Jersild v. Aker

• Decision Date: 10 June 1991
• Docket Number: No. 90-C-292.,90-C-292.
• Citation: 766 F. Supp. 713
• Parties: Carl M. JERSILD and Marilyn J. Jersild, Plaintiffs, v. George E. AKER and John J. Kalfahs, Defendants.
• Court: U.S. District Court — Eastern District of Wisconsin

766 F. Supp. 713

Carl M. JERSILD and Marilyn J. Jersild, Plaintiffs, v. George E. AKER and John J. Kalfahs, Defendants.

No. 90-C-292.

United States District Court, E.D. Wisconsin.

June 10, 1991.

Ross & Stevens by Patience D. Roggensack, Madison, Wis., for plaintiffs.

Druck & Swartzberg by John G. Movroydis, Milwaukee, Wis., for defendants.

DECISION AND ORDER

MYRON L. GORDON, Senior District Judge.

On March 23, 1990, the plaintiffs, Carl M. Jersild and Marilyn J. Jersild, filed this tort action alleging securities fraud, statutory fraud, and common law fraud by the defendants, George E. Aker and John J. Kalfahs. Federal jurisdiction is based upon diversity of citizenship, see 28 U.S.C. § 1332(a)(1). The defendants have filed a motion for summary judgment. The plaintiffs oppose that motion and have filed a motion to strike certain affidavits filed by the defendants. The motions will be denied.

I.

The action stems from a single transaction involving the stock of Jersild Knitting Corporation ("the corporation"), a closelyheld corporation. Defendant George Aker was chairman of the board of directors of the corporation; defendant John Kalfahs was president and also a director of the corporation. At one time, these defendants (and their spouses) collectively owned 75 percent of the corporation's stock; in 1986, they sold 60 percent of the corporation to Mill Creek Ventures of Neenah, Inc. (Mill Creek Ventures), an investment group headed by Thomas J. Hoffmaster.

Up to that time, the corporation was essentially family-owned: defendant Kalfahs is the grandson of the founder of the corporation; defendant Aker's wife is the granddaughter of the founder. Plaintiff Carl Jersild is a cousin both of defendant Aker's wife and defendant Kalfahs. An employee of the corporation since 1960, Mr. Jersild had been vice president of sales for the corporation since 1984; his wife, Marilyn, also a plaintiff in this action, had also worked in retail sales for the corporation.

The corporation limped through the mid-1980's when its sales dropped and its losses mounted. When sales fell below projections in 1986, Mr. Aker found the corporation to be in need of "sufficient funds to be able to continue with its good operation." Aker Deposition at 44 hereafter "Aker Dep. at ____". In March 1987, Mr. Aker, ostensibly to gain at least a portion of the funds needed by the corporation, approached Mr. Jersild with the opportunity to purchase stock from the corporation. Mr. Jersild recounts that he was "flattered" with the invitation to become a stockholder. Carl Jersild Affidavit at 2 hereafter "C. Jersild Aff. at ____". It was this flattering invitation that seems to have given rise to the plaintiffs' action.

Mr. Jersild asserts that he then had little knowledge of the financial condition of the corporation, including its debt, despite the fact that he was then its vice president of sales. C. Jersild Aff. at 2-3. Notwithstanding his contention that he was never permitted access to detailed financial records of the corporation, Mr. Jersild, as a corporate officer, regularly attended board meetings where such matters were discussed. Carl Jersild Deposition at 36-37 hereafter "C. Jersild Dep. at ____". Nevertheless, the plaintiffs assert that defendants Aker and Kalfahs treated Mr. Jersild as an outsider and responded to his requests for financial information by telling him that the information was "privileged." C. Jersild Aff. at 4; see also Thomas Hoffmaster Deposition at 30-31 (Mr. Jersild "was not considered an insider") hereafter "Hoffmaster Dep. at ____".

However, Mr. Jersild, as a corporate officer, was certainly not without independent means of obtaining significant information about the financial health of the corporation. The evidence suggests that Mr. Jersild had at least some access to knowledge of the financial plight of the corporation. For example, his position as vice president of sales, at the very least, irresistibly exposed him to information regarding the decreasing volume of sales of the corporation. It is reasonable to believe that Mr. Jersild had first-hand knowledge of the status of what probably was the corporation's primary source of revenue. In short, as vice president of sales, Mr. Jersild had a unique perspective from which to assess an important facet of the corporation's financial health.

Nevertheless, Mr. Jersild was not privy to certain significant information regarding the financial condition and the future of the corporation. For example, in early 1987, pursuant to a stockholder agreement, Mill Creek Ventures, the majority stockholder, had made a $200,000 cash call on defendants Aker and Kalfahs; Mill Creek Ventures could have closed the corporation if defendants Aker and Kalfahs did not come up with that amount of cash. At that time, Mr. Kalfahs contributed $100,000. Mr. Aker disclosed that his plan was to "contribute" his personal shares, ten percent of the corporation, to the corporation for resale in order to enable the corporation to raise $100,000. Aker Dep. at 50-51. The plaintiffs suggest that Mr. Aker was relieved of having to meet the cash call by "giving" 150 shares of stock back to the corporation in February 1987.

