest”, so obviously is intended to refer to the basis for computing the per cent and 2 per cent aggregate charges. There is no legal reason why the legislature, if it saw fit to do so, could not have made these percentages, for example, 3 per cent and 2% per cent, instead of 2% per cent and 2 per cent. Its requirement that such charges be computed on the basis of a three hundred sixty day year instead of a three hundred sixty-five day year is, therefore, not in conflict with the constitutional provision.

It is apparently petitioner’s contention that the Small Loan Act is violative of the due process and equal protection of law provisions of the federal and state Constitutions because it does not uniformly apply to all classes of lenders but creates an unjustifiable and unreasonable classification thereof through (a) application only to the so-called unsecured or non-exempt group of loan operators, (b) application only to loans of $300 or less, and (c) exemption of real estate loans. This contention is without merit.

The basic doctrine underlying the entire field of classification, and with particular reference to the loan business itself, is well expressed in Borden’s Farm Products Co., Inc., v. Baldwin, 293 U. S. 194 [55 Sup. Ct. 187, 79 L. Ed. 281], where the court said: “When the classification made by the legislature is called into question, if any state of facts reasonably can be conceived that would sustain it, there is a presumption of the existence of that state of facts, and one who assails the classification must carry the burden of showing by a resort to common knowledge or other matters which may be judicially noticed, or to other legitimate proof, that the action is arbitrary”. The same principle has also been recognized in this state in decisions upholding legislation such as that here attacked. (Eaker v. Bryant, 24 Cal. App. 87 [140 Pac. 310]; In re Stephan, 170 Cal. 48 [148 Pac. 196, Ann. Cas. 1916E, 617]; Ex parte Lichtenstein, 67 Cal. 359 [7 Pac. 728, 56 Am. Rep. 713].)

The Small Loan Act expressly exempts from its operation, banks, trust companies, building and loan associations, industrial loan companies, credit unions, licensed pawnbrokers, non-profit agricultural cooperatives, corporations loaning money pursuant to the Agricultural Credits Act of 1923, bona fide conditional contracts of sale involving disposition of personal property when not used for the purpose of evading the act, licensed personal property brokers when transacting the business authorized by such act, and licensed real estate brokers when transacting the business authorized by such act. Bona fide sales made on conditional contracts of sale do not constitute loans of money, and such transactions would not fall within the scope of an act applying to loans. Real estate brokers are subject to the regulation of the real estate commissioner, and the exemption of such brokers applies only when they are transacting business authorized by the Real Estate Act. The legislature may reasonably have determined that regulation of such brokers under the Real Estate Act is a sufficient safeguard against improper practices on their part in connection with small real estate loans, or that no abuses existed in the case of real estate loans which required any remedy.

Banks, trust companies, building and loan associations, industrial loan companies and credit unions are all created by special laws and are subject to inspection, supervision and control, which justify their exemption from other forms of regulation. The exemption of licensed pawnbrokers is justified for the same reason, and also because legislation regulating them has been consistently upheld as proper classification. (Ex parte Lichtenstein, supra.) The same principles are applicable to the exemption of licensed personal property brokers, since legislation applicable to them alone has been upheld as reasonable and proper classification. (Eaker v. Bryant, supra; In re Stephan, supra.) Moreover, their exemption is not absolute, but applies only to transactions subject to the Personal Property Brokers Act.

Non-profit agricultural cooperatives, and corporations lending money pursuant to the Agricultural Credits Act of 1923 clearly engage in a limited field of business. As to the first group, it is hardly to be expected that non-profit cooperatives would indulge in “loan shark” practices. Accordingly, as this court said in Eaker v. Bryant, supra, “we may reasonably assume that the legislature has not found any abuse in that business requiring public correction”. The same statement may properly be made as to the remaining group of corporations lending money pursuant to the Agricultural Credits Act of 1923. Also, their operations are subject to the regulation and control of the Farm Credit Administration, which is another reason why they may properly be exempted.

This leaves for consideration the question whether legislation applicable only to loans of $300 or less may be upheld. There is no doubt about the answer.

The propriety and reasonableness of a classification of the loan business, based on size of individual transactions, has been approved in practically all cases where the matter has been questioned. (In re Halck, supra; Koen v. State, 162 Tenn. 573 [39 S. W. (2d) 283].) Nor does such legislation conflict with any provision of the federal Constitution. (Engel v. O’Malley, 219 U. S. 128 [31 Sup. Ct. 190, 55 L. Ed. 128].) Size of transactions is not always an index of the evil to be remedied, but may well provide the basis of classification where the legislature is endeavoring to protect those who borrow small amounts against the rapacity of those who would prey upon ignorance or credulity.

Other assaults upon the act are many and varied, leaving unchallenged practically nothing but the punctuation. Those which have not been discussed are either included within the points passed upon or are so inconsequential as not to merit recognition.

The writ is denied and the petitioner remanded to custody.

