General Elec. Credit Corp. v. M. D. Aircraft Sales, Inc.

• Decision Date: 18 May 1978
• Docket Number: 12107,Nos. 11851,s. 11851
• Citation: 266 N.W.2d 548
• Parties: GENERAL ELECTRIC CREDIT CORPORATION, a Division of the General Electric Company, Plaintiff in # 11851, v. M. D. AIRCRAFT SALES, INC., Defendant and Cross-Claimant in # 11851, and Plaintiff and Respondent in # 12107. and Frederick G. MAHONEY, Defendant, Cross-Claimant and Respondent in # 11851, v. David PETERS, Defendant, Cross-Claim Defendant, and Appellant in # 11851, and Defendant and Appellant in # 12107.
• Court: South Dakota Supreme Court

Page 548

266 N.W.2d 548

GENERAL ELECTRIC CREDIT CORPORATION, a Division of the

General Electric Company, Plaintiff in # 11851, v. M. D. AIRCRAFT SALES, INC., Defendant and Cross-Claimant in

# 11851, and Plaintiff and Respondent in # 12107.

and

Frederick G. MAHONEY, Defendant, Cross-Claimant and Respondent in # 11851, v. David PETERS, Defendant, Cross-Claim Defendant, and Appellant in # 11851, and Defendant and Appellant

in # 12107.

Nos. 11851, 12107.

Supreme Court of South Dakota.

Argued Jan. 9, 1978.

Decided May 18, 1978.

Gale Fisher, of May, Johnson & Burke, Sioux Falls, for respondents.

Patrick J. Kane, of Kean, Kane & Ulrich, Sioux Falls, for appellant.

HALL, Circuit Judge.

These consolidated appeals, # 11851 and # 12107, began as an action in attachment (# 11851) under SDCL 21-17 by General Electric Credit Corporation (hereafter G.E.C.C.) against M.D. Aircraft Sales (hereafter M.D.), a Pennsylvania corporation, and David Peters, an Ohio resident, the transferee of an aircraft from M.D. Frederick Mahoney, president of M.D., was stipulated and ordered as a party after commencement of the action.

In January, 1974, G.E.C.C. financed the purchase of several aircraft for M.D., including a Bellanca Super Viking, under a floor plan agreement, with G.E.C.C. taking a security interest in the inventory of M.D.

Appellant Peters, a barber, owned a Cherokee airplane but wanted to purchase a Super Viking. In March, 1974, Peters negotiated with Mahoney for a trade of the Cherokee for the Bellanca Super Viking, with a $23,000 credit for the Cherokee plus $20,500 cash. The Cherokee and cashier's checks for the balance were delivered, and Peters received the Bellanca and a bill of sale from M.D. warranting title, signed by Mahoney as president. The facts after the March, 1974, sale are in dispute but the trial court's findings show that on September 9, 1974, Mahoney and Peters entered into a written agreement for Mahoney to buy the Bellanca back from Peters, with Peters to transfer the Bellanca in exchange for 25% of the stock ownership in M.D. This agreement was drawn in longhand by a Pennsylvania attorney, who testified that he explained the agreement carefully to both parties before they signed it. Later the same agreement was typed and signed again. Throughout the legal proceedings there was a question as to whether Mahoney and M.D. concealed the original sale of the Bellanca to Peters from G.E.C.C., whose security interest was still in effect. There was a further question about what information was given by Mahoney or M.D. to Peters on which he could make his decision to accept the M.D. stock in exchange for the Bellanca. On this issue, the trial court found that no material misrepresentations or suppressions of facts were made by either party sufficient to show fraud or deceit, and further found that there was no reliance by Peters on any representations or statements of M.D. However, the court's findings do not include the facts behind these generalizations, nor the relative bargaining positions and intelligence of the parties.

