Weiss v. Northwest Acceptance Corp.

• Decision Date: 11 March 1976
• Citation: 274 Or. 343,546 P.2d 1065
• Parties: , 19 UCC Rep.Serv. 348 Fred WEISS and H. C. Auld, Jr., Respondents, v. NORTHWEST ACCEPTANCE CORPORATION, a corporation, Appellant.
• Court: Oregon Supreme Court

Page 1065

546 P.2d 1065

274 Or. 343, 19 UCC Rep.Serv. 348

Fred WEISS and H. C. Auld, Jr., Respondents, v. NORTHWEST ACCEPTANCE CORPORATION, a corporation, Appellant.

Supreme Court of Oregon.

Argued and Submitted Oct. 29, 1975.

Decided March 11, 1976.

[274 Or. 344-B] William M. McAllister, Portland, argued the cause for appellant. With him on the briefs was Richard C. Josephson, Portland.

Jack A. Gardner, Eugene, argued the cause for respondent Weiss. With him on the brief was Allen L. Johnson, Eugene.

Edward V. O'Reilly, Eugene, argued the cause and filed a brief for respondent Auld.

Before O'CONNELL, C.J., and DENECKE, HOLMAN, TONGUE and HOWELL, JJ.

DENECKE, Justice.

The plaintiffs in these consolidated cases secured verdicts of approximately one million dollars against the defendant. The causes of action were based on fraud and the sales of property held as security in an alleged commercially unreasonable manner. Defendant appeals.

Fall Creek Gravel Co., Inc., is a corporation that built logging roads. The plaintiff Weiss is the president and sole stockholder. In the fall of 1969 the defendant, Northwest Acceptance Corporation, financed Fall Creek, including the acquisition of trucks by Fall Creek. Fall Creek acquired the trucks through Automotive Equipment which was Northwest's largest dealer and which had several officers and directors in common with Northwest. Automotive guarantied the payments due Northwest from Fall Creek on the truck acquisitions. Weiss guarantied Fall Creek's obligations to Northwest and to other creditors.

In the year or year and a half prior to August 1970, Fall Creek and financial difficulties. The seriousness of its difficulties is in dispute. About August 20, 1970, Northwest began to repossess the equipment. Fall Creek threatened to file bankruptcy. According to plaintiffs' evidence, Northwest then agreed with Fall Creek through its president, Weiss, that if Fall Creek voluntarily relinquished the equipment Northwest would allow Fall Creek to use the equipment, finish its jobs and later to liquidate in an advantageous manner.

Plaintiffs' evidence was that in reliance thereon, plaintiffs permitted the equipment to be brought in and sold, but that the sale, and Northwest's subsequent actions, were contrary to what it had promised plaintiffs. At the sale an outsider bid $250 more than Automotive and purchased the equipment for $472,750 which plaintiffs allege was grossly disproportionate to the equipment's true value. Automotive's bid of $472,500 was the total amount Fall Creek owed Northwest. Fall Creek was later adjudicated bankrupt and the plaintiff Auld is trustee in bankruptcy for Fall Creek.

The jury found Northwest had defrauded Fall Creek and Weiss and awarded Weiss general damages and punitive damages and the trustee for Fall Creek, general damages.

I Fraud As Against Both Plaintiffs

Northwest contends the trial court erred in denying its motion for a directed verdict upon the ground plaintiffs had not proved fraud.

[1,2] The parties agree that when the alleged fraud consists of promises, as was the case here, the plaintiffs must prove that at the time Northwest made the promises, it did not intend to perform. Fraud can also be established by proving the promisor promised 'with reckless disregard whether the promisor can or cannot perform.' Elizaga v. Kaiser Found. Hospitals, 259 Or. 542, 548, 487 P.2d 870, 874 (1971). A failure to subsequently perform the promise is, of itself, insufficient evidence of fraud. Conzelmann v. N.W.P. & D. Prod. Co., 190 Or. 332, 352, 225 P.2d 757 (1950).

We conclude that the testimony can reasonably be construed to support a finding that Northwest did not intend to perform material portions of the promises allegedly made by it or made promises with reckless disregard of whether it would perform.

There was testimony that Northwest promised that it would buy the equipment, allow Fall Creek to use it thereafter and, when Fall Creek had finished the jobs, liquidate whatever equipment was necessary to complete the payment of any balance due Northwest. The liquidation was to be on a piecemeal basis so as to yield the highest return. These promises were allegedly made after Northwest had started repossessing but before Fall Creek and Weiss agreed to cooperate in bringing in the equipment.

The jury could find that there was a meeting between representatives of Northwest and its dealer, Automotive Equipment, before the equipment started coming in out of the woods. At that meeting it was decided that Automotive would bid on the trucks. The parties did not discuss allowing Fall Creek to use the trucks after the sale.

