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Docket Number

Docket No. 15919.

Attorney(S)

Thiel, Sassone Howard for Appellant. John A. Grennan and Burt S. Hofmann for Respondents.

Judges

WOOD (Fred B.), J.

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Smart Summary

Case Summary: Johnnie Daniels et al. v. James A. Williams et al.; Walter E. McMannis, Appellant (Ct. App., May 19, 1954)

Factual and Procedural Background

Plaintiffs brought an action to annul a promissory note and a deed of trust they had executed, alleging the instruments were procured by fraud. As defendants the complaint named the payee Ben Melmet, James A. Williams (alleged to have actively procured the note), Milton N. Owens (alleged to have been engaged by Melmet to sell the note), and Walter E. McMannis (the present holder of the note).

Following the plaintiffs' application, the superior court granted a preliminary injunction restraining McMannis, during the pendency of the action, from disposing of the note or the deed of trust or from causing the sale of the real property covered by the deed of trust. That injunction was conditioned on the plaintiffs' filing of a $3,000 corporate surety bond.

McMannis appealed from the order granting the preliminary injunction. The Court of Appeal (Wood, J.) affirmed the trial court's order.

Legal Issues Presented

Whether there was any evidence in the record sufficient to support the trial court's grant of a preliminary injunction against McMannis.
Whether the injunction was improperly based on mere allegations of the complaint when, as McMannis contended, those allegations were fully and specifically controverted by a verified answer and sworn testimony.

Arguments of the Parties

Appellant's Arguments (McMannis)

McMannis contended the trial court abused its discretion in granting the preliminary injunction because, as he viewed the evidence and applicable law, (1) there was no evidence to support issuance of the injunction and (2) the injunction was based on the mere allegations of the complaint which were fully and specifically controverted by a verified answer and by sworn testimony.
McMannis testified he purchased the note after responding to a newspaper advertisement, negotiated a price of $2,500 through an intermediary (an employee of Owens), deposited funds in escrow, and received the note and deed of trust upon Melmet's endorsement. He stated he did not know the plaintiffs, the payee, or prior dealings and had no prior knowledge of the events surrounding the origination of the note.
He asserted entitlement to collect payments or foreclose, indicating his belief that, having paid for the instrument, he was "entitled to" the payments.

Respondents' Arguments (Plaintiffs)

Plaintiffs alleged that Williams, at their request to procure a purchaser, represented that an existing loan would be extinguished only if they executed and sold a new $4,000 note and deed of trust. Relying on Williams' representations, they executed the instruments in suit.
They alleged Williams sold the new note to Melmet without their knowledge or consent, and Williams appropriated the proceeds rather than extinguishing the original indebtedness of $4,187.15. Plaintiffs further alleged Melmet was aware of Williams' plan to defraud and purchased with knowledge of defective title, that Melmet employed Owens to sell the note and that Owens knew or had cause to know Melmet's title was defective, and that McMannis knew or had cause to know the title was defective (and paid $2,500 for the note).
Plaintiffs asserted factual allegations sufficient to justify a preliminary injunction and, as noted in the opinion, stated (in their brief) that McMannis did not file an answer until after the injunction had been granted.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Gagliardo v. Crippen, 22 Cal. 362	Rule that when the allegations of the complaint are fully and specifically controverted by affidavit (or its equivalent), the equities are denied and it is unnecessary to pass upon objections to the complaint.	The court distinguished Gagliardo: here the defendant's testimony controverted only a few allegations (those pertaining to McMannis' acquisition), not the core allegations of fraud in the making of the note or defective title in the hands of the predecessor. Therefore Gagliardo did not control and did not preclude granting the injunction.

Court's Reasoning and Analysis

The Court of Appeal reviewed the record and concluded there was adequate evidence to support the trial court's grant of a preliminary injunction. The court's analysis proceeded along these lines (stated in the opinion):

