Title: Canterbury Court, Inc. v. Rosenberg
Citation: 224 Kan. 493, 582 P.2d 261
Docket Number: 48,649
State: Kansas
Issuer: Kansas Supreme Court
Date: July 21, 1978

224 Kan. 493 (1978)
582 P.2d 261
CANTERBURY COURT, INC. and ANDY DOMINGUEZ and WANDA F. DOMINGUEZ, Appellees and Cross-Appellants,
v.
STUART ROSENBERG and DAVID RENYER, Appellants and Cross-Appellees.
No. 48,649

Supreme Court of Kansas.
Opinion filed July 21, 1978.
Dan H. Myers, of Fick, Myers and Horne, of Manhattan, argued the cause and was on the brief for appellants and cross-appellees.
Charles S. Arthur, of Arthur, Green, Arthur &amp; Conderman, of Manhattan, argued the cause, and Charles D. Green, Charles S. Arthur III, and John D. Conderman, of the same firm, were with him on the brief for appellees and cross-appellants.
The opinion of the court was delivered by
MILLER, J.:
All parties appeal from the judgment entered by the trial court in this contract action. The facts are complicated. We will state the controlling facts and the judgment entered, and then turn to the issues.
In 1969, Andy Dominguez and his wife, Wanda Dominguez, leased a new building in the Westloop Shopping Center, in the west part of Manhattan, Kansas, from the then owner, Town Building and Investment Co., Inc. (Shortly thereafter, Town Building and Investment Co., Inc. sold the realty to SBL Services Corporation of Topeka.) Mr. and Mrs. Dominguez formed a corporation, Canterbury Court, Inc., the plaintiff in this action. The corporation commenced a new business in the spring of 1970, known as Canterbury Court, upon the leased premises. The business catered to Kansas State University students. It was a *494 large recreational center occupying some 10,000 square feet of floor space; its facilities included 12 or more pool tables, foosball and other game tables, pinball machines, a restaurant, a band stand, and booths and tables providing seating for several hundred people. Coors beer was sold. Dance bands provided "live music." Both Mr. and Mrs. Dominguez were active in the management and operation of the business.
Stuart Rosenberg came in contact with Canterbury Court through his work as a booking agent for various rock groups. Rosenberg and David Renyer became interested, and on April 18, 1973, entered into an agreement with Canterbury Court, Inc., for purchase of the business.
The agreement provided in substance that the corporation would sell and Rosenberg and Renyer would buy the business known as Canterbury Court, together with all fixtures and personal property used therein, together with the trade name and good will of the business; that the lease would be assigned to Rosenberg and Renyer although the Dominguezes would remain personally liable on the lease; that Rosenberg and Renyer would pay $140,000, payable $15,000 in cash and the balance at $1500 per month, together with 9 1/2% interest on the unpaid principal; that Rosenberg and Renyer would pay the monthly rental to SBL, would maintain the personal property in good condition, keep up certain insurance, pay all taxes, obtain and retain a city beer license, comply with all laws and ordinances, and continue to use Coors beer as the principal beer to be sold on the premises. The contract also provided:
Rosenberg and Renyer went into possession on April 18, 1973, and operated the business thereafter. Apparently no difficulties arose during the balance of 1973. In 1974, however, Rosenberg and Renyer became delinquent in their payments and in other *495 ways failed to carry out their commitments. Mrs. Dominguez wrote to them on May 30, 1974, and expressed the hope that they would catch up on the past due payments.
Mr. Myers wrote to Mr. and Mrs. Dominguez on June 7, 1974, stating in substance that his firm had been retained by Rosenberg and Renyer "for the purpose of obtaining a reformation" of the sales agreement; that his clients had recently obtained documentation that gross income for Canterbury Court for the year 1972 was $90,094.99; that Mr. and Mrs. Dominguez had represented the 1972 gross to be $139,700 during the negotiations for sale; that Rosenberg and Renyer relied on that misrepresentation; that Rosenberg and Renyer "relied on the customary method of determining the value of a business of this nature as being equal to one year's gross income"; that they had been damaged in an amount equal to the difference between the two figures; and demand was made that the contract be reformed to reflect a purchase price of $90,000, and that the payment schedule be revised accordingly.
