Santa Clara Properties Co. v. R. L. C., Inc.

• Decision Date: 03 July 1963
• Citation: 217 Cal.App.2d 840,32 Cal.Rptr. 333
• Court: California Court of Appeals Court of Appeals
• Parties: SANTA CLARA PROPERTIES CO., a corporation, Hi Fidelity Enterprises, Inc., a corporation, Plaintiffs, Cross-Defendants and Appellants, v. R. L. C., INC., a corporation, Defendant, Cross-Complainant and Respondent. Civ. 20308.

Page 333

32 Cal.Rptr. 333

217 Cal.App.2d 840

SANTA CLARA PROPERTIES CO., a corporation, Hi Fidelity Enterprises, Inc., a corporation, Plaintiffs, Cross-Defendants and Appellants, v. R. L. C., INC., a corporation, Defendant, Cross-Complainant and Respondent.

Civ. 20308.

District Court of Appeal, First District, Division 1, California.

July 3, 1963.

Arguello, Giometti & McCarthy, San Francisco, for appellants.

Jacobs, Sills & Coblentz, William K. Coblentz, Donald M. Cahen, San Francisco, for respondent.

MOLINARI, Justice.

This is an appeal by plaintiffs from a judgment in favor of defendant and cross-complainant adjudging that plaintiffs take nothing by their complaint seeking rescission, or, in the alternative, damages.

The Facts

On August 13, 1959, appellant ¹ and respondent entered into a written agreement wherein the former agreed to buy and the latter agreed to sell 25 shares of the common stock of a corporation known as Lakeshore Hi-Fi, Inc. ² The said agreement consisted of two separate instruments executed at the same time, one entitled 'Agreement of Sale' and the other designated as 'Addendum to Agreement of Sale.' The 'Agreement of Sale' recites that the consideration was the sum of $15,000 '(more or less, as hereinafter provided),' subject to terms and conditions, among which is paragraph 1. which reads as follows: 'Contemporaneously with the execution of this agreement, Hood & Strong, Accountants, Shell Building, San Francisco, California, shall undertake an audit of all the books and records of said Lakeshore Hi-Fi, Inc. If the audit discloses that the book value of the shares purchased and sold hereby, as of July 31, 1959, exceeds Sixteen Thousand Dollars ($16,000.00), Buyer shall pay to Seller a sum equal to said excess. In the event the audit, adjusted for actual value of the fixed assets is less than Fourteen Thousand Dollars ($14,000.00), Seller shall pay to Buyer a sum equal to said deficiency.' The agreement further recites that the seller accepts and acknowledges receipt of the sum of $15,000 subject to the conditions of said paragraph 1. The said 'Addendum to Agreement of Sale' recites, among other provisions, that 'The agreement of sale entered into this 13th day of August, 1959, * * * is hereby amended as follows: 1. Paragraph No. 1 is corrected to read as follows: Seller represents that the attached balance sheet as of July 1, 1959, showing a Net Worth of $27,862.47, is substantially correct. Buyer is allowed a period of ten days (10 days) within which to examine the books and records of Lakeshore Hi-Fi, Inc., and should the Net Worth in their opinion be more or less than the amount shown on the attached balance sheet, buyer shall have the option of requesting a full refund of the $15,000.00 to be paid and hereby paid for the common stock being sold. In that event there is no obligation on either the part of the buyer to buy or on the part of the seller to sell the shares of stock referred to in this agreement.' Attached to said addendum is a document designated 'Financial Statement as of July 31, 1959.' This statement includes a 'Balance Sheet' and a 'Statement of Income' for specified periods of operation. ³ Concurrent with the execution of said instruments the sum of $15,000 was paid to respondent and the corporate records and the executed resignations of the previous officers of Lakeshore were delivered to appellant's attorney. Mr. Paine, president of both appellant corporations, thereupon requested Hood & Strong, the accountants, to make an audit of the books of Lakeshore within the 10-day period. He was informed by said accountants that a complete audit could not be completed in 10 days, but that they would get all the information they could within that time. No extension of the 10-day period was requested of respondent by appellant. On August 22, and within the said 10-day period, Paine received a report from Hood & Strong dated August 21, 1959, showing the 'adjusted net worth' of Lakeshore to be $24,885.41, instead of $27,862.47 as shown on the July 31, 1959, statement aforesaid. No exercise of the option to return the stock was made or attempted at that time. In this regard Paine testified that after discussing the report with his attorney, Mr. Giometti, and Mr. Strohl, it was decided not to exercise the option to return the stock. ⁴ Mr. Giometti testified substantially to the same effect. ⁵ Along about the 10th to the 15th of September appellant started to receive statements from suppliers which indicated a balance due from Lakeshore for which there were no accounts payable on the books of Lakeshore. Paine testified that they were thus required to write to the suppliers for a breakdown of their account and for duplicate invoices, and that because some of the suppliers were in the East three or four weeks were consumed in this process. Paine testified further that the presentation of such statements for accounts not on the books continued throughout September and October; that there were so many of them that he discussed it with his attorney and it was thereupon determined to give a notice of rescission of the agreement. This notice was given by appellant to respondent on October 23, 1959. The instant action for rescission, or, in the alternative, for damages was thereupon filed on November 18, 1959.

