Katz v. Prete

• Decision Date: 13 April 1983
• Docket Number: No. 80-262-A,80-262-A
• Parties: Jerome J. KATZ et al. v. John E. PRETE et al. ppeal.
• Court: Rhode Island Supreme Court

Page 81

459 A.2d 81

Jerome J. KATZ et al. v. John E. PRETE et al.

No. 80-262-Appeal.

Supreme Court of Rhode Island.

April 13, 1983.

DeSano & Thibodeau, Alfred G. Thibodeau, Providence, for plaintiffs.

Nugent & Nugent, J. Joseph Nugent, Jr., Providence, William A. Martin, North Providence, for defendants.

OPINION

WEISBERGER, Justice.

This is an appeal by the plaintiffs from the denial of their motion for a directed verdict on their action for contribution. The defendants cross-appeal from the denial of a directed verdict on their counterclaim and the granting of the plaintiffs' motion for a new trial. We sustain the plaintiffs' appeal, and deny and dismiss the appeal of the defendants.

The relevant undisputed facts are as follows. In 1973, plaintiff Jerome Katz and defendant John Prete decided to enter together into a picture-framing business, which was to be incorporated and called Michelle Galleries, Inc. (Michelle). Both men agreed to be equal owners of the business with each receiving 50 percent of the company's stock. ¹ The operating capital for the new corporation was supplied by People's Trust Company on August 2, 1973, in the form of a $15,000 loan. Mr. Katz, as treasurer of Michelle, signed a $15,000 promissory note to secure said loan. He did this even though the company had not yet been formally incorporated. Furthermore, Mr. Katz, Mr. Prete, and their respective wives signed, in their individual capacities, a continuing guaranty for the payment of this note, and any additional amounts that might be advanced to Michelle, in the event of a default. On November 12, 1973, a subsequent $5,000 loan was advanced from People's Trust to Michelle and evidenced by a second promissory note. This, like the prior note, bore Mr. Katz's signature in his official capacity as treasurer of Michelle.

The corporation went out of business in August 1974. According to Mr. Katz (who was a certified public accountant and handled the financial affairs of the corporation), the loans from People's to Michelle had been renewed or extended and therefore were still outstanding at the time the parties decided to bring their business venture to a close. The plaintiffs contend that although Michelle had made some interest payments on the loan, Mr. Katz had made the majority of such payments.

Shortly after Michelle ceased its operations, the bank began to exert pressure upon Mr. Katz to satisfy the outstanding portion of the loan. He did so by executing, in his own name, a new promissory note in the amount of $18,762.52, which was secured by stock that Mr. Katz owned in various companies other than Michelle. The bank eventually obtained payment of that loan in January 1978 by selling the stock pledged by Mr. Katz. Mr. Prete contends that although he signed the guaranty contract, he was informed by Mr. Katz that such a signing was a "formality" required by banks when businesses are established. He testified that he was not aware that the document of guaranty was part of a loan transaction. However, he was aware of the loan in question and of the corresponding payments that were made thereon. It was his belief that he would work without salary for the corporation, running the day-to-day affairs in return for 50 percent of the stock, ² and that plaintiff would keep the corporate books and supply the funds needed by the company.

At the first corporate organizational meeting, Jerome Katz, as president and treasurer of Michelle, made a subscription agreement for one hundred shares of the company's capital stock in exchange for a $100 payment. John Prete, as vice president and director of Michelle, signed a waiver of notice concerning the first directors' meeting. Although Mr. Prete does not concede being present at the first directors' meeting, the minutes of the meeting reflect that Prete voted, as did the other two directors, to authorize issuance of stock to Mr. Katz in accordance with his offer to subscribe. However, no stock certificates were ever formally issued. Thereafter, plaintiff attempted to cancel his subscription by accepting a corporate check from Michelle for the $100 stock subscription price. Mr. Katz testified that he therefore believed this cancellation of subscription made him and Mr. Prete equal owners of the corporation, in spite of the fact that the purported cancellation was never recorded in the corporate records.

On August 9, 1975, plaintiffs Jerome and Gertrude Katz filed a complaint requesting contribution from defendants as coguarantors for half the payment of the promissory note. The defendants filed an answer to plaintiffs' complaint, denying the essential allegations therein, and also filed a counterclaim in which they alleged, inter alia, that plaintiff Jerome Katz had intentionally misrepresented the situation to defendants in order to defraud them of their property, labor and other interests in the corporation. At the conclusion of a jury trial, a Superior Court justice directed a verdict in favor of plaintiffs on defendants' counterclaim, but denied plaintiffs' motion for a directed verdict on their contribution claim. The jury returned a verdict for defendants on plaintiffs' contribution claim. Thereafter plaintiffs filed a motion for a new trial. That motion was granted on March 27, 1980. The plaintiffs appeal from the denial of their motion for a directed verdict on their claim for contribution. The defendants appeal the granting of the directed verdict on their counterclaim and the granting of plaintiffs' motion for a new trial.

