dissenting. — I dissent.
I am unable to agree with either the conclusion reached in the majority opinion or the reasoning upon which it is based. As the conclusion reached therein is based upon inferences drawn from certain facts, I will first state the facts as disclosed by the record.
*795It appears that for some time prior to August 1, 1935, defendant A. Otis Birch had been a tenant of certain real property under a 99-year lease dated June 6, 1928, which had been assigned to him immediately following its execution. The rental payable under said lease was $1,000 per month. Said defendant had failed to pay such rental for the period from October, 1934, to April, 1935, and plaintiff had recovered judgments against him therefor in the sum of $6,395.70. Defendant had also failed to pay the rental due under said lease for the months of May, June and July, 1935, and plaintiff had demanded of said defendant the sum of $3,016.89 in payment thereof.
On August 20, 1935, after considerable negotiating between the parties, plaintiff entered into an agreement with defendants A. Otis Birch and M. Estelle C. Birch, his wife, dated August 1, 1935, whereby the indebtedness of said defendant A. Otis Birch amounting to $9,412.59 was settled for the sum of $6,000, and it was further provided that the rental under said lease be reduced for the ensuing five years on a graduated scale. Commencing August 1, 1935, the rental was reduced from $1,000 to $500 per month. This agreement was performed by defendant and he thereafter paid plaintiff the reduced rental agreed upon for the period commencing August 1, 1935, to May 1, 1936.
Plaintiff thereupon commenced this action alleging that defendants A. Otis Birch and M. Estelle C. Birch, who are husband and wife, induced plaintiff to execute the settlement agreement by means of false and fraudulent representations as to the financial condition of said defendant A. Otis Birch. Lula M. Minter was joined as a defendant on the ground that she participated in the conspiracy to defraud complained of by plaintiff.
The complaint alleges that defendants falsely and fraudulently represented to plaintiff and he was thereby led to believe that at the time said agreement was executed and for some time prior thereto defendant A. Otis Birch was in an unsafe and dangerous condition financially; that he was indebted to defendant Minter in the sum of $25,000 represented by a note secured by a trust deed on certain real property owned by defendant A. Otis Birch; that he was also indebted to defendant Minter in the sum of $130,000 secured by a pledge of 100,000 shares of stock, being the entire capital stock of the Birch Holding Company, which in turn held *796all of the stock of the Birch Securities Company and Birch Ranch and Oil Company, which two last-mentioned companies owned practically all of the properties in which the Birches were interested, and that if plaintiff insisted on the payment of the rental provided for in said lease, Minter would sell said stock under the pledge and render Birch insolvent. The complaint further alleged that defendant Minter conspired with defendant Birches to accomplish such fraud. Plaintiff also claimed as against defendant A. Otis Birch the sum of $531.90 as expenses incurred in preparing proof for the action, and also attorney’s fees by reason of a clause in the lease providing for the same in any action in connection with the lease. Plaintiff further alleged that the representations were false; that the note, trust deed and indebtedness to defendant Minter were fictitious and nonexistent; that plaintiff in belief and reliance on their genuineness was induced to execute and perform the settlement agreement, and that he was damaged thereby in the sum of $3,413.19 by reason of the settlement of the judgment and the sum of $5,000 by reason of the receipt of less rent for the period of ten months under the lease as modified.
During the course of the trial plaintiff’s counsel conceded that if the indebtedness from Birch to Minter actually existed, plaintiff could not.prevail in this action.
The findings of the trial court followed substantially the allegations of the complaint, and judgment was entered for plaintiff against all of the defendants for $8,413.59, and against defendant A. Otis Birch individually for $375 expenses preparing for trial and $878.85 attorney’s fees.
Defendants’ main contention in support of their appeal from the judgment rendered against them is the insufficiency of the evidence to support the findings of the trial court upon which the judgment is based.
