Thigpen v. Locke

363 S.W.2d 247

• Court: Texas Supreme Court
• Decided: December 5, 1962
• Docket: A-8908
• Status: Published

Opinions

HAMILTON, Justice.

This is a suit to set aside two deeds exe- - cuted by Mr. and Mrs. Robert C. Locke-(plaintiffs) by which they conveyed title to • a Flouston lot and grocery store to J. W. Thigpen (defendant). The trial court instructed verdict for Thigpen, and the Court: of Civil Appeals has reversed and remanded. 353 S.W.2d 249. Thigpen is petitioner here

Respondents’ theory is that the first deed is void because intended as a mortgage on 'business homestead property. Since petitioner does not rely on this deed, it need not he considered.

As to the second deed, dated January 2, 1951, respondents also pleaded home■stead protection, but this apparently has been waived as it was not argued in the "briefs. The other basis of respondents’ ■prayer for cancellation of the second deed is •equitable in nature, asserting three separate grounds for the imposition of a constructive trust.

On January 2, 1951, the Lockes executed ■three instruments: (a) a warranty deed conveying fee simple title to the lot and store to Thigpen; (b) a five-year lease of the premises back to the Lockes; and (c) a bill of sale to Thigpen covering all the fixtures in the grocery store. All of these instruments are acknowledged and otherwise formally in order.

Respondents’ version of the facts is as follows:

Since 1947 the Lockes had been in the •grocery business, having paid about $2,700 for their lot and building. In 1947 the Lockes met Thigpen, the “trust officer” of a local bank. According to Locke’s testimony, Thigpen helped them to get a loan and after that they became close friends. They saw •each other frequently, and Thigpen bought meat from the Lockes’ grocery store. Thig-pen helped them to get other loans and personally guaranteed one of them.

In 1949 Thigpen himself loaned respondents $5,000 and took a deed (the first deed) to the lot and grocery store as a mortgage. During 1949 Thigpen suggested that the Lockes form a corporation for the purpose of operating the grocery business, and the Lockes agreed. Respondents did not hire their own attorney but left the details of incorporation entirely up to Thigpen, who selected an attorney, signed as incorporator, and advanced $1,000 as capital stock, which was repaid. The lot and store were never conveyed to the corporation, but the Lockes endorsed all their shares of stock back to Thigpen as security for the $5,000 debt.

After the corporation was formed Thig-pen’s son, and later Thigpen himself, kept the books for the business. Thigpen was a director, vice president, and owner of two shares; Mr. Locke was president and, with his wife, owner of the 58 other shares. Locke testified that Thigpen often acted as business advisor to him in the management of the grocery business.

After the incorporation Thigpen continued to loan the respondents or the corporation money until their indebtedness reached almost $10,000. At this point — around November or December, 1950 — Locke spoke to Thigpen about taking bankruptcy, but Thig-pen urged him not to do so because he (Thigpen) would lose all of his investment. Locke testified that he then told Thigpen: “I want to pay everybody, I don’t want to lose my property, and if you and I can work out something so you can get your money, I will be glad to do it.” On January 2, 1951, Thigpen presented the instruments in question to respondents for their signatures. The Lockes testified that they did not read the instruments before signing.

According to Locke, he understood their transaction was that respondents would lease the property to Thigpen. Thigpen would sublet to the corporation, collect the rent, pay the expenses on the property, and apply whatever was left over from the rent payments to the indebtedness of the Lockes until the $10,000 was paid off. Respondents testified that Thigpen told them that it would be paid off in five or six years, after which time they could reclaim their property.

The instruments reflect an absolute sale of the land and fixtures and a lease back to the Lockes under which they were to pay rent for the continued use of the property as a grocery business. Thigpen assumed a vendor’s lien of about $3,500 on the property.