If Automotive bid what it believed to be the value of the trucks, $100,000, it would take a loss as the balance owing which Automotive guarantied was $150,000. For this reason, at this meeting the parties discussed the possibility that Automotive might bid for all the equipment. It was discussed that Automotive might bid the total amount owing Northwest, $472,500 which included the $150,000 for the trucks which Automotive had guarantied. If Automotive Equipment could then sell the equipment for $472,500, plus its selling costs, neither Automotive nor Northwest would suffer any loss.

'Several days before the sale,' Automotive and Northwest decided that Automotive would bid for all the equipment. This decison was not made known to Weiss or Fall Creek.

This evidence supports a finding that Northwest never intended to perform material portions of its promises or made promises with reckless disregard whether it would perform. The trial court correctly denied the motion for a directed verdict upon this ground.

The trial court's instruction on when promises can constitute fraud likewise was correct.

II Liability to Weiss, Individually, on His Guaranties

Weiss alleged that because of Northwest's acts he was damaged individually in the amount of $1,500,000 because the value of his stock was destroyed and he remains liable for many of Fall Creek's debts.

The jury returned a verdict for Weiss in the amount of $122,164.74, general damages, which the jury found represented the debts and taxes for which Weiss was liable and which Fall Creek would have been able to pay if Northwest had not defrauded Weiss.

Northwest contends assuming the corporation, Fall Creek, had a cause of action against Northwest, that Weiss, as an individual, does not.

[4,5] The general rule is that a stockholder has no personal right of action against a third party for a wrong to the corporation which lowers the value of the stock. This court has adopted this rule. Smith v. Bramwell, 146 Or. 611, 615, 31 P.2d 647 (1934); Dant & Russell v. Ostlind, 148 Or. 204, 215, 35 P.2d 668 (1934). Conceptually, the rule is based upon the separateness of the corporate entity and its stockholders. See cases cited in Annotation, 167 A.L.R. 279, 280--284 (1947). Practically, it is based in part upon the rule that corporate creditors are entitled to be paid out of any recovery made to the corporation before the stockholders are entitled to payment. Smith v. Bramwell, supra (146 Or. at 615, 31 P.2d 647).

The plaintiff Weiss acknowledges this to be the general rule, but contends he comes within a recognized and logical exception to the general rule. The exception is that a stockholder may have an individual cause of action against a third party if the third party breaches a duty directly owed to the stockholder as an individual. The stockholder may maintain such a cause of action although it is based upon the conduct of a third party which also creates a cause of action in the corporation. This exception was recognized by this court in Smith v. Bramwell, supra (146 Or. 611, 31 P.2d 647), but found not applicable, supra (146 Or. at 619--620, 31 P.2d 647).

The reception is illustrated by one of the cases relied upon by Weiss. In Empire Life Insurance Co. of America Corp. v. Valdak, 468 F.2d 330 (5th Cir. 1972), the plaintiff loaned Valdak Corporation $350,000. Valdak pledged stock of National Insurance Company in amount of $1,200,000 with plaintiff as security for the loan. Plaintiff had previously gained control of National Insurance and by fraudulent mismanagement drove the value of the stock down. Valdak defaulted and plaintiff sold the pledged National stock to itself for $150,000.

The court held that if the defendant could prove these alleged facts, it would have a cause of action against plaintiff in addition to the cause of action by the corporation National, against plaintiff. Valdak would have a cause of action independent of National because plaintiff had a duty to Valdak as the pledgor of stock not to deplete the value of the pledged property by intentional acts.

Weiss contends Northwest breached a special duty owed to him as a personal guarantor of Fall Creek's obligations. These obligations were not obligations of Fall Creek to Northwest but to other creditors for fuel, taxes and a bank loan.

Plaintiff Weiss relies upon two guaranty cases: Buschmann v. Professional Men's Association, 405 F.2d 659 (7th Cir. 1959), and Sacks et al. v. AFNB, 258 Ind. 189, 279 N.E.2d 807 (1972). These cases hold that the guaranty created a special duty to the guarantor which enabled the guarantor to maintain a cause of action, independent of the debtor corporation, against the person to whom the guaranty was extended. Neither case, however, is persuasive as in both cases the individual was induced to enter into the guaranty by the fraud or misrepresentation of the defendant. For example, in the Sacks case the allegation was that the defendant bank represented to the individual plaintiff stockholder that if the plaintiff guarantied the loans to the corporation, the bank would provide continual financing of the corporation. The bank refused to continue financing and the plaintiff stockholder incurred a liability on his guaranty.

In contrast to Sacks and Buschmann,...