The evidence produced by plaintiff as to the misrepresentations alleged to have been made by defendants was as follows: Plaintiff testified that in 1933 defendant, A. Otis Birch, furnished him with a financial statement showing various assets and liabilities; that during the period from March to July, 1935, at a time when said defendant was in default under the lease and had not paid the judgments for rent, two supplementary proceedings were conducted by plaintiff in aid of the enforcement of the judgments against said defendant; that during such proceedings and also in conversations be*797tween defendant, A. Otis Birch, and plaintiff, the former stated, that “his financial condition was such that he did not have funds available to pay the rent and that he would have to have a modification; that he simply could not go on. That he owed lots of money and he told me the different amounts that he owed;” that he owed defendant Minter $130,000 on a note and that she held the stock (100,000 shares) of the Birch Holding Company “and that he owed her $25,000 on a second mortgage on the Broadway property;” that “he was living by borrowing from his relatives; he was practically broke. The only available funds he had were those borrowed from his relatives;” that unless “he did get relief he would have to go into insolvency, or bankruptcy, or something.” That he had “nothing that was tangible, that you could collect anything on, and everything seemed to be mortgaged to the limit. ’ ’ Plaintiff stated that a certain Stanley C. Benson, whom he claimed was Birch’s agent, (the consummation of the negotiations culminating in the execution of the settlement agreement on August 20, 1935, were carried on between Benson and plaintiff) had stated to him during the same period that he (Benson) personally knew that the Minter obligations existed, and that he could get Minter to “not close out” Birch if the lease could be modified. Plaintiff further testified that defendant, M. Estelle Birch, stated to him that “they (the Birches) were in bad financial condition,” and that she gave him the “impression” that they “were practically broke, insolvent” — she did not say it in those words, but would give you that “impression.” With respect to factors upon which plaintiff relied in executing the settlement agreement he testified:
“Z believed . . . that Mr. Birch on August 1st really owed Miss Minter $130,000.00 on the property, which was what I considered the fact . . . and I believed that all I could do would be to attach the stock in order to collect any money, and that Miss Minter would come in with a $130,000.00 mortgage and take it away from me, because I could not pay off that large of a loan, as well as relying upon the fact that Mr. Birch had said unless he did get relief he would have to go into insolvency, or bankruptcy, or something.”
In regard to the basis for this action, plaintiff testified:
“Q. And one of the reasons you filed it (the action) was because you felt she (Minter) did not home enough money to *798loan Mr. Birch approximately a hundred twenty-five or a hundred fifty thousand dollars? A. $155,000. Q. You also said, I believe, that when the representation was made to you that Mr. Birch had given his note, secured by stock, to Miss Minter for $130,000.00 and the additional $25,000.00 was loaned, when the representation was made to you you believed it? A. Yes. Q. And you relied upon it in making this adjustment? A. Yes. Q. And then subsequently you made up your mind that that was untrue ? A. That is right. Q. Now, if you had ascertained that the $130,000.00 and the $25,000.00 had actually been loaned, then you would not have brought this suit would you? A. Why, no.”
It follows therefore that the representations upon which plaintiff must rely to support the judgment are those concerning the indebtedness to Minter and the pledge of stock and trust deed securing it. The evidence establishes that such representations were made and that plaintiff relied thereon and was thereby induced to execute the settlement agreement. It may be inferred from the circumstances that they were made by Birch for the purpose of inducing plaintiff to act upon them.
