Pinken v. Frank

• Decision Date: 12 April 1983
• Docket Number: No. 82-1495,82-1495
• Parties: Bernard H. PINKEN, Appellant, v. Dan R. FRANK, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1019

704 F.2d 1019

Bernard H. PINKEN, Appellant, v. Dan R. FRANK, Appellee.

No. 82-1495.

United States Court of Appeals,

Eighth Circuit.

Submitted Jan. 11, 1983.

Decided April 12, 1983.

Lewis R. Mills, J. Reed Johnston, Jr., Audrey G. Fleissig, St. Louis, Mo., for appellant; Peper, Martin, Jensen, Maichel & Hetlage, St. Louis, Mo., of counsel.

Martin M. Green, Gregory J. Christoffel, Clayton, Mo., for appellee; Green & Lander, Clayton, Mo., of counsel.

Before McMILLIAN, Circuit Judge, FLOYD R. GIBSON, Senior Circuit Judge, and JOHN R. GIBSON, Circuit Judge.

FLOYD R. GIBSON, Senior Circuit Judge.

Bernard H. Pinken brought a diversity claim to recover payment on a promissory note executed by Dan R. Frank. Frank admitted all elements of Pinken's claim and asserted the defense of fraud in the inducement of the note. In support of his defense, Frank was permitted to present evidence that prior to execution of the note Pinken made oral representations regarding his intention not to enforce the note unless certain conditions were met. The jury returned a verdict for Frank on his fraud defense and Pinken seeks reversal of that verdict claiming: (1) the district court ¹ violated the parol evidence rule in admitting evidence of Pinken's oral representations and (2) Frank failed as a matter of law to establish his fraud defense. For the reasons set forth herein, we reject Pinken's claims and affirm the jury verdict in favor of Frank.

I. Facts

Pinken, Allen Portnoy, and Edward Schapiro were the three principal stockholders and officers in Permaneer Corporation, a corporation created as a result of a 1968 merger between Pinken's Universal Mirror and Glass Company and Portnoy Fixtures. In 1968, Permaneer made its initial stock offering to the public. In 1969 Permaneer acquired the Jerrold-Stephen Corporation, a small corporation principally owned and operated by Frank. Frank was paid 40,000 shares of unregistered Permaneer common stock for his interest in Jerrold-Stephen. After the acquisition, Permaneer hired Frank to manage one of its wholly owned subsidiaries.

In 1970, Pinken, Portnoy, and Schapiro, each of whom owned approximately 500,000 shares of Permaneer stock, asked Frank to participate in an executive stock incentive plan. Under the plan, Frank was permitted to purchase at $6.50 per share, 9,375 shares from each of the three principal stockholders (Pinken, Portnoy and Schapiro) and O'Fallon Investment Co., a private corporation controlled by Portnoy, for a total of 37,500 shares. In return, Frank was to execute and deliver four $60,500 promissory notes, one to Pinken, one to Schapiro, one to Portnoy, and one to O'Fallon Investment Co. At trial Portnoy and Frank testified, over Pinken's objection, that the purpose behind the stock offer was to enable Frank, as a Permaneer executive, to acquire shares of Permaneer without having the responsibility of payment for the shares unless he sold the shares at a profit over and above the $6.50 per share price. As Portnoy explained at trial, the three principal stockholders wanted to use their personal shares to enrich Permaneer executives if the company did well, without requiring the executives to assume the risk of falling stock prices. Accordingly, as Portnoy and Frank testified, in three separate meetings, the three principals specifically represented to Frank that there would be no liability on the four promissory notes Frank signed to them unless Frank sold the shares at a profit. Frank testified that in reliance upon these representations, he signed stock purchase agreements with each of the principals and at the same time executed and delivered the $60,500 promissory notes to each of the principals and one to O'Fallon Investment Co. Neither the stock purchase agreements nor the promissory notes included any exculpatory provision that the notes would be enforceable only if Frank sold the shares at a profit. The notes were to mature in December, 1975.

Pinken testified at trial that he could not recall making any representations to Frank regarding the promissory note during the 1970 meetings. Pinken also testified by deposition that from the time Frank executed the note he, Pinken, had always considered the note fully enforceable regardless of whether Frank sold any shares. At trial, however, Pinken conceded that he made no demand for payment on the note until he brought suit in 1981, some six years after the note matured.

Frank never sold any of the shares he received under the stock purchase agreement and has not seen the shares since 1970 when he pledged them back to the principals. Between 1972 and 1974, Frank left Permaneer and received written releases on the promissory notes he had signed to Portnoy, Schapiro, and O'Fallon Investment Co. ² On several occasions between 1973 and 1976, Frank unsuccessfully sought a release from Pinken on the note. Frank testified that between 1972 and 1974 he received specific assurances from Pinken that the note would not be enforced.