The only evidence other than Locke’s testimony that respondents thought they were signing a lease as lessors rather than a deed is found on the face of the printed lease agreement: the Lockes signed that instrument on the line marked “Lessor”. The body of the lease agreement identifies Thig-pen as lessor and respondents as lessees.

Immediately after signing the papers on January 2, 1951, the Lockes moved to another town and began selling chickens, leaving Locke’s brother in charge of the store.

A few months after the execution of the deed, lease, and bill of sale the Lockes executed another instrument which Mr. Locke did not remember reading; this was a bill of sale on the grocery store stock transferred to Thigpen in satisfaction of arrear-age in rent payments to Thigpen under the lease of January 2, 1951. This bill of sale describes the property and expressly refers back to the deed and lease of January 2, 1951.

The Court of Civil Appeals has held that it was error for the trial court to instruct verdict because (a) whether or not there was a confidential relationship is a jury question; (b) there was some evidence from which a jury could infer that there was a confidential relationship; and (c) respondents’ suit was not as a matter of law barred by the statute of limitations, but that there was a fact issue raised as to the reasonableness of respondents’ five or six years’ delay in attempting to get back their property. Petitioner Thigpen’s application for writ of error was granted on points of error complaining of these three holdings.

As stated above, respondents have pleaded and argued on appeal three separate grounds for the imposition of a constructive trust; (I) Thigpen was guilty of actual fraud; (II) this was not an absolute conveyance but a mortgage transaction; and (III) there was a relationship of trust and confidence and breach of fiduciary duties-constituting constructive fraud and giving rise to a constructive trust.

I.

Under the first ground respondents seek to invoke the rule that equity will impose a constructive trust to prevent one who-: obtains property by fraudulent means from being unjustly enriched. Scott on Trusts, Vol. I, § 44.1, p. 251. The respondents'' pleadings allege, and their reply brief argues, two inconsistent factual theories of actual fraud: (A) that this was an agreement whereby respondents voluntarily deeded the property to Thigpen in return for his oral promise to reconvey when the $10,-000 debt had been paid off, which promise-Thigpen did not intend to honor at the time he made it; and (B) that Thigpen led respondents to believe that the instrument was-not a deed but a lease and that they signed believing it to be a lease.

The first theory of fraud alleged is-based on the rule of Turner v. Biscoe, 141 Tex. 197, 171 S.W.2d 118, that when a grantor voluntarily conveys land to a grantee upon the false oral promise that the grantee will reconvey, such is actual fraud justifying the imposition of constructive trust. The requisite fraudulent misrepresentation is as to the grantee’s state of mind. Respondents contend that they have met their burden of offering some evidence on both elements of this theory of fraud and that it was therefore error for the trial court to sustain the instructed verdict against them. We do not agree that there is any evidence in the record of the first theory of actual fraud. Instead, we think that on the trial respondents elected between the two theories and offered testimony only on the theory that they did not know what they were signing. The rule of Turner v. Bis-coe, supra, is based upon the premise that the grantor consciously deeded his land away on the strength of an oral promise by grantee that he would reconvey, not that he thought he was granting a leasehold.

Mr. Locke’s testimony as to what they understood the agreement to be is as follows :

“Q. Would you mind stating in your own words just what that agreement was ?

“A. The corporation was going to continue to operate the store; the corporation was going to give Mr. Thigpen the right to collect the rent off of my property and apply such rent that was collected against the indebtedness I owed him or the Bank of the Southwest, whichever it was, and that is what I thought I was executing when I executed * * * —

******

“Q. Now in that connection, what line does your own signature appear on?

“A. [Locke looking at the instrument] Lessor.

******

“Q. In connection with your conversation with Mr. Thigpen about him, that he was going to collect the money, collect the rent off of this property and use the money to pay expenses, pay the loan on the property, the expenses on the property and what was left pay himself, pay the rest of it to himself, was anything ever said about how long he thought it would take before he would get his money back?

“A. Between five and six years, that was the reason for the five-year lease.

