Pauly v. Haas

• Decision Date: 26 July 1957
• Docket Number: No. 7688,7688
• Citation: 84 N.W.2d 302
• Parties: Leo PAULY, Plaintiff and Appellant, v. Frank T. HAAS, Defendant and Respondent.
• Court: North Dakota Supreme Court

Page 302

84 N.W.2d 302

Leo PAULY, Plaintiff and Appellant, v. Frank T. HAAS, Defendant and Respondent.

No. 7688.

Supreme Court of North Dakota.

July 26, 1957.

Syllabus by the Court.

1. The burden of proving fraud rests on the party asserting it.

2. Fraud is never presumed. On the other hand the presumption is that private transactions have been fair and regular.

3. Where an appeal is taken pursuant to Section 28-2732, NDRC 1943 and the appellant demands a retrial of the entire

case, the findings of the trial court must be given appreciable weight by the supreme court, especially when based upon the testimony of witnesses who appeared in person before the trial court.

Bayard Lewis, Wahpeton, and Nelson & Clemmensen, Breckenridge, Minn., for plaintiff and appellant.

Johnson & Milloy, and Forbes, McMichael & Warner, Wahpeton, for defendant and respondent.

MORRIS, Judge.

In this action the plaintiff seeks to recover of the defendant the sum of $11,170 which he paid in part performance of an agreement dated December 31, 1953, and which the plaintiff claims to have rescinded on November 30, 1955, by serving a written notice upon the defendant. The case was tried to a court without a jury and pursuant to an order of the court made upon findings of fact and conclusions of law a judgment was entered dismissing plaintiff's cause of action with prejudice. From this judgment plaintiff appeals and demands a trial de novo.

For some time prior to the transaction involved in this case the defendant, Frank T. Haos, had been the owner of, or in control of, the common stock of Dakota Motors, Inc., operating an automobile sales, garage and repair business in the city of Wahpeton. The same business had formerly been owned by Haas individually. In 1952 and 1953 the operation was conducted by a manager who became ill. The business was losing money. About August 1, 1953 the manager left and the defendant assumed the management in person. He had other business interests. He decided to sell or liquidate Dakota Motors, Inc. He advertised for buyers without success until the plaintiff, Leo Pauly, became interested.

Pauly had been a residence of Wahpeton for approximately eight years and with the exception of the first year, he had operated his own electrical contracting business. He was well acquainted with Haas for whom he had done electrical work in the garage and other enterprises conducted by Haas. He had his motor vehicles serviced at the garage. On a number of occasions Pauly and Haas had conversations regarding the purchase of the business by Pauly who felt that the purchase would involve too large an undertaking for him alone.

Leonard Mackove went to work for Dakota Motors, Inc. as a salesman in February, 1953 and was so employed at the time of the negotiations which resulted in the purchase of the common stock of Dakota Motors, Inc. by Pauly and Mackove.

On December 18, 1953, Haas, Pauly and Mackove signed a memorandum agreement by which Pauly and Mackove agreed to purchase all the outstanding common stock of Dakota Motors, Inc. for the sum of $45,000. This memorandum provided:

'The assets of the corporation to consist as per the attached statement or as they may be changed by the December operation period.'

No statement was actually attached to the memorandum but it appears that the parties had under consideration a typewritten statement of assets of the corporation dated November 30, 1953 which showed the net assets to be $55,722.24. This statement is known in the record as plaintiff's Exhibit D.

On December 31, 1953 Frank T. Haas as first party, Leo Pauly as second party, and Leonard Mackove as third party entered into a final written agreement for the sale of 224 shares of common stock each to Pauly and Mackove; 2 shares of stock were retained by Haas until the terms of the contract had been performed. He also retained his directorship in the corporation. He took the notes of the purchasers for their respective shares of stock, but retained possession of the stock as security for the notes. It was also agreed that Pauly and Mackove were to take over the active management and control of the corporation on January 1, 1954 at salaries of $300 per month each. They agreed to devote their full time and effort to the operation and management of the business of the corporation. The business was to be continued in the building owned by Haas at a rental of $250 per month until a more suitable location could be found. It was also agreed that if because of the inexperience, ineptitude, inefficiency or incompetence of Pauly and Mackove, or either of them, or for any other reason, the corporation had a net loss in its operations for a period of several months, the voting powers of the purchaser should be suspended, and that Haas should have exclusive control of the management of the corporation until its operation showed a profit for at least two consecutive months.

