Argued November 6, 1958. Reargued March 4, 1959.
Decided April 7, 1959.
1. The granting of rescission for mutual mistake, misrepresentation or fraud is not a matter of right but is discretionary with the Trial Court.
2. Rescission will be granted in the Trial Court's discretion only when damages have resulted, undue hardship will not be suffered by the defendant, the status quo can be restored, and it appears right and just to the parties to do so.
3. The election by the plaintiffs to seek rescission of a purchase and sale agreement does not deprive the Trial Court of its broad and flexible discretion to deny rescission and award damages to the plaintiffs when it is more equitable and just to do so.
4. The fact that the plaintiffs in their undertaking to purchase the capital stock of defendant's corporation, which consisted in part of a gas business, relied upon an innocent misrepresentation of an accountant, who occupied fiduciary relationship with the plaintiffs, as to the value of the gas business on the basis of an offer made by another to the defendant and the fact that the accountant received a commission from the defendant for consummating the sale to the plaintiffs did not as a matter of law entitle them to a rescission of the contract where the evidence was not conclusive that the status quo of the parties could be restored and the granting of rescission would not work an undue hardship on the defendant.
5. In such case, the Trial Court's denial of plaintiffs' petition for appointment of a receiver for the corporation was designed to hold matters in abeyance pending a hearing on the merits and was not res judicata of the fact that the status quo could be restored.
6. In awarding damages to the plaintiffs, in such case, in lieu of rescission, the plaintiffs were held entitled to recover the difference between what the capital stock was worth determined by ascertaining the value of the entire business represented by it, and what it would have been worth had the representation been true.
7. Evidence of what the plaintiffs paid for the capital stock in such case may properly be considered in determining what the stock was in fact worth.
BILL IN EQUITY, by the plaintiffs Eugene L. and Dorothy Barber against Emma L. Somers, the defendant, to rescind a purchase and sale agreement dated May 6, 1956, of the capital stock of J. Therrien, Inc., all of which was owned by the defendant. The purchase price was $110,000, of which the plaintiffs paid $30,000 down and gave a note for $80,000 for the balance, with interest at five per cent per annum, payable monthly. The principal was to be paid ten years after the date of the note.
The bill as amended asked for a rescission, a return to the status quo, and for "such other and further temporary relief as may be just," on the grounds of fraud, misrepresentation, mutual mistake of fact, and the violation of a fiduciary duty on the part of an accountant who allegedly participated in the transaction in behalf of both parties.
After hearings on the merits, the Court made certain findings and rulings and denied the petition for rescission, but awarded the plaintiffs damages. Shortly thereafter, the plaintiffs moved to reopen, to amend the findings and rulings, and to submit evidence as to the value of the capital stock of the company. Hearings were held which finally resulted in the Court's receiving evidence as to the value of the company's inventory at the time of the sale, and making certain technical amendments in its findings and rulings, but otherwise affirming its original conclusions. To this, both parties filed numerous exceptions and these, together with exceptions to the admission and exclusion of evidence during the trial, are transferred.
In addition to its findings as to the terms and date of the agreement between the parties, as to which there is no dispute, the Court also found:
"That the said Petitionee represented to said Petitioner, Eugene L. Barber, that there was an outstanding offer of Eighty Thousand Dollars ($80,000.00) for the gas business of said corporation.
"The true value of the gas business as a separate unit was not in excess of Forty-two Thousand Dollars ($42,000.00).
"The said Petitionee herself did not believe the gas business was worth more than Sixty Thousand Dollars ($60,000.00).
"The son of said Petitionee, Robert Sullivan, did not value the said gas business as it actually existed at more than Forty-five Thousand Dollars ($45,000.00).
"For some years prior to the execution of said purchase and sale agreement, Raymond L. Houde had been employed by both the Petitioner, Eugene L. Barber, and the Petitionee as an accountant in their respective businesses.
"Both the said Petitioner and the said Petitionee knew that said Raymond L. Houde had been so employed.
"Some time prior to the execution of said agreement, said Petitionee and said Raymond L. Houde entered into an agreement whereby said Petitionee agreed to pay said Raymond L. Houde the sum of Five Thousand Dollars ($5,000.00) for his services in selling the said corporation's capital stock for One Hundred Ten Thousand Dollars ($110,000.00).
