Village of Burnsville v. Westwood Company

• Decision Date: 23 April 1971
• Docket Number: No. 42614--5,42614--5
• Parties: VILLAGE OF BURNSVILLE and Kenneth Stocke, et al., Plaintiffs, v. WESTWOOD COMPANY, et al., White Investment Company, et al., Respondents, H. K. and Dorothy R. Peterson, intervenors, Appellants.
• Court: Minnesota Supreme Court

Page 392

189 N.W.2d 392

290 Minn. 159

VILLAGE OF BURNSVILLE and Kenneth Stocke, et al Plaintiffs, v. WESTWOOD COMPANY, et al., White Investment Company, et al Respondents H. K. and Dorothy R. Peterson, intervenors, Appellants.

No. 42614--5.

Supreme Court of Minnesota.

April 23, 1971.

Rehearing Denied Sept. 13, 1971.

Syllabus by the Court

1. It is the duty of an agent to communicate to his principal all facts of which he has knowledge which might affect the principal's rights or interests. Since record reveals self-dealings as well as failure to disclose necessary facts, principals should be allowed to avoid release executed in reliance on agent's representations.

2. It is well-established law that the defrauded party may testify directly as to the effect of the representations on his mind and whether or not he acted in reliance upon them. It was error for the trial court to exclude testimony pertaining to intervenor's state of mind or knowledge having to do with the representations made to him.

Van Valkenburg, Moss & Flaherty, Minneapolis, for appellants.

Cant, Haverstock, Gray, Plant & Mooty and James Simonson, Minneapolis, for respondents.

Heard before KNUTSON, C.J., and NELSON, OTIS, ROGOSHESKE, and PETERSON, JJ.

OPINION

NELSON, Justice.

These appeals arise out of two actions begun in 1967, which were consolidated for trial and for appeal. One action was brought by the village of Burnsville and the other by some 90 property owners, all residents of Whitewood Addition in Burnsville, both seeking a judgment that a water supply system permit granted by the township of Burnsville on April 4, 1961, was of no legal effect.

The complaints alleged inadequacy of water service, excessive rates, an invalid assignment of the operating rights of the system under the permit, and insufficiency of the performance bond which was put up by the system's operators. The ultimate relief demanded was that the permit be declared forfeited, that title to the waterworks and its real and personal property be conveyed to the village of Burnsville without cost, and that damages be recovered.

Named as defendants in both actions are Westwood Company, a real estate development corporation which owned some 145 lots in Whitewood Addition to Burnsville, and Whitewood Water Company, a corporation set up to construct and operate the water system serving the residents of Whitewood Addition under the authorization of the aforementioned permit and an easement to use the streets for water mains and other equipment. The two corporations were wholly owned subsidiaries of White Investment Company, a mortgage and investment banking company which was owned by members of the White family up to 1967 and which was also named as a defendant in the second action.

It appears that on January 15, 1962, Whitewood Water Company assigned to Westwood Company its interest in the permit and easement granted by the town board, and on November 15, 1962, Westwood acquired land upon which to build a waterworks. Subsequently, Westwood built the waterworks and owned and operated the water system until December 30, 1966, when Westwood conveyed it back to Whitewood.

Intervenors, H. K. and Dorothy R. Peterson, had been clients of White Investment Company since 1952. They used the company and its president, R. H. White, a long-time personal friend, as their agent to invest in real estate mortgages and contracts for deed. White Investment had complete discretion in selecting and managing intervenors' investments, and these investments were made without consultation with the Petersons. Intervenors also customarily left with White Investment blank documents, such as deeds, assignments, and satisfactions, signed in advance, so that a title could be conveyed or a mortgage satisfied without any participation on their part. Annually, intervenors received a prepared statement of all investments made by White Investment for them, which consisted of a profit and loss statement, but which did not identify any specific assets.

On December 30, 1964, White Investment Company, without consulting intervenors, invested $75,000 of their funds in the Westwood Company's water supply system and its property. This investment was secured by Westwood's promissory note for $75,000, a mortgage deed, and a chattel mortgage on the equipment delivered to White Investment Company as agent for intervenors.

On February 5, 1965, White Investment wrote to the Petersons enclosing the 1964 annual statement, and after commenting on intervenors' 1964 investments, R. H. White stated:

'Your account now includes more mortgages than ever before. This includes one very interesting mortgage on the water system in our land development area South of the Minnesota River, your mortgage being $75,000.00 at 7%, payable in installments, of course, secured by the water system itself and the revenues from the sale of water to the residents.'

R. H. White died June 25, 1965, and his son, R. J. White, became president of White Investment Company, Westwood Company, and Whitewood Water Company. It was later decided by the White family to sell to a corporation known as W.G.C. and Associates the outstanding stock of White Investment, Westwood, and four other corporations owned by the Whites, but not the Whitewood Water Company. The stock purchase agreement between the Whites and W.G.C. and Associates, dated December 16, 1966, provided that the water system held by Westwood would be assigned to Whitewood Water Company, that the waterworks would be valued at zero, and its mortgage liability would also be valued at zero, conditioned on the mortgage liability being discharged against Westwood. If the mortgage liability were not discharged, the book value of the stock in the corporations was to be reduced by the amount of principal and accrued interest of the mortgage liability.

On December 22, 1966, White Investment wrote a letter to intervenors, stating:

'Dear Mr. and Mrs. Peterson:

'One of your accounts is a mortgage on the water system in Burnsville owned by Westwood Co., which has been in force since the end of 1964. The water system was originally owned by Whitewood Water Company, a corporation we established for that purpose in 1961 when the Town granted the permit. Later that year Burnsville suggested that until the system has been in operation for a reasonable period, they would prefer to have Westwood Co., the land developers, hold the permit, later to be reassigned to Whitewood Water Company.

'With over 100 of 140 lots now sold, we are in the process of selling the remaining equity in Westwood Co. and reassigning the water system to Whitewood Water Company, which will assume the mortgage. In order to complete the transfer, we need to discharge Westwood Co. from the mortgage liability at the same time as it is assumed by Whitewood. The enclosed (form) should be signed where I've indicated, and it will be put into effect with the transfer from Westwood to Whitewood when the latter assumes the mortgage.

'Very truly yours,

'WHITE INVESTMENT COMPANY, INC.

'R. J. White, President'

The letter enclosed a document entitled 'Release Agreement,' which intervenors executed and returned to White Investment Company, who then delivered it to Westwood. Westwood then conveyed its warranty deed to the real property of the water system together with all easements and other rights in real estate that it held on assignment from Whitewood Water Company back to Whitewood on December 30, 1966. On January 2, 1967, Westwood and Whitewood entered into an agreement whereby Westwood would receive 10 percent of gross water revenues collected for operating the water system for Whitewood.

In June 1967 Whitewood began to default in its payments to intervenors, and in July the village of Burnsville and the residents of Whitewood Addition commenced these actions to cause the permit and easements to be forfeited and the water system to be conveyed to Burnsville.

The Petersons were granted leave to intervene in both actions. They sought foreclosure of their mortgages and a money judgment against the Westwood Company for the deficiency. As a defense Westwood claimed that intervenors had released Westwood from such liability. Intervenors alleged that White Investment Company, acting both as their agent and as agent for Westwood in procuring the release,...