DUNLAP v NELSON

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No. 12601 IN THE SUPREME COURT OF THE STATE OF MONTANA 1974 DONALD G. DUNLAP and THELMA DUNLAP, Plaintiffs and Counter-Defendants and Appellants, CHRIS NELSON and THERESE E. NELSON, Defendants and Counter-Plaintiffs and Respondents. Appeal from: District Court of the First Judicial District, Honorable Gordon E. Bennett, Judge presiding. Counsel of Record: For Appellants : Gough, Booth, Shanahan and Johnson, Helena, Montana Cordell Johnson argued, Helena, Montana For Respondents : Keller, Reynolds and Drake, Helena, Montana Paul F. Reynolds argued, Helena, Montana Submitted: May 20, 1974 Decided : Filed : SL$ ':3.974 M I 1 7974 p Clerk Mr. Justice Gene B. Daly delivered the Opinion of the Court. This is an appeal from an action in equity for rescission of a contract on grounds of failure of consideration and fraudulent inducement heard in the first judicial district by the Hon. Gordon R. Bennett. From a judgment denying rescission, the appellants bring this appeal. Appellants, Donald G. Dunlap and Thelma Dunlap (hereinafter referred to as buyers) purchased from respondents, Chris Nelson and Therese E. Nelson (hereinafter referred to as sellers) in April of 1971, a marina facility located at Cave Bay on Canyon Ferry Lake near Helena, Montana. The facility is situated on property owned by the State of Montana and managed by the Montana Fish and Game Commission. Buyers became aware that sellers were offering the marina facility for sale through an advertisement in the Los Angeles Times. Buyers were at that time living in Anaheim, California, where Dunlap was employed as a barber and his wife managed an apartment building. Buyers met with sellers' son, Norman Nelson, in California to discuss the matter. Buyers later went to Norman Nelson's house in Pacific Palisades, California, where they met with Norman and sellers to discuss the sale. Buyers, in late March 1971, inspected the marina facilities. Sellers offered the property for $125,000. Buyers responded with a counteroffer of $75,000, which was accepted and the parties on or about May 19, 1971, entered into a contract entitled "Escrow Agreement". There are three areas of dispute in the facts as they concern the negotiations and later the action for rescission: (1) Back taxes on the marina property, (2) liability insurance on the property, and (3) the future leasehold from the Fish and G a m e Commission. There were back t a x e s owing on t h e marina p r o p e r t y a t t h e t i m e of t h e p u r c h a s e . Buyers c o n t e n d t h a t a t t h e i n i t i a l meeting between b u y e r s and s e l l e r s t h a t s e l l e r s r e p r e s e n t e d t o buyers t h a t before t h e s e l l e r s could s e l l t h e property they would r e t u r n t o Montana and " s t r a i g h t e n o u t t h e t a x e s " . Sellers' s o n , Norman Nelson, d e n i e d any such r e p r e s e n t a t i o n and t e s t i f i e d t h a t it was h i s u n d e r s t a n d i n g t h a t t a x r e s p o n s i b i l i t y was t h a t o f a former marina owner, Louie F a a s , and t h a t s e l l e r s might p o s s i b l y be r e s p o n s i b l e f o r them i f F a a s d i d n o t pay them. Buyers d i d n o t check t h e t a x r e c o r d s i n Lewis and C l a r k County t o see i f t h e t a x e s w e r e p a i d b e f o r e p u r c h a s i n g t h e marina. On Septem- b e r 2 4 , 1971, f i v e months a f t e r t h e s a l e was made, s e l l e r s b r o u g h t a q u i e t t i t l e a c t i o n i n Lewis and C l a r k County and judgment was r e n d e r e d i n s e l l e r s ' b e h a l f which d e t e r m i n e d t h e back t a x e s on t h e marina p r o p e r t y . These t a x e s w e r e p a i d on December 3 , 1971, by s e l l e r s . It i s b u y e r s 1 c o n t e n t i o n t h a t s e l l e r s r e p r e s e n t e d t o them t h a t t h e p r o p e r t y was c o v e r e d by i n s u r a n c e , i n c l u d i n g l i a b i l i t y i n s u r a n c e , and it would be p o s s i b l