Opinion
No. 296.
Argued June 5, 1973. —
Decided June 29, 1973.
APPEAL from a judgment of the circuit court for Brown county: JAMES A. MARTINEAU, Circuit Judge of the Twentieth Circuit, Presiding. Affirmed.
For the appellants there were briefs by Whyte, Hirschboeck, Minahan, Harding Harland, S.C., attorneys, and Richard C. Ninneman and James W. Mohr, Jr., of counsel, all of Milwaukee, and oral argument by Mr. Ninneman and Mr. Mohr.
For the respondents there was a brief by Everson, Whitney, O'Melia, Everson Brehm, S.C., attorneys, and John C. Whitney of counsel, all of Green Bay, and oral argument by John C. Whitney.
The plaintiffs-lessors seek to enforce a rental-payment guaranty provision of a lease.
Merrill Vandervest and his wife are the plaintiffs-respondents and the lessors in the lease agreement. In 1965 they were owners of a vacant piece of property located in the city of Green Bay. Defendant Kauffman Pizza, Inc., a newly created Wisconsin corporation, was the lessee but is not an appellant herein. The defendants-appellants are Dr. Kenneth Dean Powers, Dr. F. K. Hartley, Dr. Alvin A. Hartley and their wives. They are stockholders in Kauffman Pizza, Inc., and were the guarantors of the rental payments on the lease executed by the corporation. All of the guarantors reside in Wichita, Kansas.
Sometime during the first part of 1965, the Vandervests were contacted by one Henry Martin, a real estate agent, with respect to the sale or leasing of their vacant property. On July 4, 1965, Martin called Mr. Vandervest informing him that one Gordon Kauffman would like to discuss a business proposition as to this property. Vandervest went to Martin's office to meet with Gordon Kauffman. Kauffman told Vandervest that he wanted to put up a pizza parlor for three doctors. He added that these doctors had given him $10,000 to go through the Fox River Valley to find a site for a Shakey Pizza Parlor. Kauffman then said that these doctors would back up a lease to construct a building on the Vandervests' vacant property. The basis of the offer was that if the Vandervests constructed a Shakey Pizza Parlor on their own property it would be leased for one percent per month of the Vandervests' total investment. Kauffman added that the proposed lease would be guaranteed by these three doctors and their financial statements would be submitted. Kauffman then showed the Vandervests the building plans for Shakey's parlor and submitted them to several contractors for bids on the cost of constructing the building. The construction company owned by Mr. Frank Zeise was the successful bidder. Kauffman and Vandervest went to the Kellogg Citizens National Bank of Green Bay to seek financing. They dealt with Mr. Nick Conlon, the bank's assistant vice-president. A lease agreement was then negotiated. The terms and conditions were discussed between these three people but Kauffman and Conlon ended up "handling the lease." In the course of negotiations it was orally agreed between these three people that the bank loan payments for the building proposed to be constructed by Vandervest were to be one percent of the total investment per month. The total was estimated to be $130,000 — $105,000 to construct the building and $25,000 the value of the land. The lease was to run for ten years. At one percent the monthly payments would be $1,300.
Vandervest testified that Gordon Kauffman informed him of these facts. Appellants objected to this testimony on the grounds of hearsay and that "agency" cannot be proven by an agent's out-of-court declarations. The court allowed the testimony in as an "operative fact" and to show Vandervest's state of mind, his understanding and his reliance in dealing with Gordon Kauffman. It was not allowed in to prove "agency." This alleged error will be considered in the opinion.
The doctors own the Shakey Pizza franchise.
Vandervest had a limited education and was unsophisticated in complicated business transactions.