At or about the time this action was filed, Hood & Strong were instructed to make another audit which culminated in a report which was completed on December 4, 1959. This report disclosed that the net worth of Lakeshore was $15,377.64 and that it had a substantial loss for the year instead of a profit. ⁶ According to this last report the net worth in the July 31 balance sheet was overstated by $12,484.83, and was $9,507.77 less than the $24,885.41 net worth figure given by Hood & Strong on August 22nd.

The complaint in the present action is in four counts: The first two counts sound in fraud and charge that false representations were made by respondent to appellant as to the financial condition of Lakeshore. Each of said counts asserts that these representations were relied upon by appellant and allege that upon discovery of the facts appellant rescinded. The first count differs from the second in that it alleges that the false representations were knowingly made. The third cause of action is predicated upon failure of consideration, and the fourth count is for money had and received. The answer of respondent denies generally the allegations of the complaint and by way of cross-complaint seeks a reformation of the agreement of sale on the basis of mistake in that when the addendum was drawn it did not reflect the agreement of the parties to the effect that the sale of the subject stock was made without any warranties, representations or promises on the part of respondent relative to the financial position of Lakeshore. The trial court adjudged that neither of the parties take anything by its respective action, it being the conclusion of the court below that no representations were made to appellant with reference to the financial condition of Lakeshore or the accuracy of the balance sheet, and that respondent has fully performed the terms and conditions of the agreement of sale and the addendum thereto. ⁷

Questions Presented

1. Did respondent make any representations to appellant as to the financial condition of Lakeshore?

2. Was it proper for the trial court to admit the extrinsic evidence on the issue as to whether such representations were made? If so, is there substantial evidence in the record to support the trial court's finding that no such representations were made?

3. If such representations were made, was appellant entitled to rely upon them? If appellant was entitled to rely on such representations, did it in fact rely upon them? If such representations were made and appellant was entitled to rely upon them is there substantial evidence in the record to support the trial court's finding that appellant did not rely on such representations?

The Question of Ambiguity

In order to properly meet the issue as to whether representations were made we must consider the question of the interpretation of the agreement of sale. ⁸ If the construction of the agreement is based upon its terms without the aid of extrinsic evidence, its construction is one of law and we are not bound by the trial court's interpretation. (Estate of Platt, 21 Cal.2d 343, 352, 131 P.2d 825; Meyer v. State Board of Equalization, 42 Cal.2d 376, 381, 267 P.2d 257; Ziganto v. Taylor, 198 Cal.App.2d 603, 606, 18 Cal.Rptr. 229; Estate of Black, 211 A.C.A. 92, 100, 27 Cal.Rptr. 418.) The basis of this rule is that where no extrinsic evidence has been considered there is no issue of fact, and, accordingly, the appellate court has the duty to make the determination in accordance with applicable principles of law. (Estate of Black, supra; Meyer v. State Board of Equalization, supra; Estate of Platt, supra.) On the other hand, where it is a proper case for the admissibility of extrinsic evidence and such evidence has been received, the appellate court will accept or adhere to the interpretation adopted by the trial court where the parol evidence is such that conflicting inferences may be drawn therefrom. (Estate of Rule, 25 Cal.2d 1, 11, 152 P.2d 1003, 155 A.L.R. 1319; Munier v. Hawkins, 190 Cal.App.2d 655, 663, 12 Cal.Rptr. 274; Transmix Corp. v. Southern Pac. Co., 187 Cal.App.2d 257, 269, 9 Cal.Rptr. 714; Estate of Black, supra, 211 A.C.A. p. 101, 27 Cal.Rptr. pp. 423-424; Irey v. Len, 191 Cal.App.2d 13, 18-19, 12 Cal.Rptr. 403.) In the application of the latter rule, therefore, the question of its meaning is one of fact. (Walsh v. Walsh, 18 Cal.2d 439, 444, 116 P.2d 62; Irey v. Len, supra; Scott v. Sun-Maid Raisin Growers Assn., 13 Cal.App.2d 353, 359, 57 P.2d 148.)

The question of ambiguity in the case at bench is directed to paragraph 1. of the 'Addendum' and the crux of the inquiry is...