Hodges v. Heier

¶1(concurring).

¶2I respectfully concur.

¶3All of the litigants concede that an error was made herein by the defendants’ attorney, but the plaintiff insists that he is entitled to capitalize thereon since he was misled thereby.

¶4I am of the opinion that plaintiff was not misled by the erroneous balance sheet footnote, indicating that Salta held 700 treasury shares instead of 70. And while the option agreement warrants that the balance sheet is correct, the evidence convinces me that plaintiff knew or should have known that the disputed footnote was an error, obvious on the face thereof. Thus, I conclude that the plaintiff did not rely upon the balance sheet nor upon the warranty to his detriment. The explanation for having reached the foregoing conclusion is hereinafter set forth.

¶5Plaintiff was interested only in obtaining New Orleans Stockyards, Inc. stock to gain control of that corporation. His efforts to acquire New Orleans Stockyards majority control date back several years before the option agreement was signed. Until 1952 the Hodges family were majority stockholders in that corporation, but upon the death of plaintiff’s father they lost control. Shortly thereafter, Salta was incorporated and the primary asset thereof consisted of New Orleans Stockyards, Inc. stock. A total of 2,518 of a possible 5,000 shares of New Orleans Stockyards stock was owned by the Salta Corporation and the defendants individually, who thereby controlled Salta. For each share of New Orleans Stockyards, Inc. stock owned by the Salta Corporation, it issued one of its own shares of stock.

¶6In 1958, plaintiff approached Andrew Hillery, one of Salta’s directors, and initiated negotiations for the purchase of New Orleans Stockyards stock from either the corporation or its officers who owned these shares individually. Hillery related that the plaintiff initially offered to pay $65.00 per share therefor which was rejected. Thereafter they negotiated over an extended period of time and gradually the price per share through offer and counteroffer was increased. Finally the plaintiff offered to pay $95.00 per share for this stock, but Hillery’s proposal to the other stockholders of New Orleans Stockyards was refused; however, they made a counteroffer to sell their stock at $100.00 per share. Plaintiff was willing to pay that price.

¶7At the request of the Salta incorporators, the parties agreed that the New Orleans Stockyards stock would not be sold outright by the corporation and the individual holders thereof because the defendants would gain a tax advantage by handling the trans*796fer as a sale of the Salta Corporation outright. Plaintiff did not object to this method of transfer since, in acquiring Salta, he would obtain its primary asset, namely, the block of New Orleans Stockyards stock that the corporation owned.

¶8Negotiations for the transfer continued over a period of months between plaintiff and Hillery and Ewell Potts, Salta’s attorney. Both Hillery and Potts asserted that plaintiff knew that Salta’s stock had been issued on a one for one basis with its holdings of New Orleans Stockyards stock.

¶9Plaintiff denied that he knew that the Salta and New Orleans Stockyards stock were one for one, but he stated he did know, as a minority stockholder, that Salta voted 2,348 shares of New Orleans Stockyards stock at that meeting. He also possessed a copy of Salta’s charter, which limited it to the issuance of a total of 2,518 shares.

¶10When the option agreement was signed in August 1959, a balance sheet covering Salta was presented to the plaintiff. After the option was signed and before plaintiff exchanged a check in the amount of $10,-000.00 for the option, he asked for an explanation of the Salta assets listing its own holding. It was then that Potts added the footnote showing there were 2,418 shares of Salta, of which 700 were treasury shares. The agreement required Hodges to pay $100.00 for each outstanding share.

¶11Plaintiff testified that he used this balance sheet to compute the cost of obtaining the Salta Corporation. Because the statement noted that 700 of the 2,418 shares were treasury shares, he expected to pay $100.00 per share for 1,718 shares, or a total of $171,800.00.

¶12The sale was consummated on February 23, 1960. A day or two before the sale,, Potts called plaintiff to inform him the exact amount of each check and designated the payee thereof. At that time plaintiff knew that the defendants would deliver a total of 2,348 shares of Salta stock. Although plaintiff’s worksheet reflected that he would be required to pay not over the sum of $171,800.00, nonetheless he prepared checks and promissory notes totaling $251,-800.00 and accepted delivery of 2,518 shares, which comprised 2,348 owned by Salta and 170 owned by the individual stockholders thereof.

¶13Hodges laboriously offered the explanation, which of course taxes my credulity, that he did not question the difference of $63,000.001 in the purchase price because he assumed that Salta had reissued 630 of the 700 treasury shares back to the defendants individually. Predicated upon that unjustified and nebulous assumption, he indulged in the further assumption that since the option had established the fair market price at $100.00 per share that Salta would resell its treasury stock at this price. Thus he erroneously concluded, since he very obviously started from a false premise, that while he was paying considerably more than his worksheet revealed that he was required to pay therefor, he expected to acquire a corporation with $63,000.00 more in its cash account.