Curtis, J., Shenk, J., Gibson, J., and Waste, C. J., concurred.

Mr. Justice Carter deeming himself disqualified did not participate in the foregoing decision.


author: GIBSON, J.

text:
    [L. A. No. 16750.
    In Bank.
    April 26, 1940.]
    WILLA BALLARD et al., Administrators, etc., Appellants, v. EMILIE G. MacCALLUM et al., Respondents.

      William L. Kuehn and Franz R. Sachse for Appellants.
    Phillip N. McCaughan, Edmund Nelson and Hugo Steinmeyer for Respondents.
   GIBSON, J.

This is an action by the administrators of the estate of William A. Ballard to cancel a trust created by decedent as trustor, and to obtain a reconveyance of the corpus of the estate. The trial court gave judgment for defendant and plaintiffs appealed. The appeal involves the interpretation of two instruments, one denominated a 1 ‘ contract of annuity for life” and the other a “declaration of trust”.

On January 14, 1935, decedent, then eighty-five years of age, executed the annuity contract under which he agreed to convey certain property to the California First National Bank of Long Beach as trustee, for the benefit of defendant Emilie G. MacCallum. In consideration therefor she agreed to pay him the sum of $110 per month during his natural life and also to pay all taxes, assessments and insurance premiums, and to keep the property in repair. It is stated that time is of the essence of the contract and that if the payment or charges be not paid as provided therein the interest of Miss MacCallum shall be forfeited and the property shall revert to Ballard. The trustee is authorized by Ballard to convey the property to Miss MacCallum upon his death, if the agreement is fully kept.

It is further provided that in the event of default in payments by the beneficiary, which default shall continue for ten (10) days after notice in writing given by the trustor or trustee, or in the event of default in discharging liens or encumbrances which shall continue for thirty (30) days after such notice in writing, or in the event of failure to pay any of the taxes or assessments in the time provided by law, the trustor, “at his option, after thirty (30) days’ notice” may declare the agreement cancelled, and the trustee shall then reeonvey the real property to the trustor. The contract declares that all of the obligations of the beneficiary are “conditions precedent to be faithfully kept and performed . . . strictly in accordance with the terms of this agreement ’ ’ to entitle her to continue in possession of the property.

A declaration of trust was contemporaneously executed by the California First National Bank of Long Beach as trustee, and decedent as trustor, for the benefit of Miss MacCallum, to carry out the terms of the annuity contract, which was incorporated by reference. The declaration provides that “in the event of the failure of the Beneficiary hereunder to make the payments as and when provided for under the agreement”, or any other default by the beneficiary, “providing further that said default has not been cured in accordance with the terms of said agreement”, then the trustee shall reconvey the property to the trustor, “and said trust, upon such reconveyance, shall absolutely cease and determine . . . It is further provided that in the event of the death of the trustor, “this trust shall ipso facto cease and determine at the time of such demise, and the entire trust property shall be by said Trustee conveyed and delivered so far as it may then be able, to Emilie G. MacCallum, a single woman, provided the payments and obligations of said agreement ... be fully performed until the death of said Trustor”.

Defendant Bank of America succeeded the First National Bank of Long Beach as trustee. On December 22, 1936, Ballard died intestate and plaintiffs duly qualified as administrators of the estate. Thereafter plaintiffs brought this action to compel the reconveyance of the property to the estate.

Four causes of action were set forth in the complaint. The first was based upon the alleged failure of Miss MacCallum to make payments and to perform other obligations of the contract. The second alleged incompetency of Ballard and undue influence of Miss MacCallum at the time of the execution of the contract and declaration of trust. The third cause of action alleged that the consideration for the contract and declaration of trust was wholly inadequate. The fourth alleged that the consideration had failed by reason of nonperformance of defendant MacCallum. The complaint contained no allegation that notice of the alleged default or nonperformance by Miss MacCallum was ever given to her.

At the trial defendant objected to the introduction of evidence on the ground that the annuity contract and declaration of trust provide for termination only after notice of default given to the beneficiary, and that the complaint failed to state a cause of action because no such notice was alleged. The court sustained this objection as to the first and fourth causes of action. After trial on the second and third causes, the court found against plaintiffs on the issues raised and rendered judgment for defendants.

As already stated, the determination of this appeal depends upon the proper construction of these two instruments. No question is raised as to the sufficiency of the evidence to justify the findings in favor of defendants on the other issues.

