Opinion ID: 200468
Heading Depth: 2
Heading Rank: 1

Heading: Effects of the Jury's Verdict In Favor of Pot O'Gold

Text: 17 In its most complex argument on appeal, Pot O'Gold claims that the jury's verdict that it, the corporation, was not liable for fraudulent inducement requires judgment in its favor and a reversal of the jury's verdicts against the individual defendants, Kratze and Germain. Before we address this argument on the merits, we must provide some additional factual background. 18 When Rischitelli met with Kratze and Germain in Detroit in February, he signed a series of contracts formalizing his relationship and Kenda's as consultants to Pot O'Gold, and transferring a number of Kenda assets to the new corporation. Among those contracts was one entitled General Release of All Claims and Waiver of Rights. The third clause in that contract states: 19 The undersigned, KENDA CORPORATION,... does hereby remise, release and forever discharge, POT O' GOLD MONEY LEAGUES, INC.... and its officers, directors and shareholders, ... of and from all and all manner of actions, causes of actions, suits, ... claims and demands whatsoever, known or unknown, liquidated or unliquidated, in law or equity against POT O' GOLD MONEY LEAGUES, INC., ... and its officers, directors and shareholders.... 20 The first clause states that Rischitelli similarly releases all claims he may have against Pot O'Gold, its officers, directors, and shareholders. Rischitelli signed this contract both in his own capacity and as President of Kenda. Rischitelli signed another contract on behalf of Kenda entitled Agreement, outlining Rischitelli's and Kenda's responsibilities as consultants to Pot O'Gold. This Agreement contains a clause which states, in pertinent part: 21 KENDA CORPORATION, now and forever, relinquishes all of its rights; contractual relationships and contracts to and with all of its league members or past league members for the reason it no longer wishes to independently create, develop, control, manage and supervise pool leagues.... KENDA CORPORATION waives all rights and claims to any names, indicia, slogans, copyrights, including Pot O'Gold Pool Leagues, Inc. and all similar names. 22 Kenda also agreed in this contract to transfer its equipment and records to Pot O'Gold. Finally, Kenda signed a contract assigning the servicemark Pot O'Gold to Pot O'Gold. 23 Less than three months after signing these contracts, Kenda filed this lawsuit against Pot O'Gold, Kratze, and Germain, alleging that Pot O'Gold, Kratze, and Germain had fraudulently induced Kenda into signing the aforementioned contracts and had tortiously interfered with Kenda's business relationships. Kenda also sought a declaratory judgment as to the validity of the contracts signed on February 5. The fraud and tortious interference claims went to the jury, which found for Pot O'Gold but against its officers, Kratze and Germain. The complex jury verdict form had eight questions, most with subparts, for the jury to answer. We excerpt the relevant portions: 24 Question 1(A): Did Kenda Corp. prove that its agent, David Rischitelli (Rischitelli) was fraudulently induced by any of the defendants listed below to enter into the agreements dated on or about February 5, 1998? Pot O' Gold Money Leagues, Inc. Yes/No David Kratze (Kratze) Yes/No Jeffrey Germain (Germain) Yes/No 25 . . . . 26 If you answer Question 1(A) No as to Pot O'Gold Money Leagues, proceed to Question 2(B). 27 . . . . 28 Question 2(B): Did Kenda Corp. prove that either of the individual defendants listed below tortiously interfered with a contractual or advantageous business relationship belonging to Kenda Corp.: Kratze Yes/No Germain Yes/No 29 Beneath both question 1 and 2, the jury was asked to determine the amount of damages due Kenda if it found that any of the defendants had committed fraud or tortious interference. The instructions on the verdict form also told the jury that if they answered Yes with respect to any of the defendants listed in question 1(A), they were to skip questions 4-6. Questions 4-6 addressed Pot O'Gold's counterclaims against Kenda (for breach of contract, conversion, and service mark infringement). 3 The jury concluded that Pot O'Gold did not fraudulently induce the contracts, but that Kratze and Germain did. It also concluded that Kratze and Germain committed tortious interference. After the jury delivered its verdict, the court issued a written opinion declaring that the Agreement, General Release, and Assignment were void for fraud and lack of consideration. 30 The defendants now argue in their brief on appeal that the jury's verdict in favor of Pot O'Gold requires judgment in its favor. They elaborate as follows: 31 There can be no doubt that the Feb [sic] 5 Agreements are valid. The Jury determined that there was no fraud by Pot O'Gold. The individual defendants, Kratze and Germain, were not signatories to the Agreements.... [O]ver counsel's objections, the Verdict Form directed the Jury to consider the claims against the individuals even if it found the Feb 5 Agreements valid. But for [plaintiff's argument that the individual defendants were acting outside the scope of their authority], the individuals would have been exonerated[,] as the Feb 5 Agreements, including the Release, were determined by the Jury to be valid, i.e., no fraud by the only party to the Agreements, Pot O'Gold. 32 As relief, the defendants ask that [w]ith respect to all Agreements, this Court should declare them valid, enforceable and enter an Order requiring Kenda and Rischitelli to honor their terms. They also state that the individual verdicts against Kratze and Germain must be reversed to avoid a substantial miscarriage of justice. 