No. 88-564

INTHE SUPREME COURT OF THE STATE OF MONTANA

GAR 12. AMUNDSON,
Plaintiff and Respondent,-vsRICHARD A. WORTMAN,

Defendant and Appellant.

APPEAL FROM: District Court of theEighteenth JudicialDistrict, In and for theCounty of Gallatin, The Honorable Joseph B. Gary, Judge presiding.

COUNSEL OF RECORD:

For Appellant: Morrow, ~edivy & Rennett, P.C.; Lyman H. Rennett, 111, and Terry Schaplow, Bozeman, Montana

For Respondent: Drysdale, McLean, Nellen & Nellen; ~ichard C. g ell en, Boze~nan,Montana

Submitted on Briefs: June 8, 1989

Filed-:

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## -- Decided: July 18, 1989Mr. Justice R. C. McDonough delivered the Opinion of the Court.

This is an appeal from an action for breach of a contract tobuy a business. Defendant Richard A. Wortman appeals from the judgment of the District Court of the EighteenthJudicialDistrict, GallatinCounty, findinghim in breach of the contract and awarding the balance of the purchaseprice, plus interest, toplaintiff Gar L. Amundson. We affirm on the substantive issues regarding the breach, but remand forfurtherproceedings. Wortman presents threeissues forreview: 1. Did the District Court err in failing to find the existence of constructive fraud? 2. Did the District Court err in equating "customer lists"with "mailing lists"? 3. Did the District Court err in awarding attorney's feeswithoutholding an evidentiaryhearing? Amundson was theproprietor of a business called Information Processing inBozeman, Montana. Information Processing produced a product known as the Direct School Marketing Program, a series of computer-generated booklets designed to list the names, addresses and telephone numbers of school officials, faculty and coaches, together with dates and locations of various conferences and student events taking place during a given season or school year. The booklets

were sold tobusinesses--chiefly in the lodging and restaurant industries--interested inmaking contactwith the listed officialsinordertoobtaintheirpatronage during a conference or event. Information Processing also offered a follow-up service, which involved putting its subscribers in touch with school officials by mail. Amundson set up thebusiness himself, which included writing the computerprogram that compiled the booklet. In 1987,Wortman approached Amundson with a proposal to buy the Direct School Marketing Program. While negotiating terms of the sale, Amundson made various representations to Wortman concerning subjects such as projected earnings from the program, the costs involved and opportunities for new business. Pursuant to these negotiations,Wortman drew up a contract in longhand. Amundson read the contract and prepared a typed version. The contractwas executed onApril 7, 1987. The price for the business was $18,000, to be paid with a $2,000 down payment and two annual installments of $8,000. Among otherprovisions, the contractcalled forAmundson to deliver to Wortman the computer equipment, software and other items listed in an appendix to the contract,aswell as the copyright and logo for the Direct School Marketing Program and all documents related to its course of business. Amundson was also to provide Wortman with "whatever assistance is deemed necessary" in the preparation,marketing and distribution of the Fall 1987 edition of the program. The contract called for Wortman to pursue the business in a diligent, businessman-like manner, and.pay all expenses of doing business. Wortman began operating the business, butwas dissatisfied with the results of his efforts. He sought to rescind the contract and return the business, but Amundson did not agree to the rescission. Wortman did not pay his first installment. On September 17, 1987,Amundson made a written demand through his attorney for payment of the installment. When Wortman did not do so, Amundson filed this action on October 21, 1987. The complaint sought payment of "all monies owing now or in the future" under the contract, orreturnof thebusiness and damages forwaste due toWortman's actions in running it. Wortman raised an affirmative defense,alleging that Amundsonhad made severalmisrepresentations during negotiation of the sale that amounted to constructive fraud and entitled him to rescission. The case was tried before the District Court, sitting without a jury. On August 10, 1988, the court issued its Findings of Fact and Conclusions of Lawwith Memorandum, in which Wortman was adjudged to be in breach of the contract. Judgment was entered awarding Amundson the balance of the contract price plus interest, together with attorney's fees and costs, and Amundson's attorney filed a Notice of Judgment. This appeal followed. I. On appeal, Wortman challenges the District Court's Findings of Fact. When reviewing the findings of fact in a civil action tried by a district court without a jury, this Court will not substitute its judgment for that of the trier of fact. Rather, our review is confined to determining whether the findings of fact are clearly erroneous. Although the evidence may conflict, the court's findings will be presumed correct if supported by substantial evidence. Meridian Minerals Co. v. Nicor Minerals, Inc. (Mont. 19871, 742P.2d 456, 461,44 St.Rep. 1516, 1523-24. The District Court's Findings of Fact relevant to Wortman's appeal read as follows:
12. That the Montana Supreme Court discusses constructive fraud in the case of Moschelle v. Hulse, 622 P.2d 155 (Mont. 1980). The Court spoke in terms of "a pattern of repeated concealmentsof the true state of affairs" and "withholding relevant facts," all of which created a false impression to the purchaser. 13. That the Court does not find constructive fraudby the seller to the buyer.14. That the evidence did not show that past profits of the Plaintiff were falsely stated,that he made repeated concealments in promoting the business sale, that an intentional lack of full disclosure created a false impression, or that there was deliberate misleading of the facts which crossed the threshold of "puffing" and entered the realm of constructive fraud. 15. That the Court finds a customer list was provided,but any mailing list undergoes a constant rollover, and use of such a list in a business requires aggressive and continualupdating. 16. That a salesperson leaving the employment upon the sale of abusiness isnot reason to invoke constructive fraud. 17. That the Contract was very vague regarding what "assistance"was to be provided by the seller, and compelling evidence has not been presented to this Court justifying a lack of assistance to the point ofconstructive fraud.

