Opinion ID: 2601808
Heading Depth: 3
Heading Rank: 1

Heading: CRC's Claims for Rescission of the Buyout Agreement

Text: In a letter dated June 22, 1998, Cucullu and Tiplady unilaterally declared a rescission of the 1996 buyout agreement, then sold their putatively reclaimed shares of HIAK to CRC. In April 2002 CRC filed a motion for summary judgment, primarily arguing that because the Hobbses had failed to perform as required under the buyout agreement, Cucullu and Tiplady had effectively rescinded that agreement. The Hobbses opposed this motion. In a single order, the superior court denied CRC's motion for summary judgment and, sua sponte, granted summary judgment to the Hobbses on the question of rescission. Judge Reese concluded that the 1998 rescission declaration was ineffective, that rescission was an inappropriate remedy in the case, and that the only remaining claim in the case was a damages claim for breach of the 1996 buyout agreement. CRC filed a motion for reconsideration, arguing, among other things, that because questions of fact remained on its claim of breach of fiduciary dutyincluding whether the Hobbses acted in good faith and whether the buyout agreement was based on a full disclosure of relevant information the defendants were not entitled to summary judgment on the issue of whether rescission was an appropriate remedy. Judge Reese denied reconsideration. We first address CRC's argument that Cucullu and Tiplady's 1998 rescission declaration legally rescinded their agreement with the Hobbses. Because of the Hobbses' alleged failure of consideration, CRC claims that Cucullu and Tiplady had the right to rescind the buyout agreement and that [t]he rescission declaration should have been deemed by the trial court to be effective.... As we have explained, [r]escission at law is a suit based upon rescission already accomplished ... [in which] the court has nothing to do with the rescission itself. [7] Rescission at law occurs where at least one of the parties to a contract rescinds the contract and then turns to a court for enforcement of that rescission and an award of damages. [8] We have never held, however, that one party to a contract has a right to unilaterally rescind that contract. One maxim of contract law is the notion that competent parties are free to make contracts and that they should be bound by their agreement. [9] Thus, [a]s a matter of judicial policy, we seek to maintain and enforce contracts, rather than enable parties to escape from the obligations they have chosen to incur. [10] One party's failure to perform under a contract gives an injured party who has not already performed a right of non-performance, [11] and it gives an injured party who has already performed a right to sue for a breach of contract remedy. It does not give the injured party a right to unilaterally nullify the contract. Unless contracting parties themselves agree that either party may unilaterally rescind the contract, they have no right to unilateral legal rescission. Because Cucullu and Tiplady had no right to unilaterally rescind their buyout agreement with the Hobbses, their 1998 rescission declaration did not effect legal rescission of that agreement. We next turn to CRC's claims for equitable rescission of the buyout agreement. Unlike rescission at law, rescission in equity occurs only upon a court's decree. [12] In those cases, the court must intervene both to rescind the agreement and to award damages. [13]
CRC's first claim for equitable rescission is based on the Hobbses' failure to meet their obligations under the agreement. CRC maintains that not even one of the terms of the [buyout] agreement had been complied with by [the Hobbses], resulting in a complete failure of consideration. CRC argues that rescission is the only adequate remedy for the Hobbses' failure of consideration and therefore that the superior court was required to equitably rescind the buyout agreement. Distinct from lack of consideration, [14] failure of consideration occurs when, after an agreement is properly formed, one or both parties fail to deliver the essence of the promised performance. [15] In other words, [f]ailure of consideration is essentially identical to lack of substantial performance. [16] The superior court acknowledged the Hobbses' failure to perform when it found that [i]t is undisputed that [the Hobbses] had not fulfilled [their] obligations to Cucullu or Tiplady in 1998. [17] As we have held before, in cases of total failure of consideration, an injured party may be entitled to equitable rescission of the contract and restitution of benefits conferred on the breaching party. [18] The Restatement of Contracts indicates, however, that this principle of contract law has one major exception: where the injured party has performed all of his contractual duties and the only performance due by the breaching party is a definite money payment, the injured party is not entitled to rescission and restitution. [19] This rule is consistent with the general tenet that, although a court often orders equitable rescission as a remedy where it must unmake a contract induced by mistake, fraud, or duress, [20] it usually prefers monetary compensation as a remedy for breach of contract. [21] CRC is not entitled to equitable rescission on a failure of consideration theory as a matter of law and, for this reason, the superior court correctly denied CRC's motion for summary judgment.
At the time it denied CRC's motion for summary judgment, the superior court sua sponte granted summary judgment to the Hobbses on the broader question whether equitable rescission could be an appropriate remedy in the case under any theory. In doing so, the superior court decided CRC's second claim for equitable rescission, which was based on a theory of breach of fiduciary duty. CRC's second amended complaint included allegations that Cucullu and Tiplady under duress were offered ... to have their interest in HIAK purchased and that the Hobbses breached their fiduciary duties. The complaint further alleged that the buyout agreement was unenforceable because of coercion in the inducement and concealment of pertinent facts as to the company assets and the dealings of the company. After the superior court granted summary judgment to the Hobbses, CRC filed a motion for reconsideration arguing that factual questions remained as to whether the buyout agreement was based on full disclosure of relevant information and executed in good faith. [22] CRC pointed to evidence and documents filed in support of its motion, including testimony from both Cucullu and Tiplady that significant relevant information was withheld from their use throughout their stock ownership in HIAK, including at the time of the buyout agreement. CRC noted that the court has received the transcribed testimony of Randy Hobbs admitting to bad faith conduct involving the sale of assets offered to secure the buyout agreement without returning any of the monies from such sale to the minority shareholders. For these reasons, CRC argued that the superior court's sua sponte decision to grant summary judgment in favor of the Hobbses was improper. The superior court denied CRC's motion with a brief explanation that did not address the breach of fiduciary duty claim itself. [23] On appeal, CRC renews its complaint that the superior court erred by granting summary judgment to the Hobbses without ever addressing the breach of fiduciary duty claim. CRC maintains that the evidence it presented to the superior court raises a question of fact concerning whether the Hobbs Industries defendants have acted in good faith [or] in breach of their fiduciary duty. The Hobbses respond that any claims of non-disclosure ... were released in the 1996 settlement agreement and cannot be a basis for rescission of that agreement. The Hobbses also argue that CRC's sale of assets claim is not for breach of fiduciary duty because after the buyout agreement was signed, the Hobbs[es] were no longer in a fiduciary relationship with Cucullu and Tiplady. CRC's initial motion for summary judgment, the Hobbses' opposition, and CRC's reply did not focus on CRC's breach of fiduciary duty claim. Instead, the parties primarily briefed and argued the question of failure of consideration. But CRC's motion for summary judgment also based its claim for rescission of the agreement on a breach of fiduciary duty, specifically alleging that the Hobbses never had any intent to fulfill the buyout agreement and that [t]heir sole aim was to obtain the outstanding shares to control the corporation as they saw fit without providing any remuneration to Cucullu or Tiplady. The superior court failed to address the merits of either party's arguments regarding the breach of fiduciary duty claim. [24] We have held that shareholders in a closely held corporation are fiduciaries to one another. [25] Where a fiduciary induces a contract by unfair persuasion, he or she breaches this fiduciary duty, and under some circumstances, that contract is voidable by the victim of the breach. [26] Because the superior court failed to consider the question whether CRC was entitled to equitable rescission based on its claim of breach of fiduciary duty, we remand for consideration of that issue.