Fleetwood Corp. v. Mirich

• Decision Date: 14 May 1980
• Docket Number: No. 3-177A33,3-177A33
• Citation: 404 N.E.2d 38
• Parties: FLEETWOOD CORPORATION and Reginald E. Brown, Appellants (Defendants Below), v. Ernest MIRICH, Pasquale J. Amico, John G. Kolettis, Charles J. Yast and Eugene Leman, Appellees (Plaintiffs Below).
• Court: Indiana Appellate Court

Page 38

404 N.E.2d 38

FLEETWOOD CORPORATION and Reginald E. Brown, Appellants (Defendants Below), v. Ernest MIRICH, Pasquale J. Amico, John G. Kolettis, Charles J. Yast and Eugene Leman, Appellees (Plaintiffs Below).

No. 3-177A33.

Court of Appeals of Indiana, Third District.

May 14, 1980.

Terrance L. Smith, Anthony DeBonis, Jr., Murphy, McAtee, Murphy & Costanza, East Chicago, for appellants.

Nick Katich, Addison, Stoner, Stiles & Katich, Merrillville, for appellee Ernest Mirich.

James T. Walker, Merrillville, for appellees Pasquale J. Amico, John G. Kolettis and Charles J. Yast.

Robert F. Peters, Lucas, Clifford & Holcomb, Merrillville, for appellee Eugene Leman.

HOFFMAN, Judge.

This is an appeal from an action by plaintiffs-appellees Ernest Mirich, Pasquale Amico, John Kolettis, Charles Yast and Eugene Leman against defendants-appellants Reginald Brown and Fleetwood Corporation (Fleetwood) to recover damages for fraud. Plaintiffs charged that Brown falsely represented that all shareholders were required to sell their stock at $500 per share and further misled them as to the source of the funds used to purchase the shares. Plaintiffs also complained of Brown's failure to disclose an appraisal of the corporation's assets which would have reflected a higher value of the stock's worth. As a result of Brown's fraudulent conduct plaintiffs alleged that they were induced to sell their stock in Fleetwood at a price substantially below its fair market value. Liability on Fleetwood's part was predicated on the basis that it ratified Brown's actions and that he was acting within the scope of his authority as the corporation's agent.

Following a jury trial, judgment was rendered for the plaintiffs against both defendants. The central issue to be considered on appeal is whether there was sufficient evidence to support the elements of actionable fraud.

An examination of the evidence adduced at trial reveals that Fleetwood was organized in 1967 and among its initial investors were the plaintiff doctors. Its primary business activity was the operation of an extended health care clinic known as the Ross Care Center. From its inception Fleetwood was plagued by mismanagement and in 1969 its financial condition had so deteriorated that bankruptcy proceedings were contemplated. It was at this time that the Fleetwood Board of Directors hired Brown as administrator. ¹ Through his efforts the financial picture steadily improved and Fleetwood enjoyed outstanding profits during the 1970-71 and 1971-72 fiscal years. In 1970-71 the net retained earnings were $105,000 and by the end of the 1971-72 fiscal year those earnings had increased to $316,000. At no time prior to the challenged sales though were any dividends paid to the shareholders.

In 1971 plans were developed by Fleetwood to expand the Ross Care Center from 50 beds to 180 but in order to implement this project outside financing was needed. Consequently, Fleetwood applied for a loan through the First Federal Savings and Loan Bank in Chicago. As part of the loan application process Fleetwood was required to submit a current appraisal of its assets and Charles Dodson was engaged for this purpose. His first appraisal estimated the fair market value of the property at $560,000 but this was not high enough to secure the loan. So around the first part of November Dodson returned another appraisal re-evaluating the property at $778,500.

On November 16, 1971 Fleetwood held its annual shareholders' meeting. One of the resolutions which passed read as follows:

"RESOLVED, That the officers of the corporation are granted authority to sell the net fixed assets of the Fleetwood Corporation for a price that will yield to the shareholder an amount not less than $500.00 per share." (hereinafter referred to as the November resolution)

Around April 21-24, 1972 Brown met individually with each of the plaintiffs and told them that pursuant to the November resolution they were obligated to sell their stock at $500 per share. Brown testified that he worded his presentation so that the plaintiffs would get the impression that they had to sell. Brown told Mirich that he had obtained a loan from his brother in Florida while he told the others that he was acting on behalf of a Florida syndicate. In Leman's case Brown intimated that he too was selling his stock. Brown then executed purchase agreements with the plaintiffs. These agreements provided:

"PURCHASE AGREEMENT

"As outlined by the majority vote of the stockholders at the last annual meeting of the Fleetwood Corporation on November 16, 1971, the Board of Directors was authorized and directed to sell Fleetwood Corporation to any qualified buyer for a sum that would yield $500.00 per share of stock.

