Opinion ID: 1953696
Heading Depth: 1
Heading Rank: 6

Heading: Was Rescission Properly Ordered Based on Misrepresentation?

Text: The parties agreed at trial the Hylers' claim was one in equity for rescission based upon misrepresentation. [3] The Hylers made no claim for damages based on the tort of misrepresentation. Thus, we focus our examination on the elements of an equitable rescission claim. As noted above, our review is limited to those aspects of the ruling specifically challenged by Autorama on appeal. The trial court considered the Hylers' claim of misrepresentation to be based on Autorama's alleged failure to disclose (1) the manufacturer's troubled financial condition and its bankruptcy, (2) the negligible value of the manufacturer's warranty, and (3) the extent of repairs which the Hylers could anticipate during their first year of ownership. The trial court's findings of fact indicate that it found all three nondisclosures as a basis for rescission of the purchase agreement. Autorama argues the evidence does not support several of the court's findings: (1) the Hylers relied on a representation that the motor home was covered by a full, as opposed to a limited, manufacturer's warranty; (2) Autorama knew of the manufacturer's bankruptcy; and (3) the manufacturer's financial problems affected the quality of the motor home, the viability of the written warranty and the value of the motor home. [4] A. Background. Before we discuss the contentions made by Autorama on appeal, it is helpful to review the legal framework within which we will analyze these issues. It is significant to our discussion that the Hylers' claim is one for rescission based on misrepresentation. When a party claims that he has been induced to enter into a contract based on the other contracting party's misrepresentation, he may seek to avoid the contract by suing for rescission using the misrepresentation as a basis for the requested relief. Robinson v. Perpetual Servs. Corp., 412 N.W.2d 562, 568 (Iowa 1987); 2 Dan B. Dobbs, Dobbs Law of Remedies § 9.1, at 547 (2d ed.1993) (hereinafter Dobbs); 1 E. Allan Farnsworth, Farnsworth on Contracts § 4.10 (1990). Fraudulent inducement also gives rise to a tort claim for damages. See McGough v. Gabus, 526 N.W.2d 328, 331 (Iowa 1995); Dobbs § 9.1, at 546-47. The elements of a tort claim for misrepresentation are well established: (1) representation; 2) falsity; (3) materiality; (4) scienter; (5) intent; (6) justifiable reliance; and (7) resulting injury or damage. McGough, 526 N.W.2d at 331. Because the remedy of rescission is seen as less severe than an award of damages, rescission has traditionally been available upon a lesser showing. See Dobbs § 9.2(2), at 554-55; Farnsworth § 4.10, at 404; accord First Nat'l Bank v. Brown, 181 N.W.2d 178, 181 (Iowa 1970) (rules for recovery in equity based on fraud less strict than in law actions). Thus, the proof required for rescission based on misrepresentation under Iowa law is less demanding than the proof necessary for the tort of misrepresentation. Wilden Clinic, Inc. v. City of Des Moines, 229 N.W.2d 286, 292 (Iowa 1975). When rescission rather than damages is sought, relief may be obtained without proof of scienter or pecuniary damage. Id.; First Nat'l Bank, 181 N.W.2d at 181; Dobbs § 9.3(2), at 581 (pecuniary damages not a prerequisite to rescission). Confusion arises, however, when one attempts to define the element of intent in the context of a rescission action. See Utica Mut. Ins. Co. v. Stockdale Agency, 892 F.Supp. 1179, 1195 (N.D.Iowa 1995). As the federal district court noted in the Utica Mutual case, we have defined intent in two ways. Id. In some cases, the intent element is intent to deceive. E.g., McGough, 526 N.W.2d at 331 (tort action for damages); Garren v. First Realty, Ltd., 481 N.W.2d 335, 338 (Iowa 1992) (claim for damages); Wilden Clinic, 229 N.W.2d at 292 (equity action). In other cases, we have defined it as an intent to induce the plaintiff to act or refrain from acting. E.g., Rosen v. Board of Medical Examiners, 539 N.W.2d 345, 349 (Iowa 1995) (reciting elements of a common law action for fraud), cert. denied, ___ U.S. ___, 116 S.Ct. 1319, ___ L.Ed.2d ___ (1996); Hoefer v. Wisconsin Educ. Ass'n Ins. Trust, 470 N.W.2d 336, 337 (Iowa 1991) (tort action for damages); Air Host Cedar Rapids, Inc. v. Cedar Rapids Airport Comm'n, 464 N.W.2d 450, 453 (Iowa 1990) (action for damages). We need not reconcile these conflicting cases with respect to the nature of the intent element in a tort claim for misrepresentation, as such a claim is not involved in this case. It is necessary, however, to identify the elements of a claim for rescission based on misrepresentation to have an accurate context within which to address the issues on this appeal. In considering whether an equity claim for rescission requires proof of intent to deceive or merely proof of intent to induce the plaintiff to act or refrain from acting, we find an inconsistency between the elimination of the scienter element in such a case and a requirement that intent to deceive be proved. Scienter is knowledge of the falsity of a material representation. McGough, 526 N.W.2d at 331; Air Host, 464 N.W.2d at 453. It can be proved by showing that the defendant had actual knowledge of the falsity, possessed reckless disregard for the truth [or] falsely stated or implied that the representations were based on personal knowledge or investigation. . . . McGough, 526 N.W.2d at 331. On occasion, we have equated proof of scienter with proof of intent to deceive: Scienter and intent to deceive may be shown when the speaker has actual knowledge of the falsity of his representations or speaks in reckless disregard of whether those representations are true or false. Garren, 481 N.W.2d at 338. Clearly, if