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Masterson v. Sine
68 Cal. 2d 222 (Cal. 1968)
Traynor, Chief Justice
Dallas Masterson and his wife Rebecca owned a ranch as tenants in common. On February 25, 1958, they
conveyed it to Medora and Lu Sine by a grant deed "Reserving unto the Grantors herein
an option to purchase the above described property on or before February 25,
1968" for the "same consideration as being paid heretofore plus their
depreciation value of any improvements Grantees may add to the property from and after two
and a half years from this date." Medora is Dallas' sister and Lu's wife. Since the
conveyance Dallas has been adjudged bankrupt. His trustee
in bankruptcy and Rebecca brought this declaratory relief action to establish their right
to enforce the option.
The case was tried without a
jury. Over defendants' objection the trial court admitted extrinsic evidence that by
"the same consideration as being paid heretofore" both the grantors and the
grantees meant the sum of $50,000 and by "depreciation value of any
improvements" they meant the depreciation value of improvements to be computed by
deducting from the total amount of any capital expenditures made by defendants grantees
the amount of depreciation allowable to them under United States income tax regulations as
of the time of the exercise of the option.
The court also determined that the parol evidence rule precluded
admission of extrinsic evidence offered by defendants to show that the parties wanted the
property kept in the Masterson family and that the option was therefore personal to the
grantors and could not be exercised by the trustee in bankruptcy.
The court entered judgment for plaintiffs, declaring their right to
exercise the option, specifying in some detail how it could be exercised, and reserving
jurisdiction to supervise the manner of its exercise and to determine the amount that
plaintiffs will be required to pay defendants for their capital expenditures if plaintiffs
decide to exercise the option.
Defendants appeal. They contend that the option provision is too
uncertain to be enforced and that extrinsic evidence as to its meaning should not have
been admitted. The trial court properly refused to frustrate the obviously declared
intention of the grantors to reserve an option to repurchase by an overly meticulous
insistence on completeness and clarity of written expression. It properly admitted extrinsic evidence to explain the
language of the deed to the end that the consideration for the option would appear with
sufficient certainty to permit specific enforcement. The trial court erred,
however, in excluding the extrinsic evidence that the option was personal to the grantors
and therefore nonassignable.
When the parties to a written contract have agreed to it as an
"integration" -- a complete and final embodiment of the terms of an agreement --
parol evidence cannot be used to add to or vary its terms. When only part of the agreement
is integrated, the same rule applies to that part, but parol evidence may be used to prove
elements of the agreement not reduced to writing.
The crucial issue in determining whether there has been an integration
is whether the parties intended their writing to serve as the exclusive embodiment of
their agreement. The instrument itself may help to resolve that issue. It may state, for
example, that "there are no previous understandings or
agreements not contained in the writing," and thus express the parties'
"intention to nullify antecedent understandings or agreements." (See 3 Corbin, Contracts (1960) § 578, p. 411.) Any such
collateral agreement itself must be examined, however, to determine whether the parties
intended the subjects of negotiation it deals with to be included in, excluded from, or
otherwise affected by the writing. Circumstances at the time of the writing may also aid
in the determination of such integration.
California cases have stated that whether there was an integration is
to be determined solely from the face of the instrument and that the question for the
court is whether it "appears to be a complete . . . agreement. . . ."
Neither of these strict formulations of the rule, however, has been consistently applied.
The requirement that the writing must appear incomplete on its face has been
repudiated in many cases where parol evidence was admitted "to prove the existence of
a separate oral agreement as to any matter on which the document is silent and which is
not inconsistent with its terms" -- even though the instrument appeared to state a
complete agreement. Even under the rule that the writing alone is to be consulted,
it was found necessary to examine the alleged collateral agreement before concluding that
proof of it was precluded by the writing alone. (See 3 Corbin, Contracts (1960) § 582,
pp. 444-446.) It is therefore evident that "The conception of a writing as wholly and
intrinsically self-determinative of the parties' intent to make it a sole memorial of one
or seven or twenty-seven subjects of negotiation is an impossible one." (9 Wigmore,
Evidence (3d ed. 1940) § 2431, p. 103.) For example, a promissory note given by a debtor to his
creditor may integrate all their present contractual rights and obligations, or it may be
only a minor part of an underlying executory contract that would never be discovered by
examining the face of the note.
