Title: DUNLAP v NELSON

State: montana

Issuer: Montana Supreme Court

Document:

No. 12601 IN THE SUPREME COURT OF THE STATE OF MONTANA 1974 DONALD G . DUNLAP and THELMA DUNLAP, Plaintiffs and Counter-Defendants and Appellants, CHRIS NELSON and THERESE E . NELSON, Defendants and Counter-Plaintiffs and Respondents. Appeal from: District Court of the First Judicial District, Honorable Gordon E . Bennett, Judge presiding. Counsel of Record: For Appellants : Gough, Booth, Shanahan and Johnson, Helena, Montana Cordell Johnson argued, Helena, Montana For Respondents : Keller, Reynolds and Drake, Helena, Montana Paul F. Reynolds argued, Helena, Montana SL$ ': 3.974 Filed : Submitted: May 20, 1974 Decided : M p I 1 7974 Clerk Mr. Justice Gene B. Daly delivered the Opinion of the Court. This is an appeal from an action in equity for rescission of a contract on grounds of failure of consideration and fraudu- lent inducement heard in the first judicial district by the Hon. Gordon R. Bennett. From a judgment denying rescission, the appellants bring this appeal. Appellants, Donald G. Dunlap and Thelma Dunlap (herein- after referred to as buyers) purchased from respondents, Chris Nelson and Therese E. Nelson (hereinafter referred to as sellers) in April of 1971, a marina facility located at Cave Bay on Canyon Ferry Lake near Helena, Montana. The facility is situated on property owned by the State of Montana and managed by the Montana Fish and Game Commission. Buyers became aware that sellers were offering the marina facility for sale through an advertisement in the Los Angeles Times. Buyers were at that time living in Anaheim, California, where Dunlap was employed as a barber and his wife managed an apartment building. Buyers met with sellers' son, Norman Nelson, in California to discuss the matter. Buyers later went to Norman Nelson's house in Pacific Palisades, California, where they met with Norman and sellers to discuss the sale. Buyers, in late March 1971, inspected the marina facilities. Sellers offered the property for $125,000. Buyers responded with a counteroffer of $75,000, which was accepted and the parties on or about May 19, 1971, entered into a contract entitled "Escrow Agreement". There are three areas of dispute in the facts as they concern the negotiations and later the action for rescission: (1) Back taxes on the marina property, (2) liability insurance on the property, and (3) the future leasehold from the Fish and Game Commission. There were back taxes owing on t h e marina property a t t h e time of t h e purchase. Buyers contend t h a t a t t h e i n i t i a l meeting between buyers and s e l l e r s t h a t sellers represented t o buyers t h a t before t h e s e l l e r s could s e l l t h e property they would r e t u r n t o Montana and "straighten out t h e taxes". S e l l e r s ' son, Norman Nelson, denied any such representation and t e s t i f i e d t h a t it was h i s understanding t h a t t a x r e s p o n s i b i l i t y was t h a t of a former marina owner, Louie Faas, and t h a t s e l l e r s might possibly be responsible f o r them i f Faas d i d not pay them. Buyers d i d not check t h e t a x records i n Lewis and Clark County t o see i f t h e t a x e s w e r e paid before purchasing t h e marina. O n Septem- ber 2 4 , 1971, f i v e months a f t e r t h e s a l e was made, s e l l e r s brought a q u i e t t i t l e a c t i o n i n Lewis and Clark County and judgment was rendered i n sellers' behalf which determined t h e back taxes on t h e marina property. These taxes w e r e paid on December 3 , 1971, by sellers. It i s buyers1 contention t h a t sellers represented t o them t h a t t h e property was covered by insurance, including l i a b i l i t y insurance, and it would be possible f o r t h e buyers t o take over t h e e x i s t i n g insurance u n t i l it was necessary t o renew t h e policy. It was l a t e r discovered by t h e buyers t h a t t h e r e w a s no l i a b i l i t y insurance coverage on t h e property. S e l l e r s , however, t e s t i f y t h a t they have no r e c o l l e c t i o n of any such conversation. S e l l e r s ' son, Norman, had no recollec- t i o n of any discussions i n reference t o insurance, although it i s possible t h a t t h e subject w a s mentioned but not i n d e t a i l . He t e s t i f i e d t h a t the f i r s t t i m e he r e c a l l e d any conversation i n reference t o insurance was i n August, 1970, and t h a t discussion took place between himself and h i s f a t h e r only, t h a t he f i r s t learned t h a t t h e r e w a s no l i a b i l i t y insurance i n August, 1971. Paragraph 10 of t h e escrow agreement provided t h a t buyers were t o secure f o r themselves adequate public l i a b i l i t y and property damage insurance coverage. Paragraph 1 1 required t h e deposit of t h e insurance policy o r p o l i c i e s required with t h e escrow papers. Paragraph 13 of t h e escrow agreement s e t s f o r t h t h a t f a i l u r e of t h e buyers t o maintain insurance is a b a s i s f o r de- f a u l t . Buyers upon l e a n i n g t h a t t h e r e was no l i a b i l i t y insur- ance sought t o obtain a policy but claim t h a t they w e r e unable t o do so. Thereafter buyers had a l e t t e r of r e s c i s s i o n dated July 9 , 1971, s e n t t o s e l l e r s . J u l y 22, 1971, s e l l e r s obtained a policy of insurance f o r personal l i a b i l i t y f o r t h e marina f a c i l i t i e s . A t t h e t i m e of t h e s a l e , t h e marina property was under a ten-year l e a s e from t h e Fish and Game Department, which ran u n t i l 1980. The s e l l e r s assured buyers t h a t they could g e t a ten-year l e a s e with a ten-year renewable option. Paragraph 30 of t h e escrow agreement provided: "It is a l s o expressly provided and understood by and between t h e p a r t i e s hereto t h a t t h e s a l e of a l l of t h e property here involved by S e l l e r s t o Buyers is expressly conditioned on t h e grant- ing of a ten-year l e a s e o r permit by t h e S t a t e of Montana t o Buyers f o r t h e use and occupancy of s a i d r e a l property forming t h e s i t e f o r use a s a r e s o r t site. I t i s f u r t h e r agreed t h a t i f such l e a s e o r permit is not granted, t h a t t h e buyers may, a t t h e i r option, declare t h i s agreement n u l l and void and of no f o r c e and e f f e c t except t h a t as t o t h e down payment o r $12,500.00 which has been made by Buyers t o S e l l e r s , a s hereinabove s e t f o r t h , an equitable portion thereof w i l l be refunded by S e l l e r s t o Buyers, S e l l e r s being permitted t o r e t a i n so much thereof a s w i l l compensate them f a i r l y and adequately f o r t h e i r l o s s of time, p r o f i t s and inconvenience i n t h e premises. It is f u r t h e r agreed t h a t i f t h e p a r t i e s cannot decide upon t h e d i v i s i o n of s a i d down payment, they w i l l submit t h e m a t t e r s t o a r b i - t r a t i o n , each p a r t y s e l e c t i n g an a r b i t r a t o r and t h e s e two s e l e c t i n g a t h i r d . The decision of a majority of s a i d a r b i t r a t o r s on s a i d question s h a l l be binding on t h e p a r t i e s hereto." Buyers were not granted a ten-year l e a s e , but only a five-year lease by t h e Fish and Game Commission. Buyers present t h e following four i s s u e s f o r review: 1. Whether buyers are entitled to rescind the contract for material failure of consideration? 2. Whether buyers are entitled to rescind contract, based on fraud in the inducement? 3. Whether district court erred in admitting evidence of insurance obtained after notice of rescission had been given? 