Title: Edwards v. Wilcoxen
Citation: 278 Or. 91, 562 P.2d 1207
Docket Number: N/A
State: Oregon
Issuer: Oregon Supreme Court
Date: April 19, 1977

562 P.2d 1207 (1977)
278 Or. 91
Troy EDWARDS and Thomas Jordan, Respondents,
v.
Homer WILCOXEN and John P. Cahill, Appellants.

Supreme Court of Oregon.
Argued and Submitted January 6, 1977.
Decided April 19, 1977.
Paul J. Jolma, Clatskanie, argued the cause and filed briefs for appellants.
William F. Thomas, Portland, argued the cause and filed a brief for respondents.
Before DENECKE, C.J., and BRYSON, LINDE and MENGLER, JJ.
BRYSON, Justice.
Plaintiff purchasers brought this suit to rescind their contract with defendants for the purchase of the Sea Breeze Restaurant and associated real and personal property. They alleged defendant sellers fraudulently or otherwise misrepresented the gross receipts and net profits of the restaurant during the year preceding the sale. The trial court decree granted rescission of the contract and awarded plaintiffs damages. The defendants appeal, and we review de novo.
*1208 The Sea Breeze is located approximately three miles south of Seaside, Oregon, on Coast Highway 101 near its junction with the Sunset Highway. The sale was consummated by a contract between the parties dated April 11, 1973.
Plaintiffs' complaint alleged in part as follows:
Defendants' answer alleged in part as follows:
Defendants assign as error the trial court's decree granting rescission and contend that plaintiffs waived any right to rescind the contract because they
The plaintiffs argue that "[t]he facts in the case simply do not support this thesis. * * * [A]s time passed, the plaintiffs had a growing awareness that the gross and net income had been misrepresented to them, but waiting through the summer of 1974 was not an unreasonable delay."
The law is well settled that a party contending that a fraudulent or innocent *1209 misrepresentation was made to induce the purchase of a business must give notice of rescission promptly after the discovery of the misrepresentation.
In Ross v. Carlyle et ux., 216 Or. 576, 578, 339 P.2d 1114, 1115 (1959), the court stated:
We have continually adhered to this rule in numerous cases, the latest being Watson v. Fantus, 275 Or. 605, 610, 552 P.2d 251 (1976).
We have also said that the facts and circumstances in each case determine what constitutes prompt rescission. Schuler v. Humphrey, 198 Or. 458, 480, 257 P.2d 865 (1953).
The facts in this case disclose that the plaintiffs are more experienced in accounting, finance, and business than the defendants. Plaintiff Jordan is a college graduate with a degree in finance and 20 years' work experience with credit unions and as a trust officer. Plaintiff Edwards had 20 years' work experience as a bookkeeper. Prior to purchasing the Sea Breeze, plaintiffs owned and operated a Dairy Queen franchise at Depoe Bay, Oregon. Plaintiff Edwards did all of the bookkeeping for that operation and testified that he is generally familiar with restaurant costs and operating expenses and the percentage of gross sales normally realized as net profit.
Prior to defendants' purchase of the Sea Breeze they operated a dairy farm as partners on the Oregon coast. Neither had formal education beyond high school and neither is familiar with the intricacies of accounting, bookkeeping or tax returns. While defendants operated the Sea Breeze, Wilcoxen kept daily gross receipts and expenditures which were turned over to a Mrs. Bradley, who prepared their tax returns. Mrs. Bradley had no formal education in accounting, but had done business with defendants when they operated the dairy farm, and she prepared defendants' tax returns as a favor and without charge.
Plaintiffs saw an advertisement offering the Sea Breeze for sale and prior to entering into the contract, they visited the restaurant during business hours and liked what they saw. Before signing the contract, plaintiffs requested a statement showing defendants' gross sales and income for the preceding 12 months. Mrs. Bradley prepared this information on a "Schedule C" form for U.S. income tax returns. This form was given to the plaintiffs on March 5, 1973. There is a dispute in the testimony as to whether the figures on the "Schedule C" form covered the calendar year 1972 or the 12-month period ending February 28, 1973.
This "Schedule C" form incorrectly lists defendants' gross receipts as $75,306.67 and net profits as $37,661.47. The evidence shows that defendants' gross receipts for 1972 were $68,701.65 and for the 12-month period ending February 28, 1973, were $73,252.23. Net profits were $14,270 or $16,389.23, depending upon whether the gross profits for the calendar year 1972 or the period ending February 28, 1973, were used.
Defendant Wilcoxen testified that the discrepancy between the gross receipts listed on the Schedule C provided plaintiffs *1210 and the partnership's actual gross receipts was due to his accidental inclusion of an extra one-half month's receipts. The overstatement of the figures identified as "net profits" was due to at least two factors. First, the gross receipts and expenses were mismatched in that the expenses deducted from the gross receipts generated between March 1, 1972, and February 28, 1973, were those used by defendants on their 1972 partnership tax return. Secondly, the bulk of the discrepancy is due to defendants' failure to deduct all of the items of expense necessarily and usually deducted to arrive at a net profit. The Schedule C statement given by defendants to plaintiffs shows on its face that it covered only costs of goods sold, taxes on business and business property, wages, utilities, laundry and miscellaneous supplies. It shows no deduction for depreciation, repairs, advertising, automotive expenses, supplies, postage, freight, telephone, sanitation services, or professional expenses.