In formulating the rule governing parol evidence, several policies must
be accommodated. One policy is based on the assumption that written evidence is more
accurate than human memory. This policy, however, can be adequately served by
excluding parol evidence of agreements that directly contradict the writing. Another
policy is based on the fear that fraud or unintentional invention by witnesses interested
in the outcome of the litigation will mislead the finder of facts. McCormick has
suggested that the party urging the spoken as against the written word is most often the
economic underdog, threatened by severe hardship if the writing is enforced. In his view
the parol evidence rule arose to allow the court to control the tendency of the jury to
find through sympathy and without a dispassionate assessment of the probability of fraud
or faulty memory that the parties made an oral agreement collateral to the written
contract, or that preliminary tentative agreements were not abandoned when omitted from
the writing. (See McCormick, Evidence (1954) § 210.) He recognizes, however, that if this
theory were adopted in disregard of all other considerations, it would lead to the
exclusion of testimony concerning oral agreements whenever there is a writing and thereby
often defeat the true intent of the parties. (See McCormick, op. cit. supra, § 216, p.
441.)
Evidence of oral collateral agreements should be excluded only when the
fact finder is likely to be misled. The rule must therefore be based on the credibility of
the evidence. One such standard, adopted by section
240(1)(b) of the [first] Restatement of Contracts, permits proof of a collateral agreement
if it "is such an agreement as might naturally be made as a separate agreement by
parties situated as were the parties to the written contract." The
draftsmen of the Uniform Commercial Code would exclude the evidence in still fewer
instances: "If the additional terms are such that, if agreed upon, they would
certainly have been included in the document in the view of the court, then evidence of
their alleged making must be kept from the trier of fact." (Com. 3, § 2-202) n1
The option clause in the deed in the present case does not explicitly
provide that it contains the complete agreement, and the deed is silent on the question of
assignability. Moreover, the difficulty of accommodating the formalized structure of a
deed to the insertion of collateral agreements makes it less likely that all the terms of
such an agreement were included. n2 (See 3 Corbin,
Contracts (1960) § 587; 4 Williston, Contracts (3d
ed. 1961) § 645; 70 A.L.R. 752, 759 (1931); 68 A.L.R. 245 (1930).) The statement of the
reservation of the option might well have been placed in the recorded deed solely to
preserve the grantors' rights against any possible future purchasers, and this function
could well be served without any mention of the parties' agreement that the option was
personal. There is nothing in the record to indicate that the parties to this family
transaction, through experience in land transactions or otherwise, had any warning of the
disadvantages of failing to put the whole agreement in the deed. This case is one,
therefore, in which it can be said that a collateral agreement such as that alleged
"might naturally be made as a separate agreement." A fortiori, the case is not
one in which the parties "would certainly" have included the collateral
agreement in the deed.
It is contended, however, that an option agreement is ordinarily
presumed to be assignable if it contains no provisions forbidding its transfer or
indicating that its performance involves elements personal to the parties. The fact
that there is a written memorandum, however, does not necessarily preclude parol evidence
rebutting a term that the law would otherwise presume. In American Industrial Sales Corp.
v. Airscope, Inc., supra, 44 Cal.2d 393, 397-398, we held it proper to admit parol
evidence of a contemporaneous collateral agreement as to the place of payment of a note,
even though it contradicted the presumption that a note, silent as to the place of
payment, is payable where the creditor resides. (For other examples of this approach, see
Richter v. Union Land etc. Co. (1900) 129 Cal. 367, 375 [62 P. 39] [presumption of time of
delivery rebutted by parol evidence]; Wolters v. King (1897) 119 Cal. 172, 175-176 [51 P.
35] [presumption of time of payment rebutted by parol evidence]; Mangini v. Wolfschmidt,
Ltd., supra, 165 Cal.App.2d 192, 198-201 [presumption of duration of an agency contract
rebutted by parol evidence]. n3 Of course a statute may
preclude parol evidence to rebut a statutory presumption. Here, however, there is no
such statute. In the absence of a controlling statute the parties may provide that a
contract right or duty is nontransferable. Moreover, even when there is no explicit
agreement -- written or oral -- that contractual duties shall be personal, courts will
effectuate a presumed intent to that effect if the circumstances indicate that performance
by a substituted person would be different from that contracted for.