4. What expenditures should properly be allowed in order to make buyers whole? The buyers contend that because of the representation by the respondents concerning the matters of back taxes and liability insurance that they were fraudulently induced into the escrow agreement. We defined fraud in Cowan v. Westland Realty Company, 162 Mont. 379, 512 P.2d 714, 716, 30 St.Rep. 707, as follows: "In Lee v. Stockmen's Nat. Bank, 63 Mont. 262, 284, 207 P. 623, this court set down the elements which the plaintiff must prove to make out a prima facie case of fraud: (1) A representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity, or ignorance of its truth; (5) his intent that it should be acted upon by the person and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance upon its truth; (8) his right to rely thereon; and (9) his consequent and proximate injury. " The buyers maintain that had they known the back taxes had not been "straightened out" they would not have come to Montana in the first place to inspect the marina facilities. This Court could get involved in a semantical discussion of the possible meanings of the phrase "straightened out". We feel, however, that it will suffice to say that since the back taxes were paid 5 or 6 months before this rescission action was brought, the entire question is moot. Further a close examination of the record fails to disclose sufficient credible evidence to meet the standard established in Cowan. As we stated in Ray v. Divers, 72 Mont. 513, " * * * Generally t h e representations must r e l a t e t o a f a c t , a s distinguished from t h e expression of an opinion ( c i t i n g c a s e ) , though an exception t o t h a t r u l e is i l l u s - t r a t e d i n Como Orchard Co. v. Markham, 54 Mont. 438, 171 P. 274, and, of course, t h e representations must be made with respect t o a material matter; t h a t is, one which a f f e c t s t h e complaining p a r t y i n a substan- t i a l degree ( c i t i n g c a s e ) . ~ l l of these elements are f u l l y comprehended i n t h e more general t e r m s : Representation, f a l s i t y , s c i e n t e r , deception, and injury. ( c i t i n g c a s e ) " (Emphasis added. ) The evidence i n support of buyers' a l l e g a t i o n of fraudu- l e n t inducement a s it p e r t a i n s t o t h e policy of l i a b i l i t y insur- ance f a i l s t o e s t a b l i s h knowledge on t h e p a r t of t h e s e l l e r a s set f o r t h i n t h e t r i a l c o u r t ' s finding of f a c t No. 4 below: "During t h e t h r e e day period r e f e r r e d t o i n Finding # 3 , Chris Nelson o r h i s son, Norman, a c t i n g a s h i s agent represented t o p l a i n t i f f s e i t h e r t h a t Chris Nelson had a policy of pub- l i c l i a b i l i t y insurance i n force, which policy could be t r a n s f e r r e d t o p l a i n t i f f s , o r t h a t he could secure such a policy. Though t h e r e is evidence on both s i d e s o f - t h e question, a pre- ponderance of t h e c r e d i b l e evidence i n d i c a t e s t h a t Chris Nelson believed he had l i a b i l i t y insurance on t h e property a t t h i s time." (Emphasis added.) Knowledge on t h e p a r t of t h e person making t h e representation, a t t h e time it was made, and knowledge t h a t it was f a l s e , is necessary t o support a finding of fraud. Without it, t h e buyers f a i l i n t h e i r proof. Lee v. Stockmen's Nat. Bank, 63 Mont. 262, 207 P. 623. The admission i n t o evidence t h a t sellers obtained l i a - b i l i t y insurance on t h e premises i n question a f t e r t h e l e t t e r of r e s c i s s i o n w a s s e n t by t h e buyers has been argued by t h e buyers a s immaterial evidence and e r r o r . This being an equity a c t i o n t r i e d t o t h e court and t h e subject matter under consideration by t h e c o u r t being fraud, t h e c o u r t has wide d i s c r e t i o n with respect t o admission of evidence e i t h e r t o prove o r disprove t h e allega- t i o n of fraud. Berberian v. Martin, 214 A.2d 189 ( R . I . 