No. 79-81 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1980 

SHERWOOD MOSCHELLE and BARBARA MOSCHELLE, 

Plaintiffs and Respondents, 

vs . 

GUY HULSE and HELEN HULSE, 

Defendants and Appellants. 

Appeal from: District Court of the Fifth Judicial District, 

In and for the County of Madison. 

Hon. Nat Allen, Judge presiding. 

Counsel of Record: 

For Appellants: 

R. T. Garrison, Virginia City, Montana 

Chester Lloyd Jones, Virginia City, Montana 

Morrow, Sedivy, Olson and Scully, Bozeman, Montana 

For Respondents: 

Goetz and Madden, Bozeman, Montana 

Submitted: May 30, 1980 

Decided: (1 i~.~ 2.7, / 982 

Filed: AN 2 7 198l 

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Clerk 
Mr. Justice Daniel J. Shea delivered the Opinion of the 

Court. 

The defendant sellers appeal the judgment of the Madison 

County District Court which permitted rescission of a contract for purchase of the defendants' bar in Virginia City. 

The central issue is whether there is substantial evidence 

to support the trial court's determination that the defendants made misrepresentations of fact which constituted 

constructive fraud within the meaning of section 28-2-406, 

MCA, so as to entitle the plaintiffs to rescission of the 

contract. The sellers contend that any misstatements made to 

plaintiffs were nothing more than sales talk or puffing and 

that they did not attempt to deliberately mislead the plaintiff s. 

Defendants raise several issues directed at the right 

of the plaintiffs to seek rescission. First, they contend 

that a reasonable investigation by the plaintiffs would have 

led them to the facts relevant to the transaction. Second, 

they contend that the misrepresentations were not material 

and that the plaintiffs should be confined only to seeking 

damages. Third, they contend that by waiting nine months 

after the inception of the contract to bring the action for 

rescission, the plaintiffs either waived their right or are 

barred by laches. The laches argument is raised for the 

first time on appeal. Fourth, they contend that the plaintiffs were in default on their contract payments at the time 

they elected to rescind and that this prevents them from 

availing themselves of the rescission remedy. We affirm the 

judgment . 

Contact with the defendants in relation to selling 

their Tavern Bar in Virginia City, was initiated in October 

1975. At that time, plaintiff Barbara Wilkins (later to 
become Barbara Moschelle) and her then fiance, Kevin McGuinn, 

met with defendants Guy Hulse and Helen Hulse, to discuss 

the possible purchase of the tavern. The defendants showed 

plaintiff Barbara Wilkins their business income records for 

the month of July 1975 and a tax form apparently indicating 

the defendants' gross income for 1974. Defendants told 

plaintiff Wilkins that income from the tavern during the 

winter months was slim, but defendants refused her request 

to see records of their earnings during the winter months of 

that year. Plaintiff Wilkins and her fiance deposited 

$2,000 earnest money but did not proceed with the transaction and forfeited most of this sum. Plaintiff Wilkins, 

however, remained interested in purchasing the tavern. 

She interested her new husband, Brent Moschelle, in purchasing the tavern. 

In August 1976, Brent and Barbara Moschelle negotiated 

with the defendants to purchase the tavern. The defendants 

again refused to permit the plaintiffs to inspect their 

business records, but Helen Hulse assured them that earnings 

during the winter months would allow them to make payments 

and earn living expenses. The defendants also told the 

plaintiffs that income from the Labor Day holiday alone 

would be sufficient to make one or two monthly payments. 

These statements, it later turned out, were not entirely 

accurate; indeed, they were more than a little misleading. 

Defendants also made several representations to the 

plaintiffs concerning the condition of the premises, and the 

plaintiffs later found them to be false. Helen Hulse told 

the plaintiffs that although the building was 100 years old, 

it was in good condition. Guy Hulse told plaintiff Brent 

Moschelle that he had installed wiring in the building. 
Defendants also told plaintiffs that the tavern was connected to the city sewer system. 

On August 20, 1976, the parties executed a contract 

calling for a purchase price of $62,000. The down payment 

was $13,000 with payments to be $440 per month. On the same 

day, the plaintiffs paid the down payment and assumed possession of the tavern. 

Shortly thereafter, the plaintiffs' problems started. 

In the fall of 1976, the refrigerator and cooler stopped 

operating, and the stove blew up. Plaintiff Brent Moschelle 

then looked at the wiring in the building and discovered 

loose wires hanging outside the building. As it appeared to 

be old, Brent hired an electrician to examine the wiring. 

The electrician determined that the wiring was very old and 

that to bring the building up to standard it was necessary 

to rewire the entire building. Plaintiffs, nonetheless, 

continued to operate the tavern and made monthly payments in 

October and November 1977. 

Business was very poor during the winter months. It 

was necessary for plaintiff Brent Moschelle to borrow money 

from his mother to make the December payment. This was the 

third and final payment made by the plaintiffs, as the 

tavern income was so poor in January that they could not 

make the January payment from business earnings. 