"The said Petitioners did not know nor were they told by either the Petitionee or Raymond L. Houde of this agreement.
"After the said agreement was executed, the said Petitionee paid the said Raymond L. Houde the sum of Five Thousand Dollars ($5,000.00) as per agreement. This Five Thousand Dollars ($5,000.00) was subsequently returned to Petitionee or her counsel.
"The said Petitioners neither agreed nor intended to pay the said Raymond L. Houde for any service rendered by him in connection with the sale of the capital stock of the corporation to said Petitioners.
"The Petitioner, Eugene L. Barber, and the said Raymond L. Houde were friends, and this was known to the Petitionee, and the said Petitioner trusted and relied upon Raymond L. Houde to advise him in the transaction.
"No one representing the Petitioners ever found out about the Five Thousand Dollars ($5,000.00) being paid to Raymond L. Houde until about two weeks before the beginning of the hearing of this proceeding.
"The Petitioners believed the representation of the Eighty-Thousand Dollar offer of the corporation's gas business and made no independent effort to test its truth. The Petitioners relied upon this offer in deciding to buy the said capital stock.
"There was no bona fide offer outstanding to buy the corporation's gas business as it then existed.
"The said Petitionee did not intend to deceive the said Petitioner, Eugene L. Barber, when she represented that such an offer had been made.
"The said Petitionee did not know the details of the offer and made no investigation or inquiry to determine the facts concerning said offer.
"Neither the Petitionee nor Raymond L. Houde misrepresented the value of the corporation's inventory, as the fair value of the inventory was substantially as stated in the books of the corporation.
"When the Petitioner, Eugene L. Barber, first discussed the sale of the business with the Petitionee, she told him to go and see Raymond L. Houde who would furnish him with the necessary information with respect to the corporation's accounts, financial statement and books.
"The said Raymond L. Houde did not bargain with either of the Petitioners concerning the sale of the business but transmitted the terms of the sale as given to him by the Petitionee.
"The said Petitioner, Eugene L. Barber, knew or ought to have known that said Raymond L. Houde was acting for the Petitionee and that he was receiving compensation for his services from the Petitionee.
"While the said Raymond L. Houde was not employed by the Petitioners to act for them in this transaction, his part in it would have been above reproach if he had disclosed the agreement between Petitionee and himself with respect to the payment of the Five Thousand Dollars ($5,000.00) for his services in the event the sale was effected. The evidence does not warrant a finding that the Petitioners were materially injured by his failure to make such disclosure.
"Neither the Petitionee nor the said Raymond L. Houde intentionally made misrepresentations to the Petitioners.
"The Petitioners did not purchase the capital stock in order to liquidate the business.
"The Petitioners never liquidated or attempted to liquidate the business.
"The Petitioners did not purchase the capital stock in order to liquidate the gas business.
"The Petitioners never liquidated or attempted to liquidate the gas business.
"The Petitioners were never materially damaged by any representation made by Raymond L. Houde concerning the amount for which the Corporation might be liquidated.
"The Petitioners were never materially damaged by any representation made by the Petitionee concerning the corporation's liability as an accommodation party upon any notes or other obligations of its customers.
"The consideration for the sale of the capital stock of the corporation is found to be excessive.
"The fair value of said capital stock at the time the purchase and sale agreement was executed was Eighty-nine Thousand Dollars ($89,000.00)."
On these findings it ruled as a matter of law that the prayer for rescission should be denied, but that the plaintiffs were entitled to relief "in view of all the facts and circumstances"; that the relief would be the difference between the purchase price and the fair value of the capital stock when the agreement was executed, and it accordingly gave a verdict to the plaintiffs for $21,000. Further facts appear in the opinion.
Transferred by Sullivan, J.
Devine Millimet (Mr. Millimet orally), for the plaintiffs.
Hamblett, Kerrigan Hamblett (Mr. David C. Hamblett orally), for the defendant.
The plaintiffs base their petition for rescission and restoration to the status quo on these grounds: "(a) Fraud, misrepresentation or mutual mistake of fact in connection with the excessive valuation of the gas business, and (b) violation of a fiduciary obligation on the part of the accountant, who was the principal architect of the entire transaction, and whose position was well known to the defendant and used by her for her own benefit."
