Opinion
March 3, 1964 —
March 31, 1964.
APPEAL from a judgment of the circuit court for Dodge county: HENRY G. GERGEN, JR., Circuit Judge. Affirmed.
For the appellant there were briefs and oral argument by Thomas W. Wells of Beaver Dam.
For the respondent there was a brief and oral argument by Henry P. Hughes of Oshkosh.
One of the defendants, Parent, appeals from a judgment rendered against him and the other defendant, Flanders, in the amount of $6,000 in damages, plus costs and disbursements. The defendant Flanders did not take an appeal from the judgment and was made a respondent for the purposes of this appeal.
The plaintiff's action is based on deceit. The plaintiff claimed that the promoters of a corporation misled him when he invested $10,000 for an equal interest in the company by making misrepresentations to him and by withholding material information.
The issues were narrowed during pretrial conferences and during the trial itself; the plaintiff alleged fraud and liability on the part of the defendants on the following two theories:
(1) False representation expressly and deceitfully made by the defendants and relied upon by a careful purchaser who was thereby deceived and damaged, and
(2) A failure of defendants as fiduciaries to disclose material facts during a transaction with the plaintiff within a relationship of trust and confidence, thereby causing him to purchase, although such fiduciaries were aware that he would otherwise not have so purchased. Such conduct by the fiduciaries was an act of bad faith, and the result was that the fiduciaries gained an unfair advantage to the purchaser's damage.
The case was submitted to the jury on a detailed special verdict. The trial judge rejected the contention of the appellant in motions after verdict that there was any surprise to either defendant by variances between the pleadings and the actual proof. The trial judge was of the view that counsel were aware at all times of variances in the proof from the original pleadings which were permitted by the court.
The transcript of testimony in this case consists of some 550 pages and contains a number of discrepancies on the part of the various witnesses. There was evidence that on September 4, 1958, Parent, Flanders, and one Priebusch formed a corporation known as the P. F. P. Corporation. On October 1, 1958, its name was changed to Reinhard Lumber Company, Inc. Parent and Flanders entered into negotiations with Mr. C. G. Bickel, one of the partners who had operated for many years the lumberyard at Reeseville, Wisconsin. Priebusch was a son-in-law of C.G. Bickel. About September 26, 1958, Parent decided that the purchase of the lumberyard for $45,000 would be a bargain — since it was actually worth $65,000 — and, accordingly, an offer to buy it was made.
On October 1, 1958, stock certificates were issued for' stock in Reinhard Lumber Company. One hundred shares at a par value of $100 per share went to Flanders, 100 shares at the same par value went to Parent, and 100 shares at the same par value went to Priebusch.
The financial transactions involved in the purchase of the lumberyard are somewhat complex. Parent testified that the total purchase price was $45,000. of this total, Flanders, Parent, and Priebusch together agreed to pay $10,000 as a down payment. The former owners of the lumberyard agreed to take back a second mortgage of $18,000, and the difference of $17,000 was to be paid in cash at the time of closing, Eventually, the closing occurred on December 23, 1958. The $10,000 down payment was made in October of 1958. The payment was made by three checks of $2,000 each from Parent, Priebusch, and Flanders, and an additional $4,000 received as part of a loan transaction between the three promoters as borrowers and the State Bank of Reeseville as the lender.
The transaction between the three promoters and the bank was that the three individuals signed a promissory note in the amount of $21,000; the security for the $21,000 loan by the bank was a mortgage on the lumberyard property. Four thousand dollars of the $21,000 received from the bank constituted the remaining $4,000 of the $10,000 down payment. The remaining $17,000 was paid at the time of the closing. The promissory note to the bank for $21,000 was signed by the three individuals as officers of the corporation. The defendants and Priebusch made themselves personally liable in the event of any default on the second mortgage of $18,000 given back to the sellers of the lumberyard.
The conveyance of the lumberyard was directly from the former owners (C. G. Bickel, et al.) to the corporation; the record title was never in any of the three individuals (the defendants or Priebusch) at any time.
The evidence as to the actual value of the assets of the lumberyard was in conflict. The defendants claimed it to be at least $65,000; the plaintiff contended the actual value was $45,000.