It is, however, necessary in order for plaintiff to make out a case, to prove that those representations were false. Defendants assert that plaintiff not only failed to prove the falsity of the representations complained of but that the evidence establishing the truth thereof stands uncontradieted. In order to have a clear understanding of the facts relating to the transactions between the Birches and Miss Minter it is necessary to review the history of these transactions. According to the evidence, A. Otis Birch commenced borrowing money from his cousin, defendant Minter, and her relatives many years before this controversy arose. Various transactions were had between them in which sums were borrowed and partly repaid, including the sale by Birch to Minter of bonds in a reclamation district which Birch agreed to repurchase from her at face value. There were periodic settlements between them of their accounts. During that time and up to 1930, Birch had assets amounting to several million dollars in value. In an adjustment between them in about October, 1934, various obligations were aggregated and adjusted, the upshot being that Birch gave Minter his note for $130,000 and pledged to her as security 100,000 shares of stock of the *799Bireh Holding Company, the same being the entire issue of that company. Plaintiff did not controvert the evidence of such balance as being a genuine indebtedness. I will not attempt to discuss the many transactions leading up to that adjustment; however, from an examination of the evidence I am compelled to conclude that not only did plaintiff fail to sustain the burden of proving that the indebtedness did not exist in 1934 when the adjustment was made, but defendants’ evidence sufficiently establishes that it did exist. At about that time Birch caused to be organized three corporations, the Birch Ranch and Oil Company, Birch Securities Company, and Birch Holding Company. He transferred the bulk of his property and holdings to the first two corporations the stock of which was taken by the last-mentioned corporation. The stock of the Birch Holding Company was issued to Mr. and Mrs. Birch, 49% and 51% respectively. A note was given by defendants Birch to Miss Minter on November 8, 1934, for $15,000, secured by a second trust deed on certain property known as the Broadway property which was not included in the transfer to Birch Holding Company. The trust deed provided that it was also to stand as security for future advances. (This note and trust deed are the ones claimed to be fictitious and executed for the purpose of defrauding plaintiff.) There was a first trust deed held by a bank against the property for some $25,000. Defendant A. Otis Birch testified that he received $15,000 upon the execution of the note and trust deed and that an additional $10,000 was advanced by Minter to Birch under the trust deed on or about May 1, 1935. Defendant Birch also testified that in 1932 he transferred to Minter stock in Lyon Storage Company and several other corporations, of the value of from $60,000 to $100,000 in return for her promise to devise to him by will certain real property owned by her; that in accordance with her promise she devised the property to him; and that in 1933 he transferred to her 90% of the stock in the Birch-Smith Storage Company. He also stated that he gave or sold the stock to her. The evidence is conflicting as to the value of the stock, Minter and Birch stating that it was practically without value, and Smith, an officer of the company, testifying that its value in 1933 was $75,000 less an $8,543.32 loss. On July 16, 1935, Benson and defendants Birch entered into an agreement wherein it was recited that said defendants had many finan*800cial difficulties, and had transferred most of their assets to the three Birch corporations heretofore-mentioned, and the corporations assumed some of Birch’s liabilities; that the Birches were endeavoring to refinance their and the corporations’ obligations ; that Benson had purchased some of Birches’ property at execution sale. It was then agreed that Benson would obtain for Birches a release of all liability to Minter for the $130,000 and $25,000 indebtedness, and assume and agree to pay the same to Minter; that the stock in the Birch Holding Company was to be transferred to Benson, subject to indebtedness owed to Minter and $76,000 to Mrs. Conaway and to future loans from Minter, not exceeding $200,000 and from Conaway not exceeding $150,000; that the directors and officers of the three Birch Companies were to resign and be replaced by persons of Benson’s choice; that Benson was to pay all the debts of the Birch Corporations and some specified personal debts of the Birches; that all refinancing necessary to pay such debts must be so done that the Birches would have no personal liability; that the Birches were to receive sufficient for living expenses; that the market value of the stock of the Birch Holding Company is $1,000,000, and that if and when the corporations’ liabilities are refinanced, Benson was to pay Birches $500,000; Birch was to manage the corporations ’ property subject to the direction of the boards of directors. Pursuant to that agreement Minter released Birches from the $130,000 and $25,000 obligations and accepted in lieu thereof Benson’s note, to be secured by a pledge of the stock of Birch Holding Company, and with an agreement that such security could be used for $200,000 additional future loans from Minter to Birches; a voting trust agreement was made between Benson and Birches with reference to the Birch Holding Company stock, under which Birches held the stock as trustee with voting authority and with Benson as beneficiary, and providing that the stock was to be deposited with the trustee, the Birches to issue a trustee’s receipt to Benson. The receipt was issued but not endorsed to Minter, and it is not clear whether she received it or not. She testified that as the result of the Benson-Bireh agreement of July 16, 1935, she received the stock of the Birch Holding Company issued in Benson’s name as security for Benson’s note. The BensonBireh arrangement was discarded in 1937. Benson gave Minter his note for approximately $162,000, the same represent*801ing the $130,000 and $25,000 obligations and interest thereon. When the Benson-Bireh arrangement was discarded the Birchs gave their note for about $172,000 to Minter.
