Poulsen v. Treasure State Industries, Inc.

• Decision Date: 18 February 1981
• Docket Number: No. 79-68,79-68
• Citation: 626 P.2d 822,192 Mont. 69,38 St.Rep. 218
• Parties: Harold POULSEN, Karl Ingebrighton, Dick Olson and Emery Matsko, Jr., Plaintiff and Respondent, v. TREASURE STATE INDUSTRIES, INC., A Montana Corporation; and Kenneth K. Knight, Defendant and Appellant.
• Court: Montana Supreme Court

Page 822

626 P.2d 822

192 Mont. 69

Harold POULSEN, Karl Ingebrighton, Dick Olson and Emery Matsko, Jr., Plaintiff and Respondent, v. TREASURE STATE INDUSTRIES, INC., A Montana Corporation; and Kenneth K. Knight, Defendant and Appellant.

No. 79-68.

Supreme Court of Montana.

Submitted Jan. 16, 1981.

Decided Feb. 18, 1981.

Robert Emmons argued, Great Falls, Graybill, Ostrem, Warner & Crotty, Great Falls, Donald Ostrem argued, Great Falls, for appellant.

Cure & Borer, Great Falls, Edward W. Borer argued, Great Falls, for respondent.

DALY, Justice.

Plaintiffs brought this action in the District Court of the Eighth Judicial District of the State of Montana, in and for the County of Cascade, against Treasure State Industries (TSI) and its former president, Kenneth Knight, claiming defendants were guilty of fraud in the execution of a contract for deed. Defendant TSI filed a cross-claim against Knight, seeking indemnity, and Knight also cross-claimed against TSI. Following a trial to the court sitting without a jury, the trial court entered judgment in favor of plaintiffs in the amount of $302,129.65, adjudged TSI entitled to indemnity from Knight, and denied Knight's cross-claim. Defendants appeal.

On August 19, 1974, defendants sold to plaintiffs a shale and concrete block plant, located north of Great Falls, Montana, along with supporting equipment. This case involves the negotiations, representations and inspections which took place prior to the sale.

It is undisputed that the subject shale and block plant had been for sale at least since early 1972. Robert Mager was at all times during the sequence of events leading up to the execution of the contract for deed the plant manager of defendant TSI and was designated as the promoter of the sale in charge of showing prospective purchasers around the plant. In the early spring of 1974, plaintiffs Ingebrigtson, Olson and Poulsen became interested in the plant and decided to investigate the purchase of the TSI plant.

During the course of inspecting the shale plant, plaintiffs noticed scaffolding around the stack of the rotary kiln. It is the representations made regarding the scaffolding which present the main bone of contention.

Plaintiffs testified they asked Mager the reason for the scaffolding and were advised that the Board of Health had requested the stack be extended to take care of a pollution problem. Mager was further asked if this solved the air pollution problems to which he replied that it had. Plaintiffs also testified that approximately one month before the deal became final, they advised Knight that Mager had told them that the scaffolding had been used to extend the stack to alleviate an air pollution problem. Knight was asked if the pollution problem was cured, and he confirmed that it was.

Mager and Knight testified that the scaffolding had been discussed but contend they simply told plaintiffs that TSI had made alterations as requested by the air pollution people and that Mager said he thought, and Knight concurred, that it (TSI) might have satisfied the Board of Health because it had not heard from the Board for some time.

Negotiations between plaintiffs and TSI were concluded in the summer of 1974 and on August 19, 1974, the parties entered into a contract for deed for the purchase of the shale and block plant.

In September 1974, plaintiff Ingebrigtson was informed by the director of the Cascade County Air Pollution Control Program, Sam Kalafat, that the emissions from the stack of the rotary kiln were substantially in excess of that permitted by the air pollution program, that notice of violation would be forthcoming, and that, if corrective action was not taken, the shale plant could not be operated. On March 5, 1975, an official notice of violation and order to take corrective action to repair the aggregate dryer stack (rotary kiln) was received.

Plaintiffs were successful in obtaining a variance to operate the plant enabling them to investigate the problem and determine what corrective action might be taken. A study was undertaken which revealed that installation of a bag house at a cost of approximately $60,000 would eliminate the violation. Plaintiffs subsequently applied for and received a permit for construction of the bag house on January 9, 1976. Included in the letter approving the permit was a request to alleviate pollution from five other areas of the plant. Rather than construct the bag house and alleviate only part of the problem, plaintiffs hired engineer Charles Lush to prepare a study of the possible solutions and costs to remedy the pollution. According to Lush's report the cost of bringing the plant into compliance with regulations would be $279,871. Plaintiffs failed to obtain an extension on their variance, and the plant stopped operation sometime thereafter. This suit followed.

