Clausing v. DeHart

• Decision Date: 01 November 1973
• Docket Number: No. 42435,42435
• Citation: 83 Wn.2d 70,515 P.2d 982
• Parties: H. P. CLAUSING and Glenn E. Deer, Cross-Appellants and Respondents, v. Richard L. DeHART et al., Cross-Respondents and Appellants. Jean Oldham a/k/a Jean Walters and John Doe Oldham, her husband, third-Party Defendants and Counter Defendants.
• Court: Washington Supreme Court

Page 70

83 Wn.2d 70

515 P.2d 982

H. P. CLAUSING and Glenn E. Deer, Cross-Appellants and Respondents, v. Richard L. DeHART et al., Cross-Respondents and Appellants Jean Oldham a/k/a Jean Walters and John Doe Oldham, her husband, third-Party Defendants and Counter Defendants.

No. 42435.

Supreme Court of Washington, En Banc.

Nov. 1, 1973.

Rehearing Denied Jan. 8, 1974.

Davis, Wright, Todd, Riese & Jones, Richard A. Derham, Seattle, for cross-appellants and respondents.

Casey & Pruzan, Martin A. Godsil, Seattle, for cross-respondents and appellants.

UTTER, Associate Justice.

Richard L. DeHart and his wife appeal from a judgment in favor of Dr. H. P. Clausing and Dr. Glenn E. Deer. This judgment forfeits the sale of all the stock in a nursing home and returns possession of the home to the sellers, Clausing and Deer.

The two basic issues presented on appeal are whether a counterclaim for rescission and damages based on the Securities Act of Washington (hereinafter Securities Act) should have been granted and whether the forfeiture of the contract of sale should have been granted.

Clausing and Deer contracted for the sale of stock in Nursing Home Building Corporation, identified hereinafter as Arden, for $700,000. The sellers received $80,000 down with subsequent payments due under the contract as installments. All required installment payments were submitted late and accepted through March 1971, but no subsequent payments have been made. After a trial to the court, the court found that the sellers were entitled to forfeit the contract of sale and to retake possession of the nursing home upon discharge of the receiver and attorney's fees. The court allowed the purchasers a 90-day period of time within which to pay an amount of $316,000 to reinstate the contract and dismissed the purchasers' counterclaim based on the Securities Act.

Purchasers contend that the Securities Act provides them a remedy for misrepresentation. They argue that the act applies because the transfer, under an installment contract, of all the outstanding stock in Arden is a sale of securities under the act as a matter of law. This argument is premised upon RCW 21.20.010 which makes it

unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly:

* * *

* * *

(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading;

* * *

* * *

The trial court found that the action of the purchasers was essentially one to forfeit a contract for sale of a nursing home and that the parties used the transfer of stock as a means to accomplish this. It concluded, therefore, that the Securities Act did not apply.

We do not agree. The Securities Act of Washington, RCW 21.20, is patterned after and restates in substantial part the language of the federal Securities Exchange Act of 1934. In Matheson v. Armbrust, 284 F.2d 670 (9th Cir. 1960), the court had occasion to rule on the breadth of application of the federal act. There, at page 674, it was contended that section 10(b) of the federal act was not applicable 'with regard to 'face-to-face' negotiations outside the organized security market between private individuals as owner and purchaser in an isolated transaction for the sale of the entire capital stock of a corporation.' However, the court held that section 10, the anti-fraud section of the act, does apply to 'security transactions outside the established securities-transfer business.' Matheson v. Armbrust, Supra at 674.

In Fratt v. Robinson, 203 F.2d 627, 631 (9th Cir. 1953), the court held that section 10 of the federal act applies to transactions in stock having no relationship to security exchanges or over-the-counter businesses, reasoning that section 10 'was enacted in order that those who desire to promote crooked deals would see little advantage in using devious methods to by-pass the security-dealing business houses under regulation.'