It is plaintiff’s position that several inferences may arise from the various transactions engaged in by the Birchs and the foregoing events which support the judgment. Among others he refers to the Benson-Bireh agreement in which it was recited: “You know we had many financial difficulties; that we formed three corporations last October (the Birch Companies) — for reasons with which you are familiar; that we transferred certain assets to these corporations subject to the assumption by them of certain liabilities; that we retained considerable real estate, and we have been making strenuous efforts to refinance all of our obligations. You yesterday purchased at an execution sale three parcels of real estate formerly owned by us. ’ ’ This is followed by provisions to the effect that in the refinancing plan the personal liability of the Birchs is not to be incurred. Plaintiff asserts that from that agreement the inference follows that the three Birch Corporations were formed and the stock of the Birch Holding Company pledged to Minter to avoid liability and defraud creditors. In my opinion that inference does not follow. The personal liability referred to was that which might occur while Benson was endeavoring to refinance Birch’s liabilities and adjust his financial difficulties. It was personal liability in the future not the past which was referred to in the agreement. One of the main lawful reasons for incorporating a business is to avoid the risk of personal liability. Therefore it cannot be said that the formation of the corporations supports plaintiff’s case. That was entirely legitimate. In any event it must not be lost sight of that the action here is for damages for alleged fraudulent representations, to wit: that the Birches were indebted to Minter. No issue is presented by the pleadings regarding the use of the corporate entities for fraudulent purposes. pjis]
Plaintiff reasons that because there was no endorsement as security for the Benson note to Minter of the trustees’ certificate (representing stock in the Birch Holding Company) which arose out of the Benson-Bireh agreement of July 16,. 1935, and no evidence of its transfer to Minter except her evidence that the stock was delivered to her after July 16, 1935, issued in Benson’s name, the court was justified in *802inferring that there was no pledge of the stock of that company to her in October, 1934, for an indebtedness in the sum of $130,000. No such inference reasonably follows. The matters are not necessarily related to each other. The Benson-Birch agreement of July 16, 1935, provided for the payment of the Birch indebtedness to Minter by Benson, and that the stock was to remain as security therefor. It is clear from what has heretofore been said that from the transactions between Benson and the Birches, Minter was still protected in her security for her obligation originally owed by the Birches to her. There was no change in the essential situation insofar as plaintiff was concerned by reason of the Benson-Birch transaction; there was no such change in Birch’s financial position between the time Birch stated to plaintiff that he was indebted to Minter and the time the plaintiff-Birch settlement agreement was executed about August 20, 1935, which would be beneficial to plaintiff. It is true that in that transaction (Benson-Birch) Minter released the Birches on their obligations but the property of the Birches still remained liable therefor under the Benson-Birch agreement.
Plaintiff urges and the majority opinion agrees that from the foregoing transactions it may be inferred that defendants were engaged in a scheme whereby they could reduce their liabilities, reduce their obligations under the lease in which plaintiff was the lessor, and put their property out of the reach of their creditors. From the entire record I cannot agree that such an inference reasonably follows. Rather, the plain purpose seems to have been an honest endeavor on the part of the Birches to alleviate a serious financial involvement to the ultimate benefit of both themselves and their creditors. But even if such an inference may be drawn, it is not sufficient to support the judgment because this is not an action to set aside conveyances as having teen made with the intent to defraud creditors. As we have seen, it is an action for damages for fraudulent representations; the gist of such representations are that the Birches were indebteded to Minter in the total sum of $155,000 and that the same was secured by liens on real property and corporation stock. It does not follow from a general scheme to reduce their liabilities that the indebtedness to Minter was fictitious or false.
