Kaas v. Privette

• Decision Date: 25 November 1974
• Docket Number: No. 2200--I
• Citation: Kaas v. Privette, 529 P.2d 23, 12 Wn.App. 142 (Wash. App. 1974)
• Parties: , Blue Sky L. Rep. P 71,180, 80 A.L.R.3d 1 Marvin R. KAAS, Respondent, v. R. L. PRIVETTE and Jane Doe Privette, his wife, Defendants, and Robert W. Privette et al., Appellants.
• Court: Washington Court of Appeals

Page 142

12 Wn.App. 142

529 P.2d 23, Blue Sky L. Rep. P 71,180,

80 A.L.R.3d 1

Marvin R. KAAS, Respondent, v. R. L. PRIVETTE and Jane Doe Privette, his wife, Defendants and Robert W. Privette et al., Appellants.

No. 2200--I.

Court of Appeals of Washington, Division 1.

Nov. 25, 1974.

James R. Young, Redmond, for Robert W. Privette.

Koenigsberg, Brown, Sinsheimer, Stone & Meltzer, Seattle, for Haws.

David A. Best, Belleveu, for Kaas.

Joseph S. Kane, Seattle, for Robert L. Privette.

CALLOW, Judge.

The plaintiff, Marvin Kaas, sued to rescind a purchase of corporate stock and recover the purchase price which had been paid. Suit was brought against the owner-seller of the stock, R. L. Privette; the party holding a security interest therein, R. W. Privette; and the remaining stockholder, Farrel L. Haws. The trial court entered findings, conclusions and a judgment in favor of the plaintiff which dismissed the seller-owner but awarded judgment against the secured party and the remaining stockholder for $10,000 plus interest and costs. The judgment further removed all claims of the plaintiff to the stock, cancelled the $10,000 promissory note given by the plaintiff-purchaser to the defendant-secured party for the balance of the purchase price and made an award on a counterclaim.

The issues raised concern the duty of disclosure of material facts by a stockholder, by a party holding a security interest in the stcok sold and by a remaining stockholder to a prospective purchaser.

R. W. Privette was the owner and operator as sole proprietor of a Ford agency in Redmond, Washington, from 1954 to 1965. During this period, R. W. Privette operated under an associate dealership agreement with Ford Motor Company and Hall's Motors, Inc., a Ford dealership located in Kirkland, Washington. The associate dealership agreement enabled R. W. Privette to hold himself out as a Ford dealership but limited him to the purchase of inventory and parts and to warranty adjustments from the parent dealership, Hall's Motors, Inc.

In 1965, the business was incorporated under the name of Bob Privette Motors, Inc., with authorized capital of 500 shares of common stock having a designated par value of $100 per share. At the time of incorporation, 450 shares of stock were issued: 399 shares to R. W. Privette, 50 shares to R. L. Privette, the son of R. W. Privette, and 1 share to a third person. In exchange for the stock, all assets of the proprietorship were transferred to the corporation except the associate dealership agreement involving R. W. Privette, Hall's Motors, Inc., and the Ford Motor Company. R. W. Privette intentionally retained all interest in the associate dealership personally. Before 1969, the stock ownership in Bob Privette Motors, Inc., changed hands by sale and transfer so that by January 1969, the stockholders were R. L. Privette, who held 225 shares which was pledged to R. W. Privette, his father, as security for payment of the purchase price, and Haws, who held the remaining 225 shares. Both stockholders and the secured party were aware that the corporation did not own the associate dealership with Hall's Motors, Inc., and Ford Motor Company. All of the defendants were officers and directors of the corporation.

In the fall of 1969, the plaintiff Kaas, employed as parts and service manager of Bob Privette Motors, Inc., since February of that year, was asked by R. W. Privette and Haws to purchase the 225 shares owned of record by R. L. Privette. R. L. Privette had not made any payments on the purchase price due R. W. Privette. Neither R. W. Privette nor Haws disclosed to the plaintiff that the corporation did not have an associate dealership agreement with the Ford Motor Company or that the corporation had suffered a net loss for each fiscal year of its operation. Instead, these defendants showed the plaintiff a financial statement which implied that the corporation had a dealership. The defendants R. W. Privette and Haws told the plaintiff that they had made a good living from the business and that the value of 225 shares of the stock was approximately $20,000, the offering price. These defendants did not point out to the plaintiff that the current liabilities exceeded the current assets and that the corporation was having difficulty in paying its current expenses. Further, they did not inform the plaintiff that $18,118.83, reflected as corporate assets, was carried as goodwill on the books and had been since the corporation's inception. The plaintiff had a limited formal education, little experience in financial affairs and was unaware of the enumerated deficiencies. R. L. Privette did not participate in the negotiations with the plaintiff.