The defendants contend that the trial justice was incorrect in granting plaintiffs' motion for a directed verdict on defendants' counterclaim. We disagree. When reviewing the decision of a trial justice on a motion for a directed verdict, this court must utilize the same standard that the trial justice applies. Rickey v. Boden, R.I., 421 A.2d 539, 543 (1980). Thus, this court must view the evidence in the light most favorable to the party against whom the motion is made. Such party must be given the benefit of all reasonable and legitimate inferences that may properly be drawn from the evidence without sifting or weighing such evidence or determining the credibility of witnesses. Fox v. Allstate Insurance Co., R.I., 425 A.2d 903, 905 (1981); Evans v. Liguori, 118 R.I. 389, 394, 374 A.2d 774, 776 (1977); Hamrick v. Yellow Cab Co., 111 R.I. 515, 522, 304 A.2d 666, 671 (1973). If after so viewing the evidence, issues exist upon which reasonable minds might draw conflicting conclusions, the trial court has no alternative but to submit such issues to the jury. Fox v. Allstate Insurance Co., R.I., 425 A.2d at 905; Rickey v. Boden, R.I., 421 A.2d at 543; Evans v. Liguori, 118 R.I. at 394, 374 A.2d at 776.

In count II of their counterclaim, defendants appear to have alleged an action in tort for deceit. See Prosser, Handbook of the Law of Torts, § 105 at 685-86 (4th ed. 1971). To recover on such a claim, defendants bore the burden of proving that Katz, in making the statement at issue, knew it to be false and intended to deceive, thereby inducing defendants to rely on the statements to their detriment. Halpert v. Rosenthal, 107 R.I. 406, 412, 267 A.2d 730, 733 (1970); Cliftex Clothing Co. v. DiSanto, 88 R.I. 338, 344, 148 A.2d 273, 275 (1959); see Conti v. Walter Winters, Inc., 86 R.I. 456, 459, 136 A.2d 622, 623-24 (1957).

The defendants allege two material misstatements of fact upon which, they argue, they relied to their detriment. The first concerns the undisputed statement by Mr. Katz that he and Mr. Prete would be equal owners of the corporation when in fact no stock was issued to Mr. Prete. The second involves Mr. Katz's purported statement that the guaranty defendants signed was a formality required by banks when new businesses are established.

Regarding the former statement, we believe that certificates of stock are but mere evidence of ownership. Thus issuance and delivery of stock certificates are not essential to establish ownership, which may be inferred from the acts and conduct of a party. Pacific National Bank v. Eaton, 141 U.S. 227, 233-34, 11 S.Ct. 984, 985, 35 L.Ed. 702, 704-05 (1891); Golden v. Oahe Enterprises, Inc., 90 S.D. 263, 273, 240 N.W.2d 102, 108-09 (1976); cf. Talbot v. Talbot, 32 R.I. 72, 92-93, 78 A. 535, 543 (1911) (lack of decedent's endorsement on stock certificate not fatal to intent to deliver certificates to trustee). Therefore, the verbal agreement between the two men was sufficient as a matter of law to establish Mr. Prete's entitlement to half the stock in the corporation. ³ See DiChiara v. Calvo, 32 A.D.2d 538, 538, 299 N.Y.S.2d 634, 635 (1969). Thus, in light of their verbal agreement, Mr. Prete could have compelled the issuance of stock had he so desired. See generally 12A Fletcher, Cyclopedia of the Law of Private Corporations, § 5634 at 334-37 (rev. perm. ed. 1972) (specific performance may be used to compel the sale of stock in a closely held corporation).

The fact that Mr. Prete was not listed either as a subscriber for corporate stock or as a stockholder in the books of the corporation did not mean per se that he could not have been considered a stockholder in the corporation. See Gibson v. Oswalt, 269 Mich. 300, 308, 257 N.W. 825, 828 (1934); cf. Peninsula Leasing Co. v. Cody, 161 Mich. 604, 611, 126 N.W. 1053, 1056 (1910) (relation of a member in a corporation may arise out of mutual dealings between individual and corporation; defendant entitled to shares of corporate stock despite the fact that no sale of capital stock in ordinary way...