No. 13290 

### INTHE SUPREME COURT OF THE STATE OF MONTANA 19 

### 76

STATE 

### EX REL. 

### DIMLER

## , Petitioner,



### THE DISTRICT COURT 

### OF THE ELEVENTH JUDICIAL DISTRICT OF 

### THE STATE OF MONTANA, 

### IN

### AND FOR 

### THE COUNTY OF FLATHFAD 

### ANT) THE HON. ROBERT S

# .KELLER, a Judge thereof, Respondents.

ORIGINAL PROCEEDING: Counsel of Record: For Petitioner: James 

### D. Moore argued, Kalispell, Montana For Respondents: Warden, LJalterskirchen and Christiansen, Kalispell,

Montana

Submitted: March 

### 17, 1976Mr. JusticeGene B. Daly delivered the Opinion of the Court.

This isan application for a 

### writof supervisory control directed tothedistrict court of the eleventhjudicial district, Flathead County. The application 

### isby plaintiffs Robert E. Dimler and PattiDimler and relates to that court's order striking a prayer for'punitive damages from a complaint seeking damages from defendants Ralph Edward James and Kathy Ann James for alleged misrepresentation as tothe functional condition of one bathroom and plumbing elsewhere ina home sold by defendants toplaintiffs. This Court, upon hearing ex parte application of plaintiffs, granted defendants untilMarch 30, 1976 torespond inwriting and granted plaintiffs tendays thereafter forreply. Briefs 

### were filed and the case submitted April 9, 1976. The background giving rise to this applicationbased solely upon allegations of plaintiffs, is: In July 1974, plaintiffs entered into negotiations with defendants, through certain realtors, for the purchase and saleof a home owned by defendants near Kalispell, Montana. Defendants listed and represented the home tocontain two bathrooms. Plaintiffs in inspecting the home, were shown the "second bathroom" upstairs, which "bathroom" contained

a bathtub, a sink, and a toilet, allattached tothe walls and floor inwhat appeared tobe a normal fashion. There were diapers or dirty clothes inthe bathroom, as though they might have been rinsed and placed ina hamper therein. There was blue water in the toilet. Believing the home tobe a two-bathroom home, and relying upon that belief, plaintiffspurchased the home from defendantsunder a contract for deed on or about July 27, 1974. The day following the purchase, plaintiffs' small child had occasion touse the upstairs toiletbut was unable to flush it. Thereafter it was discovered that no plumbing whatsoever had

### been placed in the "upstairs bathroom",nor was there any plumbing anywhere leading to the upstairs portion of the home. The bathroom was in fact not usable. Subsequently, plaintiffs had additional misfortune when the main sewer line in the basement burst. Inspection of the line revealed that faulty installation and inadequatematerials had caused the rupture. ~esiring to keep the home, plaintiffs chose to affirm the real estate sales contract and sue for damages. In December 1974 a complaintwas filed in Flathead County district court alleging willful and wanton fraud on the part of defendants as to the "upstairsbathroom" and the sewer line. Plaintiffs sought actual and punitive damages. Defendants filed a motion to strike plaintiffs' prayer for punitive damages contending the only obligations alleged to have been breached were those which arose from the parties' contract and therefore under section 17-208, R.C.M. 1947,punitive damageswere not recoverable. On January 30, 1976, the district court issued an order granting defendants' motion to strike the prayer for punitive damages. Plaintiffs seek a writ of supervisory control to annul and set aside the January 30 order of the district court. The sole issue presented for review iswhether the district court acted properly in striking the prayer for punitive damages as a matter of law. First,where a motion seeks to eliminate a claim for relief upon grounds the claim is improper as a matter of law, the allegations of the complaintmust be viewed in the light most favorable to the plaintiffs for purposes of reviewing the propriety of the district court's action. Board of Equal. v. Farmers Union Grain Terminal Association, 140Mont. 523, 374

### P.2d 231. Therefore, all subsequent discussion of law in this opinion will be based on the assumption the plaintiffs' allegations in this action are true. The essential question in resolving the issue is whether plaintiffs in the instant case are basing their action upon contract. Section 17-208, R.C.M. 1947, which authorizes the recovery of punitive damages provides: "Exemplarydamages--in what cases allowed. In any action for a breach of an obligation not arising from contract,where the defendant has been guilty of oppression, fraud, or malice, actual or presumed, the jury, in addition to the actual damages, may give damages for the sake of example, and by way of punishing the defendant." Defendants, in support of their contention that the only obligation existing between the parties is contractual in nature and section 17-208 precludes recovery of punitive damages, cite several Montana caseswhere punitive damageswere denied: Westfall 