An inspection of the provisions of the two instruments discloses the controversy between plaintiffs and defendant MacCallum as to their effect. Certain language suggests that if the beneficiary fails in her obligation to make the monthly payments or to meet other charges against the property, the rights shall automatically cease, that is, they shall be forfeited and the land shall revest in the trustor and his successors without any action on their part. This inference may be drawn, for example, from the provision that all of the rights “shall cease and determine and be forfeited . . . and the property shall revert”, and the provision that each and all of the terms of the agreement are “conditions precedent” and must be strictly performed by the beneficiary to entitle her “to continue in possession”. Other language justifies the opposite inference, namely, that there is no automatic forfeiture or divestment of rights of the beneficiary upon default, but that written notice of default, followed by failure to cure the same for a specified period, is a prerequisite to the power to forfeit rights of the beneficiary and to retake the property. This is the normal effect of the provisions of the agreement that in case of default for ten days or thirty days after notice in writing, the trustor at his option may cancel the agreement. This view is reinforced by the statement in the trust instrument providing for termination of the trust upon default, ‘1 and, providing further, that said default has not been cured in accordance with the terms of said agreement”.

Faced with these contradictory provisions the trial court adopted the latter view, holding that the mere default by the beneficiary did not immediately terminate all her rights, but gave the trustor an election to serve notice of default and thereby terminate after the failure to cure the same within the required period. This interpretation of the trial court, if reasonable, must be upheld.

Plaintiffs attack the judgment on several grounds. They first call attention to the familiar rule that inconsistencies in an instrument should if possible be reconciled so as to give effect to every part of the agreement. They contend that the court has given effect only to the provisions requiring notice prior to cancellation, and has ignored the provisions for automatic forfeiture upon default. Their suggested reconciliation is to treat the trust as terminable by the trustor during his lifetime only after notice of default, but to hold it subject to forfeiture without notice if at the death of the trustor the beneficiary has not fully performed. In support of their theory they lean heavily upon the provision that performance by the beneficiary is a “condition precedent”. They also argue that the trial court’s construction of the instruments is inequitable, in that it permits the beneficiary to reap the benefits of the contract even though it is alleged that she did not perform on her part.

We may first notice the argument based on the so-called equities of the case, and here it is important to grasp the distinction between what the contract contemplates and what may happen by reason of unforeseen circumstances. There is nothing inequitable in a bargain merely because it turns out better for one party than the other. The fact that the trustor died shortly after the agreement was made, so that the actual obligations of the beneficiary were slight, was simply one of the contemplated possibilities. He might have lived a considerable time and her obligations might have been quite large. These uncertainties are inherent in any agreement of this character. The original agreement gave the trustor the assurance of support for the rest of his life in exchange for a transfer of his property, and its fairness is not open to question.

Nor is it necessarily inequitable that defendant claims rights in the property despite failure to make her required payments. She was still obligated to pay at decedent’s death and the remedy of forfeiture after notice was eoncededly available if she refused. If she has not yet paid she can still be held liable. In short, the contract itself provides an ample remedy for any default on the part of defendant and the agreement as thus interpreted is not therefore rendered inequitable by any alleged failure of defendant to perform.

Next we have the assertion that the court fails to give effect to the whole of the contract. The answer is, of course, that where the agreement contains inconsistent provisions, it is impossible to give each its full effect, and plaintiffs’ argument is nothing more than a plea that we choose those favorable to them. The suggestion that the provisions differ depending on whether the trustor is living or dead is without any support in the text of the agreement, and the distinction has no relevant connection with the objects of the parties.

In the face of these plain contradictions in the instruments, a fundamental rule of construction becomes applicable. The interpretation sought by plaintiffs is one which would lead to the forfeiture of property rights by reason of the mere failure to make payments strictly on time. In this state, by a long line of decisions, we have recognized such forfeitures in instalment contracts for the purchase of land and in conditional sales of goods. But aside from these special situations, our courts follow the accepted doctrine that equity will relieve even against an express provision for forfeiture. (See Civ. Code, secs. 3275, 3369; Ebbert v. Mercantile Trust Co., 213 Cal. 496 [2 Pac. (2d) 776] ; Hopkins v. Woodward, 216 Cal. 619 [15 Pac. (2d) 499]; Henck v. Lake Hemet Water Co., 9 Cal. (2d) 136 [69 Pac. (2d) 849] ; 20 Cal. Law Rev. 194; 21 Cal. Law Rev. 516; 18 Cal. Law Rev. 681; 52 Harv. Law Rev. 129.)

In the instant ease we are not required to apply this doctrine and grant relief from express and unmistakable language compelling a forfeiture. The problem here is much simpler. We have two possible constructions, one of which leads to a forfeiture and the other avoids it. In such a case the policy and rule are settled, both in the interpretation of ordinary contracts and instruments transferring property, that the construction which avoids forfeiture must be made if it is at all possible. (See Hawley v. Kafitz, 148 Cal. 393 [83 Pac. 248, 113 Am. St. Rep. 282, 3 L. R. A. (N. S.) 741] ; Henck v. Lake Hemet Water Co., supra; Restatement, Property, sec. 45, comment i.)