Plaintiff, Canterbury Court, Inc., commenced this action against the defendants, Rosenberg and Renyer, on June 18, 1974. The petition alleged the contract, alleged six breaches thereof by the defendants, and sought forfeiture and termination of the contract, and damages of $10,187.30 for loss of and damage to the equipment and fixtures. Defendants denied most of the breaches alleged, explained others, claimed fraud, and asked that Mr. and Mrs. Dominguez be made third-party defendants. Claiming fraud in the inception, they counterclaimed for $148,275.02 plus $50,000 punitive damages and attorney's fees. They made a like claim against the third-party defendants. Plaintiff and the third-party defendants denied fraud or misrepresentation.
The contentions of the parties were stated in the pretrial order as follows:
Trial to the court commenced on July 2, 1975. Thereafter, the parties submitted proposed findings of fact and conclusions of law, and trial court entered judgment August 29, 1975. Its findings, included within the journal entry of judgment, are in applicable part as follows:
[The court further finds that]
................
The court then entered judgment as follows:
the total amount of $40,176.76.
The first and principal issue to be determined on appeal is whether the evidence discloses actionable fraud. The trial court concluded, upon disputed evidence (and that finding is supported by substantial evidence, and is binding upon us), that plaintiff, through its agents, falsely represented (1) that the 1972 gross income was $140,000, when in fact it was not; (2) that the 1972 net income was $45,000, when in fact it was not; and (3) that the summer months were profitable, when in fact they were not. The court determined that the latter two could not properly have been relied upon by the defendants because "net" is a variable figure, dependent in large measure upon accounting practices and management. This was acknowledged by defendants' witnesses. The figures supplied by plaintiff prior to the execution of the contract, for May, June and July, 1972, reflected gross or total income for those months of $22,686.66; defendants' gross receipts for those months totaled $24,133.69 in 1973 and $29,519.95 in 1974. Expenses, of course, varied.
The annual gross income figure was recognized by the defendants, by defense counsel, and by the trial court as of major significance. "Gross income" is defined in the Internal Revenue Code as "all income from whatever source derived." 26 U.S.C.A. § 61. It is generally understood to mean total receipts, every bit of money or credit received, before any expenses or disbursements are made. Although the meaning of the term "gross income" may vary, depending upon the subject under consideration, the context in which it is used, and the results intended to be accomplished (see Alexander v. Alexander, 158 F.2d 429, 430 (10th Cir.1946), cert. den. 330 U.S. 845, 91 L. Ed. 1290, 67 S.Ct. 1086), we conclude that what the parties to this action had in mind, when they spoke of "gross" or "gross income" was the total receipts from the business, before any payments were made therefrom.
The trial court found the gross income from the business in *502 1972 was $90,101. It took this figure from plaintiff's report of gross sales to the Kansas Department of Revenue for sales tax purposes in the year 1972. Plaintiff's books, however, reflect gross receipts of $117,742 for that year, and payment of "commissions" to the bands who performed, for a total of $27,641. A deduction of this amount results in what plaintiff shows as "total taxable income" of $90,101; that was the figure plaintiff reported to the Department of Revenue. The witnesses explained that sales tax was paid by the plaintiff on the latter figure because the bands were to report and pay sales tax on their respective earnings. Under these circumstances, we conclude that gross income for the year 1972 was $117,742, not $90,101.
The trial court's finding and conclusion is therefore modified to reflect that plaintiff falsely represented its 1972 gross income to be $140,000 when in fact it was but $117,742.
However, the mere proof of the making of a false statement and reliance thereon does not establish actionable fraud; it is incumbent upon one who bases a claim upon fraud to prove that the fraud caused injury or loss.
Here, the 1972 gross receipts, represented to be $140,000, were actually only $117,742. But the 1973 gross receipts, when the business was operated until mid April by plaintiff and thereafter by defendants, totaled $149,572; and in 1974, when Canterbury Court was operated solely by the defendants, gross receipts soared to $164,889.33. Whether the defendants operated the business at a profit or not is immaterial; the issue is whether the defendants sustained damages in reliance upon the misrepresentation. They were led to believe that they were purchasing a business which grossed $140,000 in the prior year. During the two years following, the business grossed substantially more than that figure.