After the lumberyard had been purchased, the defendants decided to operate the business, but they needed working capital. The defendants and Priebusch were not experienced in lumberyard operation, and their contention was that they approached the plaintiff Killeen for the dual purpose of getting him to invest in the corporation for working capital and also because he was experienced in lumberyard operation and could manage the business. The contention of the plaintiff, on the other hand, is that the defendants were primarily interested in getting him to part with his $10,000 investment.
Killeen was thirty-one years of age at the time of the trial. He had three years of college and was married to the granddaughter of the founder of the Starkweather Lumber Company of Beaver Dam and had worked for this company for approximately five and one-half years. He had been licensed to sell real estate in Wisconsin since 1956. In the summer of 1958, he was managing a root-beer stand in Illinois. In the latter part of September, 1958, Parent telephoned the plaintiff and asked him if he would like to get back into the lumber business.
A meeting was held a few days later between the defendants and the plaintiff at Beaver Dam. It was at this meeting that Killeen was offered a job as manager of the lumberyard for $125 per week.
The events that transpired at this meeting are in sharp conflict. The plaintiff claimed that either Parent or Flanders made the statement that the lumberyard at Reeseville had been purchased for $65,000 and that the defendants and Priebusch had invested $10,000 each. Killeen claimed that it was represented to him that he could buy a quarter interest in the corporation (100 shares) for $10,000.
At the trial, the appellant admitted that he might have told the plaintiff that the lumberyard was worth $65,000 but denied stating that the actual purchase price from the former owners had been $65,000. The appellant further denied that it had been represented to Killeen that the defendants and Priebusch had each invested $10,000 in the corporation. There is no dispute that the defendants represented to the plaintiff that for his $10,000 investment the plaintiff would receive a quarter interest in the corporation and that the defendants and Priebusch each had a similar quarter interest.
The actual purchase price of $45,000 was not disclosed to Killeen, and he did not know until about January, 1962, when the corporation went bankrupt, that the defendants and Priebusch had each paid in only $2,000 for the 100 shares of stock issued to each of them. The appellant testified that the matter of the $2,000 investment had never been disclosed to Killeen prior to that time because Killeen had never asked what the defendants and Priebusch had actually paid for their stock.
On October 3, 1958, Killeen gave his check to the corporation in the amount of $5,000 for 50 shares of capital stock in the corporation. On December 1, 1958, he paid $4,000 more, and on January 8, 1959, he issued his third check in the amount of $1,000 to the corporation — thus completing payment of the $10,000 purchase price agreed upon. He was issued a stock certificate for 50 shares on November 1, 1958, and a stock certificate for another 50 shares on January 8, 1959.
Priebusch did manual labor at the lumberyard and testified that he became dissatisfied as a stockholder in February or March of 1959. Priebusch sold his interest in the corporation to the two defendants for $2,250, each of them paying him $1,125.
In November, 1960, Parent sold his original 100 shares (plus the 50 purchased from Priebusch) to Flanders for $3,125 in cash, which represented what he had invested in the corporation in actual cash. Parent testified that the sale was for less than fair market value and that, in addition to the cash, he received further consideration from Flanders that Flanders agreed to hold the appellant harmless on certain joint financial obligations which the two of them had. The appellant conceded that at the time of this sale the corporation was insolvent. The appellant's principal occupation is as a self-employed certified public accountant.
The corporation was adjudged bankrupt in January, 1962. Considerable evidence was adduced at the trial to show the reasons for the eventual bankruptcy of the lumberyard. It was variously contended that such reasons were lack of working capital, inefficiency of the plaintiff as manager, and failure of the defendants as officers of the corporation faithfully discharge their duties.
The jury found that the value of the stock purchased by Killeen was $4,000, and on this basis the court awarded him damages of $6,000. On this appeal, the plaintiff by a motion for review seeks to have this court hold as a matter of law that the plaintiff's damage was $8,000 on the ground that the actual value of the stock was only $2,000.
The two defendants, along with Priebusch, arranged to purchase the lumber business for $45,000 on September 26, 1958. The purchase price of $45,000 was accumulated from the following sources: Each of the three purchasers paid $2,000; a $21,000 first mortgage was given to a bank, and the sellers accepted a second mortgage for the remaining balance of $18,000. Each of the three original purchasers received 100 shares of the stock of the corporation which was formed.
Within a few days, the plaintiff purchased a similar interest of 100 shares, but he paid a total sum of $10,000, the first instalment of $5,000 being paid on October 3, 1958 Four thousand dollars was paid by him on December 1, 1958, and the balance of $1,000 on January 8, 1959.
