Case Name: Mueller and wife, Appellants, vs. Michels and others, Respondents
Court: Wisconsin Supreme Court
Jurisdiction: Wisconsin
Decision Date: 1924-06-23
Citations: 184 Wis. 324
Docket Number: 
Parties: Mueller and wife, Appellants, vs. Michels and others, Respondents.
Judges: 
Reporter: Wisconsin Reports
Volume: 184
Pages: 324–345

Head Matter:
Mueller and wife, Appellants, vs. Michels and others, Respondents.
December 11, 1923
June 23, 1924.
Fraud: Exchange of property: Remedies available: Rescission: Legal or equitable: Discretion of court: Recovery of consideration: Restoration of status quo: Measure of damages on fraud: Equity: Jurisdiction if rescission is impracticable.
1.One who has been defrauded in an exchange of property may (1) restore the original situation, rescind the contract, and recover the consideration parted with; (2) offer to restore, and, by keeping such offer good, sue in equity for a rescission and recovery of the consideration; or (3) sue at law for damages, p. 340.
2. To recover the consideration on the ground of fraud, as a condition precedent the defrauded person must return or offer to return that which he received, and, if the fraud is established, the money or property with which the defrauded party has parted may be recovered, p. 340.
3. In a legal rescission the defrauded party rescinds either by restoring or offering to restore the consideration received, and, if fraud be established, may recover the consideration paid; but in an action for equitable rescission the rescission does not take place until it is adjudged by the court, p. 340.
4. An action for rescission is addressed to the sound discretion of the court, and when passed upon will not be disturbed except for an abuse of discretion, p. 341.
5. The plaintiffs in an action for rescission, who at the commencement of the action could not restore to defendants the property received by them, cannot recover the consideration with which they parted, p. 341.
6. Equity is designed to do justice as far as practicable between the parties, and will not do an injustice even to a wrongdoer where it can be avoided, p. 342.
7. Where the parties to an exchange of properties agreed to pay the interest on mortgages on their respective properties to a designated date, and the defendant failed to pay the interest on the mortgage on his property to said date, but the plaintiff made no effort either to pay the interest from such date to the date the mortgage matured or the principal when due, and a situation was thereby created upon which a foreclosure could be based, the default of the defendant cannot be said to be the sole cause of the foreclosure, and, a restoration of the staUis quo being impossible, the equitable remedy of rescission could not bring about substantial justice and would be impracticable, p. 342.
8. An action for the rescission of an exchange of property having been begun in good faith and the relief prayed being impracticable, the court, having assumed jurisdiction, will retain it for the purpose of doing justice, p. 343.
9. The general rule is that a defrauded vendee is entitled, by way of damages, to the difference between the value of the thing as represented and its actual value, p. 343.
10.The parties having fixed greatly exaggerated prices on their respective properties, the proper measure of damages is the difference between the equities in the respective lands, taking into consideration an adjustment of the accrued interest due upon mortgages on the properties, p. 344.
Appeal from a judgment of the circuit court for She-boygan county: Michael Kirwan, Circuit Judge.
Reversed.
The appeal is from a judgment dismissing plaintiffs’ complaint, with costs.
Two causes of action are separately alleged in the complaint, one for rescission based on fraud, and the other for damages for like cause.
