Gross v. Appelgren

• Citation: 467 P.2d 789,171 Colo. 7
• Decision Date: 19 January 1970
• Docket Number: No. 22462,22462
• Parties: Leslie A. GROSS, Plaintiff in Error, v. Waldemar S. APPELGREN, et ux., et al., and Metropolitan Industrial Bank, aColorado corporation, the Tappan Co., S. J. Culbertson, and Isaac H. Kaiser, Defendants in Error.
• Court: Supreme Court of Colorado

Page 789

467 P.2d 789

171 Colo. 7

Leslie A. GROSS, Plaintiff in Error, v. Waldemar S. APPELGREN, et ux., et al., and Metropolitan

Industrial Bank, aColorado corporation, the Tappan

Co., S. J. Culbertson, and Isaac H.

Kaiser, Defendants in Error.

No. 22462.

Supreme Court of Colorado, En Banc.

Jan. 19, 1970.

Rehearing Denied May 4, 1970.

Michael B. Lavinsky, Denver, for plaintiff in error.

B. F. Napheys III, Denver, for defendants in error, Waldemar S. Appelgren et ux., et al.

Ben Klein, Denver, for defendant in error, Metropolitan Industrial Bank.

Gorsuch, Kirgis, Campbell, Walker & Grover, Leonard M. Campbell, John J. Mullins, Jr., Denver, for defendants in error, Tappan Co. and S. J. Culbertson.

Water L. Gerash, Joseph Saint-Veltri, Denver, for defendant in error, Isaac H. Kaiser.

KELLEY, Justice.

This lawsuit, which was instituted by forty-eight plaintiffs to rescind twenty-four contracts for the purchase of kitchen equipment and to cancel and return the purchase money notes and mortgages, is here on a writ of error to review a judgment in the amount of $42,055.09 awarded by the court, without the intervention of a jury. The judgment in favor of the plaintiffs provided for rescission and several money judgments against Leslie A. Gross, Manufacturers' Advertising Agency, Inc. (MAA), Rex Touzalin and Herb Carmel, defendants, and money judgments for corresponding amounts against the plaintiffs and in favor of the defendant Metropolitan Industrial Bank (the Bank). The purpose of the money judgments was to effect the rescission. Consequently, the money judgments against Gross were in the identical amounts as the money judgments in favor of the Bank. The court permitted the Bank to recover on the theory that it was a holder in due course, but enjoined the Bank from foreclosing on the real estate mortgages securing the notes because of the fraud of Gross, MAA and its salesmen. Gross is the sole plaintiff in error and seeks reversal of the judgments against him. Plaintiffs, by cross-error, seek reversal of the Bank's judgments against them.

Gross and I. H. Kaiser, law partners, organized and owned MAA and transacted the business through it out of which the litigation arose. Both Kaiser and MAA were defendants in the action, Gross owning two-thirds and Kaiser one-third of the corporate defendant; Gross was president and a director, and Kaiser was secretary-treasurer and a director. At the time this lawsuit was instituted, MAA was insolvent. The complaint named fourteen defendants. Other defendants will be mentioned only to the extent necessary to furnish sufficient background for an understanding of the facts, issues and basis for the trial court's disposition of the case.

The forty-eight plaintiffs were twenty-four married couples who had purchased Tappan electronic ranges and Tappan 'Fabulous 400' electric ovens from MAA under substantially identical circumstances. One of the plaintiffs is now deceased. Decedent and his wife both signed the documents in issue and owned their home in joint tenancy. Their rights and liabilities in the property, the transactions and the judgment herein were joint and several.

Although there was conflict in the evidence on some issues, in general the issues decided here are based upon the facts as found by the trial court or facts admitted by the party adversely affected by the judgment of this court. It should be noted that there is substantial evidence to support the findings of fact.

We disagree with the conclusion of law by the trial court that the Bank was a holder in due course. It was this conclusion which resulted in the court awarding the offsetting judgments.

Gross assigned five errors by the trial court in support of his argument for a reversal of the judgment. One relates to the insufficiency of the evidence to support a finding of fraud. The record amply supports the trial court on this point.

The second assignment is that the plaintiffs, by making from one to four payments on their notes, ratified the transactions. The payments were made to the Bank under threat of foreclosure of the mortgages on their homes. Under the circumstances and in view of the trial court's finding that the payments did not constitute ratification, the plaintiffs were not precluded from thereafter rescinding the transactions. Holland Furnace Co. v. Robson, 157 Colo. 347, 402 P.2d 628; Bankers Trust Co. v. International Trust Co., 108 Colo. 15, 113 P.2d 656.