* * * * * *

*‘Q. As a result of the conversation you had with Mr. Thigpen, in other words, at the time you had it before these papers were signed -in January of 1951, would you mind stating whether or not it was your understanding that you and Mrs. Locke would lease this property to Mr. Thigpen ?

“A. Right, sir.”

This testimony taken most favorably to the respondents does not give rise to the inference that they consciously deeded the property on any oral promise to reconvey. The question of whether or not there was some evidence of fraud under Turner v. Bis-coe must be answered in the negative.

As to the contention that there was some evidence on the second theory of actual fraud, petitioner has interposed the rule that a party to an arms-length transaction is charged with the obligation of reading what he signs and, failing that, may not thereafter, without a showing of trickery or artifice, avoid the instrument on the ground that he did not know what he was signing. Indemnity Insurance Company of North America v. W. L. Macatee & Sons, 129 Tex. 166, 101 S.W.2d 553. This rule is but a narrower application of the principle that the party claiming fraud has a duty to use reasonable diligence in protecting his own affairs. “In an arm’s-length transaction the defrauded party must exercise ordinary care for the protection of his own interests and is charged with knowledge of all facts which would have been discovered by a reasonably prudent person similarly situated. And a failure to exercise reasonable diligence is not excused by mere confidence in the honesty and integrity of the other party.” Courseview, Inc. v. Phillips Petroleum Co., 158 Tex. 397, 312 S.W.2d 197.

There is no evidence of active trickery or deceit in this record. But respondents contend that they were relieved of the duty to read the instruments because of the relationship of trust and confidence, that, on the contrary, Thigpen as a fiduciary owed them the duty of fully disclosing to them what it was they were signing, and that failure to disclose is sufficient deception to take the case out of the rule in Indemnity Insurance Company of North America v. Macatee, supra. In the interest of clarity we lay that question aside until we reach our discussion of the points of error dealing with confidential relationship.

II.

The second main ground upon which respondents base their claim of entitlement to a constructive trust is that this was intended as a security transaction and not an absolute conveyance. The doctrine which respondents seek to invoke here arises from the equitable rule that parol agreements may be proved to show that what appears to be an absolute conveyance is actually a mortgage, irrespective of fraud. Bradshaw v. McDonald, 147 Tex. 455, 216 S.W.2d 972; Wilbanks v. Wilbanks, 160 Tex. 317, 330 S.W.2d 607; 4 Pomeroy Equity Jurisprudence, (5th ed., 1941) § 1196, p. 581. This rule covers the, case in which a grantor voluntarily conveys property to a grantee who orally promises to reconvey, presumably intending at the time to keep his promise but who subsequently refuses or fails to perform.

It is true that some courts give the grantor relief in these security arrangements by way of the constructive trust device, reasoning that the breach of the oral agreement is evidence which may be considered in determining whether or not there was fraud in the original agreement, but the usual view is that mere breach of contract is not fraud and that it may not be evidence of fraud. The constructive trust, according to the latter view, requires actual or constructive fraud or other inequitable behavior at the time the original transaction is entered into. 54 Am.Jur., Trusts, § 231, p. 177.

It is well settled in Texas that an absolute deed may be shown by parol evidence to be a mortgage, Bradshaw v. McDonald, supra; Wilbanks v. Wilbanks, supra, but the Texas courts generally have not based relief on the constructive trust device. This court has held that mere breach of an oral contract is not fraud and that subsequent breach is not evidence that may be considered in determining whether or not there was fraud in the original transaction. Turner v. Biscoe, supra. This court has also, held that actual or constructive fraud is essential to a constructive trust. Talley v. Howsley, 142 Tex. 81, 176 S.W.2d 158. There are, however, cases to the contrary. Faville v. Robinson, 111 Tex. 48, 227 S.W. 938.

But whatever the state of the Texas decisions in this area, they do not apply to-respondents’ case; for, as we have pointed, out above in our discussion of the fraud-ground, there is no testimony by the Lockes-tending to show that they consciously deeded, their property to Thigpen; their testimony consistently is that they believed they were, leasing it to him.