More problems arose in March 1977. The plaintiffs 

found that the tavern foundation was in extremely bad condition. When the pipes in the women's bathroom froze, Helen 

Hulse told plaintiff Brent Moschelle about a trapdoor leading to a crawl space in the basement. Brent Moschelle 

proceeded to look at the floors from underneath. He found 

that three floors had been built one upon another, and that 

the joists supporting the bathroom floor had rotted. A 
professional contractor inspected the building and determined that it would cost approximately $20,000 to bring the 

building up to standard. 

In the same month, the sewer line backed up and flooded 

the basement with four to five feet of water. This flooding 

shorted out the generator, cooler and lights, and forced the 

plaintiffs to shut down the business. It was then that 

plaintiff Brent Moschelle first learned that the tavern was 

not directly connected with the city sewer system. Indeed, 

over 200 feet of 100-year-old pipe had apparently frozen 

solid as the water could not be pumped out of the basement 

to free the line. The line remained blocked even after 

using an electric rot0 machine, chemicals, and air blaster. 

This was the final straw. The plaintiffs closed the business 

and did not reopen. Later in the spring (although the business was not then open) seepage from ground water above the 

tavern caused more flooding in the basement. 

The primary thrust of the defense is the contention 

that no constructive fraud was committed because they did 

not attempt to deliberately mislead the plaintiffs. In this 

same vein, defendants contend that plaintiffs did not make 

reasonable inquiry of the condition of the premises or the 

income of the business, and that such inquiry would have 

given them all the information they needed to know. This 

argument, however, overlooks the crux of the trial court's 

determination that constructive fraud was committed within 

the statutory meaning of section 28-2-406, MCA. This statute provides that constructive fraud applies to "any breach 

of duty which, without fraudulent intent, gains an advantage 

to the person in fault . . . by misleading another to his 

prejudice." (Emphasis added.) Dishonesty of purpose or 

intent to deceive is not a requirement under this statute. 
Other jurisdictions hold that constructive fraud is invoked 

as a matter of law to prevent a party from being unjustly 

enriched as a result of false statements made, even if the 

1 deception is not knowingly made. See Olitkowsk~ v. St. 

Casimir's Saving & Loan Ass'n. (Mick 1942), 302 Mich 303, 4 

N.W. 2d 664; Hernig v. Harris (N.J. 1934), 117 N.J. Eq. 146, 

175 A. 169. See also 37 C. J.S. Fraud 52 (c) (1) , at 211, et 

seq. 

Although the record does not clearly establish actual 

fraudulent intent on the part of the defendants, there can 

be no doubt that their representations concerning the subject of the sale amounted to constructive fraud. Several of 

their statements were misleading on their face and thus 

required further elaboration so as not to give the plaintiffs the wrong impression. Helen Hulse told the plaintiffs 

that the building was in good condition, but the defects 

which plaintiffs later discovered showed that further repairs were needed to bring the building up to standard. Guy 

Hulse told plaintiff Brent Moschelle that he had installed 

new wiring in the building. He neglected to tell him that 

he had done so more than thirty years before. The cost to 

bring this wiring up to standard was estimated at $3,259.30. 

Helen Hulse told plaintiff Brent Moschelle that the tavern 

was connected to the city sewer system, but she neglected to 

tell him that he would be responsible for the maintenance of 

200 feet of 100-year-old pipe which ran between the tavern 

and city line. Guy Hulse showed plaintiff Brent Moschelle a 

sump pump which was used to pump water out of the basement 

in emergencies. He told Brent that the toilet had backed up 

on one occasion and caused the basement to flood. He neglected to tell Brent that the tavern was subject to seasonal 
flooding from high ground water seepage. 

The defendants made misleading statements to the plaintiffs concerning the profitability of the tavern. Helen 

Hulse told the plaintiffs that business earnings would 

provide sufficient income to make contract payments and to 

pay the plaintiffs' living expenses. Records for the year 

1975, obtained through discovery, revealed cash flow was so 

low during the winter months that it was necessary to depend 

upon excess earnings from the summer months to meet all the 

winter expenses. In January, February, and March 1975, 

tavern income available for contract payments, repairs and 

payroll averaged less than $500 per month. Average monthly 

income during these months was not sufficient to make contract 

payments, much less provide a minimal standard of living for 

the plaintiffs. Plaintiffs themselves were faced with this 

pattern of low winter income in 1977 when they were forced 

to borrow money to keep up the contract installments. 

Additional facts were misstated concerning the high 

volume of Labor Day trade. Helen Hulse testified she told 

plaintiffs that Labor Day business would be good enough to 

make several payments under the contract. The plaintiffs 

could not remain open on Labor Day weekend, however, because 

trouble arose with motorcycle gangs and the lack of police 

protection. Helen Hulse did not deny the plaintiffs' testimony that she had failed to tell them she also had been 

forced to close on Labor Day weekend because of trouble with 

motorcycle gangs. 

The defendants' statements cannot be excused simply 

because deliberate misstatements may not have been proven. 

The facts indicate a pattern of repeated concealments of the 

true state of affairs concerning the condition of the premises 

and probable business earnings. Withholding relevant acts 
concerning purchased property can be a fraudulent act. See 

Russell v. Russell (1969), 152 Mont. 461, 452 P.2d 77. 