e f o r t h e b u y e r s t o t a k e o v e r t h e e x i s t i n g i n s u r a n c e u n t i l it was n e c e s s a r y t o renew t h e p o l i c y . I t was l a t e r d i s c o v e r e d by t h e b u y e r s t h a t t h e r e w a s no l i a b i l i t y i n s u r a n c e c o v e r a g e on t h e p r o p e r t y . S e l l e r s , however, t e s t i f y t h a t t h e y have no r e c o l l e c t i o n o f any s u c h c o n v e r s a t i o n . S e l l e r s ' s o n , Norman, had no r e c o l l e c - t i o n of any d i s c u s s i o n s i n r e f e r e n c e t o i n s u r a n c e , a l t h o u g h it i s p o s s i b l e t h a t t h e s u b j e c t w a s mentioned b u t n o t i n d e t a i l . He t e s t i f i e d t h a t t h e f i r s t t i m e h e r e c a l l e d any c o n v e r s a t i o n i n r e f e r e n c e t o i n s u r a n c e was i n August, 1970, and t h a t d i s c u s s i o n t o o k p l a c e between h i m s e l f and h i s f a t h e r o n l y , t h a t he f i r s t l e a r n e d t h a t t h e r e w a s no l i a b i l i t y i n s u r a n c e i n August, 1971. P a r a g r a p h 10 of t h e escrow agreement p r o v i d e d t h a t b u y e r s were t o s e c u r e f o r t h e m s e l v e s a d e q u a t e p u b l i c l i a b i l i t y and p r o p e r t y damage i n s u r a n c e c o v e r a g e . 1 Paragraph 1 required t h e d e p o s i t o f t h e i n s u r a n c e p o l i c y o r p o l i c i e s r e q u i r e d w i t h t h e escrow papers. P a r a g r a p h 1 3 of t h e escrow agreement s e t s f o r t h t h a t f a i l u r e o f t h e b u y e r s t o m a i n t a i n i n s u r a n c e i s a b a s i s f o r default. Buyers upon l e a n i n g t h a t t h e r e was no l i a b i l i t y i n s u r - ance sought t o o b t a i n a p o l i c y but claim t h a t they w e r e unable t o do s o . T h e r e a f t e r b u y e r s had a l e t t e r of r e s c i s s i o n d a t e d J u l y 9 , 1971, s e n t t o s e l l e r s . J u l y 2 2 , 1971, s e l l e r s o b t a i n e d a p o l i c y of i n s u r a n c e f o r p e r s o n a l l i a b i l i t y f o r t h e marina facilities. A t t h e t i m e o f t h e s a l e , t h e marina p r o p e r t y was under a t e n - y e a r l e a s e from t h e F i s h and Game Department, which r a n u n t i l 1980. The s e l l e r s a s s u r e d b u y e r s t h a t t h e y c o u l d g e t a t e n - y e a r l e a s e w i t h a t e n - y e a r renewable o p t i o n . P a r a g r a p h 30 of t h e escrow agreement p r o v i d e d : " I t i s a l s o e x p r e s s l y p r o v i d e d and u n d e r s t o o d by and between t h e p a r t i e s h e r e t o t h a t t h e s a l e of a l l of t h e p r o p e r t y h e r e i n v o l v e d by S e l l e r s t o Buyers i s e x p r e s s l y c o n d i t i o n e d on t h e g r a n t i n g o f a t e n - y e a r l e a s e o r p e r m i t by t h e S t a t e of Montana t o Buyers f o r t h e u s e and occupancy o f s a i d r e a l p r o p e r t y forming t h e s i t e f o r u s e a s a r e s o r t site. I t i s f u r t h e r agreed t h a t i f such l e a s e o r permit i s n o t granted, t h a t t h e buyers may, a t t h e i r o p t i o n , d e c l a r e t h i s agreement n u l l and v o i d and o f no f o r c e and e f f e c t e x c e p t t h a t a s t o t h e down payment o r $12,500.00 which h a s been made by Buyers t o S e l l e r s , a s h e r e i n a b o v e s e t f o r t h , a n e q u i t a b l e p o r t i o n t h e r e o f w i l l be r e f u n d e d by S e l l e r s t o Buyers, S e l l e r s b e i n g p e r m i t t e d t o r e t a i n s o much t h e r e o f a s w i l l compensate them f a i r l y and a d e q u a t e l y f o r t h e i r l o s s o f t i m e , p r o f i t s and i n c o n v e n i e n c e i n t h e It is f u r t h e r agreed t h a t i f t h e p a r t i e s premises. c a n n o t d e c i d e upon t h e d i v i s i o n of s a i d down payment, t h e y w i l l submit t h e m a t t e r s t o a r b i t r a t i o n , e a c h p a r t y s e l e c t i n g a n a r b i t r a t o r and t h e s e two s e l e c t i n g a t h i r d . The d e c i s i o n o f a m a j o r i t y of s a i d a r b i t r a t o r s on s a i d q u e s t i o n s h a l l be b i n d i n g on t h e p a r t i e s h e r e t o . " Buyers were n o t g r a n t e d a t e n - y e a r l e a s e , b u t o n l y a f i v e - y e a r lease by t h e F i s h and Game Commission. Buyers p r e s e n t t h e f o l l o w i n g f o u r i s s u e s f o r review: 1. Whether buyers are entitled to rescind the contract for material failure of consideration? 