Summary
In McKearn v. Lerman Tire Service, Ltd. (1966), 32 Wis.2d 329, 145 N.W.2d 731, we stated rescission could be had for a misrepresentation either knowingly or inadvertently made which was a substantial breach of the contract.
Summary of this case from Whipp v. IversonOpinion
October 3, 1966. —
November 1, 1966.
APPEAL from an order and a judgment of the county court of Rock county: MARK J. FARNUM, Judge. Reversed.
For the appellant there were briefs and oral argument by Jack C. Ottenstein of Milwaukee.
For the respondents there was a brief by Hansen, Eggers, Berres Kelley of Beloit, and oral argument by Larry J. Eggers.
This is an action for rescission so as to declare null and void a note and mortgage given by the plaintiffs, James McKearn and his wife, Phyllis McKearn, on their home at Beloit to the defendant, Lerman Tire Service, Ltd., a Wisconsin corporation.
After an answer was filed, both the defendant and the plaintiffs moved for summary judgment. The trial court by order denied the defendant's motion for summary judgment and granted judgment to the plaintiffs. The defendant appeals.
For brevity, the plaintiffs-respondents will be referred to as "McKearn" and the defendant-appellant as "Lerman.
The facts which gave rise to this action are as follows:
Both Lerman and McKearn were engaged in the automobile tire business, in Milwaukee and Beloit respectively.
On June 23, 1964, Lerman obtained a judgment against McKearn in the county court of Milwaukee county in the amount of $8,750.40. A copy of this judgment was docketed in Rock county and execution returned unsatisfied by the sheriff.
Mr. Irving Lowe, an attorney and an officer of Lerman, on behalf of Lerman, conducted an adverse examination of James McKearn in a supplementary proceeding in aid of execution on July 15, 1964. McKearn testified that he and his wife owned their home which was worth $28,000 and subject only to a mortgage in favor of the Beloit State Bank in the original amount of $15,000, reduced to $13,000. A receiver was appointed over the nonexempt assets of McKearn.
On July 17, 1964, Russell Thatcher, a business associate and friend of McKearn, in the presence of and on behalf of McKearn, telephoned Mr. Lowe and requested that the qualification of the receiver be delayed until August 10, 1964. Lowe agreed to the extension upon the condition that McKearn execute a note and mortgage on his homestead. Thatcher, in the presence of McKearn, agreed to the condition.
On July 20, 1964, Attorney J.R. Long, on behalf of McKearn, telephoned Lowe and stated he had been retained to prepare the note and mortgage. It was agreed between Lowe and Long that the note and mortgage be executed in the reduced amount of $7,751.21 to become due August 31, 1964, that the supplementary proceedings be discontinued, and that the judgment be satisfied.
Attorney Long sent the following letter to Lowe on July 21, 1964:
"Dear Mr. Lowe:
"Enclosed herewith you will find the original and a conformed copy of a Promissory Note and Real Estate Mortgage executed by James and Phyllis McKearn to Lerman Tire Service, Ltd. in the amount of $7,751.21.
"In accordance with my telephone conference with you of July 20, 1964, this Note has been made payable on or before August 31, 1964, and it is understood that this sum includes the sum of $100.00 to cover the estimated costs and disbursements, exclusive of any attorney's fees that were incurred in obtaining the judgment which I understand that Lerman Tire Service, Ltd. presently holds against the McKearns.
"It is my understanding that you will render to me in duplicate an accounting for the costs and disbursements incurred by you and will issue a credit for any sum less than $100.00 incurred for these costs and disbursements.
"I further understand that the principal amount of the account of $7,651.21 may be subject to further adjustment either by way of credit to the McKearns or a debit to the McKearns for purchases made or payments made on this particular account.
"I further understand that upon receipt of this Note and Mortgage that you will in return deliver to me in duplicate a Satisfaction of the judgment in full, which has been entered in favor of Lerman Tire Service, Ltd. against the McKearns.
"If you have any question regarding this matter, I will be pleased to hear from you, otherwise I assume that you will immediately prepare and deliver to me the Satisfaction of Judgment, and will also furnish the itemization of costs and a letter indicating the exact amount of this account at the present time."
