Opinion ID: 1865218
Heading Depth: 1
Heading Rank: 10

Heading: Breach of Contract/Warranty.

Text: Specialized Tours contends that Hagen breached certain warranties: (1) that the April 30, 1979 balance sheet did not accurately reflect the net worth of Dittmann on that date; (2) that Hagen breached a warranty that to the best of seller's knowledge the corporation was in compliance with all laws, rules and regulations when, in fact, it was not in compliance with CAB regulations; (3) that Hagen failed to disclose when Oberammergau payments were due; and (4) that Hagen's failure to disclose on the April 30, 1979 balance sheet accounts payable totaling $30,440 and his payments to himself were contrary to the agreements. 1. The April 30, 1979 balance sheet. In the sale agreement, Hagen warranted the accuracy of the balance sheet. [5] It is undisputed the statement accurately represented the financial condition of Dittmann on that date according to the accounting method Dittmann had always used, a method used up to the time of trial by Monson in Specialized Tours, and a method recognized by the IRS. Respondent, however, contends Dittmann's balance sheet recognized income and expenses under an accounting method not in accordance with generally accepted accounting methods. Had such method been employed, the balance sheet's retained earnings account, according to respondent, would have been $85,008 less than was shown. The trial court accepted Specialized Tour's contention, and ruled this was a breach of the warranty. The warranty on the accuracy of the balance sheet makes no mention of generally accepted accounting principles. This raises the crucial legal issue: was Dittmann's financial statement required to be prepared in accordance with generally accepted accounting principles? If Dittmann was under no legal obligation to follow generally accepted accounting principles, its balance sheet cannot be said to overstate net worth in violation of the agreement warranties. Rather, its balance sheet would be accurate based upon the accounting principles employed. A number of factors weigh heavily in favor of the view that in this case, the financial statement need not have been figured according to generally accepted accounting principles. We note that the IRS accepts Dittmann's method of income/expense recognition as proper for income tax returns. See 26 U.S.C. § 446(c)(2) (1982). Dittmann's method of income/expense recognition was not employed to make the business look better at the time of the sale. Rather it was the method that Dittmann had traditionally used. Monson used the method he complains of in this suit. Dittmann's accountant, after the closing, asked Monson's new accountant to inform him of any discrepancies found in his audit of the balance sheet. Monson's accountant replied that the only difference was in the timing of income/expense recognition and that he should continue without changes. Considering these undisputed facts, the trial court's finding of a breach of warranty based on the April 30, 1979 balance sheet is clearly erroneous and cannot stand. 2. Compliance with Laws, Rules and Regulations. Hagen warranted [t]hat to the best of Seller's knowledge, the Corporation [Dittmann] has complied with all applicable laws, rules, and regulations of the city, county, state, and federal governments. The trial court found Hagen did not have personal knowledge of certain new CAB regulations concerning escrow accounts. Though the evidence was minimal, the court found that prior to the sale, Dittmann's office manager was aware of the new deposit regulations. The court then imputed that knowledge to Hagen, allegedly under agency principles, and concluded the warranty was breached. We conclude as a matter of law the warranty was not breached. Hagen warranted only his personal knowledge. Since he was, in fact, unaware of any violations, he did not breach the warranty. The warranty clearly concerns only appellant's knowledge and not imputed knowledge. Were the warranty to be construed to include imputed knowledge, it would create an absolute warranty  a result clearly not within the contemplation of the parties. But even if the warranty contemplated implied warranties, the imputation could arise only by piercing the corporate veil. Generally an agent's knowledge is only imputed to a principal  here the Dittmann Corporation. The trial court pierced the corporate veil based upon a finding that Hagen and Dittmann were one and the same; a finding of alter ego. In justifying the pierce, the trial court failed to set forth any elements required to prevent injustice or fraud. See, e.g., White v. Jorgenson, 322 N.W.2d 607 (Minn.1982); Victoria Elevator Co. v. Meriden Grain Co., 283 N.W.2d 509 (Minn.1979). Absent such findings, its pierce was unwarranted. [6] 3. The Oberammergau Problem. One paragraph of the purchase agreement, in essence, warrants that no material fact regarding the corporation (Dittmann) has been omitted which would reasonably affect a prudent investor's decision to purchase all of Dittmann's stock. Hagen claims he did not breach this warranty by failing to disclose the prepayment requirement for the Oberammergau arrangements. The trial court found he did. While the question is close, we are unable to conclude the trial court's finding was clearly erroneous. Hagen claims: (1) he didn't know when the payments were due; (2) that he did disclose all information by making available to Monson during the escrow period all company records for inspection; and, (3) that he truthfully answered all questions asked by Monson and Wardwell because he assumed they were experienced enough in the travel business to have all the information they needed and wanted after asking questions. However, there was evidence from which the trial court could, as it did, conclude that during the negotiations Hagen was aware of the large down payments required for all phases of the tours. Upon Monson's inquiry, Hagen showed him letters confirming airline charters for the Oberammergau tours, and orders for the pageant tickets. Although he knew at the time of the sale that substantial down payments had to be made for bus tour, car packages, and pageant tickets, Hagen did not inform Monson of the time or amounts of the payments. The court held this failure to disclose constituted a breach of warranty. As the result of this breach, the trial court found Specialized Tours sustained damages of $52,351.06. Hagen claims the court improperly computed damages on the wrong amounts and from the wrong dates. A careful review of the record indicates the court meticulously computed the interest on the right amount (16 tours), and from the right time (September 1980). There was no error. 4. The Accounts Payable Problem. Specialized Tours claims Hagen failed to include certain account payable items totaling $30,440 on the April 30, 1979 balance sheet, and this constituted a breach of warranty of paragraph 2 of the purchase agreement. In material part, that paragraph provides that the account payable is stated in the balance sheet according to information available on April 30 but individual accounts may increase or decrease due to ordinary business changes accruing or reported to Seller after April 30. By that paragraph, Hagen warranted that Dittmann had no liabilities as of April 30, other than those shown. The paragraph likewise required Hagen to satisfy accounts payable reported after April 30, 1979, except those arising afterwards in the ordinary course of business. The trial court specifically found the information concerning the unreported accounts payable was not available to Dittmann as of April 30, 1979. The court also specifically found the undisclosed accounts payable were paid off prior to the closing. A careful examination of the record reveals that the trial court correctly found no breach of warranty here. 5. Payments from Dittmann to Hagen. On January 15, 1979, Dittmann paid Hagen approximately $33,000, representing payment of the balance of $42,000 of accrued salary and bonus for 1978 as shown on the 1978 financial statement. This was not unusual. Further, it had been the practice for Hagen each year to withdraw all earnings from the prior year from the subchapter S corporation. Also, on January 15, 1979, Hagen was paid $5,400, an interest payment on the $20,000 loan from Hagen to the corporation. Two payments were made to Hagen in May 1979 totaling $26,000 for repayment of the loan. The trial court correctly found these payments were in the usual and normal course of business. Each payment was legitimate, ordinary and was disclosed in the financial statements. [7]