In the present case defendants offered evidence that the parties agreed
that the option was not assignable in order to keep the property in the Masterson family.
The trial court erred in excluding that evidence.
The judgment is reversed.
Burke J. I dissent. The majority opinion:
(1) Undermines the parol evidence rule as we have known it in this
state since at least 1872 by declaring that parol evidence should have been admitted by
the trial court to show that a written option, absolute and unrestricted in form, was
intended to be limited and nonassignable;
(2) Renders suspect instruments of conveyance absolute on their face;
(3) Materially lessens the reliance which may be placed upon written
instruments affecting the title to real estate; and
(4) Opens the door, albeit unintentionally, to a new technique for the
defrauding of creditors.
The opinion permits defendants to establish by parol testimony that
their grant to their brother (and brother-in-law) of a written option, absolute in terms,
was nevertheless agreed to be nonassignable by the grantee (now a bankrupt), and that
therefore the right to exercise it did not pass, by operation of the bankruptcy laws, to
the trustee for the benefit of the grantee's creditors.
And how was this to be shown? By the proffered testimony of the
bankrupt optionee himself! Thereby one of his assets (the option to purchase defendants'
California ranch) would be withheld from the trustee in bankruptcy and from the bankrupt's
creditors. Understandably the trial court, as required by the parol evidence rule, did not
allow the bankrupt by parol to so contradict the unqualified language of the written
option.
The court properly admitted parol
evidence to explain the intended meaning of the "same consideration" and
"depreciation value" phases of the written option to purchase defendants' land,
as the intended meaning of those phrases was not clear. However, there was nothing
ambiguous about the granting language of the option and not the slightest suggestion in
the document that the option was to be nonassignable. Thus, to permit such words of
limitation to be added by parol is to contradict the absolute nature of the grant, and to
directly violate the parol evidence rule.
Just as it is unnecessary to state in a deed to "lot X" that
the house located thereon goes with the land, it is likewise unnecessary to add to "I
grant an option to Jones" the words "and his assigns" for the option to be
assignable. As hereinafter emphasized in more detail, California statutes expressly
declare that it is assignable, and only if I add language in writing showing my intent to
withhold or restrict the right of assignment may the grant be so limited. Thus, to seek to
restrict the grant by parol is to contradict the written document in violation of the
parol evidence rule.
The majority opinion arrives at its holding via a series of false
premises which are not supported either in the record of this case or in such California
authorities as are offered.
The parol evidence rule is set forth in clear and definite language in
the statutes of this state. (Civ. Code, § 1625; Code Civ. Proc., § 1856.) It "is
not a rule of evidence but is one of substantive law. . . .The rule as applied to
contracts is simply that as a matter of substantive law, a certain act, the act of
embodying the complete terms of an agreement in a writing (the 'integration'), becomes the
contract of the parties." The rule is based upon the sound principle that the
parties to a written instrument, after committing their agreement to or evidencing it by
the writing, are not permitted to add to, vary or contradict the terms of the writing by
parol evidence. . . .
At the outset the majority in the present case reiterate that the
rule against contradicting or varying the terms of a writing remains applicable when only
part of the agreement is contained in the writing, and parol evidence is used to prove
elements of the agreement not reduced to writing. But having restated this established
rule, the majority opinion inexplicably proceeds to subvert it.
Each of the three cases cited by the majority holds that although parol
evidence is admissible to prove the parts of the contract not put in writing, it is not
admissible to vary or contradict the writing or prove collateral agreements which are
inconsistent therewith. The meaning of this rule (and the application of it found in the
cases) is that if the asserted unwritten elements of the agreement would contradict, add
to, detract from, vary or be inconsistent with the written agreement, then such elements
may not be shown by parol evidence.
The contract of sale and purchase of the ranch property here involved
was carried out through a title company upon written escrow instructions executed by the
respective parties after various preliminary negotiations. The deed to defendant grantees,
in which the grantors expressly reserved an option to repurchase the property within a
ten-year period and upon a specified consideration, was issued and delivered in
consummation of the contract. In neither the written escrow instructions nor the deed
containing the option is there any language even suggesting that the option was agreed or
intended by the parties to be personal to the grantors, and so nonassignable. The trial
judge, on at least three separate occasions, correctly sustained objections to efforts of
defendant optionors to get into evidence the testimony of Dallas Masterson (the bankrupt
holder of the option) that a part of the agreement of sale of the parties was that the
option to repurchase the property was personal to him, and therefore unassignable for
benefit of creditors. But the majority hold that that testimony should have been admitted,
thereby permitting defendant optionors to limit, detract from and contradict the plain and
unrestricted terms of the written option in clear violation of the parol evidence rule and
to open the door to the perpetration of fraud.
