Summary
upholding a jury award of all items of damages "aimed at making the [defrauded party] whole and . . . needed to place him in the same position he was before the contract"
Summary of this case from Jersild v. AkerOpinion
No. 116.
Argued September 29, 1969. —
Decided October 28, 1969.
APPEAL from a judgment of the county court of La Crosse county: GARY B. SCHLOSSTEIN, County Judge of Buffalo county, Presiding. Affirmed.
For the appellant there was a brief and oral argument by James C. McKenzie of La Crosse.
For the respondent there was a brief by Robert D. Johns, Jr., and Johns, Flaherty, Harman Gillette, all of La Crosse, and oral argument by Robert D. Johns, Jr.
On or about August 15, 1967, the parties to this action, after prior negotiations, entered into the following written agreement:
"E. Louis Harrison agrees to sell one-half interest in all the outstanding shares of common stock in the Corporation "River Frozen Foods, Inc." of 20 Cass Street, La Crosse, Wisconsin for the sum of five thousand dollars to Louis H. Schnuth.
"Mr. Schnuth will:
"1. Receive 50% of outstanding shares of stock in the Corporation.
"2. Receive $175.00 weekly salary plus one-half of the profits of the Corporation.
"3. Be elected President of the Corporation.
"The Corporation will lease the building at 20 Cass Street, La Crosse, Wisconsin as equipped for the sum of $250.00 per month for a period of twenty years. Lease to be attached to this agreement.
"The Corporation consists of:
"1. Miscellaneous inventory of frozen and canned foods (approximately $3000.00).
"2. Three trucks (description attached).
"3. Miscellaneous supplies, office furniture and equipment.
"4. Debts (list attached not to exceed $3500.00).
"5. No litigations or lawsuits pending.
"The $5000.00 received for the half interest in this Corporation is to be deposited to the Corporation bank account and from that day all checks drawn on the account must be counter-signed by both E. Louis Harrison and Louis H. Schnuth.
"All statements and facts listed above are true or this agreement is null and void."
On or about September 1, 1967, Schnuth moved his family from Palatine, Illinois, to La Crosse, and began work at River Frozen Foods, Inc. The agreement called for Schnuth to pay into the corporation $5,000 which he paid by check in three installments: September 5, 1967 — $2,000; October 4, 1967 — $2,000; and November 15, 1967 — $1,000.
Sometime during September, 1967, Schnuth sold portions of the inventory on hand to certain of the corporation's customers. River Frozen Foods, Inc., provided frozen food and other food products to colleges, hospitals, schools, and motels in Wisconsin, Iowa and Minnesota.
Shortly after these sales and subsequent to Schnuth's $2,000 payment on October 4th, complaints about spoilage of some of the frozen fish were received from these customers.
At about the same time, Schnuth learned that the corporation had prior debts exceeding the $3,500 amount mentioned in the agreement. Schnuth also discovered that one of the trucks mentioned in the agreement was leased to the company and another truck was encumbered. In addition, Schnuth was informed that a lawsuit had been initiated against the corporation on March 10, 1967, and reduced to judgment by default on August 29, 1967.
Nevertheless, Schnuth made the final $1,000 payment on November 15, 1967.
Schnuth never received any shares of stock of River Frozen Foods, Inc., nor was elected president of the corporation. Neither did he receive any salary or share of the profits.
On December 7, 1967, Schnuth sent Harrison the following letter:
". . . my contract with you and River Frozen Foods is null and void. This is in reference to the contract which was signed about August 15, 1967.
"Louis H. Schnuth"Then, on December 8, 1967, the summons and complaint in this action were served on the defendant, Harrison, alleging, inter alia:
" Fourth: That the defendant induced the plaintiff to enter into the agreement, marked Exhibit `A', by falsely representing that:
"(A) The plaintiff would receive 50% of the outstanding shares of stock in River Frozen Foods, Inc.
"(B) The plaintiff would receive $175.00 a week in salary in compensation for services performed for the Corporation.
"(C) The plaintiff would be elected president of the Corporation.
"(D) The miscellaneous inventory of frozen and canned foods had a value of $3,000.00 at the time the agreement was executed.
