The two actions herein were consolidated for trial and again upon appeal. Declaratory judgments and damages for fraud are sought. They are concerned with the Trinity Court Apartments (hereinafter referred to as the apartment house), which are located on Eighth avenue between Jefferson and James streets in Seattle.
In 1948, J.L. Grandey owned two lots located at the site in question. He planned to build an apartment house on one, and, for this purpose, incorporated Cherry Street Investment Co. (hereinafter referred to as Cherry Street).
In 1953, Grandey agreed to sell to Christian Melgard the vacant lot, the 32,000 shares of Cherry Street stock, and a $21,000 demand promissory note payable by Cherry Street to Grandey. The purchase price was $167,039.14. A warranty deed for the vacant lot, the stock shares, together with proxies for them, and the note were placed in escrow to be delivered to Melgard, or his successor, when the purchase price was paid. The warranty deed to the vacant lot could be delivered to Melgard after five years upon a lump sum payment of $15,000 on the purchase price.
In 1954, Melgard entered into an agreement to sell his interest in the vacant lot, stock, and note to H.G. Frans for $211,123.35. As part of this sale, two real-estate brokers, Capretto & Clark, Inc., and Vincent D. Miller, Inc., loaned $16,000 to Frans who, in return, executed two $8,000 promissory notes and gave one to each broker. Frans then assigned his vendee's interest in the lot, stock, and note to the brokers to secure payment of the notes. Melgard retained the obligation to pay Grandey. The various documents were placed in escrow.
In 1956 Frans sold his interest in the vacant lot, stock, and note to Jayne Todd (not a party herein) and Mary Edwards (plaintiff-respondent and cross-appellant in cause No. 519,075, hereinafter referred to as the Edwards action) for a price of $229,171.77. Todd and Edwards assumed the obligation to pay the Capretto & Clark and Miller notes and to pay the amount owing on the Melgard-Frans contract. These documents were also placed in escrow.
In late 1956, the defendants-appellants in both causes (hereinafter referred to as Hackney) began to acquire some of the various interests in the apartment house. Hackney
During this same period, Hackney had entered into negotiations with the McKelvies (plaintiffs-respondents and cross-appellants in cause No. 517,598, hereinafter referred to as McKelvie) to sell the Tee Cee stock. On December 28, 1956, Hackney agreed to sell to McKelvie his 60,000 shares of the Tee Cee stock in exchange for 600,000 shares of North Star Uranium stock (found to be worth $30,000) then owned by McKelvie. (Though the agreement was actually signed in December, several conditions and terms were left uncertain, and certain modifications occurred so that the contract did not become final and binding until April 5, 1957.) To secure payment of the underlying obligations, McKelvie gave to Hackney an irrevocable proxy to the Tee Cee stock. When the deal was closed, Hackney informed McKelvie that he owned the Frans vendor's interest and the payee's interest in the Capretto & Clark note, and that they could be purchased for thirty cents on the dollar, which would total $5,000. He did not disclose his prior agreement with Edwards relating to these obligations.
After taking over control and management of the apartment house, McKelvie, at first, made payments on the various underlying and direct obligations. About January, 1958, McKelvie stopped paying on the various interests then owned by Hackney, specifically the vacant lot, the Capretto & Clark note, and the Frans vendor's interest in the Frans-Todd-Edwards contract.
On March 1, 1958, McKelvie instituted an action (cause No. 517,598, hereinafter referred to as the McKelvie action) against Hackney. On January 21, 1959, Hackney served a notice of intention to declare a forfeiture with respect to the Frans and Capretto & Clark obligations, a notice of a Tee Cee stockholders meeting, and a notice of an intention to exercise his Tee Cee stock proxy.
