Smith v. Hill

• Decision Date: 30 September 1965
• Citation: 237 Cal.App.2d 374,47 Cal.Rptr. 49
• Parties: J. Clarke SMITH and Margaret D. Smith, Plaintiffs, Cross-defendants and Appellants, v. Edwin E. HILL et al., Defendants, Cross-appellants and Respondents. Civ. 7564.
• Court: California Court of Appeals Court of Appeals

Page 49

47 Cal.Rptr. 49

237 Cal.App.2d 374

J. Clarke SMITH and Margaret D. Smith, Plaintiffs, Cross-defendants and Appellants, v. Edwin E. HILL et al., Defendants, Cross-appellants and Respondents.

Civ. 7564.

District Court of Appeal, Fourth District, California.

Sept. 30, 1965.

Rehearing Denied Oct. 18, 1965.

Wilson & Wilson, San Bernardino, for plaintiffs, cross-defendants, appellants and the receiver.

Holcomb, Kassel & Ward and Surr & Hellyer, San Bernardino, for defendants, cross-complainants and respondents.

WHELAN, Justice.

Plaintiffs (Smith) were the owners of real property described in part as lots 14 and 15 situated in San Bernardino County and of certain equipment used in the operation on said real property of a rock-crushing plant and the preparation of sand and gravel for sale; the material so processed was obtained from other property under lease from Lytle Creek Water and Improvement Company (Lytle). Plaintiffs also were the owners of an easement upon two other lots described as lots 16 and 17 for the purpose of stockpiling sand and gravel, which easement was a residual interest in said lots left after their condemnation for flood control purposes by the Federal Government. The easement had no value except as used with lots 14 and 15 and was necessary for use with a rock, sand and gravel processing plant on those lots.

On March 1, 1952, Smith entered into a written contract for the sale to Hill of lots 14 and 15 together with all the equipment used in connection with the business for the sum of $102,875, payable at the rate of $1,000 per month including interest at six per cent on the balance remaining from time to time unpaid, and at the same time entered into a sub-lease with Hill of the property from which the crude material was obtained. That property was the only source of such material of good quality convenient to lots 14 and 15.

The agreement provided that time was of the essence; that should default be made the balance of the principal sum together with interest should become immediately due and payable at the option of Smith. Hill also gave as additional security a chattel mortgage upon the personal property covered by the contract.

In January of 1953, Hill leased the batch plant ¹ to Tri-City Concrete Company (Tri-City) for $300 per month. In 1958, the lease from Lytle expired and a new lease for five years with an option to renew for five years additional at a rent to be negotiated was given to Smith who again sub-leased to Hill for five years but without an option for renewal.

In 1959, under threat that the rock-crushing plant and other operations might be treated as a nuisance, Hill spent about $13,000 to eliminate the conditions complained of. He also renovated and enlarged the plant over the years so that from a capacity of 50 tons per hour in March 1952, it had, in June of 1961, a capacity of about 200 tons per hour. In all, the investment of Hill in the real property, including the original amount of the contract, betterments and new equipment, was about $400,000 in June of 1961. Its fair market value on June 2, 1961 was $322,706.

Commencing in 1957, Hill borrowed from the plaintiffs $25,750, evidenced by six promissory notes which, with one exception, bore interest at the rate of eight per cent per annum. The latest maturity date of any of the notes was December 7, 1960. On February 4, 1957, to secure the payment of the notes that had then been executed and the payment of any further sums that might be lent by Smith, Hill assigned to Smith all of the rights under the agreement for the purchase of the real and personal property. The assignment provided that in the event default should be made in any of the provisions of the agreement for the purchase or in the payment of any of the notes or indebtedness, the rights of Hill under the purchase agreement 'shall at the option of the said first parties [plaintiffs] forthwith terminate.'

In January of 1961, Hill owed income tax and other federal taxes for which liens were recorded in the amount of $14,318.77; and property taxes of the County of San Bernardino on the subject property were delinquent in the sum of $3,078.58. Hill was also delinquent in the payment of principal and interest on the various notes, of which only one had been paid in full, and was beginning to fall behind in the payments of the monthly installments under the purchase contract.

On January 26, 1961, Smith served upon Hill a notice of default based upon the failure to make payments and perform unspecified covenants under the purchase agreement, and which declared an election that the unpaid balance of the purchase price, together with interest thereon, be immediately due and payable and demanded the surrender of the real and personal property.

