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District Court of Appeal, Second District, Division 3, California.

FRANCK et al. v. J. J. SUGARMAN-RUDOLPH CO. et al.*

Civ. 18805.

Decided: March 24, 1952

Knight, Gitelson, Ashton & Hagenbaugh, Los Angeles (Alfred Gitelson and Leon Savitch, Los Angeles, of counsel), for appellants. John W. Preston and John W. Preston, Jr., Los Angeles, for respondents.

Appeal by defendants from a judgment for plaintiffs in an action for money due.

The complaint is in two counts: 1) a common count for money had and received; 2) for money due under written contracts with allegations for reformation.

On August 7, 1943, J. J. Sugarman-Rudolph Co., a partnership, referred to as the partnership, entered into a written contract with plaintiffs and their predecessors in interest, the owners of all the issued and outstanding stock of Hercules Foundries, Inc., a corporation, whereby the partnership agreed to buy the stock for $110,000, payable $10,000 on the signing of the contract, $90,000 on delivery of the stock, and $10,000 on receipt by the partnership of a certificate signed jointly by the respective auditors of the partnership and Hercules verifying the truth of certain statements appearing in a balance sheet of Hercules, dated July 31, 1943. The stock was delivered to the partnership on August 16, 1943.

On August 18, 1943, the Collector of Internal Revenue filed a lien against Hercules for income and excess profit taxes in the amount of $103,112.67. On August 21, 1943, in order to pay the taxes under protest, plaintiffs, their predecessors in interest, and the partnership entered into a written contract modifying the contract of August 7, 1943, to provide that the moneys then due and to become due to plaintiffs and their predecessors in interest from the partnership be paid to the Collector under protest, and that the partnership would thereafter cause Hercules to file and prosecute a claim against the United States for a refund of the $103,112.67 for the use and benefit of plaintiffs and their predecessors in interest. Thereafter the partnership paid the $103,112.67 to the Collector out of moneys due from it to plaintiffs and their predecessors in interest, and Hercules filed a claim for refund.

The Collector paid Hercules $80,495.86 on August 24, 1948, and $2,050.59 on December 21, 1948, as refunds on the taxes.

On August 16, 1943, plaintiffs and their predecessors in interest delivered to the partnership the books, records, and all of the property and assets of Hercules, in accordance with the contract of August 7, 1943; and the partnership has retained the exclusive possession and control of them ever since. Shortly after the books and records were delivered to the partnership, the latter caused its auditors to make an audit thereof. In September, 1943, the auditors made a preliminary report, and on September 25, 1944, submitted a full and complete report of their audit to the partnership; and at all times since, the partnership has had actual knowledge of all matters pertaining to the property, assets, and financial condition of Hercules as of July 31, August 7, and August 21, 1943.

On July 31, 1947, the partnership notified plaintiffs in writing that its auditors had audited the books of Hercules during 1943 and 1944, had submitted a report on September 25, 1944, and sent plaintiffs a copy which was received by them on that date. Until July 31, 1947, no member of the partnership informed plaintiffs, and the latter had no knowledge, that defendants claimed, or would claim, that the property and assets of Hercules were less in value than as stated and represented in the contracts of August 7 and 21, 1943, or that they claimed, or would claim, that the liability of Hercules was greater in amount than as stated and represented in the contracts. The partnership failed to give plaintiffs or their predecessors in interest any notice that it claimed a breach of any condition, promise, or warranty contained in the contracts until July 31, 1947.

The action was commenced June 8, 1949. Defendants pleaded the statute of limitations and counterclaims in the amount of $98,448.74, alleged to have arisen by reason of a deficiency of property and assets and an excess of liabilities of Hercules.

The court found the facts as recited, and that: the period of time from September 25, 1944, to July 31, 1947, was not a reasonable time within which the partnership was required to give notice of any breach of promise or warranty arising out of any claimed deficiency of the property and assets, or any claimed excess of liabilities, of Hercules; either of said periods of time was unreasonable within which to give such notice; on April 30, 1946, J. J. Sugarman-Rudolph Co. was dissolved and Rudolph sold his interest to the remaining partners and they continued as partners under the name of J. J. Sugarman Co., as successor to J. J. Sugarman-Rudolph Co.; the members of, and J. J. Sugarman Co. have received and now have $84,546.45, being part of the purchase price of the Hercules stock; they paid out as expenses in securing the tax refunds $20,491.84; the amount held by them for the account and benefit of plaintiffs is $64,054.61.