Kauffman wanted the construction of the building to commence immediately but Vandervest refused until a written lease was signed and personally guaranteed by the doctors and their wives after he saw their financial statements. Vandervest's agreement was dependent on the doctors' solvency and their guaranty. The doctors' financial statements were sent to Vandervest. Dr. Kenneth D. Powers' statement was dated April 14, 1965, Dr. Alvin A. Hartley's statement was dated April 6, 1965, and Dr. F. K. Hartley's statement was dated February 28, 1965. In the assets column on each of these statements none listed any stock in Kauffman Pizza, Inc. This could only be so because Kauffman Pizza, Inc., was not incorporated in this state until July 20, 1965. As a result, it is critical to note at this juncture that: (1) These statements were made prior to the existence of Kauffman Pizza, Inc.; (2) that prior to the corporation's existence, Kauffman had been dealing with Vandervest; and (3) when Kauffman first began to deal with Vandervest, Kauffman Pizza, Inc., was not yet in existence. The appellants contend that at all times Kauffman was the corporation's agent and not the agent for the doctors.
This is evidenced by the articles of incorporation filed with the secretary of state.
At no time prior to the execution of the lease did Vandervest have any discussion, conversation or other communication with the three doctors as to the terms of the lease. On September 17, 1965, in Wichita, Kansas, Kauffman's Pizza, Inc., signed a lease as the lessee. Gordon Kauffman and his wife signed it personally. Also that day in Wichita the three doctors and their wives signed the lease as guarantors. The lease was then brought up to Green Bay to be signed by Mr. and Mrs. Vandervest. On September 24, 1965, the Vandervests signed the lease as lessors. The material parts of the lease in question are as follows:
"THIS INDENTURE OF LEASE, Made and entered into this 24th day of September, 1965, by and between Merrill Vandervest and Evelyn Vandervest, his wife, hereinafter called `Lessors' and Kauffman's Pizza, Inc., hereinafter called `Lessee':
". . .
"2. That the term of this lease shall be for a period of ten years beginning on the date of completion of said building, said completion to be agreed upon by and between Lessors and Lessee and ending ten years after said date.
"2 1/2. This lease is contingent upon financing by the lessors.
"3. The total rent for said premises during said ten year term shall be the sum of $156,000.00 in lawful money of the United States of America, payable in installments of $1,300.00 per month, in advance, the first such installment to be payable on the execution of this lease and a similar one to become due on the same day of each calendar month thereafter until said sum of $156,000.00 shall have been paid. All of said installments shall be payable at the residence of Lessors at 1957 Preble Avenue, Green Bay, Wisconsin, or at such other place as may be designated by the Lessors, and Lessee promises and agrees to pay said rent in the manner and at the time above set forth. Lessors acknowledge receipt from Lessee of the sum of $2,600.00 as and for the rental for the first month and last month of said term, and it is agreed that any of said prepaid rental for the last month of said term may, at the option of Lessors, be applied upon the rental for any other month or months which may become due and remain unpaid hereunder.
". . .
"IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the day and year first above written.
"WITNESSED: /s/ Geraldine M. Schenk /s/ Merrill D. Vandervest — -------------------------- -------------------------------- Geraldine M. Schenk Merrill D. Vandervest, Lessor /s/ Robert H. Flatley /s/ Evelyn M. Vandervest — -------------------------- -------------------------------- Robert H. Flatley Evelyn M. Vandervest, Lessor KAUFFMAN'S PIZZA, INC., Lessee: By /s/ Donald Love ------------------------------- Donald Love, President /s/ James F. Pressentin ------------------------------- James F. Pressentin, Secretary /s/ Alvin A. Hartley ------------------------------- Alvin A. Hartley /s/ Gordon S. Kauffman ------------------------------- Gordon Kauffman, personally". . .
"GUARANTORS
"For value received and in consideration of the Lessors making the within lease we hereby guarantee the payment of the rent and the performance of the covenants to be observed and performed by the Lessee in the within lease covenanted and agreed, in manner and form as in said lease provided; provided, however, that guarantors shall have no liability hereunder unless lessees give Kenneth Dean Powers, M.D., 2703 East Central, Wichita, Kansas, notice in writing within thirty (30) days of any such default; and provided, further, that guarantors shall have a reasonable time after the receipt of such notice to cure such default or to cause such default to be cured.
"WITNESS, our hands and seals this 17th day ofSept., A.D., 1965, at Wichita, Kansas.