"(E) The miscellaneous debts of the Corporation did not exceed $3,500.00 at the time the agreement was executed, and
"(F) No litigation or lawsuits were pending against the Corporation at the time the agreement was executed.
" Fifth: That the plaintiff fully believed and relied upon the representations set forth in paragraph Fourth, above, and agreed to and did perform the contract by:
"(A) Depositing $5,000.00 in the Corporation's bank account as required by the agreement marked Exhibit `A'.
"(B) Paying off debts of the Corporation and ordering new inventory.
"(C) Expending his time to solicit business for the Corporation and attract new sales personnel.
" Sixth: That, at the time the agreement marked as Exhibit `A' was executed, the defendant knew of the falseness of his representations and intended to defraud the plaintiff for the purpose of inducing the plaintiff's action in reliance upon the agreement.
" Seventh: By reason of the fraud practiced by the defendant, the plaintiff has sustained the following financial injuries:
"(A) Money deposited in the Corporation's bank account for the purpose of conducting corporate business; $5,000.00.
"(B) Loss of salary which, pursuant to the agreement marked as Exhibit `A', was to be paid for services rendered to the Corporation; $2,100.00.
"(C) Travel expenses incurred in soliciting business for the Corporation; $629.40, and
"(D) Cost of relocation of plaintiff's family; $1,855.00.
" Eighth: That, upon discovery of the fraudulent acts of the defendant, the plaintiff notified the defendant of his intent to rescind the agreement and demanded repayment of the consideration tendered; that demand was refused by the defendant.
" Wherefore, plaintiff prays judgment against the defendant as follows:
"(A) That the agreement be rescinded.
"(B) That the defendant make restitution to the plaintiff of all money expended by the plaintiff in reliance upon the agreement.
"(C) For costs and disbursements and for such other and further relief as may be deemed just and equitable."
Trial was had before an advisory jury which found that Harrison had made a material misrepresentation to induce Schnuth to purchase one-half interest in River Frozen Foods, Inc., and that Schnuth relied on this misrepresentation in purchasing a one-half interest in the corporation. Thereafter, Judge SCHLOSSTEIN entered findings of fact and conclusions of law, stating inter alia:
"3. That each of said representations were material and false when made and the defendant either knew that said representations were false when made or that, when the defendant made them, they were made with utter disregard for whether they were true or false; that defendant made said representations to induce the plaintiff to purchase the said business.
"4. That, plaintiff satisfied his obligation under the contract of purchase by making a $2,000.00 deposit in the River Frozen Foods, Inc., corporate bank account on September 5, 1967, a $2,000.00 deposit on October 4, 1967, and a $1,000.00 deposit on November 15, 1967; that, after making such payments, plaintiff discovered that defendant fraudulently represented what acts he intended to perform under the contract of purchase in that he refused to transfer to plaintiff 50 per cent of the outstanding shares of stock of the corporation, he refused to install plaintiff as president of the corporation and further refused to pay plaintiff $175.00 a week in salary and one-half of the profits of the corporation; that, after making such payments, plaintiff discovered that defendant had fraudulently represented that the corporation had inventory valued at $3,000.00 when, in fact, such inventory was for the most part old, unfit and unsalable, that the debts of the corporation did not exceed $3,500.00 when, in fact, the debts were considerably in excess of that amount, and that the corporation had no litigations or lawsuits pending when, in fact, a suit by Frioner Norwegian Food Fish, Ltd. was pending in county court, branch two, La Crosse county, Wisconsin.
"5. That plaintiff never acquiesced in defendant's fraud or fraudulent representations after having gained knowledge of the falsity of such representations nor did plaintiff ever intend to relinquish his right to rescind the contract nor the plaintiff ever do any act pursuant to said contract of purchase with the full knowledge of defendant's fraud or fraudulent representations; that, upon discovery that the said representations set forth above were material, false, fraudulent and deceitful, plaintiff notified the defendant that he considered the contract of purchase rescinded.