The court concluded that: defendants were entitled to nothing by reason of their counterclaims; there was no basis for reformation; and ‘under the evidence it is clear that plaintiffs are entitled to judgment only for whatever money was had and received by defendants under duty to pay over to plaintiffs to the extent of, and equal to the unpaid balance on the purchase price of the corporate stock, as provided in an agreement of August 21, 1943.’

Judgment was for plaintiffs for $64,054.61, with interest from August 24, 1948. It was adjudged that defendants take nothing by their counterclaims ‘for the reason that said claims were waived by the defendants and are barred by reason of the unreasonable delay amounting to laches in equity and under Section 1769 of the California Civil Code in giving notice to plaintiffs and their predecessors in interest of the alleged deficiency in property and assets and excess of liabilities of Hercules * * *.’

The principal point made by defendants is that the judgment denying them an offset, as pleaded in their counterclaims, is contrary to law. They first say the contracts were for the sale of shares of stock of a corporation and that section 1769 of the Civil Code is not applicable thereto. Civil Code section 1769 is included in the Uniform Sales Act and provides that if after acceptance of goods the buyer fails to give notice to the seller of the breach of any promise or warranty within a reasonable time after the buyer knows, or ought to know, of such breach, the seller shall not be liable therefor. The argument is that shares of stock are not ‘goods' as the term is defined in section 1796 of the Civil Code, also a part of the Uniform Sales Act. See Porter v. Gibson, 25 Cal.2d 506, 514, 154 P.2d 703. The question is not material. The court concluded that the claims pleaded in the counterclaims were waived by defendants. The conclusion that defendants waived the claims is sufficient to support the judgment irrespective of the applicability or inapplicability of section 1769.

It is next argued that plaintiffs breached the contracts; that the breach is alleged in the counterclaims and consisted of a deficiency in property and assets and an excess of liabilities of Hercules; that, therefore, defendants have the right to offset against their liability for the balance of the purchase price all damages sustained by them by reason of the alleged breach.

The finding that defendants waived the alleged breach is fully supported by the evidence. On September 7, 1943, plaintiffs' then attorney, Gazlay, who signed the contracts on behalf of plaintiffs, was advised ‘that their [the partnership's auditors] audit of the assets and liabilities of Hercules * * * was practically completed.’ On September 13, 1943, Gazlay wrote Katz, the partnership's attorney: ‘It seems very important to me that this audit be determined as soon as possible and that we receive a statement from the J. J. Sugarman-Rudolph Co. as to whether any differences are claimed between the statement furnished by their auditors and the statement of assets and liabilities as of July 31, 1943, which is a part of the contract * * *. The time to settle this matter is now when the facts are fresh and the records are available.’ On September 14, 1943, Katz replied: ‘I agree with the sentiments expressed in your letter of September 13, and have asked our auditor to give me a report of any differences arising under the statement of assets and liabilities as of July 31, 1943. As soon as I have heard from the auditor I shall advise you.’

A preliminary audit was completed and in possession of the partnership in September, 1943. No copy or any information with respect thereto was furnished to plaintiffs.

On September 30, 1943, Gazlay again wrote Katz: ‘Lybrand, Ross Bros. & Montgomery started their audit on August 9 and on August 18 Mr. Cassady informed me that the audit was completed except for verification of account which would not take over ten days * * *. I see no justification for any further delay and request that we be given the report called for by subparagraph (b) of the agreement of August 21, 1943.’ On October 4, 1943, Katz replied, stating the partnership expected ‘the final report to be ready for delivery about October 11 [1943].’ On October 18, 1943, Gazlay again wrote Katz: ‘It seems to me that a reasonable time has long elapsed, especially in view of the statement of Mr. Cassidy made the latter part of August that the audit and report was practically completed. I again call your attention to the fact that the time to settle these matters is now while the facts are fresh in everyone's mind. On this proposition you and I seem to be agreed.’ Again on November 2, 1943, Gazlay wrote Katz, stating that he had not received a reply to his letter of October 18, and concluded: ‘I again request a copy of the statement. It is my opinion that failure on the part of your clients to furnish this statement is in violation of the aforesaid contracts.’ Again on January 6, 1944, Gazlay wrote Katz, calling attention to previous letters, failure to receive a copy of the audit, Katz's refusal to talk to him over the telephone, and concluded: ‘If your clients do not desire to give the statement you could at least have written an evasive letter, at which I am advised you excel. I resent the treatment received from you. I again request a copy of the statement hereinbefore referred to.’

Gazlay died during the year 1944. After his death several of plaintiffs' predecessors in interest also died. The preliminary audit was not furnished to plaintiffs until just before the trial of this action. Defendants did not deliver to plaintiffs a copy of any statement or audit until July 31, 1947, at which time they delivered a copy of the audit completed in September, 1944.