The interpretation urged by plaintiffs could give rise to great injustice in the operation of this contract. Under their theory the beneficiary could keep on paying monthly sums to the trustor and all the expenses of maintaining the property for a period of years, and yet the slightest subsequent failure in the prompt performance of any one . of her obligations would automatically terminate all of her rights and deprive her of the only return provided for her performance. In the Bbbert case, supra, this court found that the terms of the contract were to this effect, and that the provision for forfeiture expressly applied “irrespective of the kind or extent of default in performance or the amount of beneficial performance already received”. There it became necessary to overturn the very language of the agreement in order to avoid such a grossly inequitable result. Here it is only necessary to reconcile the conflicting provisions of the instruments in favor of those which avoid the inequitable forfeiture urged by plaintiffs.

The judgment is affirmed.

Curtis, J., Shenk, J., Carter, J., Houser, J., Edmonds, J., and Waste, C. J., concurred.


author: EDMONDS, J. HOUSER, J., Dissenting.

text:
    [L. A. No. 16317.
    In Bank.
    April 27, 1940.]
    MARY LOUISE FISHBAUGH, Respondent, v. ERNEST C. FISHBAUGH, Appellant.

      Meserve, Mumper, Hughes & Robertson and Baldwin Robertson for Appellant.
    Mathes & Sheppard, Wm. C. Mathes, Gordon F. Hampton and Lloyd Melvin Smith for Respondent.
   EDMONDS, J.

The controversy which occasioned this litigation concerns the actions of the appellant in securing a modification of the terms of a property settlement made before a divorce between him and the respondent, his former wife. She sued to set aside two later agreements, assertedly executed by her because of certain fraudulent misrepresentations made by the appellant. A judgment was rendered in her favor which, in effect, declares that the respective rights and obligations of the parties are as fixed by these agreements, and awards her damages in the sum of $50,000.

The litigants were married in 1914 and have since resided in California, where the appellant became a well-established and prosperous physician and surgeon. They lived together until March, 1930, when Dr. Fishbaugh left the family home. At this time all of their assets were community property.

The original property settlement was executed on December 23, 1930. Early in 1931 plaintiff sued for divorce. An interlocutory decree approving the property settlement agreement was entered on July 7, 1931, followed by a final decree the next year.

By her complaint the respondent alleges that in 1933, Dr. Fishbaugh represented to her that he desired to start anew, and wished to remarry her as soon as he was financially able, but that unless the requirements of their original agreement were modified he would be forced to resort to bankruptcy. In reliance upon these false representations, she agreed to rescind the previous agreement which she had made with him and entered into a preliminary one dated July 5, 1933, and another dated July 12, 1933. The second cause of action seeks to set aside these agreements for the reason that there was no consideration for them. As a third ground for relief, Mrs. Fishbaugh asserts that an actual controversy exists between her and the doctor with respect to their legal rights and duties under the various writings she signed which entitles her to a judicial determination of their effect. The prayer of the complaint is for declaratory relief, including a cancellation of the agreements executed in July, 1933, and the reinstatement of the 1930 agreement, or a partial rescission together with an award of damages, or if no rescission can be had, an award of both actual and exemplary damages.

The appellant answered this complaint by denying all of its material allegations and pleading, as special defenses, that his former wife had not rescinded the contract of 1933 nor restored $10,000 paid by him as consideration therefor. He also charged that respondent is guilty of laches in allowing an unreasonable length of time to elapse before attempting to rescind, because, although she knew after 1932 that he had no intention of remarrying her, yet she continued accepting the benefits of the July, 1933, agreements until January, 1936.

Upon these issues the court found that prior to the execution of the two agreements in July, 1933, Dr. Fishbaugh made numerous demonstrations to his former wife that he loved her and hoped that they could reestablish the family home; also, that he promised to remarry her as soon as he was able to straighten out his financial obligations. That the respondent, in reliance upon these representations, and upon assertions that unless the agreement made by him in 1930 was modified he would be forced into bankruptcy, agreed to terminate a trust made for her benefit, release certain insurance policies and real estate, rescind the agreement of December, 1930, and enter into a modified contract dated July 12, 1933.

The court further found that Dr. Fishbaugh at no time intended to remarry his former wife, but that she did not discover this until she and her daughter were ousted from possession of their home in 1935. That at no time in 1933 was the appellant's financial condition such that he was faced with bankruptcy; that he concealed the fact from her that he then had approximately $3,000 in cash on hand, and that his false statements and representations were made with the intention of causing her to execute agreements of July, 1933. That respondent, throughout their married life, and for some time subsequent to July, 1933, had held the deepest affection for Dr. Fishbaugh and relied upon him to handle her business affairs; that he knowingly accepted this trust and confidence, but used it to obtain an unfair advantage over her.

Other findings of the court are that Mrs. Fishbaugh would not have executed the later agreements if she had not relied upon and believed the representations made to her; that it is impossible to restore the status quo existing before July, 1933; that the original agreement of the parties was worth $180,000 to her in 1933, but the value of the July, 1933, agreements at that time was only $130,000; and that she has, therefore, been damaged in the sum of $50,000. Accordingly, Mrs. Fishbaugh was given judgment for that amount, and the rights and duties of the parties were declared to be those fixed by the two later agreements executed in July, 1933.

