Kelly Tire Service, Inc. v. Kelly-Springfield Tire Co.

• Decision Date: 16 November 1964
• Docket Number: No. 17448.,17448.
• Citation: 338 F.2d 248
• Parties: KELLY TIRE SERVICE, INC., Now Known as D and D Tire Company, Inc., Dan's Realty, Inc., and Dr. Dan Toriello, Appellants, v. The KELLY-SPRINGFIELD TIRE COMPANY, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

338 F.2d 248 (1964)

KELLY TIRE SERVICE, INC., Now Known as D and D Tire Company, Inc., Dan's Realty, Inc., and Dr. Dan Toriello, Appellants, v. The KELLY-SPRINGFIELD TIRE COMPANY, Appellee.

No. 17448.

United States Court of Appeals Eighth Circuit.

November 16, 1964.

Max Putnam, of Putnam, Putnam & Putnam, Des Moines, Iowa, for appellants.

Sherwin J. Markman, of Brody, Parker, Roberts Thoma & Harris, Des Moines, Iowa, Donald J. Brown, Des Moines, Iowa, for appellee.

Before VAN OOSTERHOUT, BLACKMUN and MEHAFFY, Circuit Judges.

MEHAFFY, Circuit Judge.

Plaintiffs, Kelly Tire Service, Inc., Dan's Realty, Inc. and Dr. Dan Toriello, brought suit against defendant, The Kelly-Springfield Tire Company, for damages sounding in tort and contract. Dr. Toriello owned Dan's Realty, Inc. and was the principal promoter and stockholder of Kelly Tire Service, Inc. The plaintiffs jointly will sometimes be referred to here as plaintiff.

Jurisdiction exists by reason of diversity of citizenship and the required statutory amount in controversy.

Plaintiff's complaint in essence alleged that (1) the defendant breached a distributor sales agreement executed by the parties on July 22, 1960 and (2) defendant committed a fraud upon plaintiff by intentionally misrepresenting its promises under the aforementioned contract which induced plaintiff to enter the retail tire business and caused the resultant losses.

The defendant denied generally the averments of the complaint and counter-claimed for recovery of an alleged $51,708.78 indebtedness represented by a stipulated unpaid open account totaling $50,608.78 for merchandise sold plaintiff and an unpaid $1,100.00 balance on a promissory note. The defendant further alleged that the entire indebtedness was secured by Dr. Toriello's individual written guaranty for the debts of Kelly Tire Service, Inc.

At the close of the evidence, the District Court directed a verdict for the defendant on the issue of fraud holding that the record was devoid of any evidence of intentional misstatement or concealment of any material fact.

The District Court likewise directed a verdict for defendant on the issue of breach of the franchise agreement during the period from its execution until January 1, 1961, ostensibly on grounds that it was during this period one Kelly Evans was a co-owner and manager of Kelly Tire Service, Inc., and was shown by the evidence to have been solely responsible for the business' losses.

The District Court further directed a verdict for defendant on all counts of its cross action. Simultaneously, the District Court overruled plaintiff's corresponding motion for directed verdict in opposition to defendant's counterclaims on grounds the evidence or lack thereof indicated as a matter of law the inapplicability of plaintiff's affirmative defenses of estoppel by acquiescence, consent, waiver, fraud or failure of consideration.

The District Court submitted to the jury in the form of a special verdict the factual issues of the existence of an oral contract between the parties subsequent to January 1, 1961, and defendant's alleged breach thereof. The jury found that the parties entered into a binding oral agreement after January 1, 1961, but that neither party was guilty of any breach. Plaintiff, therefore, was not entitled to any recovery to be set off against defendant's judgment on its counterclaim. Plaintiff asserts error on the part of the District Court in dismissing its action for fraud and failing to submit to the jury the affirmative defenses directed against a recovery on defendant's counterclaims.

We summarize the salient facts. In 1959 Dr. Dan Toriello was influenced by an acquaintance, one Kelly Evans, then a store manager in Des Moines for the General Tire and Rubber Company, to negotiate with the General Company for a lease of some of the doctor's commercial property for a retail tire and service business. Before an agreement was consummated with the General Company, Dr. Toriello instituted extensive remodeling of his property according to plans furnished him by the General Company for the single purpose of housing a tire business. After the construction had substantially progressed to a point where it would have been as inexpensive to complete the renovation as to undo the alterations, Dr. Toriello learned that the General Company would not enter into the proposed lease agreement. Dr. Toriello then temporarily halted remodeling whereupon Evans introduced him to representatives of the defendant to determine if it was interested in leasing the premises for a retail outlet.

In May of 1960, meetings between Dr. Toriello, Evans and representatives of defendant were held in Des Moines. The defendant's representatives explained that its company was not interested in leasing the building as it was not its policy to own dealer stores; but defendant would consider granting a distributorship or franchise to plaintiff. It was suggested that the doctor and his co-venturer, Evans, form a separate corporation for this purpose and lease the property from the doctor's real estate company. The parties tentatively agreed that Dr. Toriello and Evans would incorporate under the name of Kelly Evans Tire Company with a paid-in capital of $20,000.00 in cash and that Evans, who had previously been discharged by General, would manage the business. In return, the defendant promised to supply plaintiff with a consignment of tires without interest, a line of credit, account sales assistance, bookkeeping and credit supervision, and aid in the advertising program.

Thereafter, Evans and Dr. Toriello continued to consult with defendant's midwestern divisional sales manager and credit manager as to the details of the agreement. Evans estimated that with his experience and captive business in the Des Moines area he could attain an unusually high level of gross sales during the first year of operation. The defendant made a first year projection of plaintiff's anticipated sales, expenses and profits but used in the formula a reduced estimate of sales from the figure suggested by Evans, which the latter objected to as being low. More than one projection was made, but subsequently at a meeting in mid June, attended by Evans, Dr. Toriello and officials of the defendant, a projection was finalized and explained in detail to the doctor. He was informed that the annual sales estimate had again been reduced to provide a more realistic, anticipated picture of the possibilities the business could achieve. It was the understanding of all that the business should be inaugurated with a cash capital of $20,000.00. Based on this capitalization and the execution of personal guaranties by Dr. Toriello and Evans, the defendant's representatives recommended to their home office that a franchise be granted and plaintiff furnished with an $18,000.00 consignment, an $18,000.00 line of credit, a $2,500.00 loan for equipment needs, advertising assistance, plus aid in establishing the financial books of the company.

In early July, Evans and Dr. Toriello co-signed a note for $10,000.00 borrowed from a Des Moines bank. This sum constituted the sole contribution to capital. Evans had assured Toriello that he would obtain and deposit the additional $10,000.00 to capital but unbeknown to Dr. Toriello, Evans did not make the additional deposit. The defendant was likewise misled as it was mistakenly assured by the bank, through oversight, that plaintiff had deposited $20,000.00 into the business. This occurred prior to defendant's confirmation of the franchise agreement. When business was commenced by the corporation, Evans erroneously noted on the check book a balance of $20,000.00 to the corporate account when, in fact, only the original $10,000.00 was on deposit.

Shortly before execution of the franchise, the plaintiff started business with Evans in charge. Dr. Toriello had left on a European trip and did not return until the middle of September. Evans, who had not made the contribution to capital as he had led his associate and the defendant to believe, immediately incurred excessive expenses far beyond the projection's estimate. Examples of such excessive expenditures were spending fifteen per cent of the total invested capital for the purchase of business stationery alone, while paying himself a monthly salary of $1,000.00. Upon learning of these and other inordinate expenses, the defendant became alarmed and repeatedly warned Evans during August and September that he must curtail expenses in order to remain solvent.

After Dr....