On July 23, 1964, Attorney Lowe recorded the mortgage in the office of the register of deeds for Rock county, and at that time discovered that the mortgage in favor of the appellant was subject to two prior mortgages in favor of the Beloit State Bank. Attorney Lowe found the additional mortgage to be one dated July 20, 1961, in favor of the Beloit State Bank in the principal amount of $15,000. On July 24, 1964, Attorney Lowe wrote the following letter to Attorney Long:
"Re: Lerman Tire Service, Ltd. vs McKearn
"Attention: Mr. Long
"Dear Mr. Long:
"I am somewhat disturbed with regard to the information I now have on the above captioned matter.
"On July 15, 1964 I examined Mr. McKearn before Court Commissioner Collins, at which time he told me that he and his wife owned their home which had an appraised value of some $28,000, or a distressed value of around $22,000. He also indicated that it was subject to only one mortgage to the Beloit State Bank on which there was due approximately $13,000, and that the mortgage had been executed about three years ago. He did inform me that he recently had given the Beloit State Bank a mortgage on all of his shop equipment, with the exception of the new recap purchased through Herb. Hanson and mortgaged to Magna Service.
"My notes show that I asked him, and he positively denied, if the equipment mortgage in favor of the Beloit State Bank also covered the home. At it now stands, I find that there are two outstanding mortgages in favor of the Beloit State Bank one dated July 20, 1961 in the sum of $15,000 and the second dated July 22, 1963 in the sum of $12,798.34.
"Therefore, instead of having a valid second mortgage against the property in which Mr. McKearn would have an equity of as much as $15,000, I now find that we have a third mortgage on a piece of property which is already mortgaged in excess of its highest market value. This is something less than good faith on his part.
"At this moment I am certainly of no mind to satisfy our judgment and dismiss the supplementary proceedings and ask for a discharge of the receiver. However, I may not be in possession of all of the facts and I am giving Mr. McKearn an opportunity to set the matter right.
"I definitely feel that I have been imposed upon by McKearn and that the plaintiff has been deterred in enforcing its rights by reason of the misinformation. Until this matter is straightened out I feel perfectly free in going forward with the plans as they were before Mr. Thatcher called for an extension of time on behalf of McKearn.
"Should McKearn wish the return of his note and a satisfaction of the third mortgage you might so indicate, and I will discuss the matter with the client, although my present feeling is that we will be entitled to this additional security unless we are put back in the same position we were in prior to Mr. Thatcher's call."
On August 10, 1964, Attorney Long wrote the following letter to Attorney Lowe:
"Dear Mr. Lowe: Re: Lerman Tire Service, Ltd. Vs: McKearn"Since it appears that the arrangement that was contemplated at the time I forwarded to you the promissory note executed by James and Phyllis McKearn, secured by a mortgage believed to be a second mortgage on their home, under cover of my letter of July 21, 1964, will not be possible I request that you return this note and a satisfaction of this' mortgage to me, pursuant to the terms of the letter of trust written to you by me on July 21, 1964.
"I am sorry that this arrangement did not work out as was originally planned. However, I believe that you are quite aware of the fact that certain of the circumstances involved were beyond my control and there were facts existent of which I had no knowledge.
"I would appreciate receiving these documents from you by return mail.
"Very truly yours, "Blakely, Long, Grutzner Jaeckle "By "JRL:DP "Copy to Mr. and Mrs. McKearn"On September 2, 1964, the respondents filed voluntary petitions in bankruptcy in the United States district court for the Western district of Wisconsin, listing the appellant as an unsecured creditor in the bankruptcy schedules in the sum of $7,751.21. On September 3, 1964, respondents were adjudged bankrupt. On September 5, 1964, Attorney Long wrote the following letter:
"Dear Mr. Lowe:
"On behalf of James M. McKearn and Phyllis M. McKearn, I hereby demand that Lerman Tire Service, Ltd. deliver to us a satisfaction of the mortgage, dated July 20, 1964.
"This mortgage was delivered to you in trust under the terms of my letter of July 21, 1964, and the terms of that trust have not been carried out.
"In the event this satisfaction is not delivered within 7 days as is provided by Wisconsin Statute 235.64, we will commence immediate legal proceedings for the discharge of this mortgage and for damages.
"Very truly yours, "Blakely, Long, Grutzner Jaeckle "By "JRL:hs "Blind copy — James M. McKearn"Lerman filed satisfactions of the judgment with the clerk of the county court of Milwaukee and Rock counties on September 14, 1964.
On February 10, 1966, the trial court granted the respondents' motion for summary judgment, and judgment was entered directing the appellant to deliver the note to the respondents and to execute and deliver a satisfaction of the mortgage. An amended judgment further provided that the judgment obtained by the appellant against the respondents in Milwaukee county be reinstated and that satisfaction of that judgment be set aside.