Options are property, and are widely used in the sale and purchase of
real and personal property. One of the basic incidents of property ownership is the right
of the owner to sell or transfer it. . . .
The right of an optionee to transfer his option to purchase property
is accordingly one of the basic rights which accompanies the option unless limited under
the language of the option itself. To allow an optionor to resort to parol evidence to
support his assertion that the written option is not transferable is to authorize him to
limit the option by attempting to restrict and reclaim rights with which he has already
parted. A clearer violation of two substantive and basic rules of law -- the parol
evidence rule and the right of free transferability of property -- would be difficult to
conceive.
The majority opinion attempts to buttress its approach by asserting
that "California cases have stated that whether there was an integration is to be
determined solely from the face of the instrument [citations], and that the question for
the court is whether it 'appears to be a complete . . . agreement. . . .
[citations]," but that "Neither of these strict formulations of the rule . . .
has been consistently applied."
The majority's claim of inconsistent application of the parol evidence
rule by the California courts fails to find support in the examples offered. First, the
majority opinion asserts that "The requirement that the writing must appear
incomplete on its face has been repudiated in many cases where parol evidence was admitted
'to prove the existence of a separate oral agreement as to any matter on which the
document is silent and which is not inconsistent with its terms' -- even though the
instrument appeared to state a complete agreement. [Citations.]" But an examination
of the cases cited in support of the quoted statement discloses that on the contrary in
every case which is pertinent here (with a single exception) the writing was obviously
incomplete on its face. . . .
In further pursuit of what would appear to be nonexistent support for
its assertions of inconsistency in California cases, the majority opinion next declares
that "Even under the rule that the writing alone is to be consulted, it was found
necessary to examine the alleged collateral agreement before concluding that proof of it
was precluded by the writing alone. (See 3 Corbin, Contracts (1960) § 582, pp.
444-446.)" Not only are no California cases cited by the majority in supposed support
for the quoted declaration (offered by the majority as an example of inconsistent
applications of the parol evidence rule by California courts), but 3 Corbin, Contracts,
which the majority do cite, likewise refers to no California cases, and makes but scanty
citation to any cases whatever. In any event, in what manner other than by
"examining" an alleged collateral agreement is it possible for a court to rule
upon the admissibility of testimony or upon an offer of proof with respect to such
agreement?
The majority opinion has thus demonstrably failed to substantiate its
next utterance that "'The conception of a writing as wholly and intrinsically
self-determinative of the parties' intent to make it a sole memorial of one or seven or
twenty-seven subjects of negotiation is an impossible one,'" citing 9 Wigmore,
Evidence (3d ed. 1940) section 2431, page 103, whose views on the subject were rejected by
this court as early as 1908 in Germain Fruit Co. v. J. K. Armsby Co., 153 Cal. 585, 595
[96 P. 319], which, indeed, is also cited by the majority in the present case. And the
example given, that of a promissory note, is obviously specious. Rarely, if ever, does a
promissory note given by a debtor to his creditor integrate all their agreements (that is
not the purpose it serves); it may or it may not integrate all their present contractual
rights and obligations; but relevant to the parol evidence rule, at least until the advent
of the majority opinion in this case, alleged collateral agreements which would vary or
contradict the terms and conditions of a promissory note may not be shown by parol.
Upon this structure of incorrect premises and unfounded assertions the
majority opinion arrives at its climax: The pronouncement of "several policies [to]
be accommodated . . . [in] formulating the rule governing parol evidence." (Italics
added.) Two of the "policies" as declared by the majority are: Written evidence
is more accurate than human memory; n8 fraud or
unintentional invention by interested witnesses may well occur.
I submit that these purported "policies" are in reality two
of the basic and obvious reasons for adoption by the Legislature of the parol evidence
rule as the policy in this state. Thus the speculation of the majority concerning the
views of various writers on the subject and the advisability of following them in this
state is not only superfluous but flies flatly in the face of established California law
and policy. It serves only to introduce uncertainty and confusion in a field of
substantive law which was codified and made certain in this state a century ago.