The defendant contends that as a general rule rescission for mutual mistake, misrepresentation, or fraud is not a matter of right, but is discretionary with the Court. We believe this correctly states the law. Cotton v. Stevens, 82 N.H. 105, 109; 2 Story, Equity Jurisprudence (14th ed.) s. 1026; 12 C.J.S., Cancellation of Instruments, s. 3.
In order to grant rescission for any of the above causes, it must as a general rule not only appear that at least one exists, but that damage has resulted (Record v. Trust Company, 89 N.H. 1, 8-9), that there will not be undue hardship on the defendant (Johnson v. Shaw, 101 N.H. 182, 188) and that the parties can be placed in statu quo. Record v. Trust Company, supra. The granting of rescission "is always a matter of sound and reasonable discretion on the part of the Court, in the exercise of which discretion it grants or withholds relief according to the circumstances of each particular case." Bourn v. Dull, 96 N.H. 194, 200. In short, rescission can only be granted when in all the circumstances it appears right and just to the parties to do so. Oullette v. Ledoux, 92 N.H. 302. Cotton v. Stevens, supra, 109; Black, Rescission and Cancellation of Contracts, s. 644; 2 Story, Equity Jurisprudence (14th ed.) ss. 1026-27.
In support of their position, the plaintiffs urge that the Court's discretion is narrow in scope. They stress that they asked for rescission only, that they and they alone have the right to elect their remedy, and that having done so, the Court erred as a matter of law in granting damages and refusing rescission. We believe there are conclusive answers to these claims. In the first place, as previously pointed out, it is axiomatic that the Court's discretion is not as circumscribed as the plaintiffs would have us hold, but is broad and flexible, the latter quality especially being a distinguishing feature of equity. 1 Pomeroy, Equity Jurisprudence (5th ed.) s. 109. Its exercise depends on the circumstances of the particular case. Cotton v. Stevens, supra, 109; Manchester Dairy System v. Hayward, 82 N.H. 193, 206, 207; Black, Rescission and Cancellation, s. 644.
It is also fundamental that once having acquired jurisdiction, as here, equity will give complete relief rather than forcing the parties to the delay and expense of another trial. Manchester Dairy System v. Hayward, supra; Oullette v. Ledoux, supra. It may be noted in passing that the plaintiffs, in addition to their request for rescission, also asked for "such other and further temporary relief as may be just." Modern authorities agree that the doctrine of election has lost much of the rigidity which once characterized it. Ricker v. Mathews, 94 N.H. 313, 317, 318, and authorities cited.
5 Williston, Contracts (Rev. ed.) s. 1528, cited by the plaintiffs to prove they have a substantive right to rescission, does say that "the traditional view has been that the choice between substantive legal relations — between contract or no contract — is made by the mere manifestation of election, whether that be simply by the injured party's conduct in other ways, or by his bringing suit for rescission or action for damages and deceit." However, this authority goes on to state in the same section that this no longer represents the modern view, but because of the injustice it caused, a far more liberal trend now prevails. Id., 1481-1485. The traditional view is no longer held in this state. Ricker v. Mathews, 94 N.H. 313, 317, 318. In any event, we do not believe the plaintiffs, by choosing a remedy, can deprive the Court of its traditional discretionary power.
We now turn to the facts to determine whether the Court, in denying rescission and granting damages, made a "plain mistake" (Bennett v. Larose, 82 N.H. 443, 447), or whether there be evidence in the record upon which the decision could reasonably have been made. Romano v. Company, 95 N.H. 404, 406.
In regard to the misrepresentation as to the value of the gas business, which is one of two principal factors upon which the plaintiffs place main reliance, the Court found that while they did rely on the statement that an $80,000 offer had been made, and that this was the probable liquidation value of the gas business, it was actually not worth in excess of $42,000. However, the Court also found that the plaintiffs, as was stated by the plaintiff Eugene L. Barber himself, never intended to liquidate the gas business or any part of the corporate property and never tried to do so. The Court concluded that they purchased it as a going concern, and intended to operate it as such. It also found that neither the defendant nor her accountant Houde intended to deceive the plaintiffs in regard to the worth of the gas business nor in any other way. These findings are sustainable on the record.