In addition to the air pollution problem, in the spring of the year water from the plant would drain into the adjacent land of Robert Ballard, depositing shale particles and adversely affecting productivity. Under threat of a lawsuit, plaintiffs built a diversion dam at a cost of $19,028 to remedy the problem. Plaintiffs allege that defendants' failure to disclose the drainage problem was constructive fraud and that they are entitled to the amount expended to construct the dam.

The issues presented on appeal are:

1. Whether the trial court erred in determining that in negotiating the contract for deed Treasure State Industries, Inc., and Kenneth K. Knight were guilty of actual fraud or in the alternative constructive fraud with regard to the alleged air pollution problems?

2. Whether the trial court erred in determining the defendants were guilty of constructive fraud in failing to reveal an alleged problem with regard to water drainage?

3. Whether the trial court erred in its determination that defendant Kenneth K. Knight should be required to indemnify defendant Treasure State Industries, Inc., for all damages awarded to plaintiffs against defendants?

4. Whether the trial court erred in its determination of damages by application of an incorrect measure of damages?

Defendants contend there is insubstantial evidence to support a finding of either actual or constructive fraud in the contract negotiations. On appeal, our function is to determine whether there is substantial evidence to support the findings of the trial court. This Court will not reverse the findings of the trial court unless there is no substantial evidence to support such findings.

In Lee v. Stockmen's Nat. Bank (1922), 63 Mont. 262, 284, 207 P. 623, this Court set down the elements which a plaintiff must prove to make out a prima facie case of actual fraud: (1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted upon by the person and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance upon its truth; (8) his right to rely thereon; and (9) his consequent and proximate injury.

Actual fraud is always a question of fact. Section 28-2-404, MCA. Fraud can never be presumed but must be proved by a preponderance of the evidence. Good faith will always be presumed and mere suspicion of fraud is not sufficient. Reilly v. Maw (1965), 146 Mont. 145, 153, 405 P.2d 440, 442.

The alleged actual fraud upon which the District Court made its finding that plaintiffs were entitled to damages was the representations made by Robert Mager and Kenneth Knight that the extension of the rotary kiln stack had satisfactorily remedied the air pollution problem. Although the District Court's findings do not specifically set forth each element of actual fraud, a review of the record indicates evidence to support a finding of fraud and subsequent damages.

Plaintiffs Poulsen, Ingebrigtson and Olson testified that in the course of inspecting the shale plant Robert Mager, the plant manager, stated that the stack extension on the rotary kiln had remedied the air pollution problem. Also, on June 28, 1974, TSI's former president, Kenneth Knight, told plaintiffs the information given them by Mager was correct. Of course, the testimony of Mager and Knight is slightly different in that they testified they thought the repairs satisfied the pollution people and informed plaintiffs only to that extent.

As evidenced by the "Notice of Violation and Order to Take Corrective Action" dated March 5, 1975, the emissions from the aggregate dryer stack (rotary kiln) were in violation of state and county pollution regulations and the extension put thereon did not in fact remedy the pollution problem. Furthermore, in response to a question regarding TSI's attempts to alleviate the pollution problem, Sam Kalafat, the director of Environmental Health Services for the City-County Health Department, stated: "The efforts by Treasure State Industries were totally unapproved by our agency. We advised them that before they proceed, that necessary applications and permits be filed. And I think the record speaks for itself that they were not. And I feel that the efforts were not really substantial, no."

In light of the nonoperative condition of the shale plant due to pollution violations and the cost of bringing the plant into compliance with regulations, it is beyond serious argument that the representations made by defendants to plaintiffs were material to the contract.

On May 23, 1972, TSI received a "Notice of Violation and Order to Take Corrective Action" to alleviate the pollution problems caused by the aggregate dryer and dust collector.

On April 16, 1973, defendant Knight received a letter from the Cascade County Air Pollution Control Program advising him that the plant was not in compliance with the state and county regulations and that certain steps needed to be taken before operations could resume.

On April 19, 1973, Dan Lincoln and Cleve...