At the conclusion of the taking of evidence, Honorable Goodwin J. Knight, the trial judge, announced that he intended to find for Mrs. Fishbaugh, whereupon the appellant filed a statement of disqualification against him asserting bias and prejudice on his part. A motion to strike this statement from the files was granted by Judge Kenny. After the findings and judgment were signed, the appellant moved for a new trial, again urging the disqualification of Judge Knight. The motion constituting the second attempt to disqualify him was heard by Judge Schmidt and denied. Later the motion for a new trial was denied by Judge Knight, whereupon Dr. Fishbaugh appealed from the judgment and also from the order made by Judge Schmidt.

As grounds for reversal of the judgment, the appellant contends that there is no substantial evidence to support the findings upon which it is based. More specifically, he asserts that the evidence does not support the finding either that Mrs. Fishbaugh has been damaged in the sum of $50,000 or in any other amount, or that any false statements concerning his financial condition were made by him, or that he promised to remarry the respondent, or that there was any reliance by her upon any promise of remarriage or statement of financial distress. That if there was, in fact, such misrepresentations, the court erroneously found that Mrs. Fishbaugh did not know until July, 1935, that he had no intention of remarrying her and allowed her to rescind after a delay of two and one-half years. He vigorously attacks the finding that a fiduciary relationship existed between them in 1933.

The appellant further urges that the trial judge decided the issues of fact upon his knowledge of circumstances outside the record and not proper subjects of judicial notice. Another contention is that certain errors were made in the construction of the July 12, 1933, contract which imposes duties upon him contrary to its express terms. Finally, he declares that Judge Kenny erred in striking the statement of disqualification made against Judge Knight. He insists that the charges of bias and prejudice were sufficient to require a verified answer within the time allowed by section 170 of the Code of Civil Procedure, and because this provision was not complied with, all proceedings thereafter, which include the signing of the findings of fact, conclusions of law, and the judgment, are void.

Although there is sharp conflict in the evidence concerning Dr. Fishbaugh’s alleged representations that he intended to marry the respondent as soon as he was able to straighten out his financial troubles, her testimony to that effect is not only positive and direct but is supported by many letters written by him. She declared that in the early part of 1933, the doctor negotiated with her and her attorney for a modification of the agreement he had previously made. At that time, she said, he represented that he was having serious financial difficulties and had been advised that bankruptcy was his only solution. He intimated, also, that a discharge in bankruptcy would probably relieve him of his obligations under the property settlement agreement.

Apparently these efforts were unavailing until July, 1933. According to Mrs. Fishbaugh, upon a visit to her at that time he told her he was in great financial distress and needed her assistance. He made protestations of love to her and told her he was desirous of reestablishing the family home. That night or the next night, Dr. Fishbaugh had dinner with her in her home. On this occasion, also, he said that he loved her and was sorry for everything that he had done, and that he would remarry her as soon as he was financially able to do so.

On July 3d, Mrs. Fishbaugh and her attorney met with the doctor and at that time the attorney was instructed to give appellant “anything he wants”. Thereafter, on July 5th, an instrument was executed which authorized a partial termination of the trust provided for in the original agreement, and released to appellant $120,000 in life insurance. On July 12th another contract was executed.

The doctor and Mrs. Fishbaugh agree that during the month of July he was not only a frequent visitor at her home, but that they also went out to dinner several times, to the theater, and to the homes of mutual friends. He denies that he at any time told the respondent that he loved her, or that he wished to reestablish marital relations, but the trier of fact has resolved the conflict in evidence against him and that finding is conclusive upon appeal. It is, therefore, immaterial whether representations concerning bankruptcy were fraudulently made.

There is also substantial evidence to support the finding that the respondent relied upon Dr. Fishbaugh’s representations. For several months prior to July, 1933, he had been attempting .to secure a modification of the property settlement agreement made at the time of divorce. It was not until after his visits to Mrs. Fishbaugh that she consented to release him from his former obligations and instructed her attorney to give him “anything he wants”. It is certainly not unlikely that manifestations of love for his former wife and assertions of a desire to remarry her, of which she testified in detail, were decisive factors in securing her consent to the modified agreement, and the trial judge was entitled to credit that testimony and find in accordance with it.

The appellant’s contention that the evidence does not support the award of damages requires a consideration of the three contracts which are in controversy. The agreement of 1930 provided that all of the real property then owned by the parties should be conveyed to a trustee, the net income to accumulate until it amounted to $200,000. Dr. Fishbaugh was required to pay $1,000 per month to the trustee until the funds in its hands totaled $200,000. Policies of insurance upon Dr. Fishbaugh’s life to the amount of $120,000 were assigned to the trustee as additional security. Pending the accumulation of the trust funds, Dr. Fishbaugh agreed to pay the respondent $1,000 per month, these payments to continue during her lifetime until the trustee held $200,000 upon which there was an income sufficient to pay her at least $1,000 per month. Mrs. Fishbaugh was also given the exclusive right to occupy the family home until the same should be sold by the trustee, and the doctor agreed to pay the taxes, assessments, and repairs thereon. She was also to receive $15,000 in cash, payable over a period of three years, and certain items of personal property were set aside to her. Dr. Fishbaugh retained numerous shares of stock, his office furniture, books, automobile, and professional accounts receivable.