Soon after this stock transfer, G.E.C.C. foreclosed on M.D., at which time G.E.C.C. discovered that M.D. never forwarded to G.E.C.C. the proceeds from the original sale of the Bellanca to Peters. Since G.E.C.C. still maintained a security interest in the Bellanca in question, it brought the first action in attachment. In that case, the court found the terms of the agreement of September 9, 1974 valid and binding on the parties; that M.D. was indebted to G.E.C.C. in the amount of $38,667.25 plus $3,318.35 in interest (which is not appealed from); and that Mahoney was the lawful owner of the Bellanca and entitled to immediate possession.

As to Peters' defenses, the trial court concluded that there was no clear and convincing proof of fraud by M.D. Mahoney, or Peters. In appeal # 11851, the trial court did not determine the rights and obligations of Mahoney and Peters in the September 9, 1974 agreement.

The decision in the attachment action necessitated that M.D. bring a second suit against Peters, (# 12107) as a claim and delivery action. Relying on the September 9, 1974 agreement, M.D. sought immediate possession and delivery of the Bellanca. In its complaint, M.D. alleged that the stock was transferred to Peters pursuant to the agreement but that Peters wrongfully failed and refused to deliver the aircraft, and detained it from M.D. In his Answer, Peters admitted signing the agreement but denied that the stock certificates had been passed, as required by the terms of the agreement. As affirmative defenses Peters incorporated by reference all of the defenses in his Answer in the first case, which included the 1933 Securities Act (15 U.S.C.A. § 77l) and the South Dakota Securities Act (SDCL 47-31-128 to 47-31-133). The trial court upheld the validity of the September 9, 1974 agreement and held that M.D. was the owner of the airplane and entitled to possession. No findings or conclusions were made on any of Peters' defenses, or on his rights of recovery against M.D. or Mahoney for the value of the plane or value of the stock.

These appeals present three issues for consideration:

1. Did the trial court use the proper standard of proof under South Dakota law when deciding the factual issue of fraud or deceit?

2. Did the trial court use the proper elements under the 1933 Securities Act in ruling on Peters' affirmative defense of a violation of the Act by Mahoney, individually, and as president of M.D.?

3. Was Peters entitled to rescission under 15 U.S.C.A. 77l of the September 9, 1974 agreement, based on omissions of material facts?

ISSUE NO. 1

As the findings and conclusions in # 11851 indicate, the trial court found no clear and convincing proof of fraud by M.D., Mahoney, or Peters. Thus, the trial court apparently used the "clear and convincing" standard of proof in judging the fraud defense.

We do not believe this is the proper standard to evaluate a claim of fraud. When the trial court entered its judgment, it did not have this court's latest expression on the standard of proof in fraud cases: Aschoff v. Mobil Oil Corp., # 11887 and # 11894, opinion filed by this court on December 30, 1977, S.D., 261 N.W.2d 120. In Commercial Credit Equipment Corp. v. Johnson, 87 S.D. 411, 416, 209 N.W.2d 548, 551 (1973), we said that "(f)raud must be proved by a preponderance of the evidence, but that evidence must be clear, satisfactory and convincing." In Aschoff, supra, we distinguished "a preponderance" from "clear, satisfactory and convincing," and held that the standard of proof in a case of fraud is a preponderance, without the additional requirement "clear, satisfactory and convincing". Since the trial court applied an inaccurate standard of proof to the fraud issue, that issue is reversed and remanded for findings based on the preponderance test.

ISSUE NO. 2

Whether the trial court used the proper elements when ruling on Peters' affirmative defenses under the 1933 Securities Act relates specifically to three of the court's findings: (1) that there was no material misrepresentation of facts or suppression of facts sufficient to show fraud or deceit; (2) that there was no reliance by Peters on any representations or statements by M.D.; and (3) that there was no utilization of the instrumentalities of interstate commerce.

The 1933 Securities Act sections on which Peters relied as an affirmative defense are 15 U.S.C.A. § 77l and 77q. Section 77q provides in part:

"(a) It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly

(1) to employ any device, scheme, or artifice to defraud, or

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. . . ." 15 U.S.C.A. at 172. (emphasis added)

Section 77l should be read with § 77q:

"Any person who (2) offers or sells a security . . ., by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission,

shall be liable to the person purchasing such security from him,...