The shares that Mr. Aker "gave" back to the corporation were those soon sold to the plaintiffs. In fact, there is no dispute that during this time Mr. Aker invited Mr. Jersild to purchase those 150 shares for $100,000; Mr. Aker also told Mr. Jersild that he could purchase half of those shares — five percent of the corporation — for $50,000. C. Jersild Dep. at 85-87; Aker Dep. at 51. Notably, there is no evidence suggesting that defendant Aker made any additional representations. Moreover, the plaintiffs failed to proffer any evidence demonstrating that defendant Kalfahs made any representations of that sort. Mr. Jersild candidly admitted that Mr. Kalfahs was merely a "bystander in the negotiations." C. Jersild Dep. at 86. The plaintiffs charge but one representation to defendant Kalfahs: that he answered "fine" when Mr. Jersild asked him how things were going with the corporation, prior to Mr. Jersild's decision to purchase the stock. C. Jersild Dep. at 54. However, Mr. Jersild conceded that he had not asked Mr. Kalfahs that question for the purpose of buying stock in the corporation. C. Jersild Dep. at 54.

Nevertheless, the plaintiffs have demonstrated that the corporation's certified public accountants had on February 27, 1987, issued an opinion, based upon preliminary balance sheets, showing the corporation then to have a net worth of $76,798.19. Plaintiffs' Exhibit. This is uncontroverted. In his deposition, Mr. Aker admitted that the corporation's accountants had valued the corporation at $76,798.19 at the end of 1986. Aker Dep. at 10. This information certainly would have interested the plaintiffs as they were considering whether to purchase the corporation's stock; without it, the plaintiffs were at a great disadvantage.

However, the evidence also demonstrates that Mr. Jersild consulted with these very accountants as he weighed the decision whether to accept Mr. Aker's invitation to purchase the corporation's stock — presumably for that very reason. Francis Simonis Deposition at 6-7; James E. Osborn Deposition at 4-5. Furthermore, the defendants have skillfully abstracted Mr. Jersild's deposition testimony to demonstrate his awareness of the financial ill health of the corporation during the relevant period of time. C. Jersild Dep. at 76; see also Marilyn Jersild Deposition at 11-12 (acknowledging that she was aware that the corporation was "having problems") hereafter "M. Jersild Dep. at ____. The defendants urge that the plaintiffs chose to ignore risks known to them and that Mr. Jersild conducted his own economic analysis of the corporation based on his own general knowledge as he decided whether to purchase the stock. See C. Jersild Dep. at 52-53 (attributing drop in sales to a down cycle in the market). The evidence also shows that the plaintiffs had several weeks to make their investment decision.

Furthermore, there is telling evidence to suggest that Mr. Jersild, perhaps like many investors who later become plaintiffs, was enthusiastic and optimistic — if overly so — about gaining a substantial ownership stake in the corporation. C. Jersild Dep. at 28. The defendants also suggest that the plaintiffs purchased the stock for other reasons than as a direct financial investment. For example, Mr. Jersild acknowledged that one of his motivations for purchasing stock in the corporation was to assure the board of directors of his loyalty and commitment. C. Jersild Dep. at 26-27. Mr. Hoffmaster, who headed Mill Creek Ventures, was not completely satisfied with Mr. Jersild's work performance (and had made that point clear to Mr. Jersild). Hoffmaster Dep. at 22, 66. Mr. Jersild was aware that Mr. Hoffmaster could have fired him and, further, that Mr. Hoffmaster would be pleased to learn that Mr. Jersild had made an investment in the corporation. C. Jersild Dep. at 174-76; M. Jersild Dep. at 10.

It is undisputed that on March 31, 1987, Mr. Jersild paid $100,000 for 150 shares of the corporation's stock, a ten percent holding. The corporation's sales continued to dwindle, and its debt mounted until September 1988, when Mill Creek Ventures closed the corporation. At that time, the plaintiffs lost their investment. The plaintiffs now assert that the stock they purchased was practically worthless when it was purchased and that the defendants perpetrated a fraud upon them.

II.

The plaintiffs assert three claims, each under Wisconsin law: a violation of civil liabilities provision of the Wisconsin Uniform Securities Law, Wis.Stat. § 551.59(1)(a) (prohibiting fraud in connection with the sale of securities as described in Wis.Stat. § 551.41); a violation of a statutory proscription of fraudulent representations, Wis.Stat. § 100.18 (prohibiting, among many other things,...