Extensive testimony was adduced before the jury. The jurors heard Killeen testify that he was told by one of the defendants that the defendants and Priebusch had paid $65,000 for the assets. Killeen also testified that he was informed that each of the three original subscribers put in $10,000. He testified further that he did not learn that each of the others had invested only the sum of $2,000 until early in 1962, long after he had paid his $10,000. The jury also heard Parent testify that he might have informed the plaintiff that the assets were worth $65,000. Parent acknowledged that he did not disclose the actual purchase price of $45,000 to Killeen until 1962.
Testimony was further received that Priebusch sold his interest in March, 1959, with Flanders and Parent each purchasing half of the Priebusch stock. In November, 1960, the defendant Parent sold all his stock (150 shares) to Flanders for $3,125, having also procured assurance that Flanders would hold Parent harmless on certain joint obligations.
Evaluating such testimony, the jury concluded that there was a relationship of trust between the plaintiff and the defendants and that the latter had used bad faith in failing to inform Killeen of all the facts. They determined that the stock for which Killeen paid $10,000 was in fact worth only $4,000 at that time.
It is reasonably clear that the defendants were promoters. That is a term applied to those who actively assist in promoting, projecting, and organizing a corporation. 1 Fletcher, Cyc. Corp. (perm. ed., 1963 rev.), p. 710, sec. 189. See First Avenue Land Co. v. Hildebrand (1899), 103 Wis. 530, 534, 79 N.W. 753.
The trial court granted judgment on the theory that the defendants as promoters had a fiduciary responsibility to disclose material facts and that they violated this obligation in failing to disclose material facts to the plaintiff. This resulted in an unfair advantage to the defendants and a loss to the plaintiff. The fiduciary burden of a promoter is recited in a number of Wisconsin cases. Farmers Merchants State Bank v. Perry (1925), 186 Wis. 93, 202 N.W. 179; Fountain Spring Park Co. v. Roberts (1896), 92 Wis. 345, 66 N.W. 399. See also 1 Fletcher, Cyc. Corp. (perm. ed., 1963 rev.), p. 721, sec. 192.
Since a fiduciary relationship existed, it was not necessary that the representations were of such a character as to have influenced the conduct of an ordinarily prudent person. Miranovitz v. Gee (1916), 163 Wis. 246, 256, 157 N.W. 790.
The appellant urges that the reason for the plaintiff's loss was the bankruptcy of the corporation, which in turn resulted from the lack of adequate capital. Even if this were accepted as an explanation of the ultimate failure of the company, it would not exculpate the defendants from their misrepresentations. However, it is to be noted that the jury answered affirmatively to the following portion of Question No. 12:
"Was there a direct relationship of cause and effect between any loss sustained by the plaintiff, Thomas W. Killeen, and
". . .
"(b) the failure to disclose the details of defendants' transactions in relation to the assets of the yard business?"
Even though the promoters expended their own time and money, the failure of the venture does not relieve them from liability for deceitful inducements to those who subscribed for stock. 4 Fletcher, Cyc. Corp. (perm. ed.), p. 395, sec. 1691.
There was conflicting evidence presented to the jury as to the existence of deceit. The promoters had special knowledge of the financial structure of the new corporation which they did not fully disclose to the plaintiff, although it was their fiduciary duty to do so. Whether the misrepresentations were affirmatively made or resulted from nondisclosure, these were factual issues which the jury was obliged to resolve. The verdict is supported by credible evidence which was "clear and satisfactory," and it cannot be disturbed Kamuchey v. Trzesniewski (1959), 8 Wis.2d 94, 98, 98 N.W.2d 403. The trial court was warranted in granting judgment upon the verdict.
The plaintiff-respondent has asked us to review the amount of damages awarded. It is his position that there is undisputed evidence that the value of the stock was not $4,000 as found by the jury but in fact was only $2,000. We believe that the jury was entitled to have considered other factors in determining the value of the stock than the amount of the cash investment of the promoters. For example, the three promoters obligated themselves personally for a portion of the cost of the lumberyard, in excess of their cash investment. The evidence did not necessitate the $2,000 evaluation. The motion for review must be denied.
By the Court. — Judgment affirmed. The plaintiff-respondent shall have his costs upon this appeal.
WILKIE, J., took no part.