We agree with the analysis of Matheson and Fratt, and by a parity of reasoning we hold that RCW 21.20.010 is applicable to 'face-to-face' negotiations outside the security markets between private individuals for the sale of the capital stock of a corporation. This section, therefore, is applicable to this case. Schine v. Schine, 250 F.Supp. 822 (S.D.N.Y.1966); Bowman & Bourdon, Inc. v. Rohr, 296 F.Supp. 847 (D.Mass.1969); Shermer v. Baker, 2 Wash.App. 845, 472 P.2d 589 (1970); 17 C.F.R. 240.10b--5. ¹

There is still, however, a requirement that there be an untrue statement of a material fact. We have defined a material fact as 'a fact to which a reasonable man would attach importance in determining his choice of action in the transaction in question.' Shermer v. Baker, Supra at 855, 472 P.2d at 595. The trial court failed to find any such conduct. Its findings explicitly state that '(t)here is no evidence that plaintiffs or their agents made any false statements or misrepresentations to defendants DeHart or their agents . . .' Finding of fact No. 3. As stated in finding of fact No. 18: 'There has been no breach of warranties of the contract of sale by plaintiffs which would entitle defendants DeHart to rescission of the contract.' These findings establish as a matter of fact that the breach of a warranty was not material.

Purchasers, however, urge the inclusion of the factual representation that the home was operated in accordance with all government rules and regulations as a warranty, makes any misstatement material, by the very language of the contract and must, therefore, be held to be strictly true. Miller v. Commercial Union Assurance Co., 69 Wash. 529, 125 P. 782 (1912). The contract provided that:

6(1) Representations and Warranties of Sellers. Each of the Sellers, jointly and severally, covenant and warrant as follows:

* * *

* * *

(b) The statements of fact contained in this Purchase and Sale Agreement . . . relating, however, remotely, to this Purchase and Sale are true and correct, and Sellers acknowledge that Buyers relied upon each statement and were induced to purchase in reliance thereon.

* * *

* * *

(k) . . . All facilities and operations of the Company are constructed, operated and maintained in accordance with all applicable government rules and regulations, zoning, health, and licensing requirements. . . .

Testimony at trial established that a requirement of the federal Social Security Administration relating to nursing homes (20 C.F.R. 405.1134(b)) required an emergency electrical service which was not installed at the time of the purchase and sale. The trial court recognized this deficiency and awarded the purchasers a credit of $6,500 as damages for its omission if the purchasers were able to reinstate the contract on payment of $316,000.

The record reveals that although the emergency equipment was not installed, the nursing home was certified by both the State of Washington and the federal government at the time of sale to appellants and that there was no state regulation relating to emergency electrical power systems. The state nursing inspector testified that neither state not federal certification of the home had ever been jeopardized. A waiver could have been requested from the federal government concerning the emergency lighting system. The purchasers were experienced in the operation of nursing homes in the state of Washington and familiar with the requirements of the government for certification. They physically inspected the home on several occasions prior to the sale, and whether or not adequate emergency power was available was apparent. The proposed expansion plans of the nursing home before purchase showed a proposed auxiliary electrical plant. The nursing home was operated at the time of sale with valid licenses from both federal and state governments. Taken together, the documentary and testimonial evidence admitted into the record, when viewed in a light most favorable to sellers, was adequate to support the trial court's findings regarding the impact of the breach on the purchasers.

While there is testimony which would support a contrary finding, there is also testimony from which the trial court could have concluded that there was no misrepresentation of a material fact. The trial court was not required to affirmatively state that it failed to find such a misrepresentation. Negative findings of fact are not required. Miller v. Geranios, 54 Wash.2d 917, 338 P.2d 763 (1959).

The question whether a warranty is made material by the language of the contract has arisen most frequently in insurance cases. There the tendency of most courts has been to hold any statements to be representations only, regardless of the terminology employed. This has been true where the insured agrees that a statement shall constitute the basis of the insuring agreement, even where he warrants that the statements are true, full, and complete, and offered to the insurer as a basis of contract. This result has also been reached where the insured declares and warrants his answers to be true, or where the policy declares all statements to be warranties, and provides for avoidance in the event of their falsity. 12 J. Appleman, Insurance Law and Practice § 7345 (1943).

We believe this is a reasonable rule to adopt. The provisions of the Securities Act are extremely broad-reaching. Where the equitable powers of the court are sought, as in rescission, this court will be more converned with the actual impact of any statements of omissions on the parties than with formal recitals of their effect. Equity regards substance rather than form. Young v. Higbee Co., 324 U.S. 204, 65 S.Ct. 594, 89 L.Ed. 890 (1945). The trial court properly looked to the actual effect of the omission rather than the formal declaration.

The other primary issue urged by the purchasers is that the court's...