"6. That, pursuant to the contract of purchase and in reliance upon the representations contained therein, which plaintiff regarded as statements of fact, plaintiff was damaged in that he deposited $5,000.00 in the River Frozen Foods, Inc., corporate bank account, he failed to receive $2,100.00 in salary at the rate of $175.00 for each of the twelve weeks he worked for the corporation, he expended $629.40 in travel expenses on behalf of the corporation in that he drove his vehicle 6,294 miles in the course of his employment and expended an average of 10 per mile of such travel, and he incurred $1,731.21 in costs for the relocation of his family prior to August 1, 1967 in that he expended $615.96 in moving expenses, $310.00 in attorney's fees connected with the sale of his home, $540.00 in interest penalty for the repayment of a mortgage on his previous home and $265.25 in purchasing a new home in the city of La Crosse and, further, he lost the use of such monies from the time they were expended or the time they became due and owing.
"And I find as:
"Conclusions of Law
"1. That plaintiff is entitled to judgment rescinding the contract of purchase by reason of the fraud and false representations of the defendant.
"2. That the plaintiff is entitled to the return of the $5,000.00 cash deposited in the River Frozen Foods, Inc., corporate bank account, together with interest on each installment payment from the date of such payment; payment of the salary he failed to receive in the amount $2,100.00, together with interest on each weekly salary payment from the date such payment became due; reimbursement for travel expenses incurred on behalf the corporation in the amount of $624.40, together with interest on such sum from December 7, 1967, the date plaintiff demanded rescission of the contract; and payment for the costs of relocating his family in the amount of $1,731.27, together with interest on such sum from August 15, 1967.
". . .
"4. That the plaintiff has not waived his right to rescind the contract of purchase, has not ratified the contract and is not estopped to assert rescission of the contract purchase; that the defendant is not entitled to the benefit of laches.
". . . ."
Judgment for the plaintiff was entered. Defendant appeals.
This is an action seeking rescission of the agreement between the parties by reason of false representations knowingly made by defendant to induce plaintiff to enter into the agreement. On this appeal the issues can be simply stated:
1. Are the findings of the trial court as to the false representations contrary to the great weight and clear preponderance of the evidence?
2. In an action for rescission can plaintiff recover all the items of damage forming the judgment here?
Although the complaint lists six different misrepresentations which the defendant allegedly made and upon which plaintiff allegedly relied, the first three items deal with what Schnuth was to receive under the agreement and never did receive. They are:
"(A) The plaintiff would receive 50% of the outstanding shares of stock in River Frozen Foods, Inc.
"(B) The plaintiff would receive $175.00 a week in salary in compensation for services performed for the corporation.
"(C) The plaintiff would be elected president of the Corporation."
These more properly relate to elements of a breach of contract, which could not, without more, be the basis for an action for rescission and restitution. However, the remaining three items listed in paragraph Four do properly raise the issue of misrepresentation. They are:
"(D) The miscellaneous inventory of frozen and canned foods had a value of $3,000.00 at the time the agreement was executed.
"(E) The miscellaneous debts of the Corporation did not exceed $3,500.00 at the time the agreement was executed, and
"(F) No litigation or lawsuits were pending against the Corporation at the time the agreement was executed."
It is well established that on appeal from a decision of a trial court sitting without a jury, the court's findings of fact will be sustained unless they are contrary to the great weight and clear preponderance of the evidence. (D) The Inventory
When a jury acts merely in an advisory capacity, the findings of the trial judge are under inquiry on appeal, not the advisory verdict of the jury. See Kuehn v. Kuehn (1960), 11 Wis.2d 15, 104 N.W.2d 138.
Kirchen v. Gottschalk (1965), 26 Wis.2d 123, 125, 126, 131 N.W.2d 885; Estate of Dobrecevich (1961), 14 Wis.2d 82, 85, 109 N.W.2d 477; Clark v. Moru (1963), 19 Wis.2d 503, 504, 120 N.W.2d 888.
Harrison, in effect, contends that the trial court could not have found that he represented to Schnuth that the inventory was worth $3,000. The record reveals that prior to entering into the agreement, Harrison had told Schnuth that there was approximately $3,000 worth of inventory on hand. The record also reveals that although Schnuth toured the warehouse and refrigeration area, he did not take an inventory.