"In accordance with the above motion duly made and passed by a 2/3 majority I, the undersigned, do hereby declare myself a qualified buyer and herewith purchase all outstanding stock of the Fleetwood Corporation under the following terms and conditions:

1. Upon delivery of 50% of such outstanding shares, I shall assume complete control of all operations of the Fleetwood Corporation.

2. I accept the terms of the November 16, 1971 stockholders' resolution and hereby purchase all shares of stock of the Fleetwood Corporation, with immediate subsequent redemption of such acquired shares by the treasury of Fleetwood Corporation.

3. Each shareholder shall surrender his stock certificate to the secretary of Fleetwood Corporation, whereupon he will be issued a check for $500.00 per share.

4. As evidence of good faith, I deliver to each shareholder the sum of $100.00 herewith as a binder which is forfeited in the event I do not make the stipulated payment.

5. The above offer is in no way connected with nor dependent upon the contract now in existence with the current administrator of the Ross Care Center.

6. The surrender of shares and payment therefor shall be executed within thirty (30) calendar days from the date set forth below."

On May 10, 1972 the Fleetwood Board of Directors held a meeting and agreed to buy the purchase agreement options from Brown. It appears that Brown had written corporate checks payable to the plaintiffs for the balance of the purchase price prior to the Board's actions. Nevertheless, he insisted that he had executed the purchase agreements on behalf of himself only. There was also some testimony that Brown instructed Fleetwood's bookkeeper not to discuss the redemption with anyone. On October 1, 1972 Fleetwood qualified itself as a Subchapter S corporation and began distributing its retained earnings to the five remaining shareholders including Brown.

Having carefully reviewed the entire record it is apparent that the verdict of the jury cannot be disturbed. The evidence discloses a fraudulent course of conduct designed to redeem the plaintiffs' stock at less than fair market value so that Fleetwood could qualify as a Subchapter S corporation. The general purport of Subchapter S is to permit closely held corporations an elective treatment under which the corporation is not subject to tax on its income but instead the shareholders are subject to tax on that income whether distributed to them as a dividend or retained in the corporation. See generally, I.R.C. §§ 1371-1379. Thus, the Subchapter S rules eliminate double taxation of earnings. Under the code provision in effect during 1972 a Subchapter S corporation could have no more than ten shareholders. I.R.C. 1371. ² In the case at bar, by reducing the number of shareholders to ten or less the remaining shareholders could enjoy the favorable tax advantages of a Subchapter S election.

To sustain an action for fraud it must be proven that a material representation of a past or existing fact was made which was untrue and known to be untrue by the party making it or else recklessly made and that another party did in fact rely on the representation and was induced thereby to act to his detriment. Plumley v. Stanelle (1974), 160 Ind.App. 271, 311 N.E.2d 626; Physicians Mut. Ins. Co. v. Savage, Extr. (1973), 156 Ind.App. 283, 296 N.E.2d 165; Grissom v. Moran (1972), 154 Ind.App. 419, 290 N.E.2d 119. Moreover, the failure to disclose all material facts by one on whom the law imposes a duty to disclose constitutes actionable fraud. Grow v. Retired Teachers Comm. (1971), 149 Ind.App. 109, 271 N.E.2d 140.

Defendants submit there is a total lack of proof that Brown misrepresented the source of the funds used to purchase the plaintiffs' stock since the evidence demonstrates that he intended to buy the shares for himself and then redeem them. At trial Brown testified that his brother in Florida had arranged the financing for the purchase but that a condition of the deal was that all of the shareholders would agree to sell their stock. Insofar as some of the shareholders refused to sell, the financing was never secured. In order to recoup the earnest money that he had paid for the options, Brown contacted the Board of Directors for Fleetwood and proposed that the corporation acquire the options. This proposal was subsequently adopted by the Board.

However, there was substantial evidence of probative value to underpin a conflicting inference that Brown as a director, officer and managing administrator was acting on behalf of the corporation all along and that there never was any outside financing. In his deposition taken July 16, 1974, nearly two years before trial, Brown stated that he could not recall from whom he attempted to obtain financing or whether he had ever tried to secure a loan for the purchase. ³ During final argument his counsel sought to downplay the significance of the inconsistencies between his deposition and trial testimony by suggesting that Brown was only "playing games" with plaintiffs' counsel at the deposition. But the jury could believe that Brown was caught in a web of lies.

Brown told Mirich that he was the purchaser while he told the other plainti...