Norman B. LAWTON and Leonard B. Lawton, Appellants, v. Dorothy K. STRONG, Appellee, 249 F.2d 299

ALLEN, Circuit Judge. This appeal attacks the judgment of the District Court entered in a ease tried without a jury, adjudging defendants liable for damages for constructive fraud in the purchase by defendants from the plaintiff, their sister, of 8,020 shares of stock in the Star Cutter Company, a Michigan corporation, formed in August, 1949. The business had been started in 1927 by the father of plaintiff and defendants. It had operated as a family corporation until 1940 and as a family partnership from 1940 to 1949.

The transactions between the parties arranging for the sale of plaintiff’s stock to defendants were instituted while the concern was a partnership and were intended to bring about the purchase of plaintiff’s partnership interest. At the time of the negotiations for sale, defendants were the working partners having control and charge of the operation of the business, plaintiff for several years having been an inactive partner.

During this inactive period plaintiff sometimes requested to be allowed to draw money from her capital account, in which profits had accumulated, but was informed that there was no money then available for her. The partnership articles provided for division of the profits “annually.” Since plaintiff derived little income from the partnership for several years, she intended to dispose of her partnership interest and, on the advice of her mother, she consulted defendants, her brothers.

Plaintiff requested information from defendants as to what her interest was worth and testified that defendants in effect said they would examine the books and let her know. Defendants testified that they told plaintiff they would see how much they could afford to pay for her interest and would give her the information. Defendant Norman Lawton later reported that he and Leonard Lawton would pay $30,000, $10,000 of which would come from plaintiff’s drawing account in the partnership and $10,000 from each of the brothers.

Later, under the advice of the partnership accountant, to avoid questions that might arise under the tax laws, defendants had the partnership changed into a corporation. Plaintiff assigned her 8,-020 shares of stock to defendants on receipt of one check for $10,000 from each defendant. The book value of plaintiff’s stock at the time of transfer was at least $80,200, but plaintiff had no knowledge of this. The court found that it was the duty of the brothers to “fully inform the sister as to the financial affairs of the partnership and the book value of the sister’s interest.

This they did not do.” The District Court found that the sale of the stock and the contract for the sale of plaintiff’s partnership interest were parts of one and the same transaction and that a fiduciary relationship existed between the parties.

The court held that in view of defendants’ control and complete knowledge of the business as compared to plaintiff’s lack of knowledge, in view of the fiduciary relation existing between partners under which the obligation of utmost good faith exists and the reliance of plaintiff upon her brothers, plaintiff was entitled (1) to a fair and adequate price for her interest, and (2) to information from defendants which would enable her to form a sound judgment of the value of what she sold. This holding is in accord with the applicable law, including the Michigan decisions. Brooks v. Martin, 2 Wall. 70, 17 L.Ed. 732.

In the Brooks case one partner was the sole agent of the partnership for another, who relied on him wholly for true accounts. As declared by the Supreme Court, page 82 of 2 Wall.: “If the parties are to be regarded in this transaction as holding towards each other no different relations from those which ordinarily attend buyer and seller; and as, therefore, under no special obligation to deal conscientiously with each other, we are satisfied that no such fraud is proven as would justify a court in setting aside an executed contract.

But there are relations of trust and confidence which one man may occupy towards another, either personally, or in regard to the particular property which is the subject of the contract, which impose upon him a special and peculiar obligation to deal with the other person towards whom he stands so related, with a candor, a fairness, and a refusal to avail himself of any advantage of superior information, or other favorable circumstance, not required by courts of justice in the usual business transactions of life.” The court then continues, page 85 of 2 Wall.: “We lay down, then, as applicable to the case before us, and to all others of like character, that in order to sustain such a sale, it must be made to appear, first, that the price paid approximates reasonably near to a fair and adequate consideration for the thing purchased; and, second, that all the information in possession of the purchaser, which was necessary to enable the seller to form a sound judgment of the value of what he sold, should have been communicated by the former to the latter.” Buckley v.

Buckley, 230 Mich. 504, 508, 509, 202 N.W. 955; Backus v. Kirsch, 264 Mich. 339, 342, 343, 249 N.W. 872. Cf. Lightner v. W. H. Hill Company, 258 Mich. 50, 242 N.W. 218, 84 A.L.R. 601. See also Goodrich v. Waller, 314 Mich. 456, 461, 462, 22 N.W.2d 862. Defendants vigorously contend that no evidence was introduced of misrepresentation or fraud. The court specifically found that defendants had practiced concealment and given untrue statements in answer to plaintiff’s request for information. While the testimony on this point is in conflict, this finding is supported by the record.

Moreover, in case of constructive fraud such as may exist in a fiduciary relationship it is not necessary to prove deliberate or intentional fraud. Brooks v. Martin, supra, 2 Wall. 82, 85; Goodrich v. Waller, supra. Defendants also contend that the record presents no proof of damages. This contention is based upon their theory that no evidence was presented of the actual value of plaintiff’s partnership interest. The court, they contend, relied only upon book value in its determination of damages. The majority of the court concludes that this contention has no merit.

