Court Opinion

ID: 4542008
Source: CourtListenerOpinion
Date Created: 2020-06-17 16:04:21.931331+00
Date Added: 2024-06-11T08:49:33.265811
License: Public Domain

IN THE COURT OF APPEALS OF IOWA

                                  No. 19-0404
                              Filed June 17, 2020

JOSEPH MORRISSEY,
    Plaintiff-Appellee,

vs.

TIM WATTS and INTERNATIONAL WORKSHOP, LLC,
     Defendants-Appellants,

and

PAM RICKER,
     Defendant.
________________________________________________________________

      Appeal from the Iowa District Court for Polk County, Sarah Crane, Judge.

      Defendants appeal the district court order entering judgment for a plaintiff

on his claim of fraudulent misrepresentation and omission. AFFIRMED.

      Matthew G. Sease of Kemp & Sease, Des Moines, for appellants.

      William B. Serangeli and Joseph M. Borg of Dickinson, Mackaman, Tyler &

Hagen, P.C., Des Moines, for appellee.

      Considered by Bower, C.J., and Doyle and Schumacher, JJ.
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DOYLE, Judge.

       The defendants appeal the district court order entering judgment for the

plaintiff in the amount of $154,300 on a claim of fraudulent misrepresentation and

omission.1 The defendants challenge the sufficiency of the evidence to support

the finding that they committed actionable fraud.

       This action stems from the parties’ failed business venture.         Joseph

Morrissey wanted to open a woodworking shop in Ankeny. Morrissey approached

Tim Watts for information on how to go about it because Watts and his company,

International Workshop LLC (IW), operated a woodworking shop in Minnesota.

Their discussions led to the signing of a letter of intent to open a new woodworking

business in the Des Moines area, with IW owning 60% of the business and

Morrissey owning 40%. Morrissey agreed to contribute $150,000 to the venture,

with $30,000 allocated to IW as a “consulting fee” for the administrative costs of

setting up the Iowa company, $50,000 considered a loan to be repaid to Morrissey

over time, and the remaining $70,000 to build out, equip, and operate the Iowa

store. In return, IW agreed to provide management oversight and guidance,

“including policies, procedures, accounting, legal and marketing oversight,” for a

monthly fee.

       The undertaking did not go according to plan. In the six months after signing

the letter of intent, costs and expenses exceeded $200,000. IW was slow to pay

bills, and so the business was unable to open its doors as expected in February

1Initially, the court also entered judgment against a third defendant, Pam Ricker,
but dismissed the claims against Ricker in its ruling on the defendants’ motion to
amend, modify, or enlarge.
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2015. In March 2015, Morrissey tried to open the business without IW. But the

business failed by July 2015 when IW stopped making rent payments.

       Morrissey filed a petition alleging the defendants committed security

violations, fraud, and breach of fiduciary duty. After a bench trial, the district court

found Morrissey proved his claim that the defendants committed fraud by failing to

provide sufficient or true disclosures about the Minnesota workshop. The court

found the defendants’ false representations that the Minnesota woodworking shop

was “profitable” constituted actionable fraud.       The defendants challenge that

finding on appeal.2

       We review the district court’s judgment for correction of errors at law. See

Bus. Consulting Servs., Inc. v. Wicks, 703 N.W.2d 427, 429 (Iowa 2005). The trial

court’s findings are binding if supported by substantial evidence. See id. Evidence

is substantial if a reasonable mind would accept it as adequate to reach the

conclusion. See id. “When a party challenges a district court’s ruling claiming

substantial evidence does not support the decision, we must view the evidence in

the light most favorable to support the judgment and liberally construe the court’s

finding to uphold, rather than defeat, the result reached.” Papillon v. Jones, 892
N.W.2d 763, 770 (Iowa 2017) (citation omitted).

