Opinion ID: 2112466
Heading Depth: 1
Heading Rank: 1

Heading: Rescission of the Partnership Agreement

Text: The trial court implied a partnership from the carrying on of the business in accordance with certain agreements, despite the lack of corporate status. This finding is not challenged here, and, indeed, appears sound in light of the copious evidence that plaintiff and the McLeods intended to share net profits and losses. See 11 V.S.A. § 1162(4). It is immaterial to finding a partnership that the parties do not call the business a partnership, or realize that they are partners. In re Estate of Foreman, 269 Cal.App.2d 180, 189, 74 Cal.Rptr. 699, 706 (1969); Anderson Hay & Grain Co. v. Dunn, 81 N.M. 339, 341, 467 P.2d 5, 7 (1970). Furthermore, the law is well settled that a court of equity may, upon application of the defrauded party, rescind a partnership agreement for fraud in the inducement. Oteri v. Scalzo, 145 U.S. 578, 588, 12 S.Ct. 895, 898, 36 L.Ed. 824 (1892); Maruca v. Phillips, 139 Conn. 79, 83, 90 A.2d 159, 161 (1952). Section 1331 of Title 11, while not expressly authorizing rescission of the partnership agreement for fraud, assumes that this remedy is available by providing for the rights of the parties after such rescission has been decreed. The narrow question here, therefore, is whether there is evidence to support the court's conclusion of fraud. We have scrutinized the transcript and exhibits, and find that it is not supported. An action for fraud and deceit will lie upon an intentional misrepresentation of existing fact, affecting the essence of the transaction, so long as the misrepresentation was false when made and known to be false by the maker, was not open to the defrauded party's knowledge, and was relied on by the defrauded party to his damage. Fayette v. Ford Motor Credit Co., 129 Vt. 505, 510, 282 A.2d 840, 843 (1971); Anderson v. Knapp, 126 Vt. 129, 133, 225 A.2d 72, 76 (1966). An action for fraud and deceit will also lie for false promises if these promises can be shown to be essential to a scheme to defraud. Conover v. Baker, 134 Vt. 466, 469, 365 A.2d 264, 266-67 (1976). As an extension of this rule, we have stated that an intentional misrepresentation of future action may constitute a misrepresentation of existing fact because insofar as the actor presently intends to act differently in the future, he has misrepresented his present intention. Fayette v. Ford Motor Credit Co., supra, 129 Vt. at 511, 282 A.2d at 844. The law, however, recognizes a distinction between the strict elements of an action for fraud and deceit, and the constructively fraudulent misrepresentations, made negligently or innocently, which may provide grounds for a rescission of an agreement in equity. General Finance Corp. v. Keystone Credit Corp., 50 F.2d 872, 878 (4th Cir. 1931), cert. denied, 284 U.S. 684, 52 S.Ct. 201, 76 L.Ed. 578 (1932); Hudspeth v. Zorn, 292 S.W.2d 271, 275-76 (Mo. 1956); Ultramares Corp. v. Touche, 255 N.Y. 170, 186, 174 N.E. 441, 447, 74 A.L.R. 1139, 1149 (1931) (Cardozo, C. J.). But whenever rescission is sought upon a misrepresentation that is negligent or innocent, mere promises to act in the future cannot constitute the requisite misrepresentation of existing fact that is essential to fraud. Paiva v. Vanech Heights Construction Co., 159 Conn. 512, 515, 271 A.2d 69, 71 (1970); Vandeputte v. Soderholm, 298 Minn. 505, 508-09, 216 N.W.2d 144, 147 (1974). The reason is that in the case of a negligent or innocent future promise, there is no present intention to act contrary to the promise, and therefore there can be no misrepresentation of existing fact. The evidence in this case does not support a conclusion of intentional misrepresentation or of a scheme to defraud. Nor is there evidence of misrepresentation of existing fact. The parties agreed to form a corporation, and plaintiff promised to obtain a loan, give a lease, and invest $10,000. He obtained the loan, and, although he did not give defendants a written lease, he rented the premises to the Stowe shop during its operation at $500 per month. There is no direct evidence that it was plaintiff's sole responsibility to ensure the formation of the corporation, and there is clear evidence that the McLeods knew at all times that no corporation had been formed. Even if plaintiff did promise to form the corporation, there is no evidence that at the time he made this promise he in fact intended not to fulfill it. Similarly, although plaintiff broke his agreement to invest $10,000, and later $5,000, in the business, there is no evidence that he did not intend to make these investments when the promises were made. These breaches may create a right to damages for breach of the partnership agreement, see 11 V.S.A. § 1330(b)(1)(B), or for breach of fiduciary duties, see Bradley v. Marshall, 129 Vt. 635, 640-41, 285 A.2d 745, 749 (1971), but they do not constitute fraud. If every broken promise were to constitute fraud and allow rescission of a partnership or other agreement, the resultant instability would severely impair the conduct of business. Accordingly, the court's conclusion that the partnership agreement was rescinded for fraud was clearly erroneous. Absent rescission, the court's conclusion that plaintiff is not entitled to be indemnified for the McLeods' one-half of the partnership debt is not legally supportable, and must be reversed.