Title: Bergh v. Mills

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Bergh v. Mills1988 WY 127763 P.2d 214Case Number: 87-188Decided: 10/24/1988Supreme Court of Wyoming
LESLIE H. BERGH, 
INDIVIDUALLY AND AS GENERAL PARTNER OF KHYBUR INVESTMENTS, A WYOMING GENERAL 
PARTNERSHIP, RAYMOND L. BERGH, INDIVIDUALLY AND AS A GENERAL PARTNER OF KHYBUR 
INVESTMENTS, A WYOMING GENERAL PARTNERSHIP; KHYBUR INVESTMENTS, A WYOMING 
GENERAL PARTNERSHIP; DOUGLAS B. PETERSEN; AND MILTON J. BERGH, APPELLANTS 
(DEFENDANTS),

WILLIAM T. TIBBITS AND 
ROBERT TIBBITS (DEFENDANTS),

v.

JOHN W. MILLS AND DIANNE 
D. MILLS, INDIVIDUALLY; JOHN W. MILLS, AS GENERAL PARTNER, D/B/A DUNMAR INN; AND 
JOHN W. MILLS AND DIANNE D. MILLS, AS SHAREHOLDERS, AND FOR THE BENEFIT OF 
BILLYS, INC., A WYOMING CORPORATION, APPELLEES 
(PLAINTIFFS).

Appeal from the District 
Court, UintaCounty, Robert B. Ranck, 
J.

Roger Cowan of 
Harris and Morton, Evanston, for appellants.

George S. 
Andrews of Andrews & Andrews, Evanston, for appellees.

Before CARDINE, C.J., THOMAS and MACY, JJ., and 
BROWN* and GUTHRIE, JJ., 
Retired.

* Retired June 30, 1988, 
but continued to participate in the decision of the court in this case pursuant 
to order of the court entered July 1, 1988.

CARDINE, Chief 
Justice.

[¶1.]     In this case the trial 
court, after a bench trial, determined that appellants had defrauded appellees, 
and entered judgment against appellants in the amount of $286,656.33. The issues 
raised on appeal are whether the evidence was sufficient to support the trial 
court's finding of fraud, whether there was any evidence to support the finding 
of liability against appellants Raymond Bergh, Milton Bergh, and Khybur 
Investments, and whether there was a "legal basis" for piercing the corporate 
veil.

[¶2.]     We affirm in part and 
reverse in part.

FACTS

[¶3.]     The late 1970's and 
early 1980's were good times in Evanston, Wyoming. Appellant Leslie Bergh and his oil 
field service corporation, Fluids Control, were making a lot of money. In early 
1981, Mr. Bergh and two of his employees, William Tibbits and Douglas Petersen, 
decided to build an elaborate saloon and dance hall to be known as Billys 
Country Music Emporium (Billys). They formed a corporation called Billys, Inc., 
which was capitalized through sales of stock shares to Leslie Bergh, William 
Tibbits, Bob Tibbits, and Douglas Petersen. Leslie Bergh bought 19,375 shares; 
William Tibbits bought 14,375 shares; Bob Tibbits bought 9,375 shares; and 
Douglas Petersen bought 4,375 shares. The stock was paid for almost entirely 
with promissory notes.1

[¶4.]     At approximately the 
same time that Billys, Inc. was being formed, Leslie Bergh and his two brothers, 
Milton and Raymond, formed a partnership, Khybur Investments, for the sole 
purpose of acquiring the land and constructing the building for the saloon and 
dance hall. The partnership borrowed part of the necessary funds from Fluids 
Control and the remainder from First Wyoming Bank. The partners planned to lease 
the land and building to Billys, Inc. after construction was completed, and the 
lease payments would be set at whatever was necessary to cover the loans taken 
out by Khybur Investments. Necessary equipment for the business was purchased by 
Fluids Control.

[¶5.]     Before the building was 
completed, it became apparent that additional funds would be needed. In August 
or September of 1981, Leslie Bergh approached appellee John Mills, his friend 
and drinking companion, and discussed the possibility of Mr. Mills investing in 
Billys, Inc. Mr. Mills was a partner in the Dunmar Inn, Evanton's largest motel. 
A meeting was held in Room 734 of the Dunmar Inn to discuss the terms of the 
investment. The parties present at the meeting were Leslie Bergh, Douglas 
Petersen, William Tibbits and Bob Tibbits, and appellees John Mills and his wife 
Dianne.