       To succeed on a claim of fraudulent misrepresentation, a plaintiff must

establish the elements by a preponderance of clear and convincing proof. Van

Sickle Const. Co. v. Wachovia Commercial Mortg., Inc., 783 N.W.2d 684, 687

2 Although the defendants separately argue that failing to disclose losses by prior
investors was not actionable fraud, that failure is part of the claim the defendants
falsely represented the business was profitable.
                                           4

(Iowa 2010). These elements are: “(1) representation, (2) falsity, (3) materiality,

(4) scienter, (5) intent to deceive, (6) reliance, and (7) resulting injury and damage.”
Id. (citation omitted). The defendants allege that Morrissey failed to prove each of

these elements.

       The record supports the finding that the defendants’ statements about the

profitability of the Minnesota business constitute actionable fraud. Watts told

Morrissey that the Minnesota business “was a profitable venture ‘and then some’”

and gave Morrissey literature stating that the business “is profitable and is looking

forward to a fourth year of robust growth.” But Ricker, a certified public accountant

who provided accounting services to IW, testified that it always operated at a loss.

Ricker also testified that the projections provided to Morrissey to entice him to

invest in a woodworking shop were inaccurate. Watts admitted that the business

always operated at a loss and the projections given to Morrissey did not reflect the

results of his business. And when Morrissey asked Watts “pointblank” if the

woodworking shop “was a money-making venture and whether it was going to

sustain a livelihood and provide for [Morrissey’s] family,” Watts replied that “it

would and then some.” Morrissey relied on Watts’s representations about the

profitability of his business when deciding to invest in the new venture. Sufficient

evidence supports a finding that the defendants made representations about the

profitability of the business that were false and material to Morrissey investing in

the venture. The record also supports a finding that the defendants knew the

representations were false or made them with reckless disregard as to their

veracity, which shows the defendants’ intent to deceive. See Dier v. Peters, 815
N.W.2d 1, 9 (Iowa 2012).
                                         5

       The defendants claim that Morrissey was not justified in relying on these

representations because Morrissey sought advice from others who expressed

concerns before he invested in the venture. But Morrissey need not prove his

reliance was that of a reasonably prudent person. See Spreitzer v. Hawkeye State

Bank, 779 N.W.2d 726, 736 (Iowa 2009). The question is whether Morrissey was

justified in relying on the representations based on his specific qualities and

characteristics, as well as the surrounding circumstances. See id. at 737. And

that reliance cannot be blind. See id. In other words, a plaintiff cannot recover if

the misrepresentations relied on would have been found to be false with cursory

examination or investigation. See Dier, 815 N.W.2d at 9. That is not the case

here. Instead, the defendants provided Morrissey with projections that included

no background information, making it “impossible” for a person like Morrissey to

understand how they were created.

       Finally, the defendants allege that Morrissey failed to show their

misrepresentations damaged him.        They argue that the misrepresentations

concerned the overall profitability of a woodworking shop while Morrissey’s

investment was lost because of the costs of the build out, a matter unrelated to

profitability. But the issues are not as separate as the defendants claim. The

defendants’ projection about the business’s profitability led Morrissey to believe

that the defendants had some expertise in how to open and run a profitable

woodworking shop. As a result, Morrissey invested $150,000 in the venture with

the belief that the defendants would be providing a $150,000 “in-kind” investment

based on that expertise. The defendants never provided any such contribution,

and Morrissey’s cash contribution alone could not sustain the business when its
                                          6

expenses exceeded its income.        Morrissey’s loss flows from investing in the

business    venture,    and    his   investment    flows    from    the   defendants’

misrepresentation. See Midwest Mgmt. Corp. v. Stephens, 353 N.W.2d 76, 82

(Iowa 1984) (holding that the defendant liable for the shareholders’ loss where

“[t]heir loss flows from their joining in the venture, and their joining in the venture

flows from [the defendant’s] concealment”).

       Because the evidence supports the finding that the defendants committed

actionable fraud in misrepresenting the profitability of the Minnesota woodworking

shop, we affirm the judgment entered in favor of Morrissey.

       AFFIRMED.