However, it is undisputed that the goods Schnuth sold on behalf of the corporation, which were ultimately returned because they were spoiled, came from this old inventory. Harrison rather than Schnuth would appear to have been in a better position to know what condition these goods were in since in order for Schnuth to have determined that the goods were spoiled it would have been necessary for him to unpack and thaw out the cartons. Harrison at least presumably would know how long the goods were on hand. The fact that at least some of the goods were spoiled would indicate that the total value of the inventory was not as Harrison represented. Thus, this finding by the trial court is not against the great weight and clear preponderance of the evidence. (E) Corporation Debts
See generally, Sciano v. Hengle (1957), 1 Wis.2d 273, 83 N.W.2d 689.
The record reveals that before the agreement was entered into Schnuth asked for and received from Harrison a list of debts of the corporation. However, by the time of trial Schnuth had misplaced this list. There is a dispute as to what was included on the list. Harrison claims that a debt of $500 owed to Frioner Norwegian Frozen Fish, Ltd., was listed; Schnuth claims it was not. In any event, the agreement as written provided that the debts of the corporation were not to exceed $3,500, and the record shows that the debts did in fact exceed this amount. Thus, whether this Frioner debt was included on the original list is immaterial, since the debts did total more than $3,500. The representation as it appears in the contract is false. Here again, the finding of the trial court is not against the great weight and clear preponderance of the evidence. (F) No Pending Litigation
The agreement itself clearly provides that there were "no litigations or lawsuits . . . pending" against River Frozen Foods. This agreement was entered into during the early part of August of 1967. Yet, the record reveals that a lawsuit by the Frioner Norwegian Frozen Fish, Ltd., was instituted against River Frozen Foods, Inc., on March 10, 1967, five months before the parties entered into the agreement, and reduced to judgment by default on August 29, 1967, two weeks after the agreement was entered into. Thus the falsity of this representation is readily apparent. We have no hesitancy in finding that the trial court's findings of fact and conclusions of law in this respect are not against the great weight and clear preponderance of the evidence.
Faced with the realization that defendant had made several false representations in order to induce plaintiff to enter into the purchase agreement, Schnuth, as the defrauded party, could elect one of the following remedies: (1) rescind, restoring the pre-existing status and sue at law to recover his payments; (2) offer to restore the status, keep his offer good, sue in equity to rescind, and recover his payments; or (3) affirm the contract and sue for the damages resulting from the fraud. Schnuth chose the second alternative. His complaint recites that the action is for rescission of the contract and restitution.
See Neas v. Siemens (1960), 10 Wis.2d 47, 62, 102 N.W.2d 259; Morse Chain Co. v. T. W. Meiklejohn, Inc. (1941), 237 Wis. 383, 388, 296 N.W. 106, and cases cited therein.
In the earlier case of Mueller v. Michels, this court explained the difference between rescission at law and in equity. At law, the party rescinded the contract by giving back what he had received and brought suit to recover his property. In equity, the party brought suit for the court to rescind, and rescission did not take place until the court decreed it.
(1924), 184 Wis. 324, 197 N.W. 201, 199 N.W. 380.
With the merging of legal and equitable actions into one civil action, the form of the remedy has become less important and the courts somewhat less than articulate in explaining the theory of relief.
See sec. 260.08, Stats.
See Prosser, Law of Torts (3d ed.), pp. 634-753, chs. 18, 19, 20; 5 Williston, Contracts (rev. ed.), p. 4151, ch. 45, secs. 1486, et seq. But see Stevenson v. Barwineck (1959), 8 Wis.2d 557, 99 N.W.2d 690 .
Several different degrees of misrepresentation have served as a basis for rescission:
"It is not necessary, in order that a contract may be rescinded for fraud or misrepresentation, that the party making the misrepresentation should have known that it was false. Innocent misrepresentation is sufficient, for though the representation may have been made innocently, it would be unjust to allow one who has made false representations, even innocently, to retain the fruits of a bargain induced by such representations. This is often called a doctrine of courts of equity as distinguished from courts of law, and doubtless in its origin it was such; but, at the present time, it is rather a distinction between a right of rescission on the one hand whether that right is asserted in a court of equity, in a court of law, or without the aid of a court, and an action for damages on the other hand."