The first agreement executed by the parties in July, 1933, revoked the trust provisions requiring the deposit of insurance policies and authorized their reassignment to Dr. Fishbaugh. The second agreement terminated the trust and provided that all property then held by the trustee should be conveyed to the doctor as his own separate property. Its terms required him to pay his former wife $750 per month, so long as she remained unmarried, and until she received the sum of $50,000. After that amount had been paid she was to receive $500 per month for the remainder of her lifetime or until marriage. In the event the doctor’s income from the practice of his profession should exceed $50,000 in any one calendar year, he agreed to pay her $3,000 additional for that year at the rate of $250 per month. He also agreed to pay her $10,000 within ten days after the execution of the contract, and $40,000 more as soon as reasonably possible.

Upon the sale of any of the real property conveyed by the trustee to Dr. Fishbaugh pursuant to the agreement, one-half of the proceeds of the sale after the payment of expenses and encumbrances was to be paid to the respondent and credited by her upon the obligation to pay $50,000. To secure this payment the contract provided for the assignment of the life insurance policies to her. It also included Dr. Fishbaugh’s agreement that if he should die before her, she should receive the balance of the $50,000 then unpaid in lieu of monthly payments.

Mrs. Fishbaugh was also given the right to reside in the home until the appellant shall “desire to live there and give her 30 days’ notice to quit the premises” and the assignment to her of certain personal property, consisting principally of household furniture, was affirmed. In the event of default in the performance of any of the terms of the contract, Mrs. Fishbaugh might demand restoration of the former agreement. Concurrently, Dr. Fishbaugh agreed to pay any income taxes that should be assessed against her.

The trial court having found that the respondent executed the two contracts of 1933 because of the fraudulent representations .made to her by Dr. Fishbaugh, she was entitled to judgment for damages in an amount equal to the difference in value, if any, to her between the original eon-tract and the later agreements. (Garstang v. Skinner, 165 Cal. 721 [134 Pac. 329] ; Cross v. Bouck, 175 Cal. 253 [165 Pac. 702].) This amount is, undoubtedly, difficult to determine with certainty because many provisions of each contract depend upon contingencies. But one who commits a wrongful act cannot wholly escape liability because of such a difficulty. (Hartman Ranch Co. v. Associated Oil Co., 10 Cal. (2d) 232 [73 Pac. (2d) 1163] ; Rilovich v. Raymond, 20 Cal. App. (2d) 630 [67 Pac. (2d) 1062].)

Under the contract made in 1930, Mrs. Fishbaugh expressly retained all of her rights to the community property placed in trust for her benefit. However, when the trustee held $200,000 in cash, it was authorized tp reconvey to Dr. Fishbaugh, as his separate property, all real estate then remaining in the trust, and to reassign the life insurance policies “free of any claim of the trustee and of the second party”. But until that event occurred the respondent’s interest in the trust was of substantial value, for the evidence shows that the real estate cost about $325,000 and at the time of the trial was subject to encumbrances aggregating approximately $55,000. She also had a further interest in the corpus of the trust, for after the $200,000 was accumulated, if she outlived her daughter, one-half of that amount was subject to her testamentary disposition or passed to her heirs.

In the later contract, Dr. Fishbaugh agreed to pay the respondent $50,000 as consideration for the termination of the trust and the trustee’s conveyance to him of all property then held by it. This amount was not payable at once but, except for $10,000, only “as soon hereafter as he reasonably can do so”. However, the appellant agreed to pay on account of this obligation one-half of the net amount which he should receive upon the sale of any real property conveyed to him by the trustee.

In addition to these amounts, the respondent might receive additional sums from the sale of the former community property, in that the remaining one-half of the purchase price, after all defendant’s outlays had been deducted, was payable to her. But these outlays were specified as including the original purchase price, interest at 6 per cent, insurance, taxes, assessments and all other charges directly or indirectly paid by the appellant for upkeep and maintenance. The value of this interest was, therefore, problematical and, very possibly, comparatively small.

To appraise with certainty the value of Mrs. Fishbaugh’s interest in the former community property under each of the two contracts is difficult, if not practically impossible. Certainly the doctor obtained property of very considerable value for his promise to pay her $50,000. The difference in value to her, so far as monthly income is concerned, between the two is more readily ascertainable. The least amount she was entitled to receive, according to the terms of the original contract, was $1,041 a month for life. Under the second contract, Dr. Fishbaugh agreed to pay her $750 per month during her lifetime, or so long as she remained unmarried, with the added provision that after the $50,000 consideration for the revocation of the trust had been paid by him, then the amount of the monthly payments should be reduced to $500. This was subject to the further contingency that if the appellant’s net income from his profession should exceed $50,000 for any calendar year, then he would pay her an additional amount of $3,000 for that year.

