Case Name: LITTLE SKY, INC. et al. v. RYBKA et al.
Court: Court of Appeals of Georgia
Jurisdiction: Georgia
Decision Date: 2003-12-01
Citations: 264 Ga. App. 744
Docket Number: A03A1223
Parties: LITTLE SKY, INC. et al. v. RYBKA et al.
Judges: Smith, C. J., Andrews, P. J., and Ruffin, P. J., concur. Miller, Ellington and Phipps, JJ, dissent.
Reporter: Georgia Appeals Reports
Volume: 264
Pages: 744–755

Head Matter:
A03A1223.
LITTLE SKY, INC. et al. v. RYBKA et al.
(592 SE2d 154)

Opinion:
Blackburn, Presiding Judge.
Following the grant of summary judgment to Wayne Patterson and Robert Rybka (the "sellers") in their suit against Little Sky, Inc. ("Little Sky"), Vincent Tresham, and Patricia Zaeharchuk (collectively the "buyers") for nonpayment of purchase-money promissory notes, the buyers appeal, arguing that the trial court erred in granting summary judgment because: (1) the sellers' fraud entitled the buyers to an abatement of the purchase price; (2) partial failure of consideration entitled the buyers to an abatement of the purchase price; and (3) the statute of limitation on the notes expired before the suit was filed. For the reasons which follow, we affirm.
Tresham and Zaeharchuk, as president and secretary respectively of Little Sky, entered into a contract to purchase the assets of a Healthcare Recruiters International, Inc. ("Healthcare Recruiters") franchise from Patterson and Rybka, whose corporation, Big Sky, Inc. ("Big Sky"), owned and operated the franchise. The sale was partially financed by two promissory notes, one for $20,000 and the other for $55,000, executed by Little Sky and personally guaranteed by Tresham and Zaeharchuk. The notes were payable in eight semiannual installments beginning in September 1992, and finally due and payable in March 1996.
At the time the parties were negotiating the sale, Zaeharchuk had been employed by Big Sky for five years, and as manager of the Atlanta office, she was intimately familiar with the business of the franchise. As office manager, Zaeharchuk received on a regular basis notice of owners' meetings and the minutes of those meetings. Prior to the closing of the sale of the franchise, Zaeharchuk discovered that minutes of some of the franchise owners' meetings were being withheld from her. When she inquired about the reason for this, the sellers told her that the buyers were not yet on the mailing list for the minutes because they were not yet owners. Shortly before the closing of the sale, several checks from the Healthcare Recruiters home office bounced. The buyers also inquired about these checks; they were told by the sellers that the checks had bounced because of bookkeeping errors and that there was no need for concern. The buyers made no further investigation.
On October 24, 1991, the buyers proceeded with the closing on the franchise, with Tresham and Zaeharchuk signing as guarantors on the two promissory notes which are at issue in this case. Shortly thereafter, Zaeharchuk discovered that the owners' meetings for which she had not received minutes concerned misappropriation of funds by the president of Healthcare Recruiters. Zaeharchuk testified that the misappropriation of funds later caused the franchise's gross revenues for 1992 to drop precipitously.
On December 5, 1991, the buyers received notice from both the State of Georgia and the Internal Revenue Service that employment taxes were due from Big Sky. While they requested that Big Sky pay the taxes due, the buyers eventually paid the state and federal employment taxes when Big Sky failed to do so. In July 1992, the buyers wrote to the sellers demanding that the sellers pay, pursuant to the contract, a $10,000 transfer fee to Healthcare Recruiters. The sellers did not respond to this request.
Despite the problems they claim to have had with the sellers, the buyers continued to make sporadic payments on the promissory notes. In May 1993, the sellers informed the buyers by letter that they were in default on the promissory notes. In response, the buyers continued to make payments on the promissory notes and attempted to renegotiate the contract. Following the letter of May 1993, the buyers made payments on September 8, 1993 ($6,000), December 30, 1994 ($3,000), June 4, 1995 ($2,000), September 22, 1995 ($2,000), February 2, 1996 ($2,000), and August 1, 1996 ($4,000).