The appellant appealed from the summary judgment granted the respondents and from the order denying the appellant's motion for summary judgment.
We recognize the issue to be — Are the plaintiffs-mortgagors entitled to a rescission of the entire agreement because of the delay on the part of the defendant in satisfying its judgment against the plaintiffs.
It should be noted that both parties to this action moved for summary judgment and that both parties insist, in their briefs and in oral argument, that no issues of fact are present. Since the parties are intent on obtaining a decision without a trial, we will assume there is no dispute in the material facts.
It is apparent that McKearn was in financial difficulties. It is also apparent that Lerman was aggressively pursuing its available remedies in collecting its judgment.
The agreement between the parties is that Lerman was to discontinue its receivership proceedings against McKearn and to satisfy the judgment against him in return for a collectible note and mortgage, for a lesser amount, against the homestead of McKearn. McKearn would be relieved of the financial harassment of a receivership and obtain a satisfaction of a substantial judgment. Lerman would receive a note and mortgage which would afford it a much greater probability of collection because it would not be subject to McKearn's homestead exemption.
From Lerman's point of view, the entire agreement was predicated upon the representations of McKearn that the home was worth $28,000 (or at least $22,000 at a forced sale), and subject only to one mortgage with balance due of about $13,000. It appeared to be clear that McKearn had sufficient equity in the home to satisfy the proposed second note and mortgage to Lerman.
When it became known to Lerman that its mortgage was not in fact a collectible second mortgage but in reality a third mortgage subject to two prior mortgages in amounts equal to or in excess of the sale value of the home, the consideration for discontinuing the receivership and satisfying the judgment completely failed.
The misrepresentation of McKearn, whether knowingly or inadvertently made, was a substantial breach on the part of McKearn and that misrepresentation gave the right to Lerman to rescind the agreement if it so chose.
Lowe's letter of July 24th is not a rescission nor a notice of intention to rescind, nor is it a notice that Lerman would not perform. It is rather a statement of the discovery of the additional prior mortgage and an invitation to McKearn "to set the matter right."
Long's letter of August 10th is an acknowledgment that McKearn could not, as agreed, deliver a second mortgage and a notice that McKearn wanted the note returned and the mortgage satisfied. The letter of September 5th is clearly a demand for the return of the note and the mortgage satisfaction. It was not until August 10th that Lerman was definitely advised by McKearn (through Long) that he could not perform the agreement by delivery of a second mortgage. At this stage of the negotiations, because of McKearn's breach, Lerman had the right to elect to go through with the agreement or rescind it. Lerman had a reasonable time in which to make the election.
". . . The . . . rule is that the right to rescind must be exercised within a reasonable time, or with `reasonable promptness,' after discovery of the facts from which it arises . . . .
". . .
"The question as to what is a reasonable or proper time within which to rescind a contract depends upon the facts of the particular case and is ordinarily a question for the jury, even where the facts are undisputed, except where only one inference may reasonably be drawn from them. . . ." 17 Am. Jur.2d, Contracts, pp. 992, 993, 994, sec. 510.
It follows that if Lerman did not elect to rescind within a reasonable time it was duty bound to perform by satisfying the judgment.
What constitutes a reasonable time to make an election to rescind or perform is usually a question of fact for the trier of the facts but because of the insistence of the parties that there are no disputed facts and the action should be decided upon the record before us, we conclude, in view of the obvious precarious financial position of McKearn and the questionable value of the note and mortgage, that a period of time between August 10th and September 14th is not unreasonable. Lerman elected to perform as per the agreement within a reasonable time.
Under the facts before us, equity will not relieve McKearn from the obligations of his agreement based upon his own misrepresentation. The most McKearn could rightfully demand was performance of the agreement — this Lerman has done.
There may be instances where the defaulting party may demand rescission so as to be put in a status quo. Such as in this case, had Lerman refused to deliver back the note and satisfy the mortgage and also refused to satisfy the judgment. In such instance the plaintiff could seek the aid of a court of equity to obtain rescission or compel performance. We do not reach this hypothetical question for the reason we conclude that Lerman performed within a reasonable time under the facts of the case.
See 5A Corbin, Contracts, p. 3, sec. 1122; pp. 55-58, sec. 1131.
By the Court. — Order and judgment reversed, with directions to dismiss the complaint.