33 As the defendants see it, the jury's verdict in favor of Pot O'Gold on the fraudulent inducement claim conclusively establishes the validity of the contracts signed on February 5, 1998, including the General Release, which, by its terms, barred the kind of claims Kenda brought against Pot O'Gold, Kratze, and Germain. Consequently, the jury verdict form was flawed in that it permitted the jury to consider claims of fraudulent inducement and tortious interference against Kratze and Germain even after finding that Pot O'Gold had not committed fraud. 4 Moreover, the favorable finding for Pot O'Gold precluded the court from finding in its written opinion that the contracts were void. 34 The defendants contend that if Kenda is able to collect damages for the tortious conduct of the individual defendants as well as rescind its contracts with Pot O'Gold, Kenda will have it both ways. The jury verdict against the individual defendants (but not against the corporation) likely was based on the theory that the individual defendants were acting outside the scope of their agency as directors of Pot O'Gold when they fraudulently induced Kenda to sign the February 5, 1998, contracts. 5 The defendants now claim that if the jury concluded that Kratze and Germain were acting outside the scope of their agency as directors of Pot O'Gold, then the corporation cannot be held liable for these actions. 35 This is a strange argument because Pot O'Gold is not being held liable in this case. The jury did not award any tort damages against the corporation. Pot O'Gold's only loss is the loss of the benefit of its contracts with Kenda — contracts that the jury specifically found Kenda was fraudulently induced into signing. Far from an unfair or inconsistent resolution, the rescission of the February 5, 1998, contracts is entirely permissible under basic principles of contract law. 36 Fraud in the inducement can serve as both a basis for tort liability, see W. Page Keaton, et al., Prosser and Keaton on Torts § 105 (5th ed.1984), and as grounds for rescinding a contract, see Yorke v. Taylor, 332 Mass. 368, 124 N.E.2d 912, 914-15 (1955); Denton v. Utley, 350 Mich. 332, 86 N.W.2d 537, 541-42 (1957); Restatement (Second) of Contracts § 164 (1981). 6 See also Harris v. Delco Prods., 305 Mass. 362, 25 N.E.2d 740, 742 (1940) (The test to be applied in the case at bar to determine whether the defendant is to be relieved of its contract by reason of any alleged fraudulent misrepresentations is the same as that applied in actions of tort for deceit.). Principles of contract law permit rescission of a contract even when the misrepresentations at issue were made by a non-party to the contract. See, e.g., Restatement (Second) of Contracts § 164(2) (If a party's manifestation of assent is induced by either a fraudulent or material misrepresentation by one who is not a party to the transaction upon which the recipient is justified in relying, the contract is voidable by the recipient....). Rescission is an equitable remedy, and can be imposed on a contract even in the absence of culpable behavior. See Robert L. Haig, 3 Business and Commercial Litigation in Federal Courts § 41.14 (1998) (recognizing that rescission can be granted in cases of mistake and innocent representation). Therefore, the mere fact that Pot O'Gold did not engage in conduct warranting a remedy in tort does not prevent the court from relieving Kenda of a contract it was fraudulently induced into signing by directors of Pot O'Gold. 37 While Pot O'Gold contends that the rescission of its contracts with Kenda must be in error because it would permit Kenda to have it both ways — by recovering tort damages from the individual defendants for their ultra vires activities and being able to rescind the contracts with Pot O'Gold — the defendants are actually the ones trying to have it both ways. After convincing the jury that the corporation should not be held liable for the tortious conduct of its directors (thereby relieving itself of vicarious tort liability), Pot O'Gold now seeks to retain the benefits of Kratze and Germain's tortious conduct — namely, the signed contracts with Kenda. Such a result does not accord with the equitable principles of rescission. See, e.g, Boston Five Cents Sav. Bank v. Brooks, 309 Mass. 52, 34 N.E.2d 435, 439 (1941) (discussing fraudulent inducement as a defense to enforcement of a promissory note; The [bank] cannot adopt [the acts of an agent acting beyond his authority] in accepting the note from the [maker] and at the same time disavow the means by which he secured the execution and delivery of the note in its behalf.); Bates v. Southgate, 308 Mass. 170, 31 N.E.2d 551, 559 (1941) (opining that a principal should not be able to enforce for his own benefit a contract procured through the actual fraudulent misrepresentation of his agent); White Tower Mgmt. Corp., v. Taglino, 302 Mass. 453, 19 N.E.2d 700, 701 (1939) ([The seller] ought not to be permitted to take the benefit of false and fraudulent misrepresentations made by its agent.). After the rescission of the contracts, Pot O'Gold is now in the same position it would have been in but for the intentional misrepresentations of the individual defendants — there are no contracts between Pot O'Gold and Kenda. The district court's ruling on the declaratory judgment permitting the rescission of the February 5 agreements was correct. 38 As a necessary corollary, then, since the jury's verdict in favor of Pot O'Gold did not conclusively establish the validity of the February 5, 1998, contracts — including the General Release — it was permissible for the jury to consider Kenda's claims against the individual defendants. Therefore, the district court did not err in its construction of the jury form. 39