"In the presence of: /s/ James Asmann /s/ Lela Kauffman — ---------------------------- ------------------------------- James Asmann Lela Kauffman /s/ Kenneth Dean Powers, /s/ Maurine Bayler M.D. — ---------------------------- ------------------------------ Maurine Bayler Kenneth Dean Powers, M.D. /s/ Janet Powers ------------------------------ Janet Powers, his wife /s/ F. K. Hartley, M.D. ------------------------------ F. K. Hartley, M.D. /s/ Doris Hartley ------------------------------ Doris Hartley, his wife /s/ Alvin A. Hartley ------------------------------ Dr. Alvin A. Hartley /s/ Marilyn Hartley ------------------------------ Marilyn Hartley, his wife" On November 2, 1965, the Vandervests procured their loan from the bank for $105,000. Payments were to be $1,300 per month. The Vandervests then assigned the lease to the bank. The rental payments were to apply on the principal and interest of the loan and were to be paid directly to the bank. These payments were to be made by Kauffman Pizza, Inc.Mr. Zeise had already started construction on the building and the bank started paying him from the proceeds of the Vandervest loan. Construction started in the latter part of September, 1965, and the building was finished in January of 1966.
Sometime during this construction period, but after November 2, 1965, the estimated total investment was increased, but it is not clear as to why. There was some testimony that "blacktopping" the parking area of the building caused the increase. On the other hand, the record also shows that the Vandervests' real estate property was reassessed at $30,000 from $25,000, and the construction costs reduced from $105,000 to $104,850. This made the total investment $134,850, making a $48.50 overall increase in monthly payments. The Vandervests executed a promissory note to the bank for this new amount.
Vandervest, at trial, testified that orally or otherwise he did not agree with or insist that the corporation or anyone else change the monthly payments on the lease from $1,300 to $1,348.50. On the other hand, he said he knew the corporation was paying an increase but did not know the exact amount. He did testify that at one time he had discussed an increase in payments with Kauffman. Vandervest never denied knowledge of this paid increase and maintained that the corporation paid the increase on its own and "not me."
In the middle of January, 1966, Kauffman Pizza, Inc., took possession of the building. From January through November of 1966, all payments were made by the corporation directly to the bank. There were 11 payments in all, and they were drawn from the corporation's account. The amounts paid were $1,348.50 per month. During this period the Vandervests did not receive notice of the payments due from the bank, nor did the corporation send its check to them. Instead, everything was transacted between the bank and the corporation.
The first check included the first and last months' rent according to the terms of the lease.
Except for part of the March payment, the checks for the months of February through April were signed by Kauffman. From May through September the checks were signed by Meredith Luckner. For the months of October and November the checks, in the amount of $1,348.50 each, were signed by Dr. Alvin A. Hartley, one of the guarantors and a defendant-appellant.
In December of 1966, the payments were in default and the defendants abandoned the premises. During the period of occupancy, January through November, the Shakey Pizza Parlor was not operated successfully. Kauffman was replaced by Mr. Luckner as manager in May. Kauffman was eventually fired in June. Mr. Luckner was also unsuccessful so Dr. Alvin A. Hartley came up from Wichita and personally managed the business for the last few months.
During the months of March, April or May of 1966, Vandervest made two trips to Wichita, Kansas. The first trip was March 17, 1966. Kauffman had told Vandervest that the doctors wanted to talk to him in Wichita. They went to Wichita where Vandervest met the doctors for the first time. They discussed the possibility of additional pizza parlors in the Fox River Valley and generally the business condition of the Green Bay enterprise.
Vandervest testified:
"Q. What conversation did you have with him?
"A. We discussed more parlors down the valley, down here.
"Q. Well, now tell me what you mean by that.
"A. Down the valley would be like Appleton, Oshkosh, Fond du Lac. That is the valley.
"Q. Well, I mean when you say we discussed with more, we talked about more parlors, what do you mean?
"A. They wanted me to buy more property so they could go ahead and build, I would go ahead and build more parlors for them, but then they made the statement, F. K. Hartley made the statement that if we do go ahead with more parlors down the valley that they wouldn't be, the rent wouldn't be as high as in Green Bay.
". . .