¶14In my opinion, the foregoing explanation is not only implausible, it is fallacious. Hodges, an experienced business man whose knowledge of accounting is emphatically demonstrated by his December.worksheets, paid, without question or equivocation, considering the haggling over price which had existed over a period of several years, $63,000.00 more than he states he had ever anticipated paying therefor. In addition thereto, when he was presented a balance sheet at the time fixed for the sale, he tediously insisted that he did not examine it because he relied entirely on the warranty. The balance sheet is, to say the least, quite simple, and it is of special interest to refer thereto and note well that it does not reflect that the cash account asset was increased by $63,000.00, and it reveals the same treasury stock entry as an asset that the July balance sheet contained.

¶15*797The author hereof would have to place himself in the category of one of the proverbial three monkeys who saw no evil, heard no evil, nor spoke evil in order to believe plaintiff’s statement to the effect that he would pay $63,000.00 more in cash than his December calculations indicated was necessary to acquire the corporation without even glancing at the February 23rd balance sheet in order to ascertain if the cash account had been increased by $63,000.00 through the reissuance and sale of 630 treasury shares, especially since he actually knew how many shares Salta would deliver at least one day before the sale.

¶16Further, it is inconceivable that the defendants would purchase treasury stock at $100.00 per share after the plaintiff had obtained his option to acquire the corporation. Since the defendants were committed to redeliver the stock to Hodges at the sale at the same price, it is highly improbable that they would invest their own funds in treasury stock when there was no hope of profiting from the investment.

¶17Finally, had plaintiff relied on the balance sheet, he would ultimately have expended $171,800.00 for 2,348 shares of New Orleans Stockyards, Inc. stock, Salta’s principal asset. This is absolutely unrealistic when considered together with the very significant facts set forth hereinafter.

¶18(1) Plaintiff only bought Salta to obtain its New Orleans Stockyards Inc. holdings.

¶19(2) Sale of the Salta Corporation stock instead of sale of the New Orleans Stockyards stock was only done for tax advantages to the Salta stockholders.

¶20(3) Plaintiff’s earlier efforts to acquire New Orleans Stockyards stock at $95.00 per share had been rejected by the defendants, who' ultimately would accept only $100.00 therefor.

¶21Had plaintiff expected to acquire the Salta holding of 2,348 shares of New Orleans stockyard for $171,800.00, he would in effect be paying approximately $73.00 per share for New Orleans Stockyards stock. To reiterate merely for the purpose of emphasis, it taxes my credulity to accept Hodges laborious assertion that he expected to acquire this stock for $73.00 per share when his earlier offer of $95.00 had been rejected by the defendants.

¶22You may place the law in bondage, but the wizard “justice” possesses its own way of setting the victim free.

¶23I, therefore, conclude that a judgment of $63,000.00 in plaintiff’s favor is not supported by the record, but on the contrary the defendants’ position is fully substantiated therein.

¶25(dissenting).

¶26My first impression from the oral argument in Court was that the District Court’s judgment had to be reduced to the value of the St. Bernard Bank shares and the vacant lot of ground. However, after reading the transcript of testimony and the accompanying documentary evidence, I have concluded the judgment should be amended and affirmed, as stated below.

¶27The execution of the Option Agreement was the culmination of long and tedious negotiations between Plaintiff and Defendants, and their respective attorneys, Defendants being represented in the negotiations by Mr. Ewell C. Potts, Jr., as their attorney and bookkeeper. These negotiations were completely at arms’ length. Pri- or to the execution of the Option Agreement, Plaintiff had actually filed suit against Defendants, the holders of the majority shares of Stockyards, because he felt they had paid themselves excessive salaries.

¶28One of Plaintiff’s reasons for the purchase of Salta shares was his desire to gain control of Stockyards.

¶29After several years of hard bargaining the Option Agreement was finally reached and typed in Mr. Potts’ office, each page bearing his initials. He was the sole witness.

¶30*798Because Defendants were afraid Plaintiff might not exercise his option, Defendants denied him an opportunity to examine Salta’s books and records; for which reason Plaintiff insisted that Defendants warrant the accuracy of the balance sheets of both Salta and Stockyards attached as Exhibits to the Option Agreement. Mr. Potts certified the Salta balance sheet to be “a true financial statement of the Salta Corporation,” on the lower left-hand corner of which appears the following language:

“Salta Corporation, Capital—

2418 Shares of Capital Stock of Salta Corporation outstanding, 700 of which are owned by the Corporation as Treasury Shares.”