[¶6.]     At the meeting, Leslie 
Bergh proposed that appellees invest a total of $150,000 in Billys, Inc. - 
$25,000 would be for the purchase of five percent of the shares of the 
corporation, and $125,000 as an unsecured loan to the corporation. As part of 
their presentation, appellants showed appellees a prospectus which projected a 
net profit of nearly $1,000,000 for Billys, Inc. in its first year. Leslie Bergh 
alluded to his business acumen and inside knowledge of the Evanston oil patch and 
assured Mr. Mills he would not let him get hurt on the deal. He said the only 
reason that he and the other shareholders were making the offer to appellees was 
that they wanted a local family involved. He also told appellees that they would 
not be getting such a cheap deal if he and Mr. Mills were not such good friends. 
What Mr. Bergh and the others failed to tell appellees was that the project was 
already over budget, that the other investors had "purchased" their stock at a 
rate which was less than half of the price they were offering to appellees, that 
they had paid for their stock with promissory notes, and that the corporation 
was already insolvent.

[¶7.]     After the meeting, 
Leslie Bergh and the other promoters insisted on a commitment from appellees. 
When appellees finally agreed to the terms of the proposal, an immediate letter 
of commitment was demanded. Appellees mortgaged their home to obtain the 
$150,000, and on November 18, 1981, Mr. Mills gave the corporation a $150,000 
check in exchange for 2500 shares and a $125,000 promissory 
note.

[¶8.]     Billys opened in 
December 1981. Shortly thereafter, appellees became aware of the true financial 
status of the corporation. In order to protect their investment, they arranged 
to lodge Billys entertainers in the Dunmar Inn on an open account. After one 
payment, the corporation was in default upon the promissory note to appellees. 
The business closed in September 1983. By that time the outstanding balance on 
the open account with the Dunmar Inn amounted to $58,876.74. On March 20, 1985, 
appellees filed an action to recover the money they invested in the corporation 
and the amount due on the Dunmar Inn account. After a bench trial, the court 
found that appellees had been defrauded and entered judgment against appellants 
Leslie Bergh, Raymond Bergh, Milton Bergh, Khybur Investments and Douglas 
Petersen.

FRAUD

[¶9.]     Appellants first 
challenge the sufficiency of the evidence to support the trial court's finding 
of fraud. We set out the elements of fraud in Johnson v. Soulis, Wyo., 542 P.2d 867, 872 (1975), 
as

"a false representation 
by a defendant of material facts which are relied upon by a plaintiff to his 
damage. Davis v. Schiess, Wyo., 
417 P.2d 19 (1966)."

Although fraud 
in the classic sense requires an affirmative misrepresentation, this court has 
recognized that fraud may be perpetrated by silence as well as by affirmative 
representations; and when one has a duty to speak, the failure to speak may 
constitute fraud. Steadman v. Topham, 80 Wyo. 63, 338 P.2d 820, 826-27 (1959). Even in 
the absence of a duty to speak, if a person does speak, he must speak the truth 
and make a full and fair disclosure, as "`half the truth may be a lie in 
effect.'" Simpson v. Western National Bank of Casper, Wyo., 497 P.2d 878, 880 (1972) (quoting Twing v. Schott, 80 Wyo. 100, 338 P.2d 839 
(1959)).

[¶10.]  In the present case, the record contains 
sufficient evidence to support the trial court's finding of fraud by clear and 
convincing evidence. The promoters of a corporation owe a fiduciary duty to 
fully disclose material facts to an individual induced to purchase stock in the 
corporation, including facts concerning the financial structure of the 
corporation of which the promoters have special knowledge. Killeen v. Parent, 23 
Wisc.2d 244, 127 N.W.2d 38 (1964). Appellants violated this duty by failing to 
inform appellees that the other shareholders had paid for their stock with 
promissory notes and that the corporation was grossly undercapitalized. 
Appellees testified that if they had known these facts, they would not have 
invested in the corporation. In light of the close friendship between John Mills 
and Leslie Bergh, we cannot say that appellees' reliance was unreasonable. We 
affirm the trial court's finding of fraud with respect to appellees' investment 
in the corporation.

PARTNERSHIP 
LIABILITY

[¶11.]  We also affirm the court's extension of 
liability to Khybur Investments and Raymond and Milton Bergh, Leslie Bergh's 
brothers and copartners in that partnership. Section 17-13-305, W.S. 1977, 
provides:

"Where, by any wrongful 
act or omission of any partner acting in the ordinary course of the business of 
the partnership, or with the authority of his copartners, loss or injury is 
caused to any person, not being a partner in the partnership, or any penalty is 
incurred, the partnership is liable therefor to the same extent as the partner 
so acting or omitting to act."