"Q. In the course of that conversation, tell the Court whether there was any discussion of reasons why the rent in other places would not be the same as —
"A. Because they wouldn't need a basement.
"Q. In the course of those conversations that you had with
Mr. Hartley, was there any, will you tell the Court whether there was any mention of the rent, the actual rent that was being paid here?
"A. Yes.
"Q. And what conversation was there concerning that?
"A. He made the statement that the rent wouldn't be no $1,348.50.
"Q. And he explained that how?
"A. Because they wouldn't need a basement.
"Q. Now did you have any meetings at any of the offices of these doctors out there?
"A. No, I went to their office but Gordon Kauffman talked to them.
"Q. In your presence or alone?
"A. In my presence, yes.
"Q. And were you present during all of the time that Gordon was meeting with them, to your knowledge?
"A. Well, see during the day we went to their office and they had a few words together but their real meeting was at night which I wasn't on.
"Q. You say that that was some time in March?
"A. March 17th."
Admittedly, there is some inconsistency and confusion in the record as to what Vandervest discussed with the doctors. Vandervest's prior deposition disclosed that:
"`Q. When did you first meet any of the doctors?
"`A. I went there about April, May of '66.
"`Q. And you say you went "there." Where are you referring to?
"`A. I went there with Kauffman.
"`Q. And where is "there?"
"`A. Wichita, Kansas.'"
"`. . .
"`Q. How many such meetings did you have during the course of this visit to Wichita, Kansas?
"`A. I don't know if you could call it a meeting. Let's say a visit.
"`Q. With whom did you visit?
"`A. F. K. Hartley.
"`Q. And he was the only one of the three doctors or their wives that you discussed the operation of the pizza parlor here in Green Bay with?
"`A. I visited with all three doctors but I visited more with F. K. Hartley and I had dinner there one day. So I met Powers. I didn't meet Powers' wife. Alvin's wife I met too.
"`Q. Now taking each of the three doctors, do you recall what you discussed in the course of your visit with Dr. Alvin Hartley? Mr. Whitney: That was the visit at Wichita? Continuation of the question. In the course of your visit to Wichita in April or May of 1966?
"`A. What did we talk about?
"`Q. Yes. Do you recall the subjects discussed during the course of this visit. First, Dr. Alvin Hartley?
"`A. No, Alvin Hartley didn't — we talked very little about the pizza parlor. Just how Kauffman was doing. That's about it. Is business picking up. That's about it.
"`Q. About Dr. Powers, do you recall the subjects that you discussed with him in the course of this visit to Witchita, Kansas, in April or May of 1966, relative to the pizza parlor here in Green Bay?
"`A. The only thing he told me is any time something goes wrong, call him. If there was something that he should know, call him.'
"Mr. Whitney: Call them.
"By Mr. Ninneman: "`Q. Call them. You say that was the sum and substance of your conversation with Dr. Powers?
"`A. Yes. Because I was with Kauffman and Kauffman just left for a few minutes and he just told me this in a few words.
"`Q. Now you say you had a longer meeting with Dr. F. K. Hartley?
"`A. Let's say visit.
"`Q. Do you recall the things you discussed in this visit with F. K. Hartley?
"`A. Mostly how things were going. That's about it.
"`Q. Did you at any time during the course of this visit discuss the rental payments with the tenant under the lease agreement marked as —'
"`The Court: Which the tenant, not with.
"`By Mr. Ninneman: "`Q. "which the tenant under the lease agreement, marked as Defendants' Ex. #1, which is the September 24, 1965, lease agreement?"
"`A. I guess he did mention, and I says, "Well, as soon as the weather is going to provide, we will do it."
"`Q. What did he mention?
"`A. That we will have to get the blacktopping.
"`Q. Was that the only thing you mentioned with reference to that lease agreement of September 24, 1965, in the course of your visit with F. K. Hartley?
"`A. I can't remember.'"
Mr. Vandervest's second visit to Wichita was with Mr. Luckner in April. The purpose was again to talk about land in the Fox River Valley and, again, this was before Gordon Kauffman was fired. Further, in March, April or May of that year, Dr. F. K. Hartley called Vandervest by telephone and the following conversation took place:
"A. Yes, F. K. Hartley called me.