The evidence shows that plaintiff Edwards handled most of the business transactions and made most of the decisions for the plaintiff partnership. Edwards testified that he was aware that defendants' profit and loss statement Schedule C showed no deductions for sanitary service, automobile expenses, depreciation, postage, freight or insurance, and that he realized that a restaurant such as the Sea Breeze would incur those types of expenses. Edwards further stated that he did not necessarily believe that defendants made as much as they had represented and that from his knowledge and experience he expected profits from the restaurant to be between 20 percent and 25 percent of the gross receipts, or between $18,000 and $20,000 on volume of $74,000 gross receipts. Plaintiff Edwards testified:
Edwards also testified that if the restaurant grossed $75,000, "I would have felt that it was worth the price."
The following is the evidence pertaining to the question of whether or not the plaintiffs promptly sought rescission after knowledge of what they determined to be misrepresentations in the Schedule C form. It should be noted that shortly after plaintiffs purchased the Sea Breeze they materially changed the restaurant operation. Defendants had no dress requirements for customers other than those maintained by health and safety codes. The atmosphere was informal. Defendants kept the Sea Breeze open for business from 11:30 a.m. until 8:00 p.m. and were closed only on Mondays. During operation of the restaurant by defendants, they took advantage of the restaurant location on the main highway connecting Portland and the coast, and they catered to vacation and travel trade. Defendants offered a large selection of sandwiches, hamburgers, shrimp baskets, fried chicken baskets, and offered dinners of the type purchased by vacationing or traveling people. They also developed a sizeable luncheon trade among local business and tradespeople. During the winter months the restaurant was frequented by fishermen, elk hunters and deer hunters.
Plaintiffs changed the restaurant operation. Plaintiffs shortened hours and days of operation. They were interested in operating something more than a hamburger and sandwich restaurant and they sought to generally upgrade the Sea Breeze trade. Hamburgers and most sandwiches were eliminated from the menu. Plaintiffs established a dress code forbidding shorts, *1211 swim suits and tank and halter tops. They posted signs refusing service to persons smoking pipes or cigars. The price of coffee was increased to 50 cents per cup and the price of dinners was increased on a average of 35 cents to $1.00 to reduce transient business; reservations were required for dinner.
Plaintiff Edwards admitted that the plaintiff partnership tried to establish a restaurant with a different class of customers than those catered to by defendants and they sought to operate the restaurant on a different economic basis than defendants operated.
Plaintiffs' attempt to transform and upgrade the Sea Breeze was not successful. Average daily gross sales dropped to $206 during the first six and one-half months of 1975, during plaintiffs' operation, from $285 daily during defendants' last three and one-half months of operation (January, 1973, through April, 1973). Plaintiffs reported financial losses each year they operated the restaurant.[1]
Plaintiff Edwards also testified that he discovered defendants' representations in Schedule C, the profit and loss statement, were incorrect only within the last two months or so before trial, when plaintiffs had access to defendants' books. This is difficult to believe.
On direct examination, Edwards testified:
On cross-examination, plaintiff Edwards testified:
In other words, 15 months after the sale plaintiffs felt certain that they had been deceived. Prior to this, they must have had a strong suspicion. On October 10, 1974, plaintiffs wrote the defendants, advising as follows:
Plaintiffs filed the instant suit on December 23, 1974.
From our review of the evidence, it is apparent that plaintiffs knew that they were not producing the $75,000 gross sales, as represented by the defendants. There is also evidence that they did not necessarily believe the "net profit" figure presented to them on the profit and loss statement. They knew that they had materially changed the operation of the restaurant and the type of business they were conducting and they delayed any action as to rescission until October 10, 1974, some 18 months after the sale and some 12 months after they realized they were not producing gross sales in the amounts represented by the defendants. Plaintiffs, having discovered that they were not doing the gross business represented by the defendants with their new type of restaurant operation, should not be allowed to speculate risk-free on the success of the business, as they operated it, knowing that they might later rescind should their profits fall short of their expectations. The evidence further shows that plaintiffs advertised the restaurant for sale in the Los Angeles Times some 18 days before their October 10 letter to the defendants. The asking price was $75,000, $9,000 more than the price they paid defendants; also, plaintiffs entered into a five-year lease-purchase agreement for a new sign on the outside of the restaurant 30 days prior to the October 10 letter.
We do not view the facts in this case to demonstrate intentional fraud. If this were true, we would be less sympathetic to defendants' defense of waiver. Also, the defendants did not know that the plaintiffs contemplated making extensive changes in the type of restaurant plaintiffs intended to operate on the premises. Plaintiffs, having failed in their attempt to upgrade the restaurant, delayed electing to rescind the contract, and the defendants, under the facts of this case, should not be the victims of the plaintiffs' failure. We conclude that plaintiffs, by their actions, waived their right to sue for rescission.
Having concluded that plaintiffs were not entitled to rescission, we need not discuss plaintiffs' further assignments of error and the defendants' cross assignment of error, both pertaining to damages.
Reversed and remanded for entry of a decree in accordance herewith.
[1]  The full extent of these purported losses is difficult to determine. Plaintiffs divided the ownership of the real property and the restaurant business, retaining ownership of the fee in their own names and placing the restaurant business in the name of Granny Grump, Inc., a corporation wholly owned by plaintiffs. Plaintiffs charge $875 per month rent to the corporation for the restaurant building. Plaintiffs also testified that they lived rent free in the mobile home included with their purchase of the Sea Breeze, and that they charged all of their meals and automotive expenses to the restaurant. Evidence was also introduced that some of the charges to petty cash were for personal and nonbusiness expenses.