2. Whether buyers are entitled to rescind contract, based on fraud in the inducement? 3. Whether district court erred in admitting evidence of insurance obtained after notice of rescission had been given? 4. What expenditures should properly be allowed in order to make buyers whole? The buyers contend that because of the representation by the respondents concerning the matters of back taxes and liability insurance that they were fraudulently induced into the escrow agreement. We defined fraud in Cowan v. Westland Realty Company, 162 Mont. 379, 512 P.2d 714, 716, 30 St.Rep. 707, as follows: "In Lee v. Stockmen's Nat. Bank, 63 Mont. 262, 284, 207 P. 623, this court set down the elements which the plaintiff must prove to make out a prima facie case of fraud: (1) A representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity, or ignorance of its truth; (5) his intent that it should be acted upon by the person and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance upon its truth; (8) his right to rely thereon; and (9) his consequent and proximate injury. " The buyers maintain that had they known the back taxes had not been "straightened out" they would not have come to Montana in the first place to inspect the marina facilities. This Court could get involved in a semantical discussion of the possible meanings of the phrase "straightened out". We feel, however, that it will suffice to say that since the back taxes were paid 5 or 6 months before this rescission action was brought, the entire question is moot. Further a close examination of the record fails to disclose sufficient credible evidence to meet the standard established in Cowan. As we stated in Ray v. Divers, 72 Mont. 513, " * * * G e n e r a l l y t h e r e p r e s e n t a t i o n s must r e l a t e t o a f a c t , a s d i s t i n g u i s h e d from t h e e x p r e s s i o n of an o p i n i o n ( c i t i n g c a s e ) , though an e x c e p t i o n t o t h a t r u l e i s i l l u s t r a t e d i n Como Orchard Co. v . Markham, 54 Mont. 438, 1 7 1 P . 274, and, of c o u r s e , t h e r e p r e s e n t a t i o n s must be made w i t h r e s p e c t t o a material m a t t e r ; t h a t i s , one which a f f e c t s t h e complaining p a r t y i n a substant i a l d e g r e e ( c i t i n g c a s e ) . ~ l of t h e s e l e l e m e n t s a r e f u l l y comprehended i n t h e more general t e r m s : Representation, f a l s i t y , s c i e n t e r , d e c e p t i o n , and i n j u r y . ( c i t i n g c a s e ) " (Emphasis added. ) The e v i d e n c e i n s u p p o r t o f b u y e r s ' a l l e g a t i o n o f f r a u d u l e n t inducement a s it p e r t a i n s t o t h e p o l i c y of l i a b i l i t y i n s u r a n c e f a i l s t o e s t a b l i s h knowledge on t h e p a r t of t h e s e l l e r a s s e t f o r t h i n t h e t r i a l c o u r t ' s f i n d i n g o f f a c t No. 4 below: "During t h e t h r e e day p e r i o d r e f e r r e d t o i n F i n d i n g # 3 , C h r i s Nelson o r h i s s o n , Norman, a c t i n g a s h i s agent represented t o p l a i n t i f f s e i t h e r t h a t C h r i s Nelson had a p o l i c y of publ i c l i a b i l i t y i n s u r a n c e i n f o r c e , which p o l i c y c o u l d be t r a n s f e r r e d t o p l a i n t i f f s , o r t h a t h e could secure such a policy. Though t h e r e i s e v i d e n c e on b o t h s i d e s o f - t h e q u e s t i o n , a p r e ponderance of t h e c r e d i b l e e v i d e n c e i n d i c a t e s t h a t C h r i s Nelson b e l i e v e d he had l i a b i l i t y i n s u r a n c e on t h e p r o p e r t y a t t h i s t i m e . " (Emphasis added.) Knowledge on t h e p a r t o f t h e p e r s o n making t h e r e p r e s e n t a t i o n , a t t h e t i m e i t was made, and knowledge t h a t i t was f a l s e , i s n e c e s s a r y t o s u p p o r t a f i n d i n g of f r a u d . f a i l i n t h e i r proof. Without i t , t h e b u y e r s L e e v . Stockmen's Nat. Bank, 63 Mont. 262, 207 P . 