The agreement also contained this provision, which is emphasized by the plaintiff as the basis of his right to rescind the agreement:

'The financial statement of said corporation for the period ended November 30, 1953, is hereto attached, marked Exhibit A, made a part hereof, and identified by the signatures of the parties hereto. The parties hereto base their dealings on said financial statement, and first party warrants that it is true and correct, and that the condition of said business shall remain substantially as shown by said financial statement, except as the financial condition of said corporation may be changed by normal operation of said business during the month of December, 1953.'

No financial statement was ever marked as Exhibit A, attached to the agreement or signed by the parties. However, there was introduced in evidence a book of the corporation known as Exhibit C, containing a monthly financial statement covering several years. Among these is a statement for 'Month of Nov. and 11 months ending Nov. 30, 1953.' Plaintiff contends that this statement shows a loss of $520.92 for the period, that he relied on and was misled by it, and that the corporation actually lost in that period $15,072.75, the larger loss being concealed by irregular bookkeeping entries.

Pauly and Mackove took over the management of the corporation as provided in the agreement and operated it together until November 1, 1954, when Mackove went out of the business. The record does not show what became of his shares of stock or his interest in the business, but whatever was done appears to have been satisfactory to all parties concerned.

Pauly continued to operate the business alone from the time Mackove left until the end of November, 1955. On November 30, 1955 he caused to be served on Haas a 'Notice of Rescission' stating that the contract of December 31, 1953 between Haas, Pauly and Mackove was rescinded. This Notice states in part:

'This rescission is based upon the ground that you fraudulently misrepresented the value of certain assets of said corporation in the following particulars:

'1. The financial statement of said corporation, above referred to, and for the period ended November 30, 1953, which you warranted as a true and correct statement shows the value of the repair parts to be $15,156.87, when in fact the true value of said repair parts at the time did not exceed $10,009.77.

'2. Said financial statement shows the value of the office furniture and fixtures of said corporation to be $7,051.70, when in fact the true value of said office furniture and fixtures at the time did not exceed the sum of $1,000.

'Said fraud was not discovered until October of 1955.'

The notice further recited that Pauly relinquished all claim to the 224 shares of stock sold to him but in the possession of Haas and offered to do anything necessary to make Haas the owner of the stock.

The notice also tenders the property, accounts and keys under control of Pauly and demanded the return to him of the purchase price paid on the stock amounting to $10,500 and $670 interest, making a total demand of $11,170.

The final paragraph of the notice states:

'Upon your failure, within ten days from and after the date hereof, either to restore the said sum of $11,170 to the undersigned or to give notice, in writing, of your intention to acquiesce in this rescission, the undersigned will deem it as a fact that you refuse to acquiesce in said rescission, and will seek the aid of the courts in obtaining restoration.'

Plaintiff's original complaint alleged the execution of the agreement of December 31, 1953, a copy of which was attached to the complaint. It was further alleged 'that said financial statement of November 30, 1953 was false, deceitful, and fraudulent in that said financial statement showed the inventory valuation of the repair parts of Dakota Motors, Inc. to be $15,156.87, when in truth and in fact the inventory value of said repair parts did not exceed $10,009.77; that said financial statement was false, deceitful and fraudulent in that said financial statement showed the value of the office furniture and fixtures of Dakota Motors, Inc. to be $7,051.70 when in truth and in fact the value of said office furniture and fixtures did not exceed $1,000.00.'

It is futher alleged that had it not been for the false, deceitful and fraudulent statements of the defendant, the plaintiff would not have entered into the agreement, and that upon discovering that the statements were false, and upon the refusal of the defendant to pay the amount necessary to make the parts and office furniture and fixtures reflect the value as shown by the financial statement, the plaintiff served a written notice of rescission from which we have quoted above. The plaintiff then demands judgment in the sum of $11,170, interest and costs.

The defendant answered, admitting the execution of the agreement, and denying any fraud on his part.

Before trial plaintiff amended his complaint. He omitted the allegations...