Resort Car Rental System, Inc. v. Chuck Ruwart Chevrolet, Inc.

• Decision Date: 10 July 1975
• Docket Number: No. 74-1665,74-1665
• Parties: RESORT CAR RENTAL SYSTEM, INC., Plaintiff-Appellant, v. CHUCK RUWART CHEVROLET, INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 317

519 F.2d 317

RESORT CAR RENTAL SYSTEM, INC., Plaintiff-Appellant, v. CHUCK RUWART CHEVROLET, INC., et al., Defendants-Appellees.

No. 74-1665.

United States Court of Appeals, Tenth Circuit.

Argued May 21, 1975.

Decided July 10, 1975.

Edwin S. Kahn, Raul N. Rodriguez, Christopher N. Sommer, Denver, Colo., for plaintiff-appellant.

Richard S. Hays, John S. McGuire, Denver, Colo., for defendants-appellees.

Before MURRAH, HILL and DOYLE, Circuit Judges.

MURRAH, Circuit Judge.

Resort Car Rental System, Inc., a Delaware corporation, contracted for the stock-for-stock purchase of Metropolitan Leasing Inc., from its owners, Ruwart Chevrolet, a Colorado corporation, and certain named stockholders, residents of Colorado and Louisiana (the Sellers). Following the consummation of the purchase, Metropolitan failed to collect a substantial amount of its accounts receivable, lost its previous financing source, and went out of business. Resort then sued the Sellers for actual and punitive damages for breach of contract, common law fraud, and violation of federal and Colorado state securities laws, alleging federal subject matter jurisdiction over the federal statutory claims and pendent and diversity jurisdiction over the state and common law claims. 15 U.S.C. § 78j ¹; 28 U.S.C. § 1332. After trial, the court denied all of Resort's claims, holding that the Sellers had breached no contractual or statutory duty, and granted one of Sellers' counterclaims to the effect that the purchase contract required Resort to issue additional shares of its stock to the Sellers because of the decline in its value sometime after the consummation of the purchase.

There is no quarrel with the basic facts, as stated by the trial court. Metropolitan leased cars from Genway, its financing source, and in turn rented these cars to retail customers. Resort, which owned a number of similar car rental agencies in other parts of the country, sent its chief executive Bell to Denver to negotiate for the acquisition of Metropolitan in July, 1969. At that time he met with the Sellers briefly, and they agreed in principle to a stock-for-stock exchange. The Sellers then told Bell that full financial information would be provided upon request, and later the same month, their accountant wrote to Bell enclosing Metropolitan's unaudited June 30 financial statements and indicating that Metropolitan was being offered for sale at $100,000 with a liability and accounts receivable guaranty. Bell responded the next month with a written offer of 10,000 shares of Resort stock, to be registered and guaranteed at $10 per share. Within ten days, the Sellers sent Bell copies of Metropolitan's monthly leasing reports from Genway as well as authorization for Resort to obtain further financial information from Genway.

When the contract was drafted, the number of Resort shares to be exchanged was reduced from 10,000 to 7,500 due to a deterioration in Metropolitan's financial condition as revealed by updated unaudited financial statements of August 31. The contract provided in presently material part:

"3(e) All financial statements attached hereto are unaudited and reflect the transactions in the books and records. All assets reflected are guaranteed to be worth not less than reflected in these financial statements and books and records and all liabilities are not more than reflected in these financial statements and books and records. . . . The Company (Metropolitan) has no liabilities or obligations except those disclosed on the financial statements attached hereto as an exhibit or those incurred in the normal and regular conduct of its business since the date of said financial statements, except a liability of not more than $700 to Advance Neon Sign Co. for a neon sign containing the word 'Chevway'."

The contract further provided that one-half of the Resort stock to be exchanged (3,750 shares) would be placed in escrow pursuant to the guaranty of Metropolitan's accounts receivable:

"Company (Metropolitan) shall have the sole and exclusive right to collect in the normal course of its business its accounts receivable existing on the closing date. If any of such accounts remain uncollected on or after July 1, 1970, (10 months after the closing date) Resort shall have the right at any time after July 1, 1970, and before December 1, 1970, to cause Company (Metropolitan) to assign all or any portion of the then uncollected accounts receivable to Sellers jointly without payment by Sellers, and Resort shall have the right to make a stock withdrawal from the escrow for the face amount of the receivables not collected and assigned to Sellers."

The unaudited financial statements of June and August as well as copies of the print-outs of the monthly leasing reports were attached to the contract. These monthly reports showed the number of vehicles leased by Metropolitan and the scope of its obligation to Genway. Neither the financial statements nor the monthly reports indicated that at the time of the closing, Metropolitan was two months overdue in its payments to Genway. Footnote 2 of the June and August financial statements, however, outlined the general terms of Metropolitan's leasing relationship with Genway and specifically noted that "These (leased) vehicles, and (Metropolitan's) contingent liability (to Genway) arising from the lease agreement, are not recorded on the books of Metropolitan Leasing, Inc."

About three months after the September 31 closing, Genway told Resort that it must pay Metropolitan's overdue balance for the two months prior to the closing. Resort first expressed surprise then responded by acknowledging the debt and later settling it. Genway furthermore told Resort that since it was not a Chevrolet franchisee, Genway could not supply further financing for Metropolitan or Resort. Later, acting under the contract, Resort assigned $40,000 face amount accounts receivable back to the Sellers as uncollected, and retrieved all of its 3,750 shares from escrow (apparently valued at about $15,000, including credits, leaving a claimed accounts receivable deficiency of over $25,000). Resort never registered its stock, the price of which fell to $1 within a year.

Granting the Seller's counterclaim for additional Resort shares, the trial court indicated that the precise number of shares due would be determined by the parties or at a subsequent hearing. The court apparently construed the contract to guarantee accounts receivable to the extent of the escrow account, but the court could not determine whether the guaranty went further: "Whether there should be an offset for shares to be recovered by Resort because of the uncollected accounts receivable under subparagraph 3(e) can not be determined on the present record." The court found no inaccuracies in the financial statements and books and records. As to the effect of...