Wortman argues that the court's Finding of FactNo. 13was in

error and contrary to the evidence in this case. Wortman also argues that the court confused "customer lists" with "mailing lists", which rendered its Finding of Fact No. 15

erroneous. Constructive fraud is defined at 5 28-2-406, MCA, as any breach of duty which, without an actually fraudulent intent,gains an advantage to theperson in fault or anyone claiming underhim bymisleading another to his prejudice or to the prejudice of anyone claiming under him

# ... In cases such as the one at bar, the "duty" involved is the duty todisclosematerial facts to the purchaser, abreach of which is an essential element of constructive fraud. Mends

v. Dykstra (1981), 195 Mont. 440, 637 P.2d 502. The Mends

case addressed the issue of when such a duty arises. While the defendants inMends asserted that no duty arose absent a fiduciary or confidential relationship, it was pointed out that this Courthad found "special circumstances" surroundingsome transactions which give rise to the duty to disclose. One such set of circumstances was the "pattern of repeated concealments" found in the Moschelle case cited by Wortman in support of his position and included in the District Court's Findings of Fact quoted above. Wortman argues that Amundson repeatedly concealed the true state of affairs concerning the business. According to Wortman, Amundson failed or refused to provide business records detailing the financial history of the business and did not disclose important details concerning its current status. Wortman thus asserts that his negotiations with Amundson created a false impression about the desirability of purchasing the Direct SchoolMarketing Program. We disagree. The business records Wortman complains of are ledgers and tax records for the years preceding the purchase. He argues that he was unable to gauge the true performance of the business without them, and was forced to rely on representations Amundson made in income projections prepared during their negotiations. Wortman also argues that the projections presented an inflated notion of the profit,that could bemade selling booklets. Both sides introduced income projections into evidence. According to testimony by Amundson, as many as five or six such projectionswere prepared forvariouspossible approaches Wortxnan might take in operating the business. Amundson also testified that the figures for such things asmaterials costs, labor and net profit per booklet were based on the pastperformance of the business. Theprojections introduced at trial as Wortman's Exhibit "A" include a statement of annual net profit for the years Amundson ran the business, which Amundson testified he had taken from the ledgers at issue. The projections state net profit forecasts that closely approximate the actual figures from past operation,although some projected profits are actually lower than past performance. Amundson also testified that Wortman never requested tax recordsduring negotiations. Wortman complains that Amundson also concealed facts about the status of the business that worked to Wortman's detriment. After the contract had been executed, Amundson and Wortman met with Amundson's salesman, Tim Barrett, in Butte to go over Barrett's role in the business. At this meeting, Barrett informed Wortman that he would be quitting his job to pursue other business interests. Wortman alleges that Amundson knew this before the meeting and concealed it, leading Wortman to believe that he was buying a business employing an active salesman. The testimony cited by Wortman on this point bears examination. Barrett testified that he did in fact tell Amundson of his decision to quit prior to the meeting. However,Barrett said, "Ibelieve I told Mr. Amundson the day he calledme and he said he had sold the business