"Q. When was that?
"A. Oh, I would say it would be like April, May, March or April, something like that.
"Q. What did he say?
"A. He says pretty soon we will have some money for you.
"Q. Did he say anything else, about the occupancy of the building?
"A. Well, he had asked me about Meredith Luckner, what kind of a manager he was, etc., and he had told me that they had a little dispute, trouble, among the three doctors and he was thinking about taking it himself.
"Q. Did you have, — was that the last conversation you had with him?
"A. Eight.
"Q. Did you hear anything further from any of the other doctors or from him?
"A. No."
In January of 1967, the three doctors, with their attorney, Mr. Stout, came to Green Bay to look over the situation. They and Vandervest, with his attorney, Mr. Flatley, met at the building. Mr. Stout and Mr. Flatley then talked alone about the lease, after which Mr. Stout and the three doctors had a private meeting. Later that day Mr. Flatley called Vandervest and told him that Kauffman Pizza, Inc., was no longer going to occupy the building and that the doctors left the keys to the premises with him (Flatley). The building remained vacant for six months.
On June 1, 1967, the premises were rented to and are still occupied by one Bernie Kleinzing for $1,000 per month. The purpose of subletting was to mitigate damages.
Proper notice by the lessors to the guarantors of the lessee's default is not disputed.
It should be noted that at trial the same attorney, one Mr. Richard Ninneman, represented both the corporation and the doctors-stockholders but not 'Mr. and Mrs. Kauffman. If anything, this indicates a "community of interest" and no attempt was made to defend on the part of the corporation. Mr. and Mrs. Kauffman did not appear at trial and were found in default and judgment was rendered against them. The defense offered no testimony and rested after the plaintiffs put in their case.
The court found that (1) Kauffman Pizza, Inc., breached its lease and is in default; (2) the three doctors are in fact the corporation; (3) that Gordon Kauffman was the agent for the doctors; (4) that the doctors were not gratuitous guarantors-sureties under the lease, and (5) that the increase in rent or monthly principal and interest payments of $48.50 did not materially and substantially prejudice the doctors' rights as guarantors under the lease. The plaintiffs did not ask for judgment against the guarantors for a monthly rental rate of $1,348.50 per month but for $1,300 per month less the rental payments received by Vandervest in mitigation.
Other claims and causes of action concerning the breach of lease were litigated but are not at issue here. An interlocutory judgment pursuant to the written guaranty was entered. The guarantors-defendants appeal.
The principal contention of the defendants-appellants-guarantors is that they were gratuitous guarantors or uncompensated sureties, and as such they were entirely relieved of their obligation because of material change in the terms of the guaranty made without their consent. The rule is that a gratuitous surety or uncompensated guarantor is discharged of his obligation if there is a material change in the contract or obligation. It is further true that if the contract of the gratuitous surety is ambiguous it must be liberally construed in favor of the gratuitous surety.
There is a distinction between a guarantor and a surety in that a surety is primarily liable and a guarantor secondarily liable. Associates Financial Services v. Eisenberg (1971), 51 Wis.2d 85, 90, 186 N.W.2d 272, but that distinction is not argued or at issue here.
Sage v. Strong (1876), 40 Wis. 575; Nichols v. Palmer (1880), 48 Wis. 110, 4 N.W. 137.
Associates Financial Services v. Eisenberg, supra.
The plaintiffs-respondents-lessors answer this contention by claiming the guarantors were not uncompensated sureties; that the changes were not material; that Kauffman was in fact the agent of the guarantors and that the plaintiffs-lessors are not asking for any damage or guaranty based upon a change of contract, but only asking for performance of the guaranty as set forth originally in the lease.
A resolution of the dispute between the parties rests, in part, upon equitable consideration. We will discuss the issues generally rather than specifically.
The appellants take exception to the trial court's findings that Kauffman was the agent of the guarantors and that he had apparent authority to bind them and that they were not "gratuitous guarantors." They correctly argue that apparent agency and authority cannot rest solely upon the statements made to third parties by the agent but are dependent upon the principal's manifestation of consent. It is generally held there must be three elements to establish apparent agency: (1) Acts by the agent or principal justifying belief in the agency; (2) knowledge thereof of the party sought to be held; and (3) reliance thereon consistent with ordinary care and prudence.