Upon the application of McKelvie, a temporary order restraining these actions was issued against Hackney on January 31, 1959, which was made permanent on February 3rd. Hackney then filed a counter-claim against McKelvie and Tee Cee was added as an additional party defendant. Because of the complexity of the interests involved, the parties, on April 14, 1959, entered into a pretrial order
McKelvie's action is based upon the "contention that he entered into said agreements and contracts and rights as a result of fraud and deceit practiced by the making of material and false misrepresentations by" Hackney. Hackney "denies any false statements or misrepresentations and any claim of fraud and deceit" and counter-claims for default.
Edwards instituted her action for the purpose of compelling Hackney to convey back to her her interest in the vacant lot, alleging that he had acted as her agent and had induced her to enter into the transaction by fraud.
In the McKelvie action, the trial court found that Hackney, was, in fact, guilty of fraud and that McKelvie had been damaged in the sum of $3,000, the difference between the value of what he bargained for ($40,000) and the fair value of what he got ($17,000), less $20,000 that McKelvie owed Hackney on the vacant lot, the Frans vendor's interest, and the Capretto & Clark note. Hackney had his title quieted in the one-half interest in the vacant lot acquired from Todd and received a judgment of $2,800 for back rent and damages. Tee Cee got the Capretto & Clark note and the Frans vendor's interest, plus the proxy to vote the Cherry Street stock. The irrevocable proxy to vote the Tee Cee stock, acquired by Hackney as security for his interest in the Capretto & Clark note and the Frans vendor's interest, was declared void as not coupled with an interest. The obligation of Tee Cee to reimburse expenses incurred in clearing title to the vacant lot was declared void for fraud, lack of consideration, and violation of the statute of frauds.
In the Edwards case, the trial court found that Edwards did not have clean hands, because of her acquiescence in Hackney's bilking of McKelvie, and denied her the equitable relief she sought. Title to the Edwards' half of the vacant lots was quieted in Hackney. Tee Cee was given the Capretto & Clark note and the Frans vendor's interest on the ground that Hackney breached his fiduciary duty as a director in accepting less than the promised consideration.
All parties have appealed. The controversy is over the significance to be given the admitted facts and the conclusions to be drawn from them.
The following specific findings made by the trial court as to Hackney's behavior affect the conclusions and rulings on the seven main issues in the case. In the Edwards case, it found:
"That the defendant Hadley Hackney is unworthy of belief; that by his own testimony he made statements to different persons at the same time, which statements were diametrically opposed; that his claim of lack of memory so frequently resorted to throughout his testimony, is not credible; that defendant was so activated by his desire to end up with the lots, that he willingly made any statements which he felt would suit his purpose, and intentionally withheld information when he believed it would best suit his purpose."
In the McKelvie case, the trial court found "That the ... defendant is not credible and not truthful ..."
(1) The trial court found that Hackney had promised Edwards that he would transfer to Tee Cee, in exchange for his sixty per cent interest in the stock, (a) the interest which he acquired from Todd, except that in the vacant lot, (b) the Frans vendor's interest in the Frans-Todd-Edwards contract, and (c) the payee's interest in the Capretto & Clark note.
The assignment actually made and accepted by Tee Cee did not include these last two interests. The trial court further found that the acceptance of the assignment by Tee Cee was caused by Hackney breaching his fiduciary duty as an officer and director of Tee Cee. When Edwards became aware of the change, she objected and continued objecting to the time of the trial.
"The rule excluding parol evidence affecting a written instrument does not apply when fraud is the gravamen of the action or defense...."
Both of these actions are based on allegations of fraud so the evidence of the agreement considering the Frans vendor's interest and the Capretto & Clark note was admissible under this exception to the parol evidence rule.
When the Tee Cee stock was distributed under the Hackney-Edwards agreement, Tee Cee acquired from Edwards the right to enforce the contract as reformed. Thereafter, Hackney held the Frans vendor's interest and the Capretto & Clark note on a constructive trust for the benefit of Tee Cee and the agreement which he made to sell them
It is axiomatic that one cannot sell what one does not own. Since Hackney did not own them in his own right, he could not sell them to McKelvie, and it follows that McKelvie owes him nothing as a result of the agreement.
