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Kaiser v. Olson





APPEAL from the Circuit Court of Cook County; the Hon. MYRON GOMBERG and the Hon. SIDNEY A. JONES, JR., Judges, presiding.


The plaintiffs, Al Kaiser, Fred Kaiser and Harvey Kaiser (Sellers) filed an action in the circuit court of Cook County to recover the unpaid balance on a promissory note. The defendants, Gerald A. Finkle and Charles W. Olson III (Buyers), had given the note to the Sellers in partial payment for 494,444 shares of stock of Kaiser Diversified Enterprises, Inc. (KDE), pursuant to a written purchase agreement. The Buyers denied liability on the note and counterclaimed for rescission. The Buyers sought to rescind the purchase agreement and recover the amount of the purchase price paid on the grounds that the Sellers had sold the stock in question to the Buyers without registering it or perfecting an exemption from registration in violation of the Illinois Securities Law of 1953 (Ill. Rev. Stat. 1973, ch. 121 1/2, par. 137.1 et seq.) and that the Sellers had induced the Buyers to enter into the purchase agreement by untrue statements and by failure to disclose material facts in further violation of the 1973 Illinois Securities Law of 1953 (Ill. Rev. Stat. 1973, ch. 121 1/2, par. 137.1 et seq.). Alternatively, the Buyers sought damages on a theory of common law fraud.

The Sellers moved for summary judgment on the complaint and on all counts of the Buyers' counterclaim. The Buyers resisted the Sellers' motions on the complaint and on the counterclaim and filed a cross motion for summary judgment on their counterclaim. The circuit court granted the Sellers' summary judgment on their complaint on the note and entered judgment in the amount of $48,783.77 on the note. The court also denied the Buyers' motion for summary judgment on their counterclaims and entered judgment in favor of the Sellers and against the Buyers on the Buyers' counterclaims both under the securities laws and under the theory of common law fraud. The court also awarded the Sellers' attorney fees of $25,056.50, including fees for time spent defending against the Buyers' counterclaim.

A chronology of relevant events in this case begins in 1972 when the Sellers signed a finance agreement with Associates Credit Corporation of South Bend (Associates). Pursuant to this agreement, Associates financed KDE's inventory, land, building and other items. As KDE's major creditor, Associates was in a position to participate in major policy decisions involving KDE management from 1973 to 1979, the dates inclusive in this case.

In May 1973, the Sellers entered into a purchase agreement with an initial group of buyers (not the defendants) for the sale of approximately two-thirds of the stock which the Sellers owned in KDE. The Sellers took their remaining one-third shares of stock and exchanged them with KDE for the purchase of a KDE subsidiary. These two transactions not only divested the Sellers of all their KDE stock ownership, but the Sellers at the same time resigned as officers and directors of KDE and moved their offices and the subsidiary which they had purchased to a new location some distance removed from the premises of KDE.

Then, in July 1974, after the initial group of buyers defaulted on their payments to the Sellers, a second group of Buyers (defendants here) was formed to substitute for the first group. Although one of the new Buyers was also a member of the first group, an Irving Zitowsky, the new transaction was structured as a substitute sale. The second group of Buyers (defendants Olson and Finkle along with Zitowsky, an undisclosed one-third participant) signed a new purchase agreement with the Sellers for the purchase of the 494,444 shares of KDE stock.

By the terms of the substitute purchase agreement, the total purchase price of the KDE stock was $100,000. The Buyers gave the Sellers a down payment of $35,000 and signed a promissory note for the balance which was to be paid over the next three years. Under this purchase agreement, the Sellers disclaimed any warranties to the Buyers. The Buyers, however, warranted to the Sellers that they were completely familiar with the financial conditions and operations of KDE and acknowledged that they were accepting stock which was unregistered under Federal securities laws. The purchase agreement contained no mention of Illinois securities laws.

The promissory note that the Buyers gave the Sellers provided that the Buyers would pay "all costs of collection, legal expenses and attorneys' fees" incurred or paid by the Sellers in collecting the note.

At the time of the July 1974 sale, Finkle was a full-time consultant to KDE and was deeply involved in the management of the corporation. Finkle's full time office was located at KDE. Although the record is not entirely clear on this point, Finkle had apparently been identified by Associates as the appropriate person to oversee KDE operations and help insure the value of Associates' security interest in KDE. Finkle became president of KDE nine months after the July 1974 purchase agreement was signed.

Olson decided to invest in KDE in the spring of 1974 when he was approached by Zitowsky and Donald J. Brumlik. (Brumlik was Olson's attorney and also served as counsel to KDE.) Zitowsky and Brumlik encouraged Olson to join with Finkle and Zitowsky in the purchase of KDE stock. Olson agreed to join with Finkle and Zitowsky in buying the stock, but made it clear that he did not wish to actively involve himself in KDE.

Zitowsky at the time of the transaction had his office at KDE and served as its sales manager. Zitowsky declined to be named as a principal in the purchase agreement and designated Finkle and Olson as his nominees in this transaction. Unlike the Buyers' side of the 1974 purchase agreement, which included Finkle and Zitowsky as active participants in KDE, the Sellers never reinvolved themselves in KDE after initially selling out in 1973.

Simultaneously with signing the purchase agreement, the Buyers signed a voting trust agreement and placed their newly acquired stock in the hands of a trustee. This voting trust remained in effect until July 1977, when it was dissolved as part of the Buyers' attempt to tender the stock back to the Sellers and recover that part of the purchase price already paid.

The remaining relevant facts involve the setbacks suffered by KDE and the Buyers after the purchase agreement took effect. On July 10, 1974, S.D. Leidesdorf & Co., an independent auditor, completed KDE's 1973 audit and submitted a copy of this report to Finkle. The report indicated that there were serious errors in the 1972 audit which had been prepared by the firm of Borenstein, Louis, and Price, also an independent auditor. Through the Leidesdorf report, Finkle learned that KDE's inventory and accounts receivables had been overstated for 1972. In September 1974, Finkle also learned of the existence of an IRS tax lien on KDE which dated back to 1968. Olson also learned of these problems sometime between July and December of 1974.

After learning of the audit and tax problems and after conferring with counsel, the Buyers decided to continue making installment payments to the Sellers. The Buyers issued no notice of protest to the Sellers upon learning of these problems in 1974 and continued making installment payments through 1975. In July 1976, the Sellers' attorney sent a collection note to the Buyers concerning late payments on the promissory note. In August 1976, Olson responded to the collection note by sending the Sellers one-third of the amount due on the installment. The remaining two-thirds was not paid. Finally, in December 1976, the Sellers filed their complaint. Shortly after this complaint was filed, the Buyers' attorney dispatched a letter to the Illinois Secretary of State requesting information as to whether or not the KDE stock which the Buyers had bought was registered. On January 17, 1977, the Secretary of State issued his certificate certifying that the KDE stock was unregistered. The same month, the Buyers notified the Sellers ...

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