Third, Gross objected to the admission of certain evidence for want of sufficient foundation. An examination or the record fails to disclose such error.

As a fourth ground for reversal, Gross claims that 'the judgment and order of rescission do violence to basic principles of logic, reason and fairness.' As to this argument our answer will have to be gathered from the context of the opinion.

Because of the disposition we make of the case, our primary concern is with the issue raised by Gross (in his fifth assignment of error) and by the plaintiffs as to the correctness of the trial court's holding that the Bank was a Holder in due course, as contemplated by C.R.S. 1963, 95--1--52.

To be a holder in due course the instrument must have been taken without notice of any infirmity in the instrument or defect in the title of MAA. Under the Negotiable Instrument Law the title of an instrument is defective when it or the signature thereto is obtained by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when the holder negotiates it in breach of faith, or under such circumstances as amount to a fraud. C.R.S. 1963, 95--1--55. To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating it, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, Or knowledge of such facts that his action in taking the instrument amounted to bad faith. C.R.S. 1963, 91--1--56.

A review of the evidence will show that under the law the Bank is not a holder in due course.

MAA was incorporated on January 14, 1963, to purchase the assets and business of Regal Management. Regal was engaged in the retail sale of Nu-Tone intercommunication equipment for homes on the Referral plan to selected prospects. All but $50 of the $6500 Regal purchase price was furnished by the Bank.

On February 13, 1963, MAA agreed in writing to sell to the Bank the secured notes arising out of MAA's sales of equipment to its customers. The Bank required the notes to be secured by real estate mortgages. Consequently, prospects for the sale of MAA's equipment were developed solely from lists of homeowners.

In March 1963, MAA arranged to buy Tappan electronic and conventional ranges for resale by means of the Referral plan. Both the Tappan Company and its Colorado sales representative were defendants, but the trial court dismissed the claims against both defendants. At the instance and for the protection of Tappan, MAA gave John P. McGuire and Company a security interest, to the extent of the purchase price, in all Tappan equipment while stored in MAA's warehouse. MAA's financial condition was such that it could not pay the purchase price to Tappan until it received the proceeds of the purchasers' notes from the Bank. Tappan demanded security for this interim or 'float period.' To secure Tappan during the 'float period' the Bank guaranteed MAA's obligation.

When the notes were transferred by MAA to the Bank it paid MAA the amount of each note less an amount representing 'add on' interest at 8% Per annum for four years, which was called 'time differential.'

It is also undisputed that Gross and Kaiser were attorneys for the Bank prior to the organization of MAA and during its existence; that a Mr. Lederman, the chief executive officer of the Bank, had general knowledge of the sales method employed by MAA; that the Bank dealt exclusively with MAA in connection with the acquisition of the notes, having no contact of any type with the makers (plaintiffs) prior to the endorsement of the notes by MAA to the Bank.

All transactions between Manufacturers and the plaintiff couples were consummated from June through September 1963. Manufacturers' employees developed prospective customers from lists of homeowners and those who had satisfactory credit ratings. Prospects were invited to Manufacturers' sales offices for a demonstration of the Tappan 'Fabulous 400' range and Tappan Electronic range. Immediately following the demonstration the prospects, by couples, were taken to a separate sales or 'pitch room' where a sales representative made the presentation embodying the fraudulent representations which formed the basis for the rescission of the purchase contracts by the trial court.

After witnessing the demonstration and being subjected to the sales Pitch, the plaintiffs signed a commission agreement, a modernization note and mortgage, a purchase order, a credit application, and, after installation, a completion certificate which they thought was a receipt for the equipment. Each couple was then given three Five Hundred Dollar Certificates.

The Modernization Note and Mortgage signed by each couple contained the following clause:

'As security for the payment of the above Note, the Makers hereby mortgage unto the Payee, successors and assigns, the following described real property known and numbered as _ _ in the City of _ _, County of _ _ and State of Colorado, and warrant the title to the same, subject to any existing encumbrances now of record: _ _'

The blanks were not filled in at the time of execution of the instrument. Those who at first refused to sign because it appeared to be a mortgage on their homes were assured that such was not the case; that the serial numbers on the cooking equipment would be used in the space provided for the description of 'real property' after its installation in their homes. Others testified that the salesman hurried them...