Scope of the evidence: The evidence before the trial court consisted of the plaintiffs' verified complaint and the testimony of McMannis and one Rudy Washburn. The record on appeal contained no answer; plaintiffs stated McMannis did not file an answer until after the injunction was granted, and McMannis did not deny that assertion in the record.
Uncontradicted allegations: Because McMannis had not contradicted many of the key factual allegations, the verified complaint's allegations concerning the sequence of events (Williams' representations, execution of a new note and deed of trust, Williams' sale of the note to Melmet and appropriation of proceeds, Melmet's knowledge of the plan to defraud, and Melmet's defective title) remained uncontradicted for purposes of the injunction application.
McMannis' proof (or lack thereof) of holder in due course status: McMannis testified as to how he acquired the note (via an advertisement, negotiation with an employee of Owens, inspection of property, and purchase for $2,500). He did not present evidence that any prior holder had good title or that he had notice-free acquisition sufficient to establish holder in due course status. The court cited Civil Code section 3140's allocation of the burden: when it is shown the title of any person who negotiated the instrument was defective, the burden is on the holder to prove acquisition as a holder in due course.
Risk of irreparable injury and trial court discretion: The trial judge found that foreclosure of the deed of trust or sale of the note during litigation would produce great or irreparable injury to a party (citing Code Civ. Proc., § 526). The Court of Appeal found that finding amply supported by the evidence. The court reiterated the well-established principle that granting or denying a preliminary injunction rests in the sound discretion of the trial court and that an appellate court will not disturb that exercise of discretion absent a showing of abuse. The quoted statement from 14 Cal.Jur. emphasizes that discretion should be exercised in favor of the party most likely to be injured.
Preservation of status quo pending resolution of holder-in-due-course burden: Given the uncontradicted allegations of fraud infecting the title in the hands of the predecessor and McMannis' failure to carry the burden of proving holder in due course status at the preliminary stage, equity justified maintaining the status quo until trial on the merits to determine whether McMannis could meet the statutory burden.
Bond adequacy: The preliminary injunction was conditioned on plaintiffs' filing of a $3,000 bond; the court found the bond "well calculated" to cover conceivable losses McMannis might sustain, further supporting the propriety of the injunction.

Holding and Implications

Affirmed. The Court of Appeal affirmed the superior court's order granting the preliminary injunction.

Direct effect on the parties: The injunction restraining McMannis, during the litigation, from disposing of the note or deed of trust or from causing the sale of the real property covered by the deed of trust remains in force, subject to the condition that plaintiffs post a $3,000 corporate surety bond as required by the trial court.

No broader precedent was announced beyond the court's application and distinction of existing authority: the opinion relied on established principles regarding the trial court's discretion in granting preliminary injunctions, the statutory allocation of the burden when a prior negotiator's title is defective (Civ. Code, § 3140), and distinguished Gagliardo v. Crippen on the facts presented. The opinion affirmed that equity may preserve the status quo where a predecessor's defective title is alleged and the current holder has not yet borne the statutory burden of proving holder-in-due-course status.

Judge Wood authored the opinion; Peters, P.J., and Bray, J., concurred.

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JOHNNIE DANIELS et al., Respondents, v. JAMES A. WILLIAMS et al., Defendants; WALTER E. McMANNIS, Appellant.

WOOD (Fred B.), J.

Plaintiffs brought this action to annul a promissory note and deed of trust which they had executed, claiming fraud in the procurement thereof.

As defendants, they joined Ben Melmet, the payee of the note, James A. Williams, allegedly active in procuring the note, Milton N. Owens, allegedly engaged by Melmet to sell the note, and Walter E. McMannis, the present holder of the note.

Upon application of the plaintiffs, a preliminary injunction was issued restraining McMannis, during the pendency of the action, from disposing of the note or the deed of trust or from causing the sale of the real property covered by the deed of trust, conditioned upon the filing of a $3,000 corporate surety bond by the plaintiffs.

McMannis has appealed from the order for this injunction. He contends it was an abuse of discretion, a reversible error, to make the order because, according to his view of the evidence and the law, (1) there was no evidence to support the order and (2) the order was based upon the mere allegations of the complaint which were fully and specifically controverted by verified answer and sworn testimony.

(1) Our examination of the record convinces us that the evidence adequately supports the order.

The evidence consists of the verified complaint and the testimony of McMannis and one Rudy Washburn. McMannis did not file an answer until after the injunction had been granted.

McMannis claims he is a holder in due course but has adduced no evidence tending to prove that any prior holder had a good title to the note. He testified that prior to purchasing the note he had no knowledge at all of any of the dealings between any of the other parties to the action in connection with this transaction.

Accordingly, the following facts stated in the complaint are uncontradicted: Plaintiffs own certain real property subject to a secured indebtedness of $4,187.15. Plaintiffs requested defendant Williams to procure a purchaser. He later informed them he had a purchaser but represented that, to consummate the sale, it would be necessary to extinguish the existing loan and for that purpose execute and sell a new note and deed of trust for $4,000. Relying upon his representations, they executed the note and deed of trust in suit, which Williams without plaintiffs' knowledge or consent sold to Melmet, taking the proceeds for his own use and not extinguishing the original indebtedness of $4,187.15. Melmet was at all times aware of Williams' plan to defraud plaintiffs and convert the proceeds to his own use, and purchased the note with knowledge of Williams' defective title. Melmet employed Owens to sell the note and Owens knew or had sufficient cause for knowing that Melmet's title was defective.

