"This case has now been submitted for decision on the motion for preliminary injunction filed by the plaintiff, T. Morris Hackney ('Hackney'), against James F. Banton ('Banton') and also on the motion for partial summary judgment filed by Hackney against Banton and Jane J. Long ('Long').
"The claims asserted by Hackney in this case are the result of his purchase from Banton and Long of all of the outstanding shares of capital stock of Banton, Inc., which in turn owned all of the outstanding stock of its subsidiary, Banton Industries, Inc. For purposes of this order, the two corporations will hereinafter be referred to as Banton, Inc.
"In his complaint, Hackney says that he was induced to agree to buy the shares of stock of Banton, Inc., and that he did buy such shares in reliance on the materially false representations made to him by Banton and Long with respect to the financial condition of Banton, Inc., and the results of its operations. Hackney alleges in his complaint that he paid to Banton and Long the sum of $1,100,000.00 in cash and also executed guarantees of approximately $5,000,000.00 of Banton's debt in connection with such purchase.
"Hackney also alleged that Banton was aided and abetted by Long in suppressing or concealing from Hackney material facts relating to the financial condition of Banton, Inc., and its operations. Hackney seeks a preliminary injunction and ultimately
a permanent injunction imposing a constructive trust on the monies paid to Banton by Hackney and on the investments made and assets purchased with such monies.
"In a separate count, Hackney has also charged Banton and Long with violations of the Alabama Blue Sky Laws (§ 8-16-17, et seq., Alabama Code 1975). In this count, Hackney has alleged that in connection with the offer and sale of shares of the capital stock of Banton, Inc., Banton and Long made untrue statements of material fact and omitted to state material facts necessary to be made in order that the statements that they did make, in light of the circumstances under which they were made, would not be misleading.
"Hackney has also asserted claims against Ledbetter, Cork & Bethune, a partnership; and the partners, Alan T. Ledbetter, David R. Cork and James T. Bethune, Jr. As the basis for his claim against the accountants, Hackney has alleged that they audited the July 31, 1987, financial statement of Banton, Inc., and prepared and signed the opinion letter regarding their audit. Hackney says the accountants were negligent in failing to correct misstatements of material facts and omissions of material facts in the financial statement dated July 31, 1987, of Banton, Inc., and thereby proximately caused Hackney's damages.
"The merits of Hackney's claims against the accountants will not be considered in this opinion.
"Banton, Inc., is a manufacturing concern in the business of manufacturing for sale an engine-driven machine used by gardeners primarily for tilling the soil. Banton was the owner of 100 shares and Long was the owner of 3 shares of the outstanding stock of Banton, Inc.
"In October, 1987, Banton engaged Sam Sumner, a business broker, to sell the business of Banton, Inc. Sumner contacted Hackney, who became interested in purchasing the business. Banton provided Hackney initially with a copy of the audited financial statement of Banton, Inc., for the fiscal year ended July 31, 1987. The certification to this statement by the accountant was dated September 12, 1987. This statement showed current assets as follows:
1987 1986
Cash $ 17,150.00 $ 80,915.00
Accounts Receivable Less
Allowance for Doubtful
Accounts of $25,000.00 in 1987
2,823,138.00 1,228,344.00
Inventories 1,525,574.00 982,705.00
Prepaid Expenses 21,938.00 16,132.00
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TOTAL CURRENT
ASSETS $4,387,800.00 $2,308,096.00
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"Note 1 to the financial statement included a statement that inventories were valued at the lower of cost or market.
"Note 2 to the financial statement provided an itemized breakdown of the inventory as follows:
1987 1986
Finished Goods, Engines and Items Purchased for $1,150,508.00 $673,732.00
Work in Process 218,995.00 226,861.00
Raw Materials 156,071.00 82,112.00
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$1,525,574.00 $ 982,705.00
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"The gross sales for the fiscal year ended July 31, 1987, as reflected by the audited financial statement, were $3,069,417.00. After deducting $1,490,304.00 as the cost of sales, the net amount realized from sales was shown as $4,579,113.00.
"Income from operations for the year was shown as $470,552.00. After provision for income tax and the write-off of its investment in its affiliates, net income was indicated in the amount of $250,361.00.
"Hackney was later shown unaudited financial statements for the quarter ending October 31, 1987, and also an unaudited balance sheet as of December 31, 1987. Banton knew that Hackney was relying on both the audited and unaudited financial statements in making the decision whether to purchase the business from Banton.
"The October 31, 1987, unaudited balance sheet reflected shareholders' equity in the amount of $872,260.00. The December 31, 1987, balance sheet showed shareholders' equity in the amount of $929,487.00.
"The October 31, 1987, quarterly unaudited profit and loss statement showed sales for the fiscal year to date (August 1, 1987, to October 31, 1987) in the amount of $885,652.91 and net income after taxes in the amount of $98,614.26, an increase in sales of approximately $153,000.00 over sales for the same period of the preceding year and an increase in net profits of approximately $14,000.00 over the same period of the preceding year.
"On December 18, 1987, Hackney met with Banton and Long to discuss the purchase of Banton, Inc. They reached an oral agreement, later confirmed by a letter from Hackney, that the purchase price would be the 'Net Asset Value (Equity on Book Value) as determined by an opinion audit as of the closing date.'
"Hackney proposed to pay $550,000.00 on the closing of the sale and to execute a promissory note for the remainder of the purchase price. He stated in his letter that 'estimating $1,000,000.00 net asset value at closing, this note would be $450,000.00.'
"Hackney also proposed to pay Banton $750,000.00 at the rate of $150,000.00 a year for five years in consideration of Banton entering into a no compete-consulting agreement. Hackney also proposed to pay Long a total of $22,500.00, payable in annual installments of $4,500.00 each for a period of five years.
"In reply, Banton proposed that the promissory note and the no compete-consulting agreement be structured so that the same could be sold to a bank without recourse to him. In addition, Banton asked that all personal guarantees by him and his wife be removed at closing. Banton testified during the trial that he needed $1,000,000.00 in cash at the time in order to participate with other persons in an attempt to acquire control of a publicly traded corporation.
"The written agreement providing for the sale of the capital stock of Banton, Inc., by Banton and Long to Hackney was signed on January 19, 1988. In it, Banton and Long specifically represented and warranted, among other things, that:
" '(a) The October 31, 1987, financial statements and the 1987 audited financial statement for the fiscal year ended July 31, 1987, were "true and correct" in every material respect, and that they were prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied;
" '(b) There were "no material liabilities or obligations of any nature" not reserved against;
" '(c) The company's accounts receivable were "collectible in full less the reserve for bad debts shown thereon";
" '(d) The company had no disclosed contractual liabilities for goods furnished prior to January 31, 1987; and
" '(e) That the company's accounts receivable as of January 31, 1988, were collectible in full (less reserve shown for bad debts).'
"The agreement specifically provided that the warranties and representations stated above survived the closing for a period of six months (paragraph 15(a)(ii)). Under the written agreement, Hackney agreed to pay $550,000.00 in cash; to provide $150,000.00 to Banton, Inc., so that it could pay a note issued by it to Banton; and Hackney also agreed to personally guarantee the debts of Banton, Inc., to its lenders and to cause Banton, Inc., to execute employment agreements with Banton and Long.
"The sale was closed on February 2, 1988. At the closing, Banton received $683,980.59 and Long received $16,019.41. On February 10, 1988, Banton went to AmSouth Bank and, on the strength of Hackney's personal guarantee, borrowed $400,000.00. Banton represented to...