¶31The Salta balance sheet also contained the items of the St. Bernard Bank shares and the vacant lot of ground.

¶32The express warranties in the Option Agreement pertinent here, are:

1. That the balance sheet of Salta Corporation “reflects the true financial statement of the said corporation as of July 31, 1958.”

2. “That the financial condition of the Salta Corporation and the New Orleans Stockyards, Inc., respectively, on the date of delivery of the shares by GRANTEES unto GRANTOR as called for herein, shall be at least as good as it appears in the said Exhibits A and B, less only ordinary operating expenses as may be required, and that neither the Salta Corporation nor the New Orleans Stockyards, Inc., have any liability of any nature other than those as shown on the attached Exhibits A and B.”

3. That if any dividends are paid “from the date hereof until the delivery of the shares of stock as called for hereinabove, the total sales price, as above, shall be reduced by any such amount so received by Grantees.”

¶33These warranties are in clear and unequivocal language, and were made to assure Plaintiff that the financial condition of Salta would not be depleted prior to the sale, and to avoid an investigation of the internal affairs of Salta by Plaintiff in case he should not exercise his option.

¶34Following notice on January 20, 1960 to Defendants that Plaintiff would exercise his option, the sale was made on February 23, 1960. The sale agreement specifically recited that the terms of the Option Agreement would remain in full force and effect and were in no manner waived by Plaintiff.

¶35Plaintiff promptly wrote Defendants a letter confirming that he paid the purchase price rather than delay the sale awaiting his auditors’ examination and report.

¶36Plaintiff’s accountants reported to him that Defendants had violated the following express warranties:

1. Instead of the corporation owning 700 Treasury Shares of 2418 Shares issued, it owned only 70 Treasury Shares, without any cash addition to its assets in lieu of the 630 missing Treasury Shares.

2. On February 23, 1960, a dividend was declared, whereby Defendants obtained the 28 shares of the St. Bernard Bank for no consideration.

3. On the same day, Defendants obtained the lot of ground for no consideration.

¶37Plaintiff insisted upon an accurate and warranted balance sheet because he had no other means of deciding whether or not it was advisable for him to exercise his option. Plaintiff’s complete reliance upon the warranted balance sheet is fully supported by his Exhibit No. 11, which contains the figures he used. This Exhibit bears the *799notation, “12/59 R.H.,” which means December, 1959, and Plaintiff’s initials.

¶38On this document Plaintiff deducted from the outstanding shares of Salta the 700 shares expressly warranted as having been owned by Salta as Treasury Shares in the balance sheet which, at $100.00 per share, totals $70,000.00.

¶39Plaintiff and his accountant (Mr. Ott) both concluded that there were only 1718 shares of stock outstanding on that date, since the total number of shares issued was 2418, less 700 Treasury Shares. Defendants did deliver 2348 shares instead of 1718. Plaintiff explained that he presumed the corporation had sold 630 of its 700 Treasury Shares to the stockholders at their true value of $100.00 per share, which would not justify his objection because, had the missing 630 shares been so sold, Salta’s assets would have been increased by $63,000.00; accruing to Plaintiff as the new owner of Salta.

¶40There can be no doubt that, because Defendants failed to deliver the Bank shares and the real estate, Plaintiff is entitled to recover their value, fixed by expert testimony at $2186.00.

¶41The real issue is whether Defendants are liable for the value of the 630 Treasury Shares, which were neither produced in kind nor their cash value of $63,000.00.

¶42In the case of Carolet Corp. v. Garfield, 339 Mass. 75, 157 N.E.2d 876, plaintiff purchased from defendants 600 shares of a designated corporation. Prior to the sale, defendants had furnished plaintiff a detailed statement of the financial condition of the corporation as of October 31, 1948. At the time of the purchase (January 13, 1949) defendants made certain express written warranties, including the following:

“ … each of the undersigned warrants and represents to you … 3. That the balance sheet as of October 31, 1948, and the profit and loss statement for the year ended the same date, copies of which are attached hereto, are true and complete and fairly represent the financial condition of the (corporation) as of such date, including all liabilities contingent or otherwise and the results of the operations of the (corporation) for the period indicated … 4. That there has been no material adverse change in the condition of the (corporation) as set forth in said balance sheet as of October 31, 1948.”

¶43After the sale it was found that the financial statement failed to reflect the true condition of the corporation in the amount of $92,265.68. The trial court rendered judgment for that amount, plus interest.