The verified complaint further states that McMannis knew or had good cause for knowing that Melmet's title was defective, and, upon information and belief, that McMannis paid $2,500 for the note.

McMannis testified that he first learned of this note and deed of trust from a newspaper advertisement which stated: "Second trust deed $4,000.00, payable $40. a month, 7 percent interest, sell for $2800. Templebar 6-1110." He called the phone number and talked to one Dancy, an employee of defendant Owens, and was given the street address of the property. He inspected the property; phoned Dancy that $2,800 was too high; they agreed on $2,500. He deposited the money in escrow, his instructions being that upon Melmet's endorsing the note the sale would be complete. The transaction was completed and he received the note and deed of trust. He did not know the plaintiffs when he bought the note, nor did he know the payee, nor had he any prior dealings with Owens or Dancy. He did not know and did not inquire who was the maker of the note which supposedly was secured by the first deed of trust. He is a real estate broker and has purchased a number of second deeds of trust while in the real estate business.

Rudy Washburn testified on behalf of McMannis that in his opinion the second deed of trust when McMannis bought it was worth about $2,400 and that the property is worth between $9,500 and $10,500. When valuing the deed of trust in suit, Washburn viewed the premises but did not inquire as to the amount of rent being paid and did not know the amount of the first deed of trust. He admitted that the amount of the first would make a difference in his evaluation of the second if the first were real small.

Asked if it is his intention to go ahead and foreclose, McMannis said "Well, I think I'm entitled to my payments, my monthly payments. I purchased that. I paid my money out for it. I think I am entitled to it."

[1] It is clear that it appeared to the trial judge that foreclosure of the deed of trust or sale of the note "during the litigation would produce . . . great or irreparable injury, to a party to the action" (Code Civ. Proc., § 526). The evidence amply supports his implied finding to that effect. Accordingly, it was no abuse of discretion for him to grant the injunction, especially in view of the $3,000 bond which it would appear is well calculated to cover any and all losses McMannis conceivably may sustain.

In such a case as this the following statement seems particularly apt: "It is a rule, universally followed and often stated, that the granting, denying, dissolving or refusing to dissolve a preliminary or temporary injunction is not a matter of right but rests in the sound discretion of the trial court, upon a consideration of all the circumstances of each case, and that such discretion will not be reviewed on appeal in the absence of a showing of abuse. It is only necessary in the review of the action of the court in granting or denying a preliminary injunction that the appellate court shall find in the evidence sufficient basis to support the discretion which the trial court exercised. Even where there is a substantial conflict in the evidence the order will not be overthrown merely because there may be considerable or even preponderating evidence which, if believed, would have led to a contrary conclusion. The discretion, however, should be exercised in favor of the party most likely to be injured." (14 Cal.Jur. 180-183, Injunction, § 7.)

In this case there is no conflict in the evidence that the note was obtained by fraud, a fraud which infected the title of the payee, McMannis' immediate predecessor. McMannis, therefore, has the burden of showing that he acquired the note under circumstances which made him a holder in due course: "Every holder [of a negotiable instrument] is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course." (Civ. Code, § 3140; emphasis added.) The nature and extent of McMannis' inquiries prior to purchase and the considerable discount at which he purchased, lend emphasis to the view that equity should maintain the status quo until, at the trial on the merits, McMannis meets and carries or fails to carry that burden.

[2] (2) The allegations of the complaint were not "fully and specifically controverted by verified Answer and Sworn Testimony" as asserted by McMannis in his opening brief.

The record upon this appeal contains no answer. It is totally silent on the question whether an answer was presented or filed. Plaintiffs in their brief state that McMannis "did not file an answer to respondents' complaint until after the preliminary injunction had been granted. Therefore, the answer was not before the [trial] Court when it rendered its decision. . . ." McMannis has not denied this statement.

He filed no reply brief and, pursuant to stipulation and request of the parties, the case was submitted upon the briefs on file, without oral argument.

The testimony, as we have seen, controverted but a few of the allegations of the verified complaint: only those which pertained to McMannis' acquisition of the note, none of those which tended to prove fraud in the making of the note and defective title while in the hands of his predecessor.

Accordingly, this is not a case in which the principle enunciated in Gagliardo v. Crippen, 22 Cal. 362, applies. In that case the allegations of the complaint were "fully and specifically controverted by the affidavit." Therefore, said the court, "as the equities, whatever they may be, are denied, it is unnecessary to pass upon the objections to the complaint." (P. 362.) In our case, as we have seen, the defendant's oral testimony (equally effective, of course, as an affidavit would be) controverted but a few of the allegations of the complaint, manifestly a different type of case from the Gagliardo case.

The order appealed from is affirmed.

Peters, P.J., and Bray, J., concurred.

DANIELS v. WILLIAMS