(3) We next consider the "unclean hands" contention as relating to Edwards, and the resulting denial of equitable relief to her. The trial court found:
"That the plaintiff's [Edwards] hands are not clean, since she was willing to conclude her sale to McKelvie, knowing that the defendant [Hackney] had falsely represented to McKelvie the situation relative to the April rents, and knowing that the vendors' interest in the Frans-Edwards-Todd contract and the Capretto & Clark note had not been transferred to Tee Cee, Inc.; that the plaintiff apparently was willing to stand by, as suggested to her, in the expectation that McKelvie would default on the basic obligations, that Hackney would repossess the interests under the Frans-Edwards-Todd contract, and that she would be restored, by defendant, to her proportionate share of the rights in the Trinity Court Apartments."
"The authorities are in accord that the `clean hands' principle does not repel a sinner from courts of equity, nor does it disqualify any claimant from obtaining relief there who has not dealt unjustly in the very transaction concerning which he complains. ..." (Italics ours.)
In the instant case, the only inequitable conduct found on the part of Edwards was that she sat quietly by and
The trial court found that Hackney did promise to return Edwards' interest in the vacant lot if he was successful in getting it back from McKelvie. Having secured return of the property, Hackney was bound to return it to Edwards, and she was entitled to specifically enforce the contract in equity.
When Tee Cee acquired the assets from Hackney, it acquired them subject to the obligation to pay the balance still due on the Grandey-Melgard contract.
McKelvie claims that the interest in the vacant lot is unseverable from the other interests contained in the mesne conveyances starting with the Grandey-Melgard contract. We do not agree.
The interests are severable and, even though access to the vacant lot is important to the operation of the apartment house, the owners of property are entitled to segregate it in any way they choose. Hackney and Edwards were within their rights in selling only part of what they owned.
(5) Prior to April 1, 1958, Tee Cee had been paying rent of forty dollars a month on the vacant lot. On April 7th, Hackney served a notice to pay rent or vacate. He never brought an unlawful detainer action but, rather, included
(6) This brings us to the finding of the trial court that Hackney was guilty of fraud in inducing McKelvie to enter into the contract for purchase of the Tee Cee stock and the resulting assessment of damages. As mentioned above, the 600,000 shares of North Star Uranium stock paid by McKelvie as consideration for Hackney's sixty per cent interest was worth $30,000. Though this differs from the valuation of $20,000 for the 200,000 shares paid Edwards, no error is assigned to the trial court's valuations, so they must govern.
(7) Finally, the trial court found that Hackney had promised to deliver the property to McKelvie with the April, 1957, rent intact and with all bills, mortgages, and debt obligations paid up to March 31st. This Hackney failed to do, and the trial court was correct in ordering restitution of the shortage in the April rent, approximately $934, and in ordering him to pay the past due mortgage payments.
The remaining assignments of error by the appellants and cross-appellants are without merit.
McKelvie v. Hackney, cause No. 517,598, is remanded to the trial court with directions to modify the judgment as follows:
(1) Reduce the amount of the judgment for damages for failure to pay rent on the vacant lot from $2,800 to $1,700;
(2) Strike that portion of the judgment requiring McKelvie to purchase from Hackney the Frans vendor's interest in the Frans-Todd-Edwards contract and the payee's interest in the Capretto & Clark note;
(3) Strike that portion of the judgment relieving Tee Cee of the obligation to reimburse Hackney and Edwards for any payments made by them to secure quiet title to the vacant lot;
Edwards v. Hackney, cause No. 519,075, is remanded to the trial court with directions to modify the judgment by quieting title, as between the parties, in Edwards to a one-half interest in the vacant lot.
Edwards shall recover her costs from Hackney. The remaining parties shall bear their own costs.
DONWORTH, WEAVER, OTT, and HUNTER, JJ., concur.