# ...." This testimony indicates that Amundson did not know of Barrett's departure until after the sale was consumated. He therefore could not have concealed it to Wortman's detriment in deciding on the purchase. Furthermore,Wortman himself testified that the presence or absence of a hired salesman was not crucial tohisplan for operating the business. Wortman also complained that Amundson did not disclose the "considerable ill will" he had generated among his customers, or their complaints that the booklets were ineffective. However,Wortman testified that the sluggish saleshe experienced could have been the result of his own shortcomings as a salesman. Wortman's Exhibit "I",a file folder containing returned sales letters introduced in support of his contentionof customer animositydoes not lend support to his claim. The file contains 12 letters sent outby Wortmanand laterreturned. On one of theenvelopes iswritten "not interested," but the other 11 were returned because the addressee had moved. The only letter actually written by a customer statesthatthebookletpreviouslypurchased "helped

a great deal" and asks that the customer be retained on Wortman's mailing list. When testifying about the letters, Wortman admitted that the drop in sales could have been attributedtoother causes, such asa generally slowbusiness climate. Still another of Wortman's claims was that Amundson failed tosupply assistance with business operations thathe promised during negotiations and inthe contract itself. In response, Amundson testified that he had volunteered assistance, and supplieda recordof his activities. While the examples above do not address every claimed concealment, they are sufficient toillustratethatevidence in this case supports the District Court's conclusion that constructive fraud was not present. We have found no "pattern of repeated concealments" inthe record, and affirmthe DistrictCourt on thisissue. Wortman's second challenge concerns "mailing lists"

versus "customer lists". One of the items purchased by Wortman as part of the business was a "customer list" compiled over the course of the Direct School Marketing Program's existence. Wortman's brief to thisCourt makes much of the definition of "customer" as one who repeatedly makes purchases orhasbusiness dealingswith a tradesman. According toWortman, the listsuppliedwas amisrepresentation, because he was able tomake only approximately 80 sales to over 300 listed "customers". At trial, Amundson testified as to how the list was compiled. According to Amundson, businesses were placed on the listwhen they purchased a booklet. Entrieswere alsomade foreach purchaserindicating such things as method of payment. The names on the listwere thus "customers" inthateachbusiness had made atleast one purchase. While nearly every business strives for repeat customers, there is no guarantee that a customer with an established record of repeated purchases will not takehisbusiness elsewhere or simply stoppurchasing for any number of reasons. We also see nothing in the record to indicatethatAmundson made such a guarantee toWortman. The

manner inwhich the listwas referredtowas thus irrelevant, andwe affirmthe courton thisissue.

Wortman challenges the District Court's award of attorney's fees, arguing that it did soon thebasis of the affidavit of Amundson's counsel as to the amount of such fees, without holding an evidentiary hearing. Wortman is correct inthatattorney's feescannotbe awarded solelyon the basis of an attorney's affidavit. An evidentiary hearing is required. Starkv. Borner (Mont. 1988), 762 P.2d 857, 860, 45 St.Rep. 1885, 1888. Wortman's argument has placed this Court in an unusual situation. When the District Court entered its Findings of Fact and Conclusions of Law with Memorandum, counsel for Amundson was instructed to draft a judgment in conformity with the court's ruling. Part of that ruling, and consequentlypartof the "Judgment" signed and filedby thecourt,

was an award of "reasonable attorney's fees and costs, which shall be determined at a separate hearing." Shortly after the "Judgment"was filedand noticed, butbefore thetimefor the hearing, counsel forWortman filedhisNotice of Appeal. The problem arisesbecause counsel forWortman filed his Notice of Appeal prematurely. A judgment that awards costs and attorney's fees to be determined ata later hearing is not final and appealable until those costs and fees aredetermined. Roles v. Ler (1984), 213 Mont. 265, 692 P.2d 1. However, neither party raised thisissue intheir briefs, and it only became apparent upon our review of the record, after allbriefs had been filed and the record deposited with this Court. Therefore, inthe interestsof judicial economy, and for thepurposes of -- thiscaseonly, we affirmthe decisionof the District Court on the issues discussed above, and remand the cause tothe court forproper determination of costs and attorney's fees, both at the District Court level and upon appeal. Affirmed and remanded.



### Wy Concur: 

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Justice