Weber v. McKee, 14707.

• Decision Date: 25 August 1954
• Docket Number: No. 14707.,14707.
• Parties: WEBER et al. v. McKEE et al.
• Court: U.S. Court of Appeals — Fifth Circuit

215 F.2d 447 (1954)

WEBER et al. v. McKEE et al.

No. 14707.

United States Court of Appeals, Fifth Circuit.

August 25, 1954.

Ralph W. Currie, Dallas, Tex., for appellant.

Paul Carrington and Carrington, Gowan, Johnson & Walker, Dallas, Tex., Frank G. Newman, Dallas, Tex., of counsel, for appellees.

Before STRUM, Circuit Judge, and DAWKINS and HOOPER, District Judges.

HOOPER, District Judge.

Appellees H. K. McKee and others¹ brought an action against Frank B. Weber to recover unpaid balance upon the agreed purchase price for shares of capital stock of Missouri-Oklahoma Express, Inc., a Missouri corporation, sold by plaintiffs to said defendant. L. R. Strickland, who executed guarantee of payment, was joined as a defendant.

Appellants Weber and Strickland filed answers admitting the sale and the contract of sale, but denying liability upon the ground of alleged fraud and misrepresentation in connection therewith.

Defendant Strickland by way of counter-claim sought to recover back the sum of $55,000.00 which he had paid as purchase price under the contract, and other sums which he had advanced to the corporation after the sale. The trial judge entered judgment against defendant as prayed, ruling that Strickland's counterclaim was not only filed too late but was also without merit. Both defendants appealed to this court.

1. Appellants contend the judgment was not authorized by the evidence in the case. With this we do not agree. While in many respects the testimony was in sharp conflict, the testimony in the case is ample to show the following facts:

Defendant Strickland, who was then operating another transportation line, became interested in purchasing the stock of this company. He "did not want some other people to acquire it," but could not acquire it at that time himself, and suggested that the stock be bought in the name of Weber. After considerable negotiations the parties entered into a contract of sale dated October 31, 1950, the material portions of which will be referred to below.

The contract contained a representation and warranty that the liabilities of the corporation were no greater in the aggregate than revealed by a balance sheet dated August 31, 1950 which was furnished by sellers to purchasers.

The contract also guaranteed that the assets shown on said balance sheet did actually exist, were owned by the corporation, and were subject to no liens and encumbrances other than those revealed by books of the corporation, and as included in said balance sheet.²

The contract further provided that should it be determined that the liabilities were greater than represented, purchaser should have the right to discharge said excess liability by paying same out of the deferred installments and crediting the purchase price accordingly. Should it be found that any of the assets did not actually exist, purchasers might deduct from any installment "an amount equal to the depreciated book value of said nonexistent asset." The contract provided that in the event the purchaser determined to exercise any of the rights or privileges above stated he should, as a condition precedent, notify sellers, and they were to have the right to defend at their own expense any such claimed liability. In case of a non-existent asset sellers were to be given a reasonable time in which to find and restore said missing asset.

We will give a brief outline of the charges of fraud contended for by defendants and seek to point out why, in our opinion, findings of the trial court against the existence of fraud were fully authorized by the evidence.

Defendants in their answer allege false representations to the effect "that the books of the corporation were kept in accordance with the regulations of the Interstate Commerce Commission, particularly with respect to showing value of assets on the basis of costs less depreciation," and that plaintiff presented to defendants a balance sheet dated August 31, 1950, bearing account numbers prescribed by the Interstate Commerce Commission, without revealing that plaintiffs had arbitrarily increased the book value of the physical assets.

As to whether such representations were made there is sharp conflict, but the court was amply justified, having the opportunity to observe the witnesses on the witness stand, to believe several witnesses produced by plaintiffs who were present during these negotiations.

Evidence was produced by plaintiffs that in February, 1950, before this contract was executed, the company had received a loan of $70,000.00 from Reconstruction Finance Company in connection with which an appraisal was made of the company's equipment. While it appears that the Interstate Commerce Commission did require generally that equipment be carried on the books of the company at its cost price, less twenty-five per cent depreciation per annum, that rule was not invariable, and in this instance Reconstruction Finance Company had required the company, in order to obtain the loan, to carry this equipment on its books at its fair market value as shown by appraisal made by agent of the Reconstruction Finance Company.

The matter of value of assets was fully discussed before the contract was signed. Defendants requested plaintiffs to guarantee the value of the assets and plaintiffs not only declined to do so but insisted that a clause be inserted in the contract to provide for errors as to assets or liabilities. Defendant Strickland, with twenty-five years experience in dealing with this type of equipment, apparently had full opportunity to inspect the same and was satisfied with its values. He continued to use the equipment and to make payments on the same for more than ten months after taking over the company. During that period of time in June, 1951, he discovered, if he did not know before, the manner in which this equipment was carried on the books of the company.³ When he declined to pay the note due in October, 1951 he made no complaint as to fraud or misrepresentation as to this item or any other.

Another item of fraud claimed by defendants in their amended answer was the alleged misrepresentation that the corporation was solvent, and closely akin thereto was another one, to the effect that the financial condition of the company when the sale was made on October 31, 1950, was as good as was shown on a balance sheet of August 31, 1950.

The court having opportunity to observe the witnesses, was authorized to find that these representations also, were not made, and was further authorized to find, even though some errors might have been contained in the statement of August 31, 1950, they would not be sufficient to justify a rescission of the sale, particularly in view of the provisions of the contract to make adjustments therefor.

As to representations of solvency of the company, it would seem they were made. If not made expressly they were made impliedly by plaintiffs by furnishing to defendants a balance sheet which showed the company to be solvent. This balance sheet of August 31, 1950, however, carried the operating rights of the company at only $16,723.95. Defendant Strickland himself testified that these rights were worth to him the sum of $110,000.00 and that, in subsequently making application to the Interstate Commerce Commission, he had represented them to be worth in excess of $110,000.00. It also appears that some months after this sale there was a firm offer of $75,000.00 made for the operating rights. It also appeared that another company interested in buying this company placed a valuation on said rights of $75,000.00. Therefore, the court was authorized to increase the assets shown on the statement by a considerable sum.

It is true that defendants sought, as...