As a further reason why rescission should be granted, the plaintiffs contend that Houde was employed by them and the defendant, that he misrepresented the value of the gas business on the basis of the $80,000 offer, and that while occupying a fiduciary relationship to them, he accepted $5,000 from the defendant for his part in procuring the sale without informing the plaintiffs of this, whereas had they known of it they would never have gone through with the sale. Taken as a whole, they assert this misconduct was such as entitled them to rescission as a matter of law.
In regard to Mr. Houde, it is true that if one in a fiduciary relationship to another takes advantage of this to negotiate a contract wherein he represents a conflicting interest, the party imposed upon may rescind the agreement. Stevens v. Stevens, 97 N.H. 135; Wendt v. Fisher, 243 N.Y. 439. In such cases, courts are rightly solicitous to see that the person who has justifiably relied upon another suffers no losses. Hines v. Donovan, 101 N.H. 239. The right to rescission, however, is subject to the discretionary power of the court.
On the vital issues of whether the parties could be returned to the status quo (Record v. Trust Company, 89 N.H. 1) and whether rescission would be an undue hardship on the defendant (Johnson v. Shaw, 101 N.H. 182, 189), there were no special findings. However, the plaintiffs' request, in effect, that the Court find that the parties could be returned to the status quo, was denied, and the decree is clearly inconsistent with findings favorable to the plaintiffs on these questions. In the exercise of its discretion on the matter of rescission, the Court was entitled to treat as highly persuasive the plaintiffs' failure to convince it on these issues. Their claim that the denial of their petition for a receiver in December, 1956, prior to a hearing on the merits, is res judicata of the fact that the statu quo could be restored, cannot be sustained. The obvious purpose of this order of the Court was merely to hold matters in abeyance pending a hearing on the merits.
The findings which were made, considered as a whole, were consistent with the decree. There was evidence, too, that the defendant, Mrs. Somers, had changed her position, including her residence and mode of living, had made other commitments, and was ill. She testified, among other things, that she was without any substantial resources with which to carry on the business. Viewing the entire situation, it cannot be said that all reasonable persons must agree that the parties could be placed in status quo and that rescission would work no undue hardship on the defendant. We believe, on the record and on the findings made, the order denying rescission was proper. Perry v. Company, 101 N.H. 97, 100.
The question next presented is the plaintiffs' contention that even if rescission be denied and damages given, the Court erred in fixing the amount at $21,000. In regard to the innocent misrepresentation as to the value of the gas business, the Court found that the plaintiffs relied upon the alleged $80,000 offer for this business as a separate unit, but that its value as such did not exceed $42,000. The fact that they did not intend to liquidate this portion of the business is immaterial. The plaintiffs were entitled to recover the difference between what the capital stock was worth, determined by ascertaining the value of the entire business represented by it, and what it would have been worth had the representation been true. Lampesis v. Comolli, 101 N.H. 279, 284. The Court is entitled to consider, together with other evidence, the purchase price of $110,000 in determining what the stock was worth. See Page v. Parker, 43 N.H. 363, 369. Since it appears there was error in the assessment of damages, the plaintiffs' exceptions thereto must be sustained. The defendant's exceptions, based on the proposition that the plaintiffs suffered no loss and are entitled to no award, are overruled. The order is
DUNCAN, J., dissented; the others concurred.
I am of the opinion that upon the facts found the ruling "as a matter of law" that rescission should be denied was erroneous; and that the Court exceeded its discretionary powers in denying rescission, if the decree was entered in the Court's discretion. 5 Williston, Contracts (Rev. ed.) s. 1523; Seneca Wire Mfg. Co. v. Leach Co., 247 N.Y. 1. See. also, 2 Lawrence, Equity Jurisprudence, ss. 755, 756, 760-762. To the extent that the plaintiffs cannot restore what they received from the defendant, compensation can be made upon an accounting. Beaudry v. Favreau, 99 N.H. 444; Newton v. Tolles, 66 N.H. 136, 139. Any change in the defendant's position which occurred after the sale can furnish no basis for denial of the relief sought. Restatement of the Law, Restitution, s. 142 (3) and comment d. I find nothing in the record to justify discretionary denial of rescission (see Twardosky v. Company, 95 N.H. 279, 285; Manchester Dairy System v. Hayward, 82 N.H. 193, 206, 207; cf. Cotton v. Stevens, 82 N.H. 105, 109), and no recognized principle of equity which can properly be invoked to support it. I would therefore vacate the decree of the court below in its entirety.