Furthermore, where a vendor by his conduct or words creates a 

false impression concerning a matter of vital importance to 

the purchaser, full disclosure of relevant facts may be 

required. See Twing v. Schott (Wyo. 1959), 80 Wyo. 100, 338 

P.2d 839; 12 Williston on Contracts (3rd. ed.) 81498, at 

387; Restatement of Contracts S472 (1) (b) , Comment b. 

Under the facts here, the defendants were under a duty 

to make such disclosures as would erase the false impressions 

created in the minds of the plaintiffs that repairs to the 

premises were not needed and that winter earnings were 

sufficient for the plaintiffs' needs. 

Defendants argue that relief should not have been 

granted to the plaintiffs because they could have discovered, 

by their own investigation, facts relevant to the transaction. Although it is true that the conduct of the purchaser 

in making inquiry into the condition of the premises and 

income status of the business cannot be overlooked, Hardin 

v. Hill (1967), 149 Mont. 68, 73, 423 P.2d 309, 312, we 

cannot say that the purchasers here should be denied relief. 

The major defect in the premises was its rotted floor and 

foundation. The rotting was particularly bad under the cafe 

portion of the building where the defendants had patched it. 

The-rotted foundation could be detected only by entering a 

crawl space under the floor. Although it appears that Brent 

Moschelle noticed the patched floor, he did not enter the 

crawl space. The defendants knew that the foundation was 

rotten. At trial a contractor testified that it would 

require almost $20,000 to repair the rotted floor and foundation. The defendants knew that the floors and foundations 

required repair but did not inform the plaintiffs of this. 
Brent Moschelle had no experience in carpentry and indeed 

did not discover the location of the trapdoor leading to the 

crawl space until March 1977. 

Nor can we accept the defendants' arguments that the 

plaintiffs had no right to rely on their representations 

concerning the winter earnings of the tavern business. 

Plaintiffs had never before invested in real estate. The 

defendants prevented them from obtaining an accurate picture 

of the tavern's earning potential for the winter months. 

Helen Hulse refused the plaintiffs' request to look at the 

books, and in fact, even objected to the plaintiffs making 

inquiry around town as to the income of the tavern. Given 

these circumstances the plaintiffs had little choice but to 

take the defendants at their word that the winter business 

was sufficient for the plaintiffs' needs. 

Defendants also argue that their misrepresentations 

were not material to the contract and thus that rescission 

should not have been granted. See Johnson v. Meiers (19461, 

118 Mont. 258, 164 P.2d 1012. Defendants argue that damages 

are a sufficient remedy to compensate the plaintiffs. There 

is no doubt, however, that the misrepresentations directly 

relate to the condition of the premises. Testimony established that it would require over $27,000 in repairs to 

upgrade the tavern to a satisfactory condition. The rotted 

floors and foundations, the decrepit wiring, and the seasonal 

flooding amount to major problems, and the process of making 

repairs would probably result in a prolonged period that the 

tavern would not be open for business. Damages under these 

circumstances would be clearly inadequate. 

Defendants next argue that the plaintiffs waived their 

right to rescind, or were guilty of laches, in waiting 

almost nine months to act. The decaying foundation and the 

age of the wiring were not readily observable to plaintiffs 
as inexperienced laymen. The major defects in the premises 

did not surface until March 1977. Almost immediately thereafter, plaintiffs consulted a lawyer. Upon the advice of a 

lawyer, they stopped payments on the contract and sent 

notice of rescission to the defendants. We do not find a 

waiver under these facts. 

The laches argument must fail because the defendants 

did not plead this as an affirmative defense at the trial as 

is required by Rule 8(c), M.R.Civ.P. Defendants cannot now 

raise this argument for the first time upon appeal. See 

Elliston Lime Co. v. Prentice Lumber Co. (1971), 157 Mont. 

64, 483 P.2d 264; Bull Creek Oil & Gas Development v. Bethel 

(1953), 127 Mont. 222, 258 P.2d 960. 

Finally, defendants argue that plaintiffs have no right 

to rescission because they defaulted on the purchase contract. We first note that when plaintiffs gave notice of 

rescission, they were still within the grace period permitted 

by the express terms of the contract for curing default on 

payments. 

In making a decision to rescind rather than bring the 

payments up to date, the plaintiffs did not waive. It would 

be incongruous to hold that when the plaintiffs decided to 

rescind rather than to bring the payments up to date, they 

therefore waived their right to rescind. It would, essentially, leave them without a remedy. We note, furthermore, 

that a vendor's fraud vitiates the contract from its inception, and thus, even a purchaser in default may seek rescission. See Gamble v. Beahm (Ore. 1953), 198 Or. 537, 257 

P.2d 882, 886; Thompson v. Huston (Wash. 1943), 17 Wash.2d 

457, 135 P.2d 834, 837. Also see, 91 C.J.S. Vendor & Purchaser, 

5168 at 1126. 

The judgment granting rescission is affirmed. 
We concur: 

,/ Chief Just 'i"B 

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Justices