Hansche v. A. J. Conroy, Inc. (1936), 222 Wis. 553, 269 N.W. 309.
Domasek v. Kluck (1902), 113 Wis. 336, 339, 89 N.W. 139; also see: Ivers Pond Piano Co. v. Peckham (1966), 29 Wis.2d 364, 139 N.W.2d 57.
We believe the finding that Kauffman was the agent of the guarantors is not against the great weight and clear preponderance of the evidence.
The appellants were the sole stockholders and directors of Kauffman Pizza, Inc. At the time of the original negotiations the corporation was not in existence. Vandervest testified (the testimony was objected to) that he was representing three doctors. This testimony was received not to prove the fact stated but to show the subjective state of mind of Vandervest at the time of the negotiations and eventual contract. The franchise to operate a Shakey Pizza Parlor was owned by one of the doctors and not by Kauffman Pizza, Inc., or Kauffman; the building has to be and was built to conform to the franchise requirements. Vandervest would not enter into or sign a contract to construct the building until he was furnished with a financial statement of the three doctors. Nor would he sign the lease before the doctors signed it as guarantors. Pursuant to these demands, Kauffman did furnish Vandervest with the doctors' financial statements and they did sign the guaranty agreement before Vandervest signed the lease. The doctors, through Kauffman, did invite Vandervest to Wichita to discuss the acquisition of land and construction of additional pizza parlors. They also discussed with him, in a limited and general way, how the Green Bay operation was going and the competency of a prospective manager. Inferentially they knew of the rental demanded by and collected by the bank in the amount of $1,348.50. A reasonable inference from the evidence is that Kauffman was replaced as manager and discharged as an employee solely by the doctors as directors. One of the doctors, personally, took over the active management of the pizza parlor and signed the rental checks. And, finally, the discussion to quit the business and abandon the premises was made by the doctors and their attorney.
Appellants' reply brief, pages 2 and 3.
We believe this evidence is sufficient to establish that the acts and representations of Kauffman were either directed or known and ratified by the defendants-appellants. This, coupled with their own manifestations and participation, justified Vandervest in reasonably believing and relying upon Kauffman's apparent authority as their agent.
We conclude, as did the trial court, that the defendants-appellants were more than mere uncompensated guarantors. There was good and sufficient consideration for their agreement to guarantee the rental payments — without it the building would not have been built and the lease would not have been entered into. Because of this consideration flowing to them they cannot claim the benefit of a rule that allows a gratuitous surety or uncompensated guarantor to escape his original liability by a change in terms of the principal's obligation.
The trial court further concluded that the doctors were in fact the corporation and that the corporate veil should be pierced so as to deny them limited liability. We agree with this conclusion. Without repeating the evidentiary facts set forth above, it can be said that the entire pizza parlor venture in Green Bay was solely the personal enterprise of the defendants-appellants. They owned all of the stock, they were the directors, and they had control of the management and operation of the business. They had personally guaranteed the performance of the lease. To allow them to escape liability under these facts would work a fraud upon Vandervest. Equity should step in and pierce the corporate veil, if necessary, to hold the guarantors-stockholders-directors personally liable upon their written promise.
R. B. General Trucking v. Auto Parts Service (1958), 8 Wis.2d 91, 99, 87 N.W.2d 863; Marlin Electric Co. v. Industrial Comm. (1967), 33 Wis.2d 651, 148 N.W.2d 74; Stebane Nash Co. v. Campbellsport Mut. Ins. Co. (1965), 27 Wis.2d 112, 121, 122, 133 N.W.2d 737.
There is no attempt in this action to impose liability upon the defendants beyond the amounts calculated under the terms of the original written guaranty. We need not, therefore, discuss any increased liability because of the increase of the payments from $1,300 to $1,348.50 per month.
The interlocutory judgment entered by the trial court should be affirmed.
By the Court. — Judgment affirmed.