Pursuant to a stock sale agreement dated January 1, 1970, entered into between R. W. Privette, R. L. Privette and the plaintiff, the plaintiff Kaas purchased the 225 shares carried in the name of R. L. Privette for the sum of $20,000, $10,000 of which was paid in cash and the balance represented by a promissory note delivered to R. W. Privette.

In June 1970, Kaas learned from the Ford Motor Company that the corporation did not own the associate dealership but that it was held personally by R. W. Privette. The plaintiff thereupon disassociated himself from the corporation, tendered the stock to the defendants and commenced this action to rescind the purchase and cancel his outstanding obligation. The findings of the trial court reflect in greater detail the facts as stated.

The findings are supported by substantial evidence in the record and, therefore, stand as verities on appeal. The unraveling and deciphering of the evidence is a function of the trial judge, and we will not upset his interpretation of the testimony when any reasonable view substantiates his findings even though there may be other reasonable interpretations. We turn to a discussion of the issues.

I. THE DUTY OF HONEST STATEMENT AND DISCLOSURE

A. Affirmative Misstatements

A buyer is entitled to rely upon the truth of a statement of a material fact made about the subject matter of a sale. Scroggin v. Worthy, 51 Wash.2d 119, 123, 316 P.2d 480 (1957); 3 Restatement of Torts § 540 (1938). A prospective buyer may accept a statement about a material fact at face value if the statement is made to induce a sale. Recourse is available against such a misrepresentation. Johnson v. Olsen, 62 Wash.2d 133, 381 P.2d 623 (1963). A representation that dividends had been paid out of profits when, in fact, the distribution was from capital was held to be false and material in J. C. Miller Estate, Inc. v. Drury, 120 Wash. 628, 208 P. 77 (1922), and Mills v. Knudson, 54 Wash. 614, 103 P.2d 1123 (1909), held that a stockholder who falsely represents the extent of the debts of a corporation is liable to the purchaser who relies upon the statement to his detriment. See also Michaelson v. Hopkins, 38 Wash.2d 256, 228 P.2d 759 (1951); Shores v. Hutchinson, 69 Wash. 329, 125 P. 142 (1912). The affirmative statements of the defendants concerning the value of the stock constituted direct fraudulent misrepresentations. Their comments about the 'good living' they had earned from the business and the financial statements submitted misled the plaintiff by inference.

B. Statements as to Value

The defendants told the plaintiff that the stock offered to him had a value of $20,000 when in fact it could not have had such a value under any realistic appraisal. Where the owner of corporate stock sells it by inducing the buyer to buy through a misrepresentation of the value of the corporate assets, such a misrepresentation is an assertion of fact, not opinion; and the selling stockholder is responsible for loss to the buyer. Dalen v. Hansen, 166 Wash. 597, 8 P.2d 416 (1932); Blewett v. Ward, 159 Wash. 651, 294 P. 577 (1930); McGowan Co. v. Carlson, 79 Wash. 92, 139 P. 869 (1914). In like manner, a sale of stock induced by a company officer who falsely stated that the company was solvent, making profits, paying dividends and that its stock had been issued for value received is subject to rescission; and those practicing the fraud are subject to a judgment for the return of the purchase price of the stock. Harris v. Saunders, 108 Wash. 195, 182 P. 949 (1919).

Applicable to the circumstances of this case is 3 Restatement of Torts § 525 (1938) which states:

One who fraudulently makes a misrepresentation of fact, opinion, intention or law for the purpose (sic) of inducing another to act or refrain from action in reliance thereon in a business transaction is liable to the other for the harm caused to him by his justifiable reliance upon the misrepresentation.

As an illustration to that section of the Restatement, we find on page 62:

3. A, knowing that the X Corporation is hopelessly insolvent, in order to induce B to purchase from him shares of its capital stock assures B that the shares will within five years pay dividends which will amount to the purchase price of the stock. B is justified in accepting these statements as an assurance that A knows of nothing which makes the corporation incapable of earning such dividends.

C. Duty to Disclose

The defendants were not entitled to remain silent concerning the company's difficulties or to fail to disclose the absence of a dealership agreement with the automobile manufacturer. Silence is not fraud when the purchaser is on equal footing with the seller in the opportunity to be aware of the material aspects of the subject matter of the sale. Lincoln v. Keene, 51 Wash.2d 171, 316 P.2d 899 (1957). However, the trial court did not find actual knowledge or an obligation to know the material facts in the plaintiff, and we agree that the vendee should not have been expected to know the true situation even though he was present at the company for some time. The rule has been that silence as to a material fact does not constitute fraud where there was no duty to disclose (See O'Neile v. Ternes, 32 Wash. 528...