With respect to the falsity of the representations concerning the indebtedness to Minter there is evidence heretofore-*803mentioned with reference to two transactions: First, that in 1933, Birch transferred to her 90% of the stock in the Birch-Smith Storage Company, and indicated that the value of the assets of that company were about $66,456.68. In regard to that transfer Birch testified: “Q. How did she (Minter) acquire that stock? A. She bought — loaned me some other money and I gave her the stock. Q. When did you give her the stock ? A. That is to say, she purchased the stock of us. Q. When did you receive the money? A. Oh, about the time that the compamy was organised.” Second, in 1932, Birch transferred to Minter stock in the Lyon Storage Company, Pacific Crest Cemetery, and Citizens National Trust & Savings Bank; that stock had a value of from $60,000 to $100,000. According to Birch’s testimony it was made in return for Minter’s promise to devise her home place to him by will; she did so devise it. Plaintiff urges, and the majority opinion is based upon the proposition that these transactions constituted a payment by Birch to Minter of his indebtedness; that from the transfer of that stock an inference arises that such transfer was in payment of the debt and that therefore the debt did not exist. I do not believe that position is tenable. As seen, the evidence is uncontradicted that a portion of the stock was transferred in return for Minter’s promise to devise property to Birch. Whether that transaction was particularly advantageous to Minter is of no significance. Birch could have made a gift of the stock and plaintiff would have been in no position to complain. As I have stated before, plaintiff is not seeking to have the transfer set aside as in fraud of creditors. There is no law that prevents a debtor from giving one creditor a preference over others; indeed, the rule is to the contrary. (Civil Code, see. 3432; 12 Cal. Jur. 1009, et seq.)
In regard to the transfer of the securities being made in consideration of Minter’s promise to devise her property to Birch, we have the uncontradicted evidence that said transfer was not made in payment of the debt; that it was a sale to Minter for which she paid the purchase price. In order to escape the effect of that evidence, the majority decision relies upon two propositions: first, that the trial court could have disbelieved defendants’ evidence on the subject; and second, that an inference of payment arose from the transfer of the securities. With the first I agree, but where does that leave us ?
*804It must be remembered that the burden of proof was upon the plaintiff to establish that the indebtedness which Birch claimed to owe Minter was fictitious. But the majority opinion, in order to support its conclusion, declares that there is an inference of payment of such indebtedness by the transfer of the securities above-mentioned, and that the judgment is thereby supported. That premise must fail because there is no such inference. On the contrary the presumption commonly invoked between creditor and debtor, is that when the debtor retains possession of the instrument representing the obligation, it is concluded that the debt has not been paid. (Light v. Stevens, 159 Cal. 288 [113 Pac. 659]; Levey v. Henderson, 177 Cal. 21 [169 Pac. 673].) And where payments are made by the debtor to the creditor, but the latter retains possession of the instrument representing the obligation, it is presumed, in the absence of evidence to the contrary, that the payment was made on some obligation other than the one involved in the action. (Light v. Stevens, supra.) In the case at bar, the notes representing the indebtedness were in Minter’s possession, and furthermore, they called for their payment in money. There is no evidence or possible ground for an inference that Minter agreed to accept securities rather than cash in payment of her claim. If it be asserted that there was an inference of her consent to accept payment in a medium different than that called for in her notes, then the result reached by the majority would require the building of an inference upon an inference; that is, first an inference of payment, and then the further and additional inference that a different medium than cash was acceptable to Minter in payment of Birch’s obligation to her.
It is also pertinent to observe that even if it be assumed that the debt was paid by the stock transfers prior to 1934, we have the notes themselves which were executed after those transfers. Such instruments are presumed to be supported by adequate consideration. (Civil Code, sec. 3105.) There is no evidence rebutting that presumption. The transfers of the stock having occurred prior to their execution could not upon any theory be deemed a basis for an inference of payment. Furthermore, the execution of the notes after the transfer gives rise to the inference that the stock transfers were not payment. There is no room for a contrary inference.