As indicated above, the last payment on the promissory notes was made on August 1, 1996. The sellers filed suit for the remaining amounts due under the notes, together with interest, attorney fees, and court costs, on September 25, 2000. The buyers answered, alleging, among other things, fraud as a defense. Citing Jernigan Auto Parts v. Commercial State Bank, the trial court ruled that defendants waived their defense of fraud by making payments on the notes after learning of the financial improprieties at the home office rather than rescinding the sales contract for fraud, suing plaintiffs for breach of contract, or terminating the contract under paragraph 13. As a result, the court awarded summary judgment to plaintiffs in the principal amount of $69,852.22, together with $58,371.75 interest and $19,233.60 attorney fees.
1. The buyers argue in their first enumeration of error that the sellers' fraudulent conduct entitled them to an abatement of the purchase price. We do not agree.
As in Jernigan Auto, supra, the gravamen of the buyers' position is that they should be relieved from paying the balance on the notes because of fraud on the part of the sellers which induced them to purchase the franchise and to execute the promissory notes. They claim that they discovered this fraud in 1991, yet they continued to make payments on both notes, as late as August 1996.
It is a well settled rule that if a party who is entitled to rescind a contract because of fraud or false representation, when he has full knowledge of all the material circumstances of the case[,] freely and advisedly does anything which amounts to the recognition of the transaction, or acts in a manner inconsistent with its repudiation, it amounts to acquiescence, and, though originally impeachable, the contract becomes unimpeachable even in equity. It is incumbent upon a party who attempts to rescind a contract for fraud to repudiate it promptly on discovery of the fraud. If he does not, he will be held to have waived any objection, and to be conclusively bound by the contract as if no fraud or mistake had occurred.
(Citations and punctuation omitted.) Id. at 271 (3). The Jernigan Auto court goes on to state that "[e]ven accepting defendants' evidence as undisputed that the notes were entered into because of the bank officer's fraud, the bank was still entitled to judgment because defendants waived the fraud and ratified the notes by their silence after they learned of the officer's objected-to actions and by their subsequent payments on the notes." Id.
A buyer has an election of remedies, i.e., to rescind the contract and sue in tort, or to affirm the contract and sue for damages. See Conway v. Romarion. Here, however, the buyers made no election. It is clear from the record that they never brought suit. Their conduct in making the partial payments, far from being an election, instead constituted a waiver of any claim of fraud. See id. As the trial court noted in its order,
Defendants did not pursue any remedy for the fraud they allege was committed by Plaintiffs. Defendants knew that there were problems with the home office before the closing of the sale. By their own admissions, Defendants knew of the fraud shortly after the closing of the sale of the franchise. Defendants continued to make payments until 1996, some five years after the completion of the sale of the business. Further, Defendants admit to attempting to renegotiate the terms of the contract. Even after Defendants were given notice of their default, they still did not attempt to rescind the contract, nor did Defendants sue Plaintiffs for breach of contract. Further, under section 13 of the Contract for Sale of Business signed by the parties, Defendants had the right to terminate the contract within a year of the date of sale. This is yet another remedy which was available to the Defendants for Plaintiffs' alleged fraud, and yet again Defendants made no attempt to utilize the remedies made available to them by law.
The trial court might also have added that it was only in their answer to the sellers' complaint, filed nine years after the closing of the sale, that the buyers asserted fraud on the part of the sellers. Thus, even if it could reasonably be said that the buyers made an election, we fail to see how such an election could be considered prompt, as required by our case law. Jernigan Auto, supra at 271 ("[i]t is incumbent upon a party who attempts to rescind a contract for fraud to repudiate it promptly on discovery of the fraud"); see also Woodall v. Beauchamp (year-long silence following full knowledge of the alleged fraud constituted waiver of any objection). In sum, as the trial court observed, the buyers' actions are inconsistent with their claims of fraud. Given these facts, it is clear that the trial court did not err in finding that the buyers had waived any claims of fraud.