However, despite the law which until the advent of the present majority
opinion has been firmly and clearly established in California and relied upon by attorneys
and courts alike, that parol evidence may not be employed to vary or contradict the terms
of a written instrument, the majority now announce that such evidence "should be
excluded only when the fact finder is likely to be misled," and that "The rule
must therefore be based on the credibility of the evidence." But was it not, inter
alia, to avoid misleading the fact finder, and to further the introduction of only the
evidence which is most likely to be credible (the written document), that the Legislature
adopted the parol evidence rule as a part of the substantive law of this state?
Next, in an effort to implement this newly promulgated
"credibility" test, the majority opinion offers a choice of two
"standards": one, a "certainty" standard, quoted from the Uniform
Commercial Code, and the other a "natural" standard found in the Restatement of
Contracts, and concludes that at least for purposes of the present case the
"natural" viewpoint should prevail.
This new rule, not hitherto recognized in California, provides that
proof of a claimed collateral oral agreement is admissible if it is such an agreement as
might naturally have been made a separate agreement by the parties under the particular
circumstances. I submit that this approach opens the door to uncertainty and confusion.
Who can know what its limits are? Certainly I do not. For example, in its application to
this case who could be expected to divine as "natural" a separate oral agreement
between the parties that the assignment, absolute and unrestricted on its face, was
intended by the parties to be limited to the Masterson family?
Or, assume that one gives to his relative a promissory note and that
the payee of the note goes bankrupt. By operation of law the note becomes an asset of the
bankruptcy. The trustee attempts to enforce it. Would the relatives be permitted to
testify that by a separate oral agreement made at the time of the execution of the note it
was understood that should the payee fail in his business the maker would be excused from
payment of the note, or that, as here, it was intended that the benefits of the note would
be personal to the payee? I doubt that trial judges should be burdened with the task of
conjuring whether it would have been "natural" under those circumstances for
such a separate agreement to have been made by the parties. Yet, under the application of
the proposed rule, this is the task the trial judge would have, and in essence the
situation presented in the instant case is no different.
Under the application of the codes and the present case law, proof of
the existence of such an agreement would not be permitted, "natural" or
"unnatural." But conceivably, as loose as the new rule is, one judge might deem
it natural and another judge unnatural. n11 And
in each instance the ultimate decision would have to be made ("naturally") on a
case-by-case basis by the appellate courts.
In an effort to provide justification for applying the newly pronounced
"natural" rule to the circumstances of the present case, the majority opinion
next attempts to account for the silence of the writing in this case concerning
assignability of the option, by asserting that "the difficulty of accommodating the
formalized structure of a deed to the insertion of collateral agreements makes it less
likely that all the terms of such an agreement were included." What difficulty would
have been involved here, to add the words "this option is nonassignable"? The
asserted "formalized structure of a deed" is no formidable barrier. The
Legislature has set forth the requirements in simple language in section 1092 of the Civil
Code. It is this: "I, A B, grant to C D all that real property situated in [naming
county], State of California, . . . described as follows: [describing it]." To this
the grantor desiring to reserve an option to repurchase need only so state, as was done
here. It is a matter of common knowledge that collateral agreements (such as the option
clause here involved, or such as deed restrictions) are frequently included in deeds,
without difficulty of any nature.
To support further speculation that "the reservation of the option
might well have been placed in the recorded deed solely to preserve the grantors' rights
against any possible future purchasers, and this function could well be served without any
mention of the parties' agreement that the option was personal," the majority assert
that "There is nothing in the record to indicate that the parties to this family
transaction, through experience in land transactions or otherwise, had any warning of the
disadvantages of failing to put the whole agreement in the deed." (Italics added.)
The facts of this case, however, do not support such claim of naivete. The grantor husband
(the bankrupt businessman) testified that as none of the parties were attorneys "we
wanted to contact my attorney . . . which we did. . . . The wording in the option was
obtained from [the attorney]. . . . I told him what my discussion was with the Sines
[defendant grantees] and he wanted . . . a little time to compose it . . . . And, then
this [the wording provided by the attorney] was taken to the title company at the time Mr.
and Mrs. Sine and I went in to complete the transaction." (Italics added.) The
witness was an experienced businessman who thus demonstrated awareness of the wisdom of
seeking legal guidance and advice in this business transaction, and who did so. Wherein
lies the naive family transaction postulated by the majority?