Smith told Hill that the notice was given only for the purpose of protecting Smith against the federal tax liens and that Hill should ignore it; Smith told Hill's bookkeeper that the notice could be ignored. Thereafter, Smith accepted three payments of $500 each, the last in April of 1961. Smith, from the time of the contract of sale, continued to occupy and use a small office building on the property sold to Hill; when he requested it he was given information of the financial condition of the business by Hill's bookkeeper; he was in frequent contact with Hill after the serving of the notice. He did not indicate to Hill, prior to June 2, 1961, when this action was commenced, any intention of attempting to enforce the demands contained in the notice of January 26.

Smith's complaint asked for termination of all of Hill's rights in the agreement and in the sub-lease, for restoration of possession of the real and personal property, including the property covered in the lease, and a decree quieting Smith's title to all of said property, for the amount due on the notes evidencing the various loans, for attorney's fees of $5,000 and for the appointment of a receiver. The receiver was appointed ex parte upon Smith's furnishing a bond in the sum of $15,000 under the provisions of section 566, Code of Civil Procedure. The receiver Johnson qualified upon posting a bond in the sum of $2,000 for the performance of his duties and took possession of the property on June 2, 1961.

An answer to the complaint and a cross-complaint were filed on July 24. During the interval, both oral and written negotiations were carried on between counsel for Smith and Hill, looking toward a solution of the controversy. The first written communication was the letter of June 8, 1961 from Smith's counsel (Wilson) to Hill's counsel (Holcomb), which contained among other conditions reduction of Hill's total indebtedness to Smith to the sum of $40,000, to be paid in monthly installments of $1,000 including six per cent interest.

Meanwhile, Hill was negotiating a sale of the property to one Johnson and one McCook for the sum of $227,000. On June 19, two escrows were opened, one for the sale of real property for $25,000 cash to be deposited before July 5, 1961; and one for $202,000 for the personal property, good will, inventory and leasehold interest. In this second escrow, $50,000 cash was deposited and additional cash in the sum of $77,000 was to be deposited prior to July 5, 1961. The balance of the $75,000 in the second escrow was to be evidenced by a promissory note. The prospective purchasers were ready, willing and had the ability to perform the terms of the escrow agreement. Information as to those arrangements which required from Smith a deed to the real property and an assignment of the lease, was conveyed to Wilson. On June 26, 1961, Wilson submitted a demand as to the items that Smith would require paid, which were restricted to payment of the balances on the contract price and of the various notes with accrued interest thereon, the premiums on the bonds in connection with the receivership, some items of costs not exceeding $75, attorney's fees of $5,000, and payment of any deficiencies between assets of the receivership and its liabilities which included two loans of $5,000 each authorized by the court and obtained by the receiver from Smith. That demand, which in fact constituted an offer, had not been accepted by June 29 when Wilson wrote that Smith demanded $10,000 for an assignment of his interest in the lease from Lytle inasmuch as the sub-lease to Hill did not contain any option for a renewal; and extra compensation for Smith's interest in lots 16 and 17. The letter stated the writer's opinion that the closing of the escrow by July 5 was out of the question. On July 7, 1961, Wilson wrote that Smith demanded $20,000 for transfer of his leasehold interest, his rights to lots 16 and 17, his office building on lots 14 and 15, and for indemnification against increase in income taxes (by reason of receiving the total payment in a lump sum), and an additional $20,000 for the cost of the receivership, other than the bond premiums, but including any deficit arising from the operation of the receivership; Hill would have the right to collect and retain accounts receivable of the receivership. Within a day or two thereafter, Wilson by telephone informed Holcomb that the demand for the assignment of the leasehold interest and of the easement interest in lots 16 and 17 would be $10,000 rather than $20,000.

The negotiations not having been concluded before the date for the closing of the escrow, Hill filed a motion for the dissolution of the receivership which was denied on September 25, 1961, and on that date Hill filed a petition in the U. S. District Court under the provisions of chapter 11 of the Bankruptcy Act.

Hill's answer set up the fact that Smith had told Hill that the notice of January 26, 1961 was served only to protect Smith against any tax claims, and the acceptance of payments by Smith after that date. The cross-complaint alleged oral representations made by Smith during the negotiations for the sale and...