The plaintiffs are husband and wife of about middle age, and for. and during a great portion of their existence have been engaged in farming. The defendants Frank Michels and Margaret Michels, his wife, are farmers and were the owners of an eighty-acre farm in Sheboygan county, while the defendant Rosenthal was a farmer and a licensed real-estate agent in said last named county. In September, 1921, the plaintiffs were the owners and in possession of a piece of real estate located near the outskirts of the village of Kiel, Wisconsin, on which were located a residence, saloon, and dance hall. Being desirous of exchanging their said property, plaintiffs engaged the services of said defendant Rosenthal to aid and assist them in procuring some one with whom a satisfactory exchange could be made and to aid and advise them in such exchange. Rosenthal was in formed by the plaintiffs that the latter estimated their property at $10,000 and that they expected it to be credited at such value upon any exchange which might be effected. This property was incumbered by two mortgages aggregating $3,025. Rosenthal called the attention of the plaintiffs to the Michels farm, and on the 26th day of September, 1921, the plaintiffs, together with Rosenthal, called on defendants Michels and made an inspection of the farm and of the buildings. Mr. Michels told Mr. Rosenthal that he wanted $16,000 for the farm, but, his attention having been called to the defective condition of the roofs on the buildings, he volunteered to take $15,500 for the property. Thereupon the Michels, together with Rosenthal, made an inspection of the plaintiffs’ property and were told that plaintiffs wanted $10,000 for their property, and it was thereupon agreed by and between the parties that an exchange would be effected, each party assuming the indebtedness upon the properties to be received in exchange. On September 28, 1921, a written agreement for an exchange was executed upon the terms above referred to, it being expressly agreed between the parties that each would pay the interest upon the incumbrances upon their property up to the time of the exchange. Considering the valuations of the parties as aforesaid, it was ascertained that there was a difference of $1,535 due the defendants Michels, which amount, it was understood, would be paid by the .plaintiffs in cash; however, it was ascertained that the plaintiffs were in possession of no ready means and were unable to consummate the exchange, being unable to raise this difference in cash. Thereupon plaintiffs and Rosenthal skirmished around the county and interviewed various monied parties to raise the cash necessary upon a chattel mortgage of the personal property on the farm, but utterly failed in their efforts. After some negotiations it was agreed that the defendants Michels would accept a note for the amount, payable in six months, secured by a chattel mortgage. The proper documents for an exchange were thereupon prepared, executed, and delivered, including the chattel mortgage aforesaid, It is to be noted that the chattel mortgage contained the usual insecurity clause, authorizing the mortgagees, in the event of their deeming themselves insecure, to levy upon the property and to sell the same and to apply the proceeds on the payment of the note and mortgage. The. parties thereupon immediately removed upon the properties received by them in the exchange. Neither of the parties complied with the agreement pursuant to which they were to pay the interest upon the incumbrances on their own property up to the date of the exchange. Within four or five days after the exchange had been effected Mr. Michels demanded payment of the chattel mortgage. Having no means whatever excepting only the farm and the stock upon the same, plaintiffs sold certain of the stock and realized thereon the sum of $312.95, which amount was paid over to Michels and the proceeds of which were in part used in paying interest on one of the mortgages upon the property originally owned by the plaintiffs, and the balance was credited upon the chattel-mortgage note. Thereafter and üp to December 30, 1920, Michels, at intervals, persistently demanded the payment of the balance of the amount secured by the chattel mortgage, and, being unsuccessful in his efforts, seized the property under the aforesaid insecurity clause and sold the same at public auction, realizing therefrom the sum of $623.95. The plaintiffs continued to remain upon this farm until April, 1923, but being without any means of subsistence, having lost all of their personal property secured by the chattel mortgage, removed from the farm, and during the same month the owner of the $3,000 second mortgage upon the farm, on account of default in the payment of principal and interest, foreclosed the same by advertisement and the farm was thereupon sold. In the month of July, 1922, the instant action was begun.
