Opinion
Hearing Granted, and Petition Subsequently Stricken by Order of Supreme Court, Oct. 24, 1927.
COUNSEL
Marshall Stimson and Noel C. Edwards, both of Los Angeles, for appellant Charles Johnston.
Bicksler, Smith & Parke, of Los Angeles, for appellants Bessie Johnston, Ida Johnston-Humphrey, and Ruth Elma Johnston
Anderson & Anderson, of Los Angeles, for respondent.
OPINION
CASHIN, J.
An action to have a trust declared as to an interest in certain real property purchased by the defendant from the estate of David S. Johnston, deceased.
The property, which consists of lots 15 and 16 in block 1 of Wiltshire Boulevard tract, in Los Angeles county, was acquired by the deceased and the defendant in the year 1910, and in 1911 was improved by the erection thereon of a four-story brick apartment hotel known as the Hotel Shoreham.
David S. Johnston died intestate in Los Angeles county on November 18, 1919, and at the time of his death the property was incumbered by a mortgage originally executed for $35,000, but of which $5,000 had been paid, and the time for the payment of the balance extended to December 28, 1921.
None of the heirs of the deceased resided in California, and on December 17, 1919, letters of administration on the estate were granted to the public administrator of Los Angeles county.
An inventory and appraisement of the estate was filed on January 23, 1920, from which it appears that the deceased, in addition to his interest in the hotel, the appraised value of which was $40,000, owned other real and personal property, the total appraised value of the estate being $59,801.80.
Thereafter, on January 28, 1920, the administrator caused to be posted and published in accordance with the provisions of the statute a notice that the interest of the estate in the hotel property would be sold at private sale to the highest and best bidder for cash, subject to confirmation by the court.
The defendant, who so far as shown was the only bidder, agreed to assume and pay the proportionate part of the mortgage chargeable to the estate, viz., $15,000, and in addition to pay the estate the sum of $21,000, a total of $36,000, this sum being 90 per cent. of the appraised value of the interest of the estate in the hotel.
It was alleged in the petition for confirmation that the sale would be for the best interest of the estate and was necessary in order to pay claims, and, further, that the amount bid by the defendant was fair and reasonable and not disproportionate to the value of the interest sold.
The notices of sale were regular and the petition sufficient to give the court jurisdiction, and no errors in its exercise would render the decree void. Burris v. Kennedy, 108 Cal. 331, 41 P. 458; Estate of Bette, 171 Cal. 583, 153 P. 949; Estate of Spriggs, 20 Cal. 121.
After a hearing, which was duly noticed, the sale was confirmed to the defendant on March 3, 1920, following which a deed was executed by the public administrator.
Upon the petition of plaintiff Charles Johnston, who was a brother of the deceased, the letters granted to the public administrator were revoked on March 9, 1920, and letters of administration were duly issued to the petitioner.
The complaint alleged, with respect to the hotel:
"That at the time said property was acquired said David S. Johnston and G. W. Kitchin were and had been for some time past partners, and during the years of 1910 and 1911 as partners they erected the building on the above-described property known as the ‘Hotel Shoreham,’ and that from the date that they acquired the property until the death of said David S. Johnston they were partners in the ownership and conduct of the business connected with the above-described property and the Hotel Shoreham, and that the defendant George W. Kitchin managed the affairs of the partnership, collected the rents, and paid all of the charges and attended to all of the business of the partnership, giving to the said David S. Johnston monthly statements of account,"
--these allegations not being denied by the answer.
It was also averred that by a fraudulent arrangement between the public administrator and the defendant the fact that the sale proceedings were pending was concealed from the heirs and their attorneys; that the defendant, to induce the public administrator to institute the proceedings and procure the decree mentioned, represented to the latter that in the event the sale was not made it was his intention to bring suit for a partition of the property, falsely represented the terms of the mortgage thereon, that there would be difficulty in renewing the same, that the hotel was in need of repairs, that the lessee in possession was in default in the payment of rent, and that the lease was about to expire; that the public administrator, influenced by the defendant, made no effort to procure higher bids, and that the price paid to the knowledge of both was less than the reasonable market value of the interest sold; that the public administrator, induced by the representations of the defendant as to the value and condition of the property, falsely represented to the court that the sale was necessary in order to pay claims, was for the best interests of the estate, and that the amount bid by the defendant was fair and reasonable.
The allegations of fraud were denied, and all the allegations of the complaint, with the exception of those admitted by the answer, were found by the trial court to be untrue, and upon its findings judgment was entered for the defendant.
The plaintiffs appealed, and urge as grounds for reversal that the facts shown by the evidence and those admitted sustain their contention that the conduct of the defendant was actually and constructively fraudulent, and that the findings and judgment are unsupported.
Without reviewing in detail the evidence in support of the allegations of a fraudulent arrangement between the defendant and the public administrator, a concealment by the latter of the fact that the proceedings were pending, and a failure to use due diligence in the matter of obtaining higher bids, it will be sufficient to say that the findings of the trial court on these issues were fully sustained, as was also the finding against the allegation that the administrator fraudulently misrepresented the value of the hotel property and the condition of the estate to the probate court.
