Court Opinion

ID: 9517538
Source: CourtListenerOpinion
Date Created: 2023-08-07 00:20:03.506179+00
Date Added: 2024-06-11T09:54:45.496712
License: Public Domain

SHIRLEY S. ABRAHAMSON, J.
(dissenting). The majority holds that the two agreements should be construed together because “it is clear that neither agreement would have been executed without the other being executed.” {Supra, p. 496.) I agree with this conclusion.
I am not convinced that restitution is the proper measure of recovery in this case. Even if it is, however, I do not agree with the majority’s computation of Harris’ award. Restitution is a broad equitable remedy and restitutional damages depend upon the facts of the particular case. Perillo, Restitution in a Contractual Context, 73 Colum. L. Rev. 1208 (1973); Calamari and Peril-lo, Contracts, ch. 15 (2d ed. 1977) ; Dobbs, Law of Remedies, sec. 4.1 p. 227, sec. 4.5 pp. 268-69 (1973). In this case the court should, in assessing damages, consider restoring the plaintiff to his original position. I therefore would remand the case to the trial court to consider whether Harris’ recovery as calculated by the majority should be reduced by Harris’ tax benefits, if any. See Brodsky, Tax Shelter Litigation: Damage Calculations, 184 New York L.J. (Sept. 3, 1980, p. 1; Sept. 4, 1980, p. 1; Sept. 5, 1980, p. 3), and cases cited therein and in the majority opinion.
*507WILLIAM G. CALLOW, J.
(dissenting). The majority incorrectly concludes “that the guaranty executed here obligates the individuals as guarantors to pay for the restitution of the injured party’s investment.” Supra at 521. In this case knowledgeable investors, counseled by attorneys and accountants under the auspices of Munz Investment Real Estate, Inc., negotiated the disposition of forty-two apartments in Janesville and a shopping mall in Monona. Harris wanted to dispose of his apartments but wanted to avoid the capital gains tax. By trading his apartments for the mall, he avoided the tax which would have resulted from a sale for cash and obtained a “tax shelter” for income he received from his hardware stores.
The mall owners needed cash to complete the construction. The Mall Group and Harris each listed their properties with Munz. Munz brought the parties together and received a commission of over $100,000 from the deal. The transaction included two separate documents — a sale contract and a lease agreement. The trial court properly recognized “[t]he sole issue in this case is what are the plaintiff’s provable damages resulting directly from the breach of the lease by the Mall.” The trial court, relying on First Wisconsin Trust Co. v. L. Wiemann Co., 93 Wis. 2d 258, 286 N.W.2d 860 (1980), limited the damages to losses incurred between November 1, 1975, and the date of the sale of the property, June 3, 1977.
Certainly the record supports the trial court’s conclusion that the members of the Mall Group suffered a loss of over $400,000, and Harris lost a substantial portion of the value of his apartments. Acknowledging that both parties suffered major losses in the venture, the majority concludes Harris shall be made whole at the expense of the mall investors.
The majority concludes that the sale contract and the lease agreement should be construed together. Constru*508ing documents together is appropriate to interpret the general intent of the parties. However, unless the documents incorporate each other by reference, it is inappropriate to construe them together for purposes of their operation and effect. In this case the sale contract and lease agreement cannot be construed as one document. No clause in either document referred to the other. The attorney for the Mall Group prepared the sale contract, and the attorney for Harris prepared the lease. The personal guaranty of the lease by defendants Borman, Dyson, Clark, and Carncross provided for “the payment of rent or in the performance of any other covenants contained in such lease, . . . and all damages that may arise in consequence of any default by the Tenant under such lease.” The guaranty, by its terms, does not apply to the sale contract.