The complaint, among other things, alleges fraudulent representations as to the value of the farm and the personal property, also as to the status of the incumbrances upon the farm and the existence of a secret agency between the defendants Michels and the defendant Rosenthal, by the terms of which Rosenthal, who was known by the defendants Michels to be the agent of the plaintiffs, also was hired and acted as the agent for such defendants for a valuable consideration; and that, pursuant to such employment by his codefendants Michels, Rosenthal deliberately failed to perform his full duty as an agent for the plaintiffs and to properly or sufficiently advise them with respect to the exchange. The case was submitted to a jury upon a special verdict, and the jury found that the market value of the eighty-acre farm at the time of the exchange was $8,000; that the market value of the personal property on the farm was the sum of $1,900; that the market value of the plaintiffs’ property was the sum of $4,800; that the defendants Frank Michels and Rosenthal did not represent to the plaintiffs, shortly before the date of the exchange, that the farm and personal property thereon were of the reasonable value of $16,000; that Rosenthal acted as the agent for the defendants Michels and wife as well as for the plaintiffs; that the plaintiffs did not have knowledge, before the exchange was consummated, that Rosenthal was acting as the agent for the defendants Michels; that the defendant Frank Michels did not, at the time of the making of the exchange, represent to the plaintiffs that he had paid the interest on the mortgages on his farm up to the date of the exchange. At the close of the evidence and before the case was submitted to the jury, the court made and entered the following finding upon the undisputed evidence:
“Before the date, when the properties in question were exchanged, it was agreed between the plaintiffs on the one part and the defendants Michels on the other part that the unpaid interest on the mortgages of $3,025 incumbering the plaintiffs’ saloon and dance hall property should be paid by the plaintiffs up to September 28, 1921; and that the unpaid interest'on the mortgages, aggregating $7,000, on the Michels farm should be paid by the defendants Michels up to September 8, 1921. The plaintiffs failed to pay the interest which they agreed to pay as aforesaid, and the defendants Michels also failed to pay the interest on the mortgages of $7,000 which incumbered their farm.”
Upon the rendition of the verdict the defendants moved for judgment to dismiss the plaintiffs’ complaint with costs, and plaintiffs moved for findings of fact and conclusions of law and for a change in the answer of the jury to question 2 in the special verditt from $1,900 to $936.60. Plaintiffs’ motions were denied and defendants’ motion was granted. Whereupon judgment was entered in defendants’ favor, dismissing plaintiffs’ complaint, with costs, from which judgment plaintiffs have taken this appeal.
For the appellants there was a brief by Lehner <& Lehner of Oconto Falls, attorneys, and Otto P. Lehner of Madison, of counsel, and oral argument by Philip Lehner of Princeton.
For the respondents there was a brief by Bowler & Bozv-ler, and oral argument by G. W. Buchen, all of Sheboygan.

Opinion:
The following opinion was filed January 15, 1924:
Doerfler, J.
Before the introduction of any evidence defendants' counsel moved that plaintiffs be required to elect upon which cause of action they desired to rest their case. The court did not rule upon the motion but reserved its ruling, whereupon plaintiffs' counsel made the following statement, entered upon the record:
"We elect and rely upon the cause of action for equitable rescission, if there is any election necessary."
A similar motion was made, both at the close of plaintiffs' evidence and at the close of defendants' evidence, but no ruling was made by the court, the plaintiffs' counsel, however, insisting throughout the trial that the action was one in equity for. rescission. Counsel for both parties on this appeal have treated this case as an action in equity for rescission. While there is nothing definite in the record to convince one' as to. the attitude of the trial court on the subject, in view of the attitude of counsel we are persuaded that the court considered the action one in equity, took the verdict of the jury as advisory and inferentially adopted the same as its findings, and added the finding above set forth, based upon the undisputed evidence in the case. We therefore conclude that the action is one'in equity, that the plaintiffs duly elected to stand upon rescission, and that having made such election they are bound thereby. Limited Inv. Asso. v. Glendale Inv. Asso. 99 Wis. 54, 74 N. W. 633; Ludington v. Patton, 111 Wis. 208, 86 N. W. 571; Pfeiffer v. Marshall, 136 Wis. 51, 116 N. W. 871; Smeesters v. Schroeder, 123 Wis. 116, 101 N. W. 363; Fox v. Wilkinson, 133 Wis. 337, 113 N. W. 669; Warren v. Landry, 74 Wis. 144, 42 N. W. 247.
The complaint, with its two causes of action, one in equity for rescission and the other at law for damages on account of fraud, attempts to invoke two inconsistent remedies, and the defendants were clearly entitled to the granting of their motions for an election.