¶44The Supreme Court of Massachusetts affirmed the judgment of the lower court, and after an extensive review of all of the authorities, stated the following:

“The express written warranty that the balance sheet reflected all liabilities and was otherwise true and accurate, and the findings of the master that the assets and liabilities of the corporation were not as shown on the balance sheet in specified particulars, were sufficient to support the final decree.”

¶45The Court also held that the warranty was enforceable “irrespective of any fraud on the part of the seller or knowledge on his part that the representations constituting the warranty were untrue.”

¶46In McCarthy v. Tetyak, 184 Kan. 126, 334 P.2d 379, defendant sold all of the stock in a named corporation, attaching thereto a balance sheet purporting to show all assets and liabilities. In the sale, the vendor warranted that the balance sheet “was complete and correct.” The purchaser later discovered several undisclosed liabilities and sued to recover the amount of such liabilities. The Supreme Court affirmed the judgment for Plaintiff for the full amount of the undisclosed liabilities.

¶47In the case of Gibbens & Gordon v. Crane Co., 15 La.App. 335, 131 So. 73, *800plaintiff sought damages for breach of contract because defendant had warranted that certain material sold to plaintiff would be accepted by the U. S. Steamboat Inspectors. The Inspectors rejected the material. Even though defendant established that the local Inspectors had erred in rejecting the material, the Court of Appeal held that defendant, by warranting that the material would be accepted by the Inspectors, had made an absolute warranty and was bound thereby; the Court reasoning that an express warranty cannot be set aside on the basis of an ■error.

¶48When paying the full sum demanded by Defendants pursuant to Mr. Potts’ assurance it was the total amount due, Plaintiff was then without means to verify the accuracy of the figure until his auditors could ■check the books and records of the corporation.

¶49Mr. Potts explained why, prior to the ■sale, Plaintiff had only seen the balance ■sheet made part of the Option Agreement, as follows:

“A. Yes, sir, Mr. Hodges did not have to have records of the Salta Corporation during that period, because the transaction was based on the hundred dollars a share for each outstanding share of stock of Salta, the 170 of New Orleans Stockyards Corporation, and the fact that neither corporation had changed its financial condition during the intervening period, from the date of the option to the time of the passing of the act of sale. It was at the time of the act of sale when I delivered to Mr. Hodges all of the records of Salta Corporation.”

¶50Defendants have never explained, however, why it was that, notwithstanding a month elapsed between Plaintiff’s exercise of his option (January 20, 1960) and the completion of the sale (February 23, 1960), Plaintiff was not given access to Salta’s books until after the completion of the sale and the payment of the purchase price. Once Plaintiff exercised the option, there could no longer be any fear that Plaintiff sought the option as a ruse to examine Salta’s books.

¶51A payment made in error can be recovered by the party who made the overpayment.

LSA-C.C. Art. 2301.

“He who receives what is not due to him, whether he receives it through error or knowingly, obliges himself to restore it to him from whom he has unduly received it.”

¶52I cannot draw any difference between Defendants’ responsibility under the warranties for failing to deliver the St. Bernard Bank shares and the vacant lot, on the one hand, and the missing 630 Salta Treasury Shares, on the other hand, as assets of Salta. However, I am firmly convinced that Defendant-Hillery, spokesman with attorney-bookkeepér Potts for Defendants in all the negotiations with Plaintiff, was as well-informed as was Mr. Potts regarding the Treasury Shares warranty.

¶53Express warranties must be fulfilled unless it is shown that warrantee had, or should have had, full and complete knowledge that the warranties were clearly erroneous; or unless the warrantee’s conduct borders» on fraud and ill-practice, which I cannot find present in this case, particularly because warrantee was denied access to the books before exercising his option. Both parties were hard-bargainers, competent businessmen, represented by competent counsel, and should be held to strict compliance with their bargain and warranties.

¶54It must be remembered that Plaintiff is not demanding damages for Defendants’ failure to deliver the 630 Treasury Shares, but seeks only the return of the purchase price paid for such shares, which Defendants failed to deliver as an asset of Salta, along with the other assets listed on the warranted balance sheet.

¶55*801It is my opinion that the judgment of the District Court should be affirmed in awarding Plaintiff the $63,000.00, but Defendants should not be cast in solido, each only for his pro rata thereof, to be determined by the percentage the promissory note he received bears to the whole $125,000.00 credit portion of the purchase price paid by Plaintiff; i. e., if a Defendant received 15% of such credit portion, he should be cast in judgment for only 15% of the $63,000.00 judgment; not in solido for the whole.

¶56Rehearing denied; YARRUT, J., is of the opinion that a rehearing should be granted.