Under these circumstances, $750 per month over a term of years is probably the highest average amount Mrs. Fishbaugh would receive. In July, 1933, she had a life expectancy of 24.29 years, as computed by the “American Experience Table for Mortality”, and the difference to her in the value of an annuity for life of $1,000 per month and one of $750 per month was $47,373.30. She testified that the former contract was worth $125,000 more to her than the 1933 agreement. The evidence, therefore, amply supports the findings of damages.

The appellant also attacks other findings in which the court construed provisions of the 1933 contract concerning the time when he was required to make payments upon the obligation of $50,000. One of these is that Dr. Fishbaugh agreed to pay this amount “within a reasonable time after the 12th of July, 1933”. This finding, asserts appellant, is not supported by the evidence.

According to the construction of the contract by the trial court, the appellant agreed to pay Mrs. Fishbaugh, in all events, the sum of $50,000, $10,000 not more than ten days after the 12th day of July, 1933, and the balance within a reasonable time thereafter. Also, the court found, he agreed to pay to her, prior to the maturity of the whole unpaid balance thereof, additional sums on account of the obligation from time to time as and when he could make such periodical payments with reasonable safety to his financial condition. As against this construction, the appellant insists that his obligation to her is not to pay when he is able, but when, in his judgment, he is able to do so.

However, the express terms of the contract are, first, that “in all events” appellant will pay $50,000 “as soon hereafter as he reasonably can do so ”; second, that he will pay $10,000 within ten days after the execution of the contract; and, third, “that from time to time hereafter, when and in his judgment he can do so with reasonable safety to his then financial condition, he will pay to second party additional sums until she has thus been paid . . . the full sum”. The first of these promises is an unconditional promise to pay “in all events”, as soon as he could “reasonably” do so, a reasonable time being dependent "upon the circumstances. Of course, the appellant’s financial ability is the principal circumstance to be considered in determining what is a reasonable time for performance. The second and third promises are to make payments on account.

The appellant thereby promised, in effect, that he would not withhold all payment until a reasonable time for payment of the full sum had elapsed, but would pay $10,000 within ten days and would make further payments on account “from time to time” prior to the maturity of the full amount, whenever he could do so “with reasonable safety to his then financial condition”. If, as he contends, the provision as to his “judgment” modifies the entire obligation, and does not refer merely to payments on account, why were the significant phrases “in all events” and “as soon hereafter as he reasonably can do so”, used in connection with the promise to pay the amount of $50,000? Manifestly the appellant’s promise was not the ordinary promise to pay “when able”, such as that considered in Van Buskirk v. Kuhns, 164 Cal. 472 [129 Pac. 587, Ann. Cas. 1914B, 932, 44 L. R. A. (N. S.) 710] (1913), and similar cases, but, as found by the trial court, to pay $50,000 “in all events”, and with the further obligation to make partial payments thereon as his financial condition allowed him to do so.

The appellant also complains of the trial court’s further finding that the balance of the $40,000, after payment of the $10,000, is owing and unpaid by the appellant; that at the time of the commencement of this action, a reasonable time had not yet elapsed for the payment of this amount, but that since July, 1933, the defendant could reasonably have paid to Mrs. Fishbaugh the sum of $10,000 with reasonable safety to his financial condition; and that by reason of the appellant’s failure to make any payment whatever during this period on account of his obligation, he is now in default in the performance of his obligations under the contract. But the appellant’s own testimony showed that during the period of thirty months from July, 1933, until the commencement of this action, the net cash income from all sources amounted to more than $125,000. This and other evidence furnishes substantial support for the finding of the trial court.

However, the court also found that Dr. Fishbaugh agreed with the respondent to sell, within a reasonable time after July 12, 1933, the real property 'conveyed to him by the trustee. This finding is completely at variance with the express provision of the contract, which is that “if, when and as he sells” any of it, that he will pay one-half of the net proceeds of each sale upon his obligation. There is no agreement upon the appellant’s part to sell any of this property, hence the court was in error in making its finding in this regard. An agreement to apply the proceeds from any sale of the property to an obligation which the promisor has agreed to pay “in all events” lays no requirement upon him to sell such property within a reasonable time, or at all.

Concerning the efforts made by the appellant to disqualify Judge Knight, the statement of asserted bias or prejudice does not comply with the requirements fixed by section 170 of the Code of Civil Procedure. According to this statement, the judge said at the conclusion of the trial that appellant “misrepresented his financial condition” to his former wife and that he “took the law into his own hands”. But Judge Knight was acting as the finder of the facts, and if the evidence introduced before him was in conflict, he had the right and it was his duty to believe the testimony of the party who it appeared to him was telling the truth.