The majority opinion then proceeds on the fallacious assertion that the
right to transfer or to assign an option, if it contains no provisions forbidding transfer
or indicating that performance involves elements personal to the parties, is a mere
disputable presumption, and in purported support cites cases not one of which involves an
option and in each of which the presumption which was invoked served to supply a missing
but essential element of a complete agreement. As already emphasized hereinabove,
the right of free transferability of property, including options, is one of the most
fundamental tenets of substantive law, and the crucial distinction would appear
self-evident between such a basic right on the one hand, and on the other hand the
disputable evidentiary presumptions which the law has developed to supply terms lacking
from a written instrument but essential to making it whole and complete. There is no such
lack in the deed and the option reservation now at issue.
The statement of the majority opinion that in the absence of a
controlling statute the parties may provide that a contract right or duty is
nontransferable, is of course true. Equally true is the next assertion that "even
when there is no explicit agreement -- written or oral -- that contractual duties shall be
personal, courts will effectuate a presumed intent to that effect if the circumstances
indicate that performance by a substituted person would be different from that contracted
for." But to apply the law of contracts for the rendering of personal services to the
reservation of an option in a deed of real estate calls for a misdirected use of the rule,
particularly in an instrument containing not one word from which such "a presumed
intent to that effect" could be gleaned. Particularly is the holding objectionable
when the result is to upset established statutory and case law in this state that
"circumstances" shown by parol may not be employed to contradict, add to or
detract from, the agreement of the parties as expressed by them in writing. And once again
the quoted pronouncement of the majority concerning the showing of
"circumstances" by parol fails to find support in the cases they cite, which
relate to a patent license agreement, held to be assignable absent terms indicating a
contrary intent; a contract to sell grapes also held assignable; a contract which included
language showing the intent that it be nonassignable; a contract to buy land held to be
assignable because approval of title by the buyer was held not to be a personal privilege
attaching only to the assignor; and to contracts for personal services.
Neither personal skill nor personal qualities can be conjured as a
requirement for the exercise of the option reserved in the deed here, regardless of how
ardent may be the desire of the parties (the bankrupt husband-optionee and his sister),
"to keep the property in the . . . family." Particularly is this true when a
contrary holding would permit the property to be acquired by plaintiff referee in
bankruptcy for the benefit of the creditors of the bankrupt husband.
Comment hardly seems necessary on the convenience to a bankrupt of such
a device to defeat his creditors. He need only produce parol testimony that any options
(or other property, for that matter) which he holds are subject to an oral
"collateral agreement" with family members (or with friends) that the property
is nontransferable "in order to keep the property in the family" or in the
friendly group. In the present case the value of the ranch which the bankrupt and his wife
held an option to purchase has doubtless increased substantially during the years since
they acquired the option. The initiation of this litigation by the trustee in bankruptcy
to establish his right to enforce the option indicates his belief that there is
substantial value to be gained for the creditors from this asset of the bankrupt. Yet the
majority opinion permits defeat of the trustee and of the creditors through the device of
an asserted collateral oral agreement that the option was "personal" to the
bankrupt and nonassignable "in order to keep the property in the family"!
It also seems appropriate to inquire as to the rights of plaintiff wife
in the option which she holds with her bankrupt husband. Is her interest therein also
subject to being shown to be personal and not salable or assignable? And, what are her
rights and those of her husband in the ranch land itself, if they exercise their option to
purchase it? Will they be free to then sell the land? Or, if they prefer, may they hold it
beyond the reach of creditors? Or can other members of "the family" claim some
sort of restriction on it in perpetuity, established by parol evidence?
And if defendants sell the land subject to the option, will the new
owners be heard to assert that the option is "personal" to the optionees,
"in order to keep the property in the Masterson family"? Or is that claim
"personal" to defendants only?
These are only a few of the confusions and inconsistencies which will
arise to plague property owners and, incidentally, attorneys and title companies, who seek
to counsel and protect them.
I would hold that the trial court ruled correctly on the proffered
parol evidence, and would affirm the judgment.