The plaintiffs' counsel forcibly argue in their brief and contend that the answers of the jury in the verdict on the subject of dual agency establishes fraud which entitles plaintiffs to relief for rescission as prayed for.
An agent engaged by one of the parties to aid and assist in procuring and bringing about an exchange, ordinarily cannot legally, gratuitously or for a consideration, serve the party adversely interested. "Absolute fidelity and loyalty to the interests of his principal is the first duty and the highest obligation of an agent." Weinhagen v. Hayes, 174 Wis. 233, 178 N. W. 780, 183 N. W. 162, 187 N. W. 756; Becker v. Spalinger, 174 Wis. 443, 183 N. W. 173.
True, there are exceptions to this rule. An agent may serve both parties where he acts as a mere middleman and where he is not called upon to exercise any judgment or discretion in the premises. He may also act as agent for both parties for a consideration where the facts with respect to his employment are fairly and fully brought home to. each of the parties and where they consent thereto. Unless he comes within the exceptions above noted, a secret employment on his part by the adverse party constitutes the grossest fraud. The policy of this state upon the subject has been expressly declared by the provisions of sec. 4575m of the Statutes, making the act of an agent in violation of the provisions of such statutes a criminal offense, punishable by fine or imprisonment, or both. The jury found such undisclosed secret agency upon what appears to be quite conclusive evidence.
It is also well settled that where a contract was entered into as the result of a secret dual agency, the party upon whom the fraud has been practiced is entitled to rescind upon the ground of public policy even where there was no intention to cheat or defraud and notwithstanding no actual damages were suffered. 2 Mechem, Agency (2d ed.) § 2138; Black v. Miller, 71 Ill. App. 342; Empire State Ins. Co. v. Am. Cent. Ins. Co. 138 N. Y. 446, 34 N. E. 200.
It therefore follows that, unless plaintiffs in some way have precluded themselves from asserting the remedy, the relief prayed for should be granted.
We are now confronted with the proposition, advanced by defendants' counsel, that the plaintiffs are unable to restore the status quo by restoring substantially the property received by them in the exchange. Plaintiffs, by due process of law, have been divested of all of their legal title in and to their property. The personal property on the farm was seized under, the chattel mortgage, sold, and converted into money, while the real estate was sold under foreclosure proceedings, leaving in the plaintiffs the mere equity of redemption. The question therefore logically arises, Are the plaintiffs under such circumstances entitled to their equitable remedy? The general rule applicable is stated in 1 Black on Rescission and Cancellation, § 1, as follows:
"To rescind a contract is not merely to terminate it but to abrogate and undo' it from the beginning; that is, not merely to release the parties from further obligation to each other in respect to the subject of the contract, but to annul the contract and restore the parties to the relative positions which they would have occupied if no such contract had ever been made. Rescission necessarily involves a repudiation of the contract and a refusal of the moving party to be further bound by it. But this, by itself, would constitute no more than a breach of the contract or a refusal of performance, while the idea of rescission involves the additional and distinguishing element of a restoration of the status quo, that is an offer by the moving party to restore all that he has received under it, with a demand for the similar restoration to him of all that he has paid or given under it, and, in effect, a mutual release of further obligations."
Viewing the charges of fraud alleged in the complaint and appearing from the evidence and barring the subject of secret agency, we find that the plaintiffs, soon after the exchange, were fully apprised thereof and had ample opportunity to discover the same. The principal on the $3,000 mortgage became due on the 15th of October, 1921, at which time the interest on such mortgage also matured, and notice thereof was received by the plaintiffs. It was also forcibly brought home to the plaintiffs that the defendants Michels would insist upon the immediate payment of the amount represented by the chattel-mortgage note, notwithstanding the six-months period provided by the note for payment; and furthermore, the personal property was seized pursuant to the insecurity clause in the mortgage, was sold, converted into money, and applied as aforesaid. In the spring of '1922 the second mortgage upon the farm was actually foreclosed by advertisement, and the legal title, subject to an equity of redemption, was conveyed to the purchaser. During all of this period of time the plaintiffs saw fit to abide coming events apparently without protest or complaint and without asserting any rights to rescind and without making a formal offer of rescission. In the meantime the status-quo was materially and substantially changed. Equity will not permit one to sleep upon his rights or to stand idly by while valuable property. involved in the transaction is dissipated, and then permit him to resort to the equitable remedy of rescission. Equity affords relief not to those who are negligent or indifferent but to the vigilant. Barndt v. Frederick, 78 Wis. 1, 6, 47 N. W. 6; Jacobsen v. Whitely, 138 Wis. 434, 441, 120 N. W. 285; Baker v. Becker, 153 Wis. 369, 381, 141 N. W. 304.