the scienter element is to be truly eliminated in equity cases for rescission, we must define the intent element in such a way that scienter is not reincorporated through the definition of intent. We conclude the intent necessary in an equity action is intent to induce the plaintiff to act or refrain from acting. [5] As the federal district court stated in Utica Mutual, such a formulation of the intent element is proper in an equity action, because knowledge of falsity is not at issue, but whether misrepresentations induced the complaining party to contract is at issue. Utica Mut. Ins. Co., 892 F.Supp. at 1195. To adopt intent to deceive as an element in a rescission case would essentially inject scienter into the case, making the elimination of this requirement in equity cases illusory. Moreover, the requirement of an intent to deceive would be contrary to our cases holding that even innocent misrepresentations may be sufficient to support an action for rescission. See, e.g., Alpen v. Chapman, 179 N.W.2d 585, 590 (Iowa 1970); Swanson v. Baldwin, 249 Iowa 19, 23, 85 N.W.2d 576, 578 (1957); Griswold State Bank v. Milne, 416 N.W.2d 109, 114 (Iowa App.1987). Thus, the elements of an equitable claim for rescission based on misrepresentation are (1) a representation, (2) falsity, (3) materiality, (4) an intent to induce the other to act or refrain from acting, and (5) justifiable reliance. [6] We now turn to the specific claims made by Autorama. B. Did the Hylers rely on a representation that the motor home was covered by a full, as opposed to a limited, warranty? At trial the Hylers claimed and the trial court found Autorama failed to disclose the negligible value of the manufacturer's warranty. On appeal, Autorama argues the evidence cannot support a finding the Hylers relied on a representation that the motor home was covered by a full manufacturer's warranty; Autorama points out the manufacturer's warranty was plainly labeled a limited warranty. We find no basis for reversal in this contention. The evidence shows Bonnie Hyler was concerned about the quality of the Mallard motor home. The Autorama salesperson assured her there was nothing to worry about, the motor home had a full one-year warrantyfactory warranty. The Hylers later discovered the manufacturer was in bankruptcy at the time they purchased the motor home. Garner testified at trial he knew at the time of Hylers' purchase that the manufacturer would not be responsive to warranty claims. Garner admitted he did not advise the Hylers' of potential problems with the manufacturer's warranty before they purchased the motor home. The trial court's finding of misrepresentation was based on what Autorama failed to say, not what it said. Consequently, whether the manufacturer's warranty was full or limited was not the issue; the value of the warranty given by the manufacturer based on the manufacturer's financial condition was the focus of the claim made by the Hylers at trial. Thus, the fact that the Hylers could not have relied on a full warranty, as argued by Autorama, is irrelevant. C. Did Autorama know of the manufacturer's bankruptcy? One of the misrepresentations upon which the Hylers relied to support their claim for rescission was Autorama's failure to disclose to them the manufacturer's troubled financial condition and its bankruptcy. Autorama claims the trial court erred in finding that Garner knew of the manufacturer's bankruptcy. See Restatement (Second) of Contracts § 161 (1981) (a person's nondisclosure of a fact is a misrepresentation only if the nondisclosed fact is known to the person); Barrer v. Women's Nat'l Bank, 761 F.2d 752, 761 (D.C.Cir.1985) (same); Bossuyt v. Osage Farmers Nat'l Bank, 360 N.W.2d 769, 774 (Iowa 1985) (holding that nondisclosure of a known fact can be an assertion under certain circumstances) (citing Restatement (Second) of Contracts § 161(b) (1981)). [7] A letter written by Autorama's attorney to the Hylers' attorney stated Garner knew when the Hylers bought their motor home that the manufacturer had filed for reorganization, but Garner was not then aware the company had gone out of business. Although he equivocated at trial as to when he learned of the manufacturer's bankruptcy filing, Garner testified he went over the contents of his attorney's letters before they were sent. Additionally, one of Autorama's experts, himself the owner of a local recreational vehicle dealership, testified Mallard's bankruptcy was reported in a trade publication and it was pretty common knowledge in the motor home industry that Mallard was in bankruptcy. On our de novo review, we conclude Autorama knew of the manufacturer's serious financial troubles prior to the sale of the motor home to the Hylers. Therefore, we find no basis for reversal in this assignment. D. Did the manufacturer's financial problems affect the quality of the motor home, the viability of the written warranty or the value of the motor home? The trial court found that the manufacturer's financial troubles had three effects: (1) cost-saving measures resulted in poor quality and defects in the motor homes; (2) the manufacturer's warranty was worthless; and (3) the motor home was less valuable and less marketable. Autorama contends the trial court erred in these findings. As discussed above, the Hylers made an equitable claim for rescission. Consequently, they were not required to prove damage resulting from Autorama's misrepresentations. Therefore, even if the manufacturer's financial condition did not damage the Hylers, they are still entitled to rescission upon proof of the elements discussed above. Autorama does not explain how any error with respect to the challenged findings undermines the court's decision to grant rescission. Therefore, we conclude there is no basis for reversal.