Specialized Tours, Inc. v. Hagen

• Decision Date: 08 August 1986
• Docket Number: No. C1-83-135,C1-83-135
• Citation: 392 N.W.2d 520
• Parties: Blue Sky L. Rep. P 72,396, 54 USLW 2643 SPECIALIZED TOURS, INC., Respondent, v. Ronald D. HAGEN, Appellant.
• Court: Minnesota Supreme Court

Page 520

392 N.W.2d 520

Blue Sky L. Rep. P 72,396, 54 USLW 2643

SPECIALIZED TOURS, INC., Respondent, v. Ronald D. HAGEN, Appellant.

No. C1-83-135.

Supreme Court of Minnesota.

Aug. 8, 1986.

Syllabus by the Court

1. A warranty by a sole stockholder of a travel tour corporation which warranted that the business, to the best of his personal knowledge, was in compliance with all laws, rules, and regulations, was not breached when he personally had no knowledge of noncompliance with a recently promulgated federal regulation.

2. Under the facts and circumstances of this case, the seller of a business corporation did not breach a warranty as to the accuracy of a mid-year balance sheet that was not completed according to generally accepted accounting principles.

3. Seller of a travel tour corporation breached a contract warranty that no material fact regarding the corporation had been omitted which would reasonably affect an investor's decision to purchase the corporation by neglecting to reveal that substantial tour prepayments were due shortly after the closing of the sale.

4. Seller of corporation did not fraudulently represent facts in a financial statement furnished buyer prior to execution of the sale contract.

5. Omission by seller of travel tour corporation to reveal to buyer that substantial prepayments from the corporation were due to promoters of the tours constituted common law fraud and a violation of the Minnesota Securities Act.

6. Settlement of a claim with one wrongdoer, without reservation of right to pursue claims against other wrongdoers, or without other contemporaneous manifestations of intent to hold the latter, supports the trial court's conclusion that the latter was likewise discharged from liability by the release.

7. A sale by the sole stockholder of a business corporation of 100 percent of the corporate stock to a buyer who was to solely operate the corporation is governed by the Minnesota Securities Act.

8. The Minnesota Securities Act does not unconstitutionally discriminate against the seller of 100 percent stock of a corporation.

9. The seller of 100 percent stock of a business corporation who had no personal knowledge that the corporation was in violation of recently promulgated CAB rules was not in violation of the Minnesota Securities Act when he failed to disclose that fact to buyer.

10. The seller of 100 percent stock of corporation did not violate the Minnesota Securities Act by not affirmatively telling buyer that tour tickets had not been confirmed when seller gave buyer, his accountant, and his employee access to all of the records of the tours showing that the accommodations had not, in fact, been confirmed.

11. Amount of costs awarded successful claimant for a violation of the Minnesota Securities Act is discretionary with the trial court operating within guidelines established by Minn.Stat. Sec. 549.02 (1982); Minn.Stat. Sec. 357.25 (1982); as well as Part 1, Rule 11 of the Code of Rules for District Courts.

12. Trial court correctly applied the rate found in Minn.Stat. Sec. 334.01 (1982) in computing prejudgment interest on an award following violation of the Minnesota Securities Act.

13. In computing attorney fees recoverable under the Minnesota Securities Act by a party only partially successful, the court, in addition to computing hours spent times a reasonable hourly rate, should consider other factors, including the time spent on the successful issue, and the result obtained.

14. The trial court properly refused to relieve buyer of corporate stock from its contract performance under the facts and circumstances of this case.

Lee L. Fossum, Northfield, for appellant.

John S. Gowan, Ronald L. Seeger, William J. Ryan, Rochester, for respondent.

Considered and decided by the court en banc without oral argument.

KELLEY, Justice.

In 1979, appellant Ronald D. Hagen (Hagen) entered into a contract to sell Dittmann Travel Organization, Inc., d/b/a Dittmann Tours (Dittmann), to respondent Specialized Tours, Inc. Shortly after the sale, Specialized Tours ceased making contract payments. Subsequently, it sued Hagen, claiming breach of contract/warranty, fraud/misrepresentation, and violation of the Minnesota Securities Act (Minn.Stat. Secs. 80A.01-.31). Hagen counterclaimed for the unpaid contract balance and alleged fraud and conversion.