The doctrine is clearly and forcibly stated in 2 Black on Rescission and Cancellation, § 536, as follows:
"The true doctrine is that, after discovering the facts justifying rescission, the party is entitled to a reasonable time in which to decide upon the course he will take. But this does not mean that he will be indulged in a vacillating or hesitating course of conduct, but that he must act with such a measure of promptness as can fairly be called 'reasonable' with reference to all the circumstances of the particular case. Particularly he must, if possible, avoid such a delay as will make the ensuing rescission injurious to the other party or to the intervening interests of third persons. He must use reasonable diligence in ascertaining the facts which may entitle him to rescind, and must act so soon after the discovery of them as that the opposite party will not be unnecessarily prejudiced by the delay."
As a logical deduction from the. foregoing, we hold, therefore, that the plaintiffs, in respect to the various allegations of fraud in the complaint, barring only that of secret dual agency, were guilty of laches and have voluntarily permitted themselves to be placed in a situation where valuable property rights have been lost or placed in a precarious condition so as to prevent a restoration of the status quo.
Are the plaintiffs under their complaint and the evidence entitled to a rescission upon the ground of the secret dual agency? It is elementary that a complaint in rescission on the ground of fraud should affirmatively allege the time when the fraud was discovered so as to place, the court in a position where it can determine whether or not the party has acted with due diligence; and it is not only necessary to allege such fact but to prove it on the trial. Plaintiffs' counsel, in their brief, make a statement that the secret dual agency was not discovered until at or about the time of the commencement of the action. There is evidence in the case to the effect that, shortly before the action was begun, the defendant Frank Michels made .the statement that he had agreed to pay commissions to the defendant Rosenthal. There is no evidence, however, in the record to indicate when 'the plaintiffs first discovered this secret dual agency. There is therefore no affirmative showing upon which the court could properly base rescission. What has heretofore been said with respect to the promptness and celerity with which one who charges fraud must act is also applicable to this branch of the case. We cannot infer from the record that the fraud involved in the secret dual agency was not discovered until shortly before the commencement of the action. A court of equity, therefore, cannot grant rescission upon this ground, and we are not in a position to disturb the judgment of the lower court for the reason that it has exercised its judgment and because an application for the rescission of a contract is addressed to the sound discretion of a court of equity. Weinhagen v. Hayes, 174 Wis. 233, 178 N. W. 780, 183 N. W. 162, 187 N. W. 756.
Can a court of equity, notwithstanding its inability to grant equitable relief in this case, award damages to the plaintiffs ? It has heretofore been shown that an action for damages on the ground of fraud and an action for rescission constitute inconsistent remedies and that an election to pur sue the one extinguishes the other, and having elected to stand upon a rescission a court cannot award damages unless upon the trial the situation is presented which was unknown to the plaintiffs before the commencement of the action but which developed during the course of the trial which makes rescission impracticable. It is true, in cases where in the course of the trial it is made to appear that the defendants have. conveyed their, property to an innocent purchaser, a court of equity having taken jurisdiction of the action will retain such jurisdiction for all purposes and will award damages.