It was testified by the defendant that it was his intention in the event he was unable to purchase the interest of the estate in the hotel to bring suit for a partition, and that he so stated to the administrator; that he further stated that both the mortgage and the lease had something over a year to run; that the hotel could not be again leased without repairs; and that the rent had previously been in arrears, but that subsequently the payments were made.
The evidence shows that certain repairs were necessary and that with the exception of the statements as to the date of the maturity of the mortgage and that there would be difficulty in renewing the same, the other representations were substantially true.
Although a surviving partner is a trustee for the representative and the heirs of his deceased partner (Civ. Code, § § 2410, 2411; Little v. Caldwell, 101 Cal. 553, 36 P. 107, 40 Am. St. Rep. 89), he may purchase the interest of the estate in the property of the firm (Kimball v. Lincoln, 99 Ill. 578; Valentine v. Wysor, 123 Ind. 47, 23 N.E. 1076, 7 L. R. A. 788; Ludlum v. Buckingham, 35 N.J.Eq. 71-80; Didlake v. Roden Grocery Co., 160 Ala. 484, 49 So. 384, 22 L. R. A. [N. S.] 907, 18 Ann. Cas. 430; Bradbury v. Barnes, 19 Cal. 120), it being the duty of the court before confirming a sale of any partnership interest to a surviving partner or any other person to inquire into the condition of the partnership affairs and to examine the surviving partner, if in the county and able to be present in court (Code Civ. Proc. § 1524).
The transaction, however, must be fair and free from fraud, or it will not be sustained. In making the purchase he cannot place the representative at arm’s length and seek a profitable bargain for himself, but is bound to acquaint the representative and the court with full information as to the facts, and it is not sufficient that he does not withhold or conceal such information, but it is incumbent upon him to disclose voluntarily all the facts within his knowledge from which a sound judgment as to the value of the interest of the estate may be formed. Welbourn v. Kleinle, 92 Md. 114, 48 A. 81; Tennant v. Dunlop, 97 Va. 234, 33 S.E. 620; Newcomb v. Brooks, 16 W.Va. 32.
As stated, the heirs were nonresidents, and with the exception of plaintiff Charles Johnston, who arrived in Los Angeles county on February 15, 1920, were not within the state or represented by local counsel previous to the confirmation of the sale, nor so far as appears did any of them receive notice or have knowledge that the sale was pending.
It is clear from the evidence that the existence of the partnership relation was not disclosed to the public administrator or to the court, and it further appears that the defendant on March 28, 1920, in an application for a loan to be secured upon the property, stated its value to be the sum of $110,000. The loan was made thereon for $40,000 upon an appraisement by the mortgagee of $90,000, and expert witnesses called by the respective parties placed its value in the months of January and February, 1920, at amounts varying from $85,000 to $110,000.
It was not alleged in the complaint that the partnership relation was not disclosed, and it is contended by the defendant that to establish a constructive fraud all the facts relied upon as giving rise to the trust must be averred.
That such is the general rule may be conceded, but where a fiduciary relation is admitted and it appears that an advantage was gained by the one standing in that relation, allegations of actual fraud are unnecessary. Alaniz v. Casenave, 91 Cal. 41. 27 P. 521. The transaction under such circumstances is presumed to be constructively fraudulent, and the burden is upon him to show not only that he exhibited the utmost good faith, but that the transaction was in all respects fair and was entered into with a full knowledge of the facts. Cox v. Schnerr, 172 Cal. 371, 156 P. 509; Wright v. Rohr, 41 Cal.App. 265, 182 P. 469; Bauchle v. Smylie, 104 A.D. 513, 93 N.Y.S. 709.
The court found in effect that none of the representations by the defendant were fraudulently made, and it appears that his statement of the date of the maturity of the mortgage, though incorrect, did not mislead the public administrator, as the true date was contained in the inventory and appraisement filed by him before the proceedings leading to the sale were commenced.
Although these findings are fairly supported, no explanation was made of the failure to apprise the administrator or the court of the partnership relation, and it further appears beyond reasonable question that the value of the interest of the estate in the property was in fact and to the knowledge of the defendant largely in excess of the price paid.
The defendant by reason of the partnership relation occupied a position of advantage which enabled him to procure a profitable bargain, which, had the relation been known, would not have been approved by the court without an inquiry into the partnership affairs and a close scrutiny of the transaction. Moreover, it is reasonably certain that had all the facts as to the value of the property known to the defendant been fully disclosed the sale would not have been confirmed for the price offered.
In view of the relations of the parties and the circumstances shown, we are satisfied that the defendant failed to show that decree of fairness and good faith which the law required of one in his position, and that the implied conclusion of the trial court to the contrary was not sustained by the evidence.
The judgment is reversed.
We concur: TYLER, P. J.; KNIGHT, J.