Chapman College v. Wagener

— Plaintiff college brought this action for declaratory relief and for reformation of certain promissory notes and a deed of trust which it executed in connection with the purchase of a tract of land. The defendants, who include two of the sellers and the executor of the third, will for convenience be referred to as the sellers. By cross-complaint the sellers sought cancellation of all instruments relating to the sale upon the ground that there was no “meeting of the minds” of the parties. The trial court sitting without a jury declared the instruments to be void and, insofar as possible, endeavored to restore the parties to their positions before the sale.

In June 1949 the parties executed a contract in which the college agreed to buy a large tract of land from the sellers at the price of $1,500,000. The sum of $150,000 was paid on account. A portion of the property was to be subdivided into lots and sold by the college and, as they were sold, the lots were to be released from the lien of a deed of trust which was to be given to secure the payment of the balance of the purchase price. With respect to the balance, the contract provided that the college should execute three notes totalling $1,350,000, bearing interest at the rate of two per cent payable annually, that the notes should provide that “all payments thereon shall first be credited on interest and the balance on principal,” and that they should provide “for the payment of said sum of $1,350,000 ... in the following manner.” There followed detailed provisions in which the college agreed to pay to the sellers “on the 10th day of each month” a fixed per cent of the receipts from subdivision sales plus certain specified sums. These payments are referred to by the parties as “release price” payments or as the “sellers’ share” of the proceeds of the sales made by the college.

The contract also provided that the college should create a subdivision trust to facilitate the sales of lots; that the trust should provide that all principal and interest due on the notes should be paid from the trust; and that, notwithstanding the provision in the notes that interest is to be paid annually, the trust shoulds provide that whenever the trustee shall have available funds resulting from sales made by the college,, the trustee shall pay interest on the trust deed notes on “the first day of each month, or as near to monthly as possible. ’ ’

Before the property was conveyed to the college, it requested that the contract be modified and that those provisions which related to the creation of a subdivision trust be eliminated. The sellers consented to the modification upon certain conditions, which will be referred to later, and it was agreed that the release price payments would be made to the sellers from

The escrow instructions, which were prepared by the college, provided for the payment through escrow to the sellers of certain sums computed in accordance with the release price provisions of the notes, and further provided that there would be “no payment of interest or interest adjustment” on the principal through the escrow.

Although the notes clearly provide that principal and interest are to be paid from the proceeds of the sale of lots by the college, it is not clear whether the release price payments are to be applied solely on principal, and this is the crux of the dispute between the parties. There is nothing in the deed of trust or the escrow instructions which eliminates the uncertainty. Extrinsic evidence was therefore properly received to aid the court in interpreting the agreement between the parties as it existed after elimination of the subdivision trust and the execution of the notes.

The court found that the provision of the June 1949 contract that all payments should first be credited on interest was omitted from the notes by mutual agreement of the attorneys for the parties in order to make certain that the release price payments would be credited solely on principal and that the notes were approved by the college and its attorney before they were executed. The court also found that the sellers’ consent to the elimination of the subdivision trust was conditioned upon the drawing of the notes and deed of trust so as to provide the sellers with substantially the same protection they would have received from a subdivision trust containing the usual and customary provisions, and that the standard provisions in such trusts specify that release price payments are to be credited solely on principal. It was further found that the sellers credited on their books as payments on principal all money received by them through escrow and that the college made similar entries in its books until some time after the controversy arose, when the college

The foregoing findings, all of which are supported by the evidence, compel the conclusion that a valid agreement existed, after the modifications referred to above, under which all release price payments were to be applied solely on principal, and interest was to be separately payable from the college’s share of the proceeds of the sales of lots.

This was not, however, the judgment of the court below. Instead, it concluded that the grant deed from the sellers conveying the property to the college, the three promissory notes, and the deed of trust were void and should be cancelled for lack of mutuality of consent of the parties. This conclusion was based upon a finding that the sellers understood that the release price payments were to be credited solely upon principal, that the chairman of the board of trustees of the college executed the notes in reliance upon the approval of their terms and provisions by the college’s attorney, but that the chairman believed the notes provided that all payments made thereon should be first credited on interest and the balance on principal. This finding does not support the conclusion or the judgment, and it is contrary to other findings made by the court. The attorney for the college helped draft the notes, he had full knowledge of their provisions and, as we have seen, the court found that he agreed with the attorney for the sellers to omit from the notes the provisions specified in the contract that all payments be first credited on interest and the balance on principal in order to make certain that the release price payménts would be credited solely on principal. The general rule of agency is that notice to or knowledge possessed by an agent is imputable to the principal. (Civ. Code, § 2332; see Freeman v. Superior Court, 44 Cal.2d 533 , 537-538 [ 282 P.2d 857 ] ; Rest., Agency, §§ 9, 272-282.) This rule ordinarily applies in the relation of attorney and client. (Lazzarevich v. Lazzarevich, 39 Cal.2d 48 , 50 [ 244 P.2d 1 ]; see Freeman v. Superior Court, 44 Cal.2d 533 , 537-538 [ 282 P.2d 857 ]; 4 A.L.R. 1592 .) Under the circumstances presented here, the actual belief of the college chairman is immaterial, and there is no basis for the finding and conclusion of the court that the promissory notes and other documents were void for lack of mutuality of consent.

Moreover, as disclosed by the findings and undisputed evidence, the conduct of the parties subsequent to the execu

The judgment is reversed.

Shenk, J., Edmonds, J., Carter, J., Traynor, J., Sehauer, J., and Spence, J., concurred.

Respondents’ petition for a rehearing was denied January 18, 1956. McComb, J., did not participate therein.