Court Opinion

ID: 9627926
Source: CourtListenerOpinion
Date Created: 2023-08-22 08:59:36.77533+00
Date Added: 2024-06-11T18:06:52.807130
License: Public Domain

CARTER, J.
I dissent. I am in substantial accord with the view set forth in the dissenting opinion of Mr. Justice Edmonds in this case.
Judicial conscience should revolt against the concept that a valid defense may be predicated upon a fraud perpetrated by the defendant asserting it. Especially should this be true in a case where the fraudulent scheme was conceived and proposed by such defendant for his own benefit and advantage. Such is the situation we are confronted with in this case. That is, the defendant comes into court and boldly asserts, that with the intent and design to defraud his creditors by withholding from them a valuable asset to which they might resort for the satisfaction of their claims against him, he proposed to plaintiff that a fraudulent deal be arranged ' whereby plaintiff would appear to have a valid contract for the purchase of this valuable asset for a nominal purchase price which would be paid by defendant if the creditors saw fit to force the collection of their claims, and the asset would thereafter be retained by defendant for his own use, benefit and advantage. To carry out this fraudulent design, the defendant had a purportedly valid written contract prepared and executed by himself and the plaintiff. When plaintiff attempted to enforce said contract, defendant’s sole defense was that it was entered into for the fraudulent purpose of hindering, delaying and defrauding his creditors and was. therefore invalid and unenforceable even as between the-parties themselves. In my opinion there are compelling reasons which support the view that as between the parties the-contract is valid and enforceable. These reasons are ably-stated as follows in the dissenting opinion which was written', by Mr. Presiding Justice Peters of the District Court of" Appeal, First Appellate District, Division One, when this-cause was before that court:
*579“There is another factor that compels the conclusión that such contracts should be enforceable by the third person. Public policy requires that contracts in fraud of creditors should be discouraged. The rule of the majority opinion encourages such contracts. Under that rule a fraudulent debtor can enter into a contract in fraud of his creditors knowing that the worst that can happen to him is, that if the creditors discover the fraud, they can reach the property—a right they would have had had the contract not been executed. Under the rule announced by the majority the third person cannot enforce that contract so that no penalty at all is exacted, no restraint at all is placed upon, the fraudulent debtor. But if such contracts could be enforced by the third person a real restraint against such contracts would exist. Any fraudulent debtor would hesitate before entering into such a contract if the third person could enforce it. It follows that, even if the parties were in pari delicto (which they are not), the public policy in favor of preventing such contracts being much stronger than the policy that the judicial hands should not be tainted by enforcing them, the first policy must prevail.”
I take issue with the statement in the majority opinion that the contract is rendered void by the fact that the parties to it are subject to punishment under the penal statutes (Pen. Code, §§ 531, 154, 155). Sections 154 and 155 refer only to acts of the debtor and contain no provision which might be construed to defeat any right of plaintiff. Section 531 in effect provides that every party to any contract made “with intent” to defeat, hinder, or delay creditors is guilty of a misdemeanor.
The majority opinion correctly states that a contract must have a lawful object, and that as a general rule “where a statute prohibits or attaches a penalty to the doing of an act, the act is void, and this, notwithstanding that the statute does not expressly pronounce it so, and it is immaterial whether the thing forbidden is malum in se or merely malum prohibitum” (citing Smith v. Bach, 183 Cal. 259, 262 [191 P. 14], and other eases.) But in holding that this rule is here applicable, the opinion fails to discuss the many exceptions to it which have been declared by the courts, and fails to give weight to the controlling fact that the exception, and not the general rule, should prevail where the effect of application of the general rule is to encourage the making of the type of illegal contract under review.
*580The question is largely one of legislative intent, and in order to determine whether the penal provision was intended by the Legislature to render agreements violative of it illegal, the purpose of the statute has been generally adopted as a test (12 Am.Jur., § 163, p. 658). The penal statutes above referred to were obviously enacted solely for the protection of creditors, and they apply only where a transaction is entered into with a disclosed or undisclosed intent to defraud that class of persons. Their terms indicate that their purpose may be more successfully accomplished by not declaring illegal as between the parties, contracts violative of their provisions.
A contract, denominated by the majority opinion as void because its “object” is prohibited by penal law, should be distinguished from a contract, such as the present one, having an “object” which is unqualifiedly lawful but which is executed with the unstated intent to secure an unlawful advantage over persons not parties to it. The obviously lawful “object” of the present contract was to effect a purchase and sale of tariff plates at their metal value. Regardless of the undisclosed motive, or “intent” when that word is used in the sense of “motive” (see, discussion, Hansen v. Bear Film Co., 28 Cal.2d 154, 175 [168 P.2d 946]), the “object” of the contract is not prohibited by penal law. Section 531 refers to an intent or motive to deceive and defraud others, not to an object so to do.
There is nothing in the statute which indicates a legislative intent to declare void and illegal as between the parties contracts having a lawful object but motivated by design to defraud creditors. The statute has never been before the courts for construction on this point (see Sasaki v. Kai, 56 Cal.App. 2d 406 [133 P.2d 18]). The compelling reasons already set forth constrain me to conclude that the effect of the penal provision is not to render totally void as between the parties, contracts in fraud of creditors.
It is said in Reconstruction Finance Corp. v. Central Republic T. Co., 17 F.Supp. 263, 298, “Each statute must be judged by itself as a whole, regard being had, not only to its language, but to the objects and purposes for which it was enacted. If the statute does not declare a contract made in violation of it to be void, and if it is not necessary to hold the contract void in order to accomplish the purpose of the statute, the inference is that it was intended to be directory, and not prohibitory of the contract. ...” Such is the case here.
In my view, the judgment should be reversed.