### v. Motors InsuranceCorp., 140Mont. 564, 374 P.2d 96;Ryan

v. Ald, Inc., 146 Mont. 299, 406 P.2d 373; State ex rel. Cashen

v. District Court, 157Mont. 40, 482 P.2d 567. InWestfall the plaintiff claimed the defendant insurance adjuster had fraudulently procured his signatureon a release form and sought to void such release, suing for actual and punitive damages. This Court held that such an insurance release was a contractand therefore was entitled to rescission under the circumstances of that case but punitive damages could not be allowed in light of section 17-208,R.C.M. 1947. In Ryan plaintiff sought actual and punitive damages from the defendant as the result of the sale of defective laundromat equipment. Plaintiff attempted to show the defendant had an obligation under the contract to see that the machines were properly installed and in working order. In addition,plaintiff alleged that said obligation arose from fraudulent oral representationsmade prior to the contract. This Court held the secondclaimwas inconsistent with the claim under the contract, that the suitwas inrealityone for breach of contract, and therefore punitive damages could not be awarded under section 17-208, 

### R.C.M. 1947. In Stateex rel. Cashen plaintiff claimed fraud on the part of the insurer and 

### its agent in settling an auto collision insurance claim and sued for breach of contract, asking for rescission with actual and punitive damages. Once again, the action was forbreach of contract and since, contrary toplaintiff'scontention, no penal section of Montana's Insurance Code



### was relevant, punitive damages could not be allowed under section 17-208. Since allthree cited cases involved actions for breach of contract, with rescission as part of the relief sought, those

cases are distinguishable from the instant case. Here, plaintiffs chose toaffirm the contract and sue for fraudulentrepresentationspreceding the contract, representations which plaintiffs alleged induced them to sign thecontract forpurchase of defendants' home. That such a course of action ispermissible and infact isnot a contract action has long been recognized inthe 

### law. 37 Am Jur 2d, Fraud and Deceit, 

### B 332, p. 439, states inpertinent part: "A traditional remedy ordinarily availableto

### a person who has parted with something of value 

### as a result of a contract or transaction induced by fraud isthat he may retainwhat he has received and bring an action atlawtorecover the damages sustained. Thus, a person who has been injured by the fraud of another orothers, by either a party orparties toa transaction or a third party or third parties committing fraudulent acts involving or bringing about the negotiation of a transaction, such transaction usually but not necessarily involving business or commercial dealings, may maintain an action atlawintorttorecover damages for the injury received from the fraud and deceitperpetratedby such other orothers. The foundation of the action 

### is not contract, but tort. 

## * * *" (~mphasis supplied.) 37 Am Jur 2d, Fraud and Deceit, S 333, p. 442, continues the discussion: "In accordance with the right tobring an action for deceit generally, a buyer who has been induced by the fraud of the seller topurchase real or personal property may ordinarilymaintain an action for, or inthe nature of, deceit, torecover damages resulting from the fraud. 

## *.* *" (Emphasis supplied.) See also: Associated Hardware Supply Co. v. Big Wheel Distributing Co. 355 F.2d 114; Rogers v. Toni Home Permanent Co., 167 Ohio St. 244, 147 N.E.2d 612; Cole v. Associated Const. Co., 141Conn. 49, 103 A.2d 529. InFalls Sand and Gravel Co. v. Western Concrete, Inc. 270 F.Supp. 495, 500, Judge Jameson stated: 

### " 

## * * * It isclear that inMontana, and generally, a partymay not pursue both an action for recission and damages for deceit or misrepresentation. 

## * * *I1 Judge Jameson then quoted approvingly from Bankers Trust Co. v. Pacific Employers Insurance Co., 282 F.2d 106, 110: 

## "'

## * * * It is the 

### lawthat one who has been fraudulently induced intoa contract may elect to stand by that contract and sue for damages for the fraud. 