2. The buyers assert that a partial failure of consideration entitled them to an abatement of the purchase price, explaining this assertion only by stating that the trial court was not justified in refusing "to credit the buyers for the sellers' failure to make approximately $16,000 in payments it was obliged to make under the terms of the parties' contract," and "to allow a jury trial, under a partial failure of consideration theory, on buyers' contention that they got less than they bargained for." The buyers, however, fail to provide record citations to evidence necessary to evaluate the validity of their arguments. Accordingly, this enumeration of error is deemed abandoned. Court of Appeals Rule 27 (c).
3. Finally, the buyers argue that the sellers' suit was filed outside the six-year statute of limitation because the sellers had exercised their option to accelerate the notes in phone calls made to the buyers after the letter of May 1993, thus requiring the filing of suit by 1999. Again, we disagree.
The notes give the sellers an election to accelerate maturity of the debt. "[I]f maturity was in fact accelerated, the statute of limitations began to run from the time of the election to accelerate rather than on the date the last installment was due; . . . the question for the jury was one of whether or not the [sellers] had accelerated maturity." Wall v. C & S Bank of Houston County.
Because the sellers had an election as to acceleration, the entire indebtedness did not ipso facto become due upon the buyers' default. Instead, it was
necessary that some affirmative action be taken by the creditor evidencing his intention to take advantage of the acceleration clause; otherwise the provision has no operation, and the debtor has a right to tender the sums in default. The creditor cannot in his own mind effectively exercise the option to declare the whole principal due; he must communicate his decision to the debtor, or manifest it by some outward affirmative act sufficient to constitute notice of his election, such as service of notice of attorney's fees, the filing of suit for the entire debt, written notice of his exercise of the option, or by advertisement under the power of sale, to collect the entire principal.
(Citations omitted.) Lee v. O'Quinn.
The affirmative actions enumerated in Lee are actions of a legal nature, not mere declarations of intent. In this case, the sellers did not take the sort of outward affirmative action that was sufficient, under Lee, to constitute notice of their election to accelerate the debt. The letter of May 14, 1993, sent to the buyers by the sellers' attorney was certainly not sufficient notice. That letter advises the buyers that the sellers will accelerate the notes if payment is not made, and expressly states that the fact that the sellers have written "does not in any way waive their rights to declare the notes in default, accelerate the maturity of the notes and attorney's fees."
The buyers also assert in their affidavits that the sellers followed up the letter of May 1993 with phone calls in which they made "demands to the effect 'y°u are in total default, pay up, we are taking the business back, all payments are now due.'" These assertions, unspecific as to the date on which the calls were made, also do not constitute the outward affirmative action contemplated by Lee or provide a specific date from which the buyers say the statute of limitation should have run. Added to this is the fact that the buyers did not appear to believe that payment of the promissory notes had actually been accelerated since they continued to make payments on the promissory notes. In light of these facts, the trial court was authorized to find that the sellers' claims were not defeated by the statute of limitation.
Judgment affirmed.
Smith, C. J., Andrews, P. J., and Ruffin, P. J., concur. Miller, Ellington and Phipps, JJ, dissent.
Jernigan Auto Parts v. Commercial State Bank, 186 Ga. App. 267 (367 SE2d 250) (1988).
Conway v. Romarion, 252 Ga. App. 528 (557 SE2d 54) (2001).
Woodall v. Beauchamp, 142 Ga. App. 543, 545 (1) (236 SE2d 529) (1977).
Wall v. C & S Bank of Houston County, 247 Ga. 216-217 (1) (274 SE2d 486) (1981).
Lee v. O'Quinn, 184 Ga. 44, 45 (2) (190 SE 564) (1937).