Khybur 
Investments was formed by Leslie Bergh and his two brothers for the sole purpose 
of purchasing the land and the building for Billys. Leslie Bergh testified that 
the partnership had no other business interest or purpose. The necessary funds 
were borrowed, and the real estate was leased to Billys, Inc. for an amount 
sufficient to cover Khybur Investment's loan payments. When the Dunmar Inn 
meeting was held, Billys, Inc. needed funds to cover its obligations, which 
included the lease payments to Khybur. The evidence was sufficient to support an 
inference that Leslie Bergh was acting for the benefit of the partnership and in 
the ordinary course of the business of the partnership when he met with 
appellees at the Dunmar Inn and induced them to invest in Billys, Inc. 
Consequently, the partnership is liable for the fraud committed by Leslie Bergh 
at that meeting.

[¶12.]  Raymond and Milton Bergh, as partners in 
Khybur Investments, are liable by virtue of § 17-13-307, W.S. 1977, which 
provides:

"(a) All partners are 
liable:

"(i) Jointly and 
severally for everything chargeable to the partnership under sections 13 [§ 
17-13-305] and 14 [§ 17-13-306]."

The effect of 
this section of the Uniform Partnership Act is to impose individual liability 
against the members of a partnership when another partner commits a tortious act 
within the scope of partnership business. Phillips v. Cook, 239 Md. 215, 210 A.2d 743 
(1965). Fraud is among the tortious acts included within the scope of this 
section. First National Bank of Altoona v. 
Turchetta, 407 Pa. 511, 181 A.2d 285 (1962). The trial court 
did not err in finding Raymond Bergh, Milton Bergh, and Khybur Investments 
liable for fraud.

DUNMAR INN 
ACCOUNT

[¶13.]  The trial court entered judgment in favor 
of the Dunmar Inn and against Leslie Bergh, Milton Bergh, Raymond Bergh, Khybur 
Investments, and Douglas P. Petersen for the amount owing to the Dunmar Inn on 
its account with Billys, Inc. on the theory that "fraud rendered this entire 
deal void from the beginning." Appellants argue that the court erred in finding 
fraud liability in connection with this claim. We agree.

[¶14.]  When John and Dianne Mills were 
defrauded, they were not acting as agents of the Dunmar Inn. When they later 
convinced the Dunmar Inn to allow Billys, Inc. to run up an open account, they 
had already become aware of the true financial status of Billys, Inc. The Dunmar 
Inn's business relationship with Billys, Inc. did not come about through 
misrepresentation. Instead, it came about through the desire of its partners to 
try to help out John and Dianne Mills after the fraud had been 
committed.

[¶15.]  In the alternative, the Dunmar Inn 
pursued a contract claim on the open account. While this theory could clearly 
succeed against Billys, Inc., the shareholders of that corporation cannot be 
held individually liable unless the corporate identity is disregarded. In our 
view, the evidence in this case justifies disregard of the corporate entity. In 
AmFac Mechanical Supply Company v. Federer, Wyo., 
645 P.2d 73 (1982), we stated that where a showing of actual fraud is made, that 
ground alone may be sufficient for piercing the corporate veil. Id. at 79. In the present 
case, appellees demonstrated actual fraud in the capitalization of the 
corporation. Even though the Dunmar Inn was not defrauded, the evidence supports 
the trial court's conclusion that it would not have entered and continued its 
contract with Billys, Inc. in the absence of appellants' fraudulent acts. We 
will not reward appellants' fraud by allowing them to enjoy the benefits of 
corporate status. We therefore affirm the trial court's finding of liability 
against Billys, Inc. and its individual shareholders, Leslie Bergh and Douglas 
Petersen, on the claim concerning the Dunmar Inn account. We must reverse the 
court's finding of individual liability against Khybur Investments, Raymond 
Bergh and Milton Bergh on that claim, however, as those parties were not 
shareholders in Billys, Inc.

[¶16.]  AFFIRMED IN PART AND REVERSED IN 
PART.

FOOTNOTES

1 Section 17-1-116(b), 
W.S. 1977, provides: "Neither promissory notes nor future services shall 
constitute payment or part payment, for shares of a corporation."