Other statements made by Judge Knight concern the value of a piece of property upon which there was no evidence introduced except the original sale price, and an opinion as to whether a prominent banker might have given Dr. Fishbaugh assistance in his financial difficulties. Complaint is also made that Judge Knight read depositions not introduced into evi-

dence. But neither the statements charged to Judge Knight nor his reading of the depositions, if he did so, show bias or prejudice on his part. If a judge in finding facts falls into error by basing his conclusions upon inadmissible evidence, such an action may constitute sufficient ground for a reversal of the judgment upon appeal, but will not support a charge of disqualification under section 170 of the Code of Civil Procedure. (McEwen v. Occidental Life Ins. Co., 172 Cal. 6 [155 Pac. 86].) The statement of disqualification was therefore properly stricken from the file. For the same reasons the order of December 3, 1936, denying the appellant’s motion to disqualify Judge Knight, must be affirmed and it is so ordered.

However, the judgment is modified by striking therefrom the provision: “That by said agreements of July, 1933, the defendant became and is now obligated to the plaintiff to sell the properties hereinafter described within a reasonable time after the 12th day of July, 1933; that at the time of the commencement of this action a reasonable time had not yet elapsed for the performance by the defendant of said obligation to sell said real properties.” As so modified it is affirmed, respondent to recover costs on appeal.

Shenk, J., Gibson, J., Curtis, J., Carter, J., and Waste, C. J., concurred.

HOUSER, J., Dissenting.

I dissent.

Undeniably, the facts are that for and during a period of several weeks next preceding the execution of the two contracts which form the basis of the instant action, the various provisions of such contracts not only were the subject of negotiations and were thoroughly considered by each of the parties thereto, but also that the said provisions constituted the subject matter of each of several serious discussions that occurred between able and experienced counsel who represented the respective parties. Everyone who in any way was connected with the matter was completely familiar with each and every detail of the original contract, as well as with each of the several provisions of the new contracts which thereafter were executed. No one was deceived nor was anyone misled by any representation which may have been made by defendant. The single circumstance that he may not have expressly divulged the fact that he had approximately $3,000 on deposit in a bank in no way operated to plaintiff’s disadvantage, nor did it constitute a factor in her determination to enter into either of the agreements. That item of defendant’s assets, considered in comparison with the total value of the properties and the other respective interests of the parties, was so small as to be regarded as insignificant and of no consequence as an inducement to the execution of the contracts. As a matter of record, in addition to the several advantages by which plaintiff benefited by reason of the provisions of the new contract, she received a cash consideration of $10,000. In such a situation, from a legal standpoint it was impossible that plaintiff could have been defrauded. In fact, the only ground (if any) upon which plaintiff’s case may be rested is the asserted fact based on her testimony to the effect that she was induced to enter into each of the contracts by reason of the alleged fraudulent promise of defendant that he would remarry her. Although perhaps unnecessary of corroboration, no substantial evidence may be found in the record to support her testimony in that regard. To the contrary, following the date when, according to her testimony, defendant had promised to remarry her, the undisputed evidence discloses the fact that each and every letter, communication, or documentary evidence of any kind refutes the testimony that was given by plaintiff in that respect. Not only were the parties treating one with the other “at arm’s length” but, practically, they were “at swords’ points”. At no time during the course of the negotiations when the respective attorneys were present was an asserted promise by defendant of remarriage to plaintiff even mentioned or hinted. Every scrap of evidence and every inference deducible from any source not only proclaim the unreliability of plaintiff’s testimony in that regard, but also demand (without practicability of successful denial) that such testimony be regarded as unequivocally impeached. To my mind, far from being considered as substantial evidence of a promise by defendant to remarry her, plaintiff’s testimony fails to provide even a “scintilla” of evidence in that regard. But conceding the possibility that such conviction may not be well founded, assuredly it is patent that plaintiff slept on such rights as at any time she may have possessed. As far as the record herein discloses, for two and one-half years plaintiff carefully guarded and safely kept her secret. To no one did she ever divulge the asserted fact of such a promise save possibly to her present attorneys who assumedly were informed thereof shortly preceding the commencement of the instant action. If her claim was genuine why was it not asserted at some time during the period when negotiations were pending, or at least within a reasonable time after it must have been apparent to plaintiff that defendant had no intention of ever marrying her? The authorities are numerous to the effect that although a plea of the statute of limitations may not be available to a defendant; nevertheless if an unreasonable delay in bringing an appropriate action has ensued the defendant may successfully set up such a plea as a defense. In my opinion, by her laches plaintiff has es-topped herself from the maintenance of the instant action.

The foregoing suggestions constitute my principal objections to the conclusion that has been reached in the prevailing opinion herein; but the fact that other objections have not been here set forth should not be considered as conclusive or even as an indication that there are not several other equally valid and sufficient reasons why the judgment should be reversed.

Kehearing denied.