There is no language in the sale contract referring to the lease. Harris testified the completed building was worth the price he paid. Therefore, I conclude it is unreasonable to read the guaranty of rents and damages in the lease, incident to the failure of the general tenant (the mall) to pay rent, to be a guarantee that the purchase of the mall would be a successful investment for Harris. The trial court found “that the individual defendants here only guaranteed lease payments and not the success of the entire transaction.” The trial court noted that, under sec. 704.29(1), Stats. 1977, Harris was obligated to enter and take possession for the purpose of mitigating damages. Harris did take possession, and the trial court assessed his effort to mitigate the damages. The trial court stated, “[t]he evidence elicited at the trial bearing on the plaintiff’s efforts to mitigate damages is somewhat meager.” In order to recover on the guaranty, Harris was obligated to offer substantial evidence that he had mitigated damages.
The trial court noted that in 1976 Harris could have settled all liens against the property for $600,000 and *509in 1977 could have sold the premises for $911,000 but did not avail himself of that opportunity. Such a course of action could have produced an “apparent net gain of in excess of $300,000.00,” stated the trial court. The trial court inferred that Harris had sufficient financial means to have put such a deal together. The trial court noted that Harris had failed to make his payments to the mall and called it a “two-way” breach. It was during this period of “two-way breach” that Harris refused the $911,000 sale opportunity. The trial court concluded its findings by saying: “It is obvious the plaintiff bought into a very bad business situation, and he had to assume some of the risks of that venture; and it should not be overlooked that Mr. Harris breached his own purchase contract without, in our judgment, making all reasonable attempts to mitigate his damages.” This conclusion most certainly is not against the great weight and clear preponderance of the evidence. It clearly justifies the trial court’s limiting the award of damages to the out-of-pocket disbursements and the total amount flowing to Harris from the failure of the Mall Group to pay the $750 per month for nineteen months.
The majority acknowledges that the issue of Harris’ option of seeking restitution of his investment in the project is one of first impression in this state. The majority concludes that option is available to Harris. I disagree. The majority incorrectly construes the contract of sale and the lease as one agreement. Harris did not terminate or rescind the lease or the contract of sale. He agreed to accept the leased property and mitigate damages. He chose to sue on the lease and to recover damages under the statute. Harris never claimed to have rescinded the sale contract, and understandably so because rescission is not the remedy for breach of a lease. Rescission is allowed only where there has been a substantial breach of contract. Here, the defendants breached the terms of the lease agreement, and Harris *510breached the terms of the sale contract. Harris does not come into this lawsuit with clean hands.
In Appleton State Bank v. Lee, 33 Wis. 2d 690, 692, 148 N.W.2d 1 (1967), this court stated:
“In order to establish a breach sufficient to constitute repudiation of the entire agreement the nonperformance or breach must be substantial.
“ ‘. . . a breach which goes to only a part of the consideration, which is incidental and subordinate to the main purpose of the contract, and which may be compensated in damages, does not warrant a rescission of the contract; . . .’
“Before a party not in default may be entitled to the relief of rescission there must be so serious a breach of the contract by the other party as to destroy the essential objects of the contract.” (Citation omitted.) (Emphasis added.)
The lease which was breached was only one element of the total transaction and produced only $750 per month cash flow to Harris. Harris bought a substantial piece of property acquiring a lease with a general tenant. The general tenant occupied no space. The Mall Group had some individual rent-paying tenants and space available for rent. Harris bought it for what he thought to be a fair value. It permitted him to defer capital gains and provide a tax shelter which he said were primary motives for the purchase. He had a defaulting general tenant but had the opportunity to collect rents from the occupying tenants. His remedy was limited to reimbursement for damages incident to the default in payment by his general tenant. This would be the amount representing the difference between the rent Harris collected from the individual tenants and the amount he was to receive from the general tenant. He insured his ability to recover potential damages resulting from default in rent payments by the guaranty.
*511An election to seek restitution requires a tender of benefits. Harris received what he bargained for in his purchase contract — which was a fair-priced building and substantial tax benefits. Restitution requires the return of benefits received restoring the parties to the position they occupied prior to entering into the contract. Rescission is, therefore, not appropriate where the rescinding party (Harris) received substantial tax benefits. Bridgen v. Scott, 456 F. Supp. 1048, 1058 (S.D. Texas 1978). In Bridgen the court recognized benefits which prohibit rescission, such as immediate tax write-off, immediate cash flow profit, the potential for further annual tax benefits, and the opportunity to obtain significant gains. These same elements exist in this case. The tax consequences were crucial. The Bridgen court stated that to ignore the tax consequences would require the court to live in a “never-never land.” It would be asking the court to try the case blindfolded. Id. at 1061.