III.

We have eliminated respondents’ first two-grounds; if they are entitled to a constructive trust, it must be on the ground that they had entered into a relationship .of trust and. confidence with Thigpen. Respondents’ theory is that Thigpen breached his fiduciary duty by failing to fully disclose to-them that they were signing a deed rather than a lease. If there is a confidential relationship, respondents would be relieved of' the duty of reading the instruments and: could' justifiably rely on their fiduciary, Thigpen, to treat them with the utmost fairness. The effect of establishing the relationship of trust and confidence would be to remove from the case the rule of Indemnity Insurance Company of North America v. Macatee.

Petitioners’ points of error complain that the Court of Civil Appeals erred in holding-that the existence of confidential relationship is a fact question for the jury, erred in holding that there was some evidence to go-to the jury, and erred in holding that limitations had riot as a matter of law run against respondents’ cause. 1

Restatement of Restitution defines the confidential relationship as existing “ * * * where, because of family relationship or otherwise, the transferor is in fact accustomed to be guided by the judgment or advice of the transferee or is justified in placing confidence in the belief that the transferee will act in the interest of the transferor.” Restatement of Restitution, § 182, Comment on clause (b), p. 735.

In the cases of Mills v. Gray, 147 Tex. 33, 210 S.W.2d 985, and Fitz-Gerald v. Hull, 150 Tex. 39, 237 S.W.2d 256, this court recognized that confidential relationships may arise not only from the technical fiduciary relationships such as attorney-client, trustee-cestui que trust, partner and partner, etc.—which as a matter of law are relationships of trust and confidence—but may arise informally from “moral, social, domestic or purely personal” relationships. 54 Am.Jur. 173, § 225, “Trusts”. (Quoted in Fitz-Gerald v. Hull, supra.) The existence of the fiduciary relationship is to be determined from the actualities of the relationship between the persons involved.

Taking the testimony as a whole and most favorably to the respondents, we hold that in this case there is not such evidence of justifiable trust and confidence as will create a fiduciary relationship. We may assume that respondents did trust Mr. Thigpen; they have testified so time and time again, but mere subjective trust alone is not enough to transform arms-length dealing into a fiduciary relationship so' as to avoid the statute of frauds. Businessmen generally do trust one another, and their dealings are frequently characterized by cordiality of the kind testified to here. If we should permit respondents to set aside their conveyances on such slender evidence, the security of contracts and conveyances in this state would be seriously j eopardized.

In Pope v. Garrett, 147 Tex. 18, 211 S.W.2d 559, 562, Judge Smedley said:

“ * * * We realize that a constructive trust does not arise on every moral wrong and that it cannot correct every injustice. [Citation omitted.] It must be used with caution, especially where as here proof of the wrongful act rests in parol, in order that it may not defeat the purposes of the statute of wills, the statute of descent and distribution, or the statute of frauds.”

Our holding in no way detracts from the principle that a relationship of trust and confidence may be shown to arise informally from purely personal relationships. All we hold is that respondents do not testify to facts—other than their own subjective feelings—which show that their relationship with Thigpen was anything more than a debtor-creditor relationship.

We reaffirm the principle that parties to a contract have an obligation to protect themselves by reading what they sign. Unless there is some basis for finding fraud, either actual or constructive, they may not excuse themselves from the consequences of failing to meet that obligation because they unwisely trusted the other party. Indemnity Insurance Company of North America v. Macatee, supra; Courseview, Inc., v. Phillips Petroleum Co., supra.

In view of our holding in this case it is not necessary for us to reach petitioner’s point of error dealing with the statute of limitations.

The judgment of the Court of Civil Appeals is reversed, and the judgment of the trial court is affirmed.

CALVERT, C. J., and WALKER and STEAKLEY, JJ., dissenting.