## * * *'" Horner v. Ahern, 207 Va. 860, 153 S.E.2d 216, 221, is similar to the circumstances of the instant case. In Horner, purchasers brought an action of fraud against the sellersand a real estate firm for misrepresentations allegedlymade concerning termite damage inthe house which they purchased. Defendants contended that under the terms of the contract, plaintiffs' only remedy, inthe event termite damage was found, was torescind the contract. By retaining the property and bringing an action for damages, defendants alleged plaintiffs were seeking toaffirm that part of the contfact entitling them tothe property and todisaffirm thatpart prescribing their soleremedy if termite damage was found. In answering thiscontention theVirginia Supreme Court said: "The other fallacy inthe defendants' position is thatthe plaintiffs' action of fraud and deceit is not based upon thecontract, but is independent of it. The action is not incontract, but in tort. The bringing of the action has the effectof affirming the contract, but that does not constitutea release orwaiver of theright to seek recovery of damages for the alleged tort." Applying the authorities discussed toplaintiffs' allegations of misrepresentation on thepart of defendants, these conclusions can be made as toplaintiffs' cause of action in the instant case: The cause of action arises from representations which plaintiffs claim induced the execution of the contract, section 13-308, R.C.M. 1947. Such representations necessarily contain an obligation toact ingood faith. Such representations if knowingly false, as alleged, would be a "breach of an obligation" ascontemplated by section 17-208. Additionally, a cause of action for fraudulent inducement can be i n t o r tand thus independent of the contract and therefore affirmance of the contract does not automatically preclude suit i n t o r t for fraud. Since plaintiffs' cause of action for fraud isbased in tort, not contract, section 17-208, R.C.M. 1947, is not controlling and plaintiffscan properly pray for punitive damages. Let a writissue from this Court directing the district court of the eleventhjudicial districttoreinstate plaintiffs' prayer for punitive damages, therefor.

JusticeWe concur:

judge, sitting in place of 

### Mr. "'Chief Justice James T. Harrison.Mr. 

### JusticeWesley Castles dissenting;

1 

### respectfully dissent to the majority holding. The

11 

### issue around which this case revolves 

### is fraudulent inducement" to enter intoa contract, and the action clearly arises out of the 

### contract within the meaning of section 17-208, R.C.M. 

### 1947. In construing the cases of Westfall, Ryan and Cashen, the majority inaccurately states: 

### "*

# ** allthree cases involved actions forbreach of contract, with rescission aspart of therelief sought 9~ 9: 

# *. Here, plaintiffs chose toaffirm the contract and sue for fraudulent representations

# ** 9;. l1 

### In Westfall, punitive damages were denied because of an allegation the insurance carrierhad breached itscontractwith the insured. Rescission of that underlying obligation, the initial insurance contract, was not prayed for. The fact that rescission of the release agreement was requested, was not determinitive of the case. The continuing existence of the underlying obligation was the factorwhich caused the application of 

### the statutetodeny punitive relief. The facts inRyan presented a "fraudulent inducement" very similar to the instant case. The majority statesrescission of 

### the purchase contractwas sought, but the opinion contains

no language to that effect. Again, punitive damages were disallowed in light of the continuing existence of the contract, an existencewhich could onlybe denied by a prayer forrescission. In Cashen, another insurance contract and release problem ispresented. A 

### fairreading of that case fails toreveal any intent of the plaintiff todeny the existence of the original insurance agreement. Thus, punitive damages were deemed inappropriate. In a case not citedby the majority, Paulson v. Kustom Enterprises Inc., 157 Mont. 188, 

### 483 P.2d 708, the relationship between

### the prayer forrescission and therecovery of punitive damages 

### ismade clear. The problem in Paulsonwas also one of fraudulent inducement. Yet, inPaulson punitive damages were allowed as rescission or cancellation of theunderlying contractual obligationwas clearly sought. By denying the contract, the plaintiffs became legally eligibleto seek punitive damages, as the action clearly sounded in tort. Section 17-208, 

### R.C.M. 1947, requires that plaintiff elect

one of two remedies: (1) affirm the contract, receive the benefits derived thereunder, and sue foractual damages, or (2) disaffirm through a prayer forrescission or cancellation and sue forboth actual and punitive damages. Even inthe unfortunate circumstances presented here, the law does not permit both. The majority by 

### itsholding, overrules the firmly established cases citedheretofore, and applies the direct converse of the correct rule. 

# 4a,iQd Justice. .- 

# C