Though the giving of false information is or may be morally wrong, the false information relied upon must be the cause of injury before a claim for actionable fraud arises. In the early case of Stinson v. Aultman, 54 Kan. 537, 38 Pac. 788 (1895), this court said:
This premise has been followed in many of our later cases. See Bailey v. Oatis, 85 Kan. 339, 116 Pac. 830 (1911); Fleming v. Campbell, 146 Kan. 294, 69 P.2d 718 (1937); Todd v. Wichita Federal Savings &amp; Loan Ass'n, 184 Kan. 492, 337 P.2d 648 (1959); Sipes v. Crum, 204 Kan. 591, 464 P.2d 1 (1970); and Minnesota Avenue, Inc. v. Automatic Packagers, Inc., 211 Kan. 461, 507 P.2d 268 (1973).
In the Minnesota Avenue case, supra, we said:
In Prosser, Torts, 4th Ed. § 110, p. 732, the rule is stated:
The Restatement puts the rule in these words:
See, also, 37 C.J.S., Fraud § 40, pp. 288-289, and 37 Am.Jur.2d, Fraud and Deceit § 283, pp. 377-379.
Applying the rule to the facts at hand, we conclude that the evidence in the case before us fails to demonstrate actionable fraud. The defendants actually received a business which grossed more each year than had been represented. That they failed to operate the business profitably was not due to any false statement or misrepresentation by the plaintiff. We hold that there was no actionable fraud, and therefore the judgment in favor of the defendants for actual and punitive damages cannot stand.
The defendants contend that the trial court erred in declaring *504 the contract terminated, in ordering all payments made by defendants forfeited, and in denying the election of defendants to "affirm" the contract. There is really no dispute in the record as to defendants' breach of the contract. They failed to make contract payments and interest for over a year, and they failed to pay rent to SBL for a like period  although they were in possession of the business and were operating it throughout that period. There were other breaches as well. Under the circumstances the trial court did not abuse its discretion in terminating the contract and ordering the payments, made during the early months of defendants' possession, forfeited. From what we have said earlier in this opinion, the trial court did not err in failing to reform the contract to reflect a smaller purchase price. Finally, in view of defendants' extended failure to pay rent or otherwise abide by the terms of the contract, the court did not err in ordering them to turn over possession to plaintiff. Other points raised by defendants have been considered, but are now moot in view of our determination of the fraud issue.
Likewise, the points raised in the cross-appeal have either been determined above, or are now moot.
One further matter deserves attention. The trial court ordered that defendants forfeit payments already made to plaintiff, approximately $22,000; and it entered judgment against defendants for the amount of additional contract payments accrued up to time of judgment, in the sum of $24,557.60, plus accrued and unpaid lease payments of $11,731.60, plus $3,567.50 for damage to personal property, and $320 Merchants Association dues. Under the terms of paragraph 9 of the sale agreement, quoted above, plaintiff is entitled to retain payments previously made in full satisfaction and liquidation of all damages sustained at the time a forfeiture was declared. Under the peculiar facts of this case, we hold that the defendants should in all fairness and equity be required to pay the rent accruing while they remained in possession of the premises, as well as the damage to the furniture and fixtures and the accrued assessment to the West Loop Merchants Association, required under the terms of the lease. But under the terms of the sale agreement, defendants should not be required both to forfeit the business and the payments previously made thereon, and be required additionally to pay subsequently accrued contract payments of $24,557.60.
*505 The judgment of the trial court is affirmed insofar as it declared the contract terminated, prior payments made by defendants forfeited, restored plaintiff to possession of the business, including personalty and fixtures, and in the entry of judgment against the defendants for past due rent, damage to personal property, and association dues in the total sum of $15,619.10.
The judgment against the defendants for past due installment payments of $24,557.60, and the judgments against plaintiff and the third-party defendants, are reversed. The case is remanded to the trial court with directions to enter judgment in conformity with this opinion.