Following a lengthy trial to the court, the judge found Hagen had breached various contract warranties, committed actionable fraud and violated the Minnesota Securities Act. The trial court also found Specialized Tours converted Hagen's security interest and breached various contract agreements. Based upon its findings, the trial court awarded Specialized Tours judgment against Hagen in the amount of $411,246.13. The trial court also awarded Hagen judgment against Specialized Tours in the amount of $442,308.80, representing the unpaid balance under the sale agreement.

Both parties appeal from the court's findings and judgment. We affirm in part, reverse in part and remand.

1. Preliminary Facts.

Ronald Hagen became involved in the travel business in 1959. From 1963 until July 3, 1979 he was the sole stockholder and manager of Dittmann. By the time of its sale, Dittmann was one of the nation's three largest public charter tour agencies, specializing in sales to college and university alumni organizations. Although the corporation was engaged primarily in the public charter business, it also sold retail airline tickets and accommodations. This retail operation accounted for approximately ten percent of Dittmann's gross revenue. Dittmann's annual gross revenue for the fiscal year preceding the sale exceeded $3 million, with gross income at $361,508. Projected gross revenue for the fiscal year 1980 was $5 million.

Specialized Tours is a Minnesota corporation owned by Donald Monson (Monson) and W.W. Schulz (Schulz). The two jointly owned Specialized Tours prior to the purchase of Dittmann, but Monson acquired Schulz's interest before the sale was consummated. Monson and Schulz believed this transfer would facilitate negotiations because Schulz had previously worked with Hagen but left Dittmann after a disagreement. After the sale, Schulz reacquired his share of Specialized Tours. Monson intended that Schulz be actively involved in Dittman after the sale and, in fact, this occurred. Although Monson and Schulz were knowledgeable in the retail travel business, both possessed little experience in the public charter business. ¹

2. The Negotiations.

In late 1978, Monson inquired of Hagen whether Dittmann might be for sale. Between February 6, 1979 and late April 1979, the two met approximately a half-dozen times to discuss the sale. On March 26, 1979, they met with Monson's accountant. At that time, Hagen furnished copies of Dittmann's financial statements and income tax returns for 1974 through 1978. Sometime after May 24, 1979, Hagen provided Monson and his accountant with an unaudited April 30, 1979 mid-year balance sheet.

The pre-sale discussions were general in nature. The bulk of the discussions concerned the history of the business, the operation of the business, its profitability, and some general projections of earnings for the 1979 and 1980 tour season. Hagen volunteered little detailed information, assuming Monson was experienced enough in the travel business to know what information was needed. Monson and his accountant could inspect all records and files of the company except during business hours. During the negotiations, Monson represented that he had 14 years of experience in the travel business and indicated that he and William Wardwell (Wardwell), who had 25 years' experience, would actively manage the business. Monson also supplied Hagen with his personal financial statement. This information satisfied Hagen that Monson could afford to purchase and properly operate the business. Despite these representations to Hagen, however, Monson never intended to be more than an investor in the business. Moreover, Monson never informed Hagen that Schulz, who currently owned and operated a competing travel agency across the street from Dittmann, would be a half-owner of the business and would oversee its operation and management by Wardwell.

A major portion of Hagen's plans for Dittmann's 1980 tour season was running tours to Bavaria with emphasis on the Oberammergau Passion Play. The Passion Play is a special event occurring every tenth year. Hagen told Monson that he had 15 aircraft under contract and had ordered five more to service the Oberammergau tours. Hagen also stated he had ordered arrangements for the Passion Play tickets and had sent a token deposit. Although Hagen did not specifically inform Monson the tickets were not confirmed, Monson fully understood this fact. Hagen did not notify Monson when and what amounts would be due from Dittmann in order to secure the planned Oberammergau arrangements. Hagen assumed Monson would know that substantial payments would be due in advance to cover the tour expenses. This special event expected to increase Dittmann's gross revenues by $3 million, would require more working capital.

At one meeting, Monson specifically inquired whether additional capital would be required over and above the down payment. Hagen responded that the question was difficult to answer. Hagen noted "a lot was up to Monson" and the answer depended to a great degree on how Monson operated the business, how he promoted the tours and how quickly he "turned-over" the paperwork necessary to secure participants' deposits in the traditional manner. He said it further depended on the success of the 1979 fall tours and the 1980 winter tours. Hagen also informed Monson that he had no plans to raise additional capital.

During the negotiations, Monson consulted with his accountant to determine a reasonable purchase price for Dittmann. After evaluating all the requested information, including the...