The court had before it, and evidently considered, items of evidence as to value apart from book value. It is true that in effect the court found the book value equivalent to actual value, for it found specifically that plaintiff’s stock was worth not less than $93,200 and not more than $106,177.97. The last figure is the book value of plaintiff’s interest for late May or early June of 1949. Where, as here, no market value is shown, the value of stock may be shown by evidence tending to show its intrinsic value. Commonwealth of Virginia v. State of West Virginia, 238 U.S. 202, 213, 35 S.Ct. 795, 59 L.Ed. 1272.

Such evidence was presented here. This business had been a prosperous and growing concern for many years before and up to the transaction of 1949. The record shows that the partnership made substantial profits.

The court found that the profits were applied to the respective drawing accounts of the partners in proportion to their respective interests and that “Norman and Leonard being working partners, withdrew funds from their shares of the capital for living expenses, and the profits of Dorothy and her sister Vivian continued to pile up because they did not withdraw their shares.” In the year 1948 the partnership had cash on hand in the amount of $127,600 and in the year 1949, when the sale was consummated, there was $157,800 cash on hand. The accounts payable during that time were between $20,000 and $30,000.

The partnership- articles expressly made book value the determining factor in valuation of a partnership interest upon severance-due to “voluntary retirement, death, bankruptcy or otherwise * * - *>> The value of the partnership herein was based upon cost of assets-, all liabilities and depreciation being deducted, with nothing added for good will.

It was shown by defendants’ witness, accountant for both the partnership and the corporation, that the concern had a very substantial volume of business. .When the contract of sale was made between plaintiff and defendants few contingent liabilities existed against the corporation. Two important controversies with the government had been settled and closed.

That the parties regarded book value as being the value, both of the-partnership interest and of the stock, was shown by the fact that when the corporation was formed each partnership interest was transferred in full payment for the stock received by each partner. Moreover, defendant Leonard Lawton, secretary and treasurer of the corporation, in charge o-f personnel, much of the purchasing, maintenance, and general work in the plant, testified that his own stock in the new corporation was worth $10 a share. If this was true, plaintiff’s stock was worth the same amount and in the aggregate was worth $80,200.

This testimony of Leonard Law-ton is not considered in the dissenting opinion. By the great weight of authority the owner of personal property is qualified by his ownership alone to testify as to its value. 37 A.L.R.2d 974 and cases cited from 40 states. The weight of such testimony is, of course, affected by the owner’s knowledge of circumstances which affect value. Hellstrom v. First Guaranty Bank, 54 N.D. 166, 209 N.W. 212, 45 A.L.R. 1487; Kohl v. Arp., 236 Iowa 31, 17 N.W.2d 824, 169 A.L.R. 1067. Cf. Kinter v. United States, 3 Cir., 156 F.2d 5, 172 A.L.R. 232.

This rule is also applied in the State of Michigan. Kavanagh v. St. Paul Fire & Marine Insurance Co., 244 Mich. 391, 221 N.W. 119; Mason v. Partrick, 100 Mich. 577, 59 N.W. 239. Cf. Andries v. Everitt-Metzger-Flanders Co., 177 Mich. 110, 142 N.W. 1067; Michaud v. Grace Harbor Lumber Co., 122 Mich 305, 81 N.W. 93. The testimony of defendant Leonard Lawton that his stock in the corporation was worth $10 a share was not only competent but was based upon exceptional experience. He and his brother Norman had been for a number of years, as' the court found, substantially exclusive managers of the partnership.

No financial reports were issued to any members of the partnership but defendants, by virtue of their management, had personal knowledge of the property, of the-business and assets of these two concerns. This fact rightly gave weight to-defendant Leonard Lawton’s testimony as to the value of the stock and strongly supported the finding of the court that the value of plaintiff’s partnership interest at the time defendants agreed to purchase it was at least the amount of book value.

Yet, in spite of Leonard Lawton’s exclusive knowledge and experience and his fiduciary relationship to- plaintiff, he-told her upon inquiry that she would be-lucky to get $3,000 for 8,020 shares, although he himself recognized and testified that the stock was “worth $10 a share.” The court found specifically that “there was nothing included in the book value that actually was not there in the business.” The majority of the court concludes that the District Court rightly found that plaintiff’s interest was worth the book value, that plaintiff relied on the information given by her brothers, and that there was a great disparity between the $20,000 that she received and the $80,200 which plaintiff’s shares were worth.

We cannot say that these findings are clearly erroneous. In fact, the findings in general are clearly correct. Under Federal Rules of Civil Procedure, rule 52, 28 U.S.C., we are bound by the facts determined by the District Court. The judgment is affirmed. . The parties will be denominated as in the court below.