Setchell v. Prochaska

BARNARD, P. J. This is an action to foreclose a mortgage for $5,000 held by the plaintiff and originally executed and delivered to her and her husband by the California Land Buyers Syndicate, a corporation. The real property covered by the mortgage was conveyed by the defendants to this corporation by deed dated July 23, 1929. It was stipulated that the only consideration given by the corporation in exchange for the real property was 380 units of the investment certificates of said syndicate and that, at the time of the transaction, the permit issued by the commissioner of corporations to said corporation allowed it to issue said units for cash only and prohibited the issuance thereof in exchange for real property. The deed referred to was placed in escrow with a title company, the corporation placed in escrow the investment certificates and the plaintiff and her husband placed in escrow the amount of the loan represented by the mortgage. The escrow was closed and the respective papers delivered. Some months later, on January 8, 1930, the corporation conveyed the property by deed to the defendants, the ‘ deed reciting that the conveyance was made “subject to the mortgage indebtedness in the sum of $5000”.

In their answer, the defendants alleged that the deed of January 8, 1930, to the defendants was made by the corporation by way of admitting its fault and as a partial restitution for its act in the matter of securing the deed from these defendants on or about July 23, 1929. In a cross-complaint they alleged that on July 19, 1929, they were approached by agents and employees of the corporation named and urged to exchange the real property for the investment shares; that they relied upon certain representations made by the agents and employees of the corporation and agreed to transfer the property to the corporation in exchange for the investment shares; that they did not then know that it was unlawful for the corporation to dispose of its capital stock other than by actual sale for cash; that they did not know this when the reconveyance of January 8, 1930, was delivered to them; that they learned that the transaction was illegal shortly [543]before this suit was filed; that the purported consideration received in exchange for the real property has utterly failed; that the transaction was void from the beginning on account of its illegality; and that the misrepresentations made ' by the agents of the corporation were false, were known by them to be false, were made with the intent to deceive the defendants, and were believed and relied upon by them.