Professors Corbin and Dobbs declare that restitution is designed to prevent unjust enrichment. 5 A. Corbin, Contracts sec. 1107 (1964) ; D. Dobbs, Handbook on the Law of Remedies sec. 4.1 at 224 (Hornbook Series 1973). The majority labors to find the defendants were enriched, but the record repudiates that conclusion and supports the trial court's determination that the defendants “apparently lost in excess of $400,000.” The fact that there was a repurchase option agreement and that defendants used the Harris money to finish the mall for Harris is gossamer support for a conclusion that the defendants were enriched.
The majority opinion unjustly enriches Harris. The majority returns to Harris his entire investment of $388,100 and ignores his substantial tax advantages. This includes $288,100 for the apartments. It ignores the trial court’s conclusion that his property was overvalued. The trial court stated as follows: “One of the *512problems in this case arises out of the fact that in our judgment the parties over valued . . . the value of plaintiff’s equity in his apartment units.” The court concluded, “the best evidence of the value of plaintiff’s equity is the amount that Munz received when it sold the apartments, approximately $207,000.00.”
Because the majority reads the two instruments — the sale contract and the lease agreement — as one, the majority concludes the guaranty provision in the lease must be read to guarantee Harris’s investment in the project. This conclusion is reached by declaring there is nothing in the guaranty showing an intent by the parties to limit the guarantors’ liability to an action for expectation damages rather than an action for restitution. The unreasonable result proves the fallacy of the majority’s original premise that the two instruments must be read as one.
Had the parties contemplated a guaranty of Harris’s investment, it would certainly have been noted in the contract of sale or reference to the lease guaranty would have been included. In the absence of specific guaranty language and in the light of the statutes dealing with liability on breach of lease, the conclusion of the majority is incredible. Harris did not present the reliance damages theory in the trial court nor in the appellate court, but the appellate court considered the theory of reliance damages and observed that expenditures made in reliance upon the other party’s performance must be prudent and reasonable. Harris argues the testimony showing his investment’s true value was irrelevant. The court of appeals correctly concluded it was relevant evidence in determining damages, relying on 5 A. Corbin, Contracts sec. 1033 at 206 (1964) :
“[I]t becomes material to know whether the expenditures of the plaintiff in preparation and part performance have been prudent and reasonable, or not. The *513plaintiff has the burden of proving his entire cause of action and also of proving the amount of damages to which he has a right. If he is unable to prove the pecuniary position in which he would have been put by full performance and is asking to recover as damages the amount of his expenditures in part performance, he should at least be required to establish a probability that such a judgment will not be excessive compensation. Expenditures by a contractor that are improvident and unreasonable lead to net losses, rather than to profits; and so long as it is uncertain which would have been the result of such improvident expenditures, they are not included in damages.”
The trial court relied on and the court of appeals noted with approval the testimony of Timothy Warner, a real estate investment expert. The appellate court correctly affirmed the trial court’s conclusion that Harris’s investment was improvident. It was not contrary to the great weight and clear preponderance of the evidence.
In summary, I disagree with the majority’s conclusions that the lease agreement and the sale contract be read as one instrument; that a breach of a lease in a real estate transaction involving a sale and a leaseback justifies an action for restitution of the investment in the project; that a guaranty clause in the lease can be extended to hold the guarantors liable for the restitution of Harris’s investment in the contract.
I would modify and affirm the court of appeals by limiting the recovery to only those damages proved. Those damages are $19,584 out-of-pocket expenses and $14,250 which represents $750 for 19 months’ loss of the proven net cash flow, plus interest.
I am authorized to state that Justice Donald W. Steinmetz joins in this dissenting opinion.