The general rule is also stated as follows: If a person in good faith brings an action in equity, alleging facts sufficient to constitute a good cause of action within some recognized principles of equity jurisprudence, and by his proofs establishes a state of facts entitling him to some relief by way of damages or otherwise, though failing to prove some fact essential to the relief sought, the court will not dismiss the bill and thereby render further litigation necessary, but will retain it and render such judgment as will do complete justice between the parties. Franey v. Warner, 96 Wis. 222, 71 N. W. 81; Maloney v. Warner, 96 Wis. 238, 71 N. W. 1119; Cole v. Getzinger, 96 Wis. 559, 71 N. W. 75.
The rule, as applicable to this case, however, is properly set forth in 1 Pomeroy, Eq. Jur. (4th ed.) p. 374, § 237, as follows:
"If a court of equity obtains jurisdiction of a suit for the purpose of granting some distinctively equitable relief, such, for example, as the specific performance of a contract, or the rescission or cancellation of some instrument, and it appears from facts disclosed on the hearing, but not known to the plaintiff when he brought his suit, that the special relief prayed for has become impracticable, and the plaintiff is entitled to the only alternative relief possible of damages, the court then may, and generally will, instead'of compelling the plaintiff to incur the double expense and trouble of an action at law, retain the cause, decide all the issues involved, and decree the payment of mere compensatory damages."
This rule is cited with approval in Luetzke v. Roberts, 130 Wis. 97, 109 N. W. 949; Cole v. Getzinger, 96 Wis. 559, 71 N. W. 75. See, also, Johnson v. Carter, 143 Iowa, 95, 120 N. W. 320; Van Dusen v. Bigelow, 13 N. Dak. 277, 100 N. W. 723; Muskingum Co. Comm'rs v. State, 78 Ohio St. 287, 85 N. E. 562.
The reason for the rule as set forth .in Pomeroy is apparent. This rule is, applicable to actions which are in their nature purely equitable and where the remedies are essentially inconsistent, and therefore differs from actions where the equitable and the legal remedies are concurrent. If that were not so, the rule requiring an election of inconsistent remedies would lose its force and would be a mere sham. One must always be impressed .and bear foremost in mind the doctrine, well established in our jurisprudence, that an election to pursue one of two inconsistent remedies practically extinguishes the other. If a plaintiff in equity can pray for rescission in a case of this kind and thereupon can recover damages, then it cannot be true that where he declares rescission he annuls the contract and where he declares for damages he affirms the contract. The rule is modified in cases where it develops in the course of a trial that the defendant has created a situation where rescission has become impracticable because he has conveyed or disposed of the property, upon the ground that a court of equity in such case can afford relief on account of a mistake of fact, and on the further ground that the impracticability to decree rescission results from defendant's own voluntary act. The 'plaintiffs herein commenced this equitable action with full knowledge of all of the facts, including that of the secret ,cluaj agency, and upon the trial nothing developed which in any way can be deemed to have taken the plaintiffs by sur prise. They have deliberately assumed this position, not in ignorance of but with full knowledge of all of the facts. Under such circumstances, we believe that a court of equity cannot award damages in the face of the generally accepted doctrine that one who elects one of two inconsistent remedies must stand and fall by his decision and accept the results.
We regret the position we are thus obliged to take, especially in view of the fact, as has already been heretofore indicated, that the defendants were guilty of an act of fraud criminal in its nature, because the defendant Rosen-thal, as the agent of the plaintiffs, grossly neglected his obligation to act for and advise properly the plaintiffs of their rights and liabilities, and particularly because, knowing all of the facts, he permitted the plaintiffs to execute this chattel mortgage with knowledge, as .we assume he had, that they could be placed in an absolutely helpless condition by an immediate foreclosure of the chattel mortgage resting upon the only property which they possessed on earth out of which they could realize their only means of subsistence, and because, bearing in mind this secret dual agency and the bribery committed by the defendants Michels, it explains fully the neglect and the failure on the part of Rosenthal, the agent, to perform his primary duty, which was loyalty to his clients.
By the Court. — Judgment affirmed.
The appellants moved for a rehearing.