1965). I n Koch v. Rhodes, 57 Mont. 447, 452, 188 P. 933, we held : "Where fraud is alleged, g r e a t l a t i t u d e of proof is allowed, and every f a c t o r circumstance from which a l e g a l inference of fraud may be drawn i s admissible. (Citing cases. ) " Therefore under these circumstances t h e t r i a l c o u r t d i d not abuse its d i s c r e t i o n . Buyers next contend t h a t t h e i r f a i l u r e t o o b t a i n a 1 0 - year renewable l e a s e from t h e Fish and Game Commission amounted t o a f a i l u r e of consideration f o r t h e escrow agreement. Buyers f u r t h e r contend t h a t s e l l e r s ' f a i l u r e t o demand a r b i t r a t i o n under paragraph 30 of t h e escrow agreement, t h e i r f a i l u r e t o plead a r b i t r a t i o n as a defense and t h e i r counterclaim amounted t o a waiver of t h e a r b i t r a t i o n clause i n t h e c o n t r a c t , and c i t e as authority: E. I. DuPont D e Nemours & Co. v. Lyles & Lang Const. Co., 219 F.2d 328; Trubowitch v. Riverbank Canning Co., 30 Cal.2d 335, 182 P.2d 182; Finlayson v. Waller, 64 Ida. 618, 134 P.2d 1069; and Anderson v. Twin City Rapid Transit Co., 250 Minn. 167, 84 N.W.2d 593. The cases from t h e foreign j u r i s d i c t i o n s c i t e d t o support waiver a r e not f a c t u a l l y i n point with t h e problem we have before t h e Court. The cases c i t e d d e a l with s u i t s brought i n l i e u of a r b i t r a t i o n and concern t h e subject matter which t h e a r b i t r a t i o n clause w a s designed t o cover. The case before us, however, not only d e a l s with t h e subject matter of t h e a r b i t r a t i o n clause, i.e. f a i l u r e t o obtain a 10-year renewable l e a s e from t h e Fish and Game Department, but a l s o d e a l s with fraudulent inducement i n t h e enter- ing of t h e escrow agreement. S e l l e r s argue t h a t because buyers a r e claiming r e s c i s s i o n on t h e grounds of fraudulent inducement, it would have been non- responsive t o demand a r b i t r a t i o n under paragraph #30. For i f r e s - c i s s i o n r e s u l t s because of fraudulent inducement, they argue, so would any r i g h t t o a r b i t r a t i o n . Neither buyers nor sellers c i t e any a u t h o r i t y d i r e c t l y on t h e question of whether an a r b i t r a t i o n clause concerning f a i l u r e of consideration i s waived under t h e s e circumstances when fraudulent inducent is a l s o pleaded t o void t h e c o n t r a c t t h a t contains t h e clause. Corbin on Contracts, 81444, p. 449 s t a t e s : " * * * The fraud of one p a r t y , inducing t h e o t h e r ' s a s s e n t t o t h e whole, makes t h e whole voidable a t t h e l a t t e r ' s option; a f t e r a proper avoidance, t h e r i g h t t o an a r b i t r a t i o n f a l l s along with a l l o t h e r r i g h t s created by t h e o t h e r promises t h a t were made. I n c a s e s within t h i s paragraph, t h e remedies f o r enforcement of a r b i t r a t i o n agreements a r e not a v a i l a b l e , includ- ing t h e enforcing order authorized by an a r b i - t r a t i o n s t a t u t e . Before issuing such an order t h e court must know t h a t l e g a l duty t o a r b i t r a t e e x i s t s ; t h i s is an i s s u e t h a t t h e c o u r t i t s e l f must decide." When a p a r t y t o a c o n t r a c t attempts r e s c i s s i o n of t h a t c o n t r a c t because of fraudulent inducement and t h a t i s s u e does not come within t h e purview of t h e a r b i t r a t i o n clause, t h e c o u r t must f i r s t determine i f t h e c o n t r a c t is v a l i d before it can g r a n t relief through a r b i t r a t i o n . I n re Kinoshita & Co.. 287 F.2d 951 (2nd C i r . 1961); Atcas v. Credit Clearing Corporation of America. 292 Minn. 334. 197 N.W.2d 448; Interocean Shipping Co. v. National Shipping and Trad. Corp., 462 F.2d 673 (2nd C i r . 1972). Under t h e s e circumstances, t h e Court having found no fraudulent inducement t o rescind t h e c o n t r a c t , we f i n d no abuse of d i s c r e t i o n by t h e t r i a l court a c t i n g i n equity i n ordering t h e t e r m s of t h e c o n t r a c t enforced. The judgment of t h e ---- J u s t i c e W e concur: * . . - 4 , - 2 - - - ; -- - - -- -- - - - - -- -- - - - - -- - - - Chief J u s t i c e