One may waive a right given him by contract. Michaels v. Pacific Soft Water Laundry, 104 Cal.App. 349, 363, 286 P. 165, 1071. A party to a contract may by conduct or representations waive the performance of a condition thereof or be held estopped by such conduct or representations to deny that he has waived such performance. Panno v. Russo, 82 Cal.App.2d 408, 412, 186 P.2d 452. A waiver is the intentional relinquishment of a known right or such conduct as warrants an inference of the relinquishment of such right, and may result from an express agreement or be inferred from circumstances indicating an intent to waive. Jolin v. Spira, 94 Cal.App.2d 356, 360, 210 P.2d 704. A waiver has also been defined to be: an implied consent by a failure to object; a neglect or omission to insist upon a matter of which a party may take advantage at the time when it ought to be done, so that it may operate as a trap to the other party, to insist upon it afterwards. 67 C.J. 307, § 7. An implied waiver may arise from an omission to object when the occasion gives proper opportunity, or from such negligence and failure to act as to induce a belief that it was the intention and purpose to waive, or it even may take place in consequence of laches. 67 C.J. 307, § 7. It is the general rule that when personal property is delivered to a purchaser in fulfilment of a contract for the purchase thereof, the duty devolves on him to make an examination of the property within a reasonable time for the purpose of determining whether it fills the contract; and if from such examination he finds it does not, he must promptly reject it. If he does not promptly reject it, he may be held to have waived the defect, and acceptance of the property constitutes such a waiver. Jackson v. Porter Land & Water Co., 151 Cal. 32, 39, 90 P. 122; Byron Jackson Machine Works v. Duff, 158 Cal. 47, 49, 109 P. 616. Whether there has been a waiver is ordinarily a question of fact. Lyons v. Brunswick-Balke etc. Co., 20 Cal.2d 579, 583, 127 P.2d 924, 141 A.L.R. 1173.

The facts fully support the conclusion that defendants waived the claims pleaded in the counterclaims. The defendants were under the duty to promptly inform plaintiffs of any deficiency in property or assets or excess of liabilities of Hercules. They had actual knowledge not later than September 25, 1944, and probably in September, 1943, of the alleged deficiency. The court was warranted in concluding that their failure and refusal to inform plaintiffs thereof for nearly four years was wilful and a waiver of their subsequent claims. While the court did not conclude that defendants are estopped to assert that there was a deficiency of property and assets and an excess of liabilities of Hercules, the evidence and the facts found amply justify such a conclusion.

Defendants argue that their counterclaims are at law and that the defense of laches being equitable is not available against them. The point is immaterial. The court having found that the claims were waived, the fact that the court also concluded they were barred by laches is of no consequence. A waiver is a legal defense. 67 C.J. 314, § 14. See, also, Miller & Lux, Inc., v. San Joaquin Light & Power Corp., 120 Cal.App. 589, 607–609, 8 P.2d 560; 56 Am.Jur. 105, 125, §§ 4, 23; 25 Cal.Jur. 932, § 8.

The court did not find specifically that plaintiffs' cause of action was not barred by the statute of limitations. Defendants assign error. The error, if any, is not ground for reversal. Defendants, in their answer, expressly admitted that Hercules received $80,495.86 from the Collector on August 24, 1948, and $2,050.59 on December 21, 1948. The statute did not begin to run until the money was received. 17 Cal.Jur. 623, § 18. It cannot be seriously urged that the statutory period is less than two years. Code Civ.Proc. § 339(1). The action was commenced June 8, 1949, less than one year after the money was received. It is obvious that if a specific finding had been made on the issue of the statute of limitations, it would have been adverse to defendants. It is settled that where a finding, if made, would necessarily have been against the appellants, they cannot complain of the lack of such finding. Chamberlain v. Abeles, 88 Cal.App.2d 291, 300, 198 P.2d 927.

The court found the refunds were made to Hercules. Defendants contend that in view of this finding, it was error to award judgment against J. J. Sugarman Co. and the individual partners thereof. The point is not tenable. The partnership paid the tax lien of $103,112.67 to the Collector out of moneys due to plaintiffs. The contract of August 21, 1943, expressly provided that if any portion of the $103,112.67 should be refunded, defendants would cause Hercules to assign to plaintiffs ‘all of its right, title and interest in and to said refund.’ The contract further provided that any such refund when received by plaintiffs should constitute part payment for the stock. The partnership thus was obligated to pay to plaintiffs any refund received by Hercules from the Collector. Furthermore, the court found that defendants ‘have received and now have moneys belonging to the plaintiffs' in the net amount of $64,054.61.


VALLÉE, Justice.

SHINN, P. J., and WOOD, J., concur.