In 1981, Pinken filed suit in federal district court seeking to enforce the promissory note and Frank successfully defended on the ground that he was fraudulently induced to execute the note based on Pinken's misrepresentation that the note would not be enforced unless Frank sold the shares at a profit.

II. Parol Evidence Rule

Pinken first contends that the district court violated the parol evidence rule in admitting evidence of his oral representations that he would not enforce the note unless Frank sold the shares at a profit. The parol evidence rule, adopted and consistently followed by Missouri courts, ³ precludes the admission of oral representations made prior to or contemporaneously with the execution of a written contract. Bellows v. Porter, 201 F.2d 429, 432 (8th Cir.1953), cited with approval in Biggs v. Moll, 463 S.W.2d 881, 887 (Mo.1971). See also, Smith v. Tracy, 372 S.W.2d 925, 937-38 (Mo.1963). However, there is a well established exception to that rule where, as here, a claim of fraud in the inducement is made. Missouri courts have uniformly held that parol evidence is fully admissible to support a claim of fraudulent inducement. Smith v. Tracy, 372 S.W.2d at 938; Wallach v. Joseph, 420 S.W.2d 289, 294-95 (Mo.), cert. denied sub nom., Freidmen v. Wallach, 389 U.S. 953, 88 S.Ct. 335, 19 L.Ed.2d 362 (1967); Countess v. Strunk, 630 S.W.2d 246, 254 (Mo.App.1982).

Pinken, however, contends that the fraud exception is limited to cases where the oral representation relates to a matter "extrinsic" to the express terms of the contract; an oral representation contradicting an express term in the contract is inadmissible for any purpose, even to show fraud in the inducement. In this case, Pinken's oral representation that he would enforce the note only if Frank sold the shares at a profit presumably contradicted an express term in the note providing that Frank had an unconditional obligation to pay the note when due. Thus, Pinken concludes, that oral representation is inadmissible to prove that he fraudulently induced Frank to sign the note.

Pinken principally relies on specific language in Dowd v. Lakes Sites, Inc., 365 Mo. 83, 276 S.W.2d 108, 112 (Mo.1955), where the court stated: "parol testimony establishing fraud in the procurement of a written contract 'cannot be legally used to control or vary the terms of such agreement.' " Pinken also relies on similar language in Rigler v. Reid, 186 Mo.App. 111, 171 S.W. 952, 955 (Mo.App.1915) to the effect that evidence of an oral representation contradicting an express term of a written contract is inadmissible to support a claim of fraudulent inducement.

Pinken's reliance on Dowd is misplaced and his argument is both specious and at odds with controlling Missouri case law. In Dowd, the court was presented with a reformation of contract claim in which the plaintiff offered evidence of oral representations that contradicted and varied the express terms of the written contract. The court refrained from exercising its equitable power to make a new contract for the parties based upon the proffered oral representations. In so doing, the court clearly distinguished cases where an oral representation is offered to vary or reform a written contract from cases like the instant one where an oral representation is offered in support of a fraud defense to defeat or invalidate the enforceability of the written contract. Id. at 112. ⁴ In fact, the quotation from Dowd relied upon by Pinken is but part of a longer passage from Corpus Juris Secundum which states:

Parol evidence admitted and admissible only for the purpose of proving fraud in a written instrument cannot be legally used to control or vary the terms of such agreement, that is to say, if the evidence is insufficient to defeat the instrument, it cannot be considered for any other purpose. Thus the evidence must tend to establish some independent fact or representation, some fraud in the procurement of the instrument, or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing.

32A C.J.S. Evidence Sec. 979e. p. 483-84 (1964) (citations omitted). Here, Pinken's oral representation was offered to invalidate or defeat, not to vary or reform, the written contract. Furthermore, it tended to establish "fraud in the procurement of the instrument." Finally, it went to proving an "extrinsic" or "independent" fact--i.e., Pinken's state of mind when the note was executed. ⁵ Thus, Pinken's position is not supported by the language in Dowd.

Moreover, despite Pinken's reading of Dowd and Rigler to the contrary, Missouri courts have consistently admitted parol statements inconsistent with the express terms of a written contract to establish a fraudulent inducement claim. Wallach v. Joseph, 420 S.W.2d at 294-95; Smith v. Tracy, 372 S.W.2d 925, 937 (Mo.1963); Wolf v. St. Louis Public Service Company, 357 S.W.2d 950, 959 (Mo.App.1962);...