In this connection it should be noted that the majority *805opinion fails to consider plaintiff’s own testimony that his position would have been no different even if the stock had been given by Birch to Minter. He testified: “Q. I am going to ask you, Dr. Campbell, whether or not if you knew the fact to be that Miss Minter had taken the Birch Storage stock as a gift from Mr. Birch it would have also induced you to make the contract of August 1, 1935? A. That fact alone? Q. Yes. A. No. Q. Would that have assisted in inducing you to make the contract of August 1, 1935, if you knew that instead of Mr. Birch putting it up as a security for a loan with Miss Minter that in effect Mr. Birch had given her the stock? A. Yes, I thimk it would have been about the same, it would have been lowering his assets.” Thus, even if Birch gave the stock to Minter, plaintiff would have felt he had been defrauded when in fact he would not have been.
In addition to the foregoing, it must not be forgotten that in an action for damages for fraud the burden of proof of all of the elements thereof, including the falsity of the representations, rests upon the one asserting the fraud. (McEwen v. New York Life Ins. Co., 42 Cal. App. 133 [183 Pac. 373]; Moore v. Giffen, 110 Cal. App. 659 [294 Pac. 730]; 12 Cal. Jur. 816, 818.) Plaintiff failed to meet that burden with evidence of any probative force. On the contrary the evidence shows the truth of the existence of the indebtedness to Minter. This is especially true in the light of the firmly established rule that fraud is never presumed, except under certain circumstances where fiduciary relations exist, rather the presumption is in favor of fair dealing. (Code of Civil Procedure, see. 1963(19); 12 Cal. Jur. 816, 818.)
The undisputed evidence in the record discloses that during the three or four years immediately preceding August 1, 1935, defendant A. Otis Birch became seriously involved financially and his obligations increased to such an extent that he was having great difficulty in meeting them; in fact, plaintiff had recovered two judgments against said defendant for rent which had accrued under the lease in question and plaintiff had been unable to enforce satisfaction of these judgments. Plaintiff does not seriously question the fact that Miss Minter was financially able to make the loans to defendant A. Otis Birch which formed the basis of the representations which plaintiff now asserts were untrue. There was no direct evidence offered to contradict the testimony of defendant A. Otis *806Birch and Miss Minter that the indebtedness claimed did actually exist, and there is no evidence from which an inference can be drawn that such indebtedness 'was fictitious or that the representations made by defendant A. Otis Birch to plaintiff in relation thereto were false.
Of course, if the evidence is insufficient to establish the fraud on the part of Mr. Birch, then Minter and Mrs. Birch necessarily are not liable. But assuming it is sufficient, there is a total lack of evidence to charge Minter and Mrs. Birch with Mr. Birch’s fraudulent representations. It is conceded in the majority opinion that neither Mrs. Birch nor Minter made any representations to plaintiff, fraudulent or otherwise. In regard to Mrs. Birch, there is no evidence that she had any knowledge that the indebtedness to Minter was fictitious or that any representations were made by her husband in connection therewith. The sole evidence in the record touching upon her connection with the transaction is that she knew nothing about Birch’s business transactions; and that she was anxious to have the transaction settled. Surely, that is not sufficient to support a judgment against her.
The basis stated in the majority opinion for holding Minter liable as a conspirator is that she must have known that the indebtedness between her and Birch was fictitious. She made no representations, had no knowledge of any being made, or of the settlement transaction between Birch and plaintiff. There is no showing of am/ plan, or scheme, or agreement between Birch, Minter and Mrs. Birch to engage in a conspiracy to defraud plaintiff. It is essential to establish a conspiracy that a common plan and design for concerted action be proved. There is no evidence of such an agreement.
For the foregoing reasons, I believe that the judgment should be reversed.
Shenk, J., and Curtis, J., concurred.
Appellants’ petition for a rehearing was denied April 2, 1942. Shenk, J., Curtis, J., and Carter, J., voted for a rehearing.