5 Williston, Contracts (rev. ed.), pp. 4189-4191, sec. 1500.
The Restatement of Contracts defines misrepresentation as:
"(1) `Misrepresentation' in the Restatement of this subject means any manifestation by words or other conduct by one person to another that, under the circumstances, amounts to an assertion not in accordance with the facts.
"(2) Where a misrepresentation would be likely to affect the conduct of a reasonable man with reference to a transaction with another person, the misrepresentation is material, . . . ."
Restatement, 2 Contracts, pp. 890, 891, sec. 470.
The Restatement also provides:
"(1) Where a party is induced to enter into a transaction with another party that he was under no duty to enter into by means of the latter's fraud or material misrepresentation, the transaction is voidable as against the latter and all who stand in no better position. . . ."
Id. at page 908, sec. 476.
It would seem that in the instant case, the representations made by Harrison as illustrated by the agreement meet all the above criteria and so can be classified as material misrepresentations. Misrepresentation has historically been a basis for rescission.
See 5 Williston, Contracts (rev. ed.), p. 4193, sec. 1501.
In McKearn v. Lerman Tire Service, Ltd., the plaintiffs brought an action to rescind and declare void a note and mortgage. The note and mortgage were given by plaintiffs to defendant as a satisfaction for a judgment the defendant had obtained against the plaintiffs. The plaintiffs represented the mortgage they were giving to the defendant as a second mortgage when in fact it was a third mortgage. In discussing the defendant's right to rescission, this court stated:
(1966), 32 Wis.2d 329, 145 N.W.2d 731.
"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."
Id. at page 336.
The effect of a rescission of a contract is to restore the parties to the position they would have occupied had no contract ever been made. In other words, when a contract is rescinded the parties are placed in the status quo as if no contract had ever been made.
See First Wisconsin Nat. Bank v. Pedley (1932), 208 Wis. 628, 242 N.W. 512.
This brings us to the second issue on this appeal: Whether plaintiff is entitled to all the elements of damage as found by the trial court.
The trial court here found that Schnuth was entitled to: (a) The $5,000 he had paid in; (b) travel expenses of $624.40, incurred by him on behalf of the corporation; (c) the costs of relocating his family ($1,731.27); and (d) payment of the salary he failed to receive ($2,100).
All these items were aimed at making the plaintiff whole and were properly awarded as items of damage needed to place him in the same position he was in before the contract.
Harrison raises the question of whether Schnuth affirmed the contract by making the final payment of $1,000 on November 15, 1967, after discovering the misrepresentations. But Schnuth made this last payment because it was required by the contract. Moreover, he testified at trial that he did this because he wanted to make sure that his friend, from whom the corporation bought some fish, was paid. The trial court found that Schnuth did not in any way affirm the contract. This is not against the great weight and clear preponderance of the evidence.
Appellant raises numerous points about allegedly improper admission of evidence, improper closing argument, and improper jury instructions. We have reviewed these contentions and find them without merit. Furthermore, it is to be remembered that this was a trial to the court with the jury acting in an advisory capacity only.
Counsel for appellant has again prosecuted an appeal with many breaches of the court's rules regarding the preparation of his brief and appendix. Even the findings of fact and conclusions of law, as entered by the trial court, which had to be material to the appeal, were not printed in appellant's appendix. The respondent and the court have been forced to do much additional work which would not have been required if the appellant, through his counsel, had abided by the rules. If it were not for the fact that respondent has not asked for additional costs under sec. (Rule) 251.85, Stats., we would impose the same.
See National Farmers Union Property Casualty Co. v. Maca (1965), 26 Wis.2d 399, 132 N.W.2d 517; Olson v. Sentry Ins. Co. (1968), 38 Wis.2d 175, 156 N.W.2d 429.
On June 27, 1969, respondent's motion to strike the appellant's brief in the instant case was denied without costs and without prejudice to reassert the question at the time of briefing and argument on the merits.
By the Court. — Judgment affirmed.