623. The a d m i s s i o n i n t o e v i d e n c e t h a t s e l l e r s o b t a i n e d l i a b i l i t y i n s u r a n c e on t h e p r e m i s e s i n q u e s t i o n a f t e r t h e l e t t e r o f r e s c i s s i o n w a s s e n t by t h e b u y e r s h a s been a r g u e d by t h e b u y e r s a s i m m a t e r i a l e v i d e n c e and e r r o r . T h i s b e i n g an e q u i t y a c t i o n t r i e d t o t h e c o u r t and t h e s u b j e c t m a t t e r under c o n s i d e r a t i o n by t h e c o u r t b e i n g f r a u d , t h e c o u r t h a s wide d i s c r e t i o n w i t h r e s p e c t t o admission of evidence e i t h e r t o prove o r disprove t h e a l l e g a t i o n of f r a u d . B e r b e r i a n v . M a r t i n , 214 A.2d 189 ( R . I . 1965). I n Koch v . Rhodes, 57 Mont. 447, 452, 188 P . 933, we held : "Where f r a u d i s a l l e g e d , g r e a t l a t i t u d e of proof i s a l l o w e d , and e v e r y f a c t o r c i r c u m s t a n c e from which a l e g a l i n f e r e n c e o f f r a u d may be drawn i s admissible. (Citing cases. ) " T h e r e f o r e under t h e s e c i r c u m s t a n c e s t h e t r i a l c o u r t d i d n o t a b u s e its discretion. Buyers n e x t c o n t e n d t h a t t h e i r f a i l u r e t o o b t a i n a 1 0 y e a r renewable l e a s e from t h e F i s h and Game Commission amounted t o a f a i l u r e of c o n s i d e r a t i o n f o r t h e escrow agreement. Buyers f u r t h e r c o n t e n d t h a t s e l l e r s ' f a i l u r e t o demand a r b i t r a t i o n under p a r a g r a p h 30 of t h e escrow agreement, t h e i r f a i l u r e t o p l e a d a r b i t r a t i o n a s a d e f e n s e and t h e i r c o u n t e r c l a i m amounted t o a waiver of t h e a r b i t r a t i o n c l a u s e i n t h e c o n t r a c t , and c i t e a s authority: Co., E. I . DuPont D e Nemours & Co. v . L y l e s & Lang C o n s t . 219 F.2d 328; Trubowitch v . Riverbank Canning Co., 30 Cal.2d 335, 182 P.2d 182; F i n l a y s o n v . W a l l e r , 64 I d a . 618, 134 P.2d 1069; and Anderson v . Twin C i t y Rapid T r a n s i t Co., 250 Minn. 1 6 7 , 84 N.W.2d 593. The c a s e s from t h e f o r e i g n j u r i s d i c t i o n s c i t e d t o s u p p o r t waiver a r e n o t f a c t u a l l y i n p o i n t w i t h t h e problem we have b e f o r e t h e Court. The cases c i t e d d e a l w i t h s u i t s b r o u g h t i n l i e u of a r b i t r a t i o n and c o n c e r n t h e s u b j e c t m a t t e r which t h e a r b i t r a t i o n c l a u s e w a s designed t o cover. The c a s e b e f o r e u s , however, n o t o n l y d e a l s w i t h t h e s u b j e c t m a t t e r of t h e a r b i t r a t i o n c l a u s e , i . e . f a i l u r e t o o b t a i n a 10-year renewable l e a s e from t h e F i s h and Game Department, b u t a l s o d e a l s w i t h f r a u d u l e n t inducement i n t h e e n t e r i n g of t h e escrow agreement. S e l l e r s a r g u e t h a t because b u y e r s a r e c l a i m i n g r e s c i s s i o n on t h e grounds of f r a u d u l e n t inducement, i t would have been nonr e s p o n s i v e t o demand a r b i t r a t i o n under p a r a g r a p h #30. For i f r e s - c i s s i o n r e s u l t s b e c a u s e of f r a u d u l e n t inducement, t h e y a r g u e , s o would any r i g h t t o a r b i t r a t i o n . N e i t h e r b u y e r s n o r s e l l e r s c i t e any a u t h o r i t y d i r e c t l y on t h e q u e s t i o n of whether a n a r b i t r a t i o n c l a u s e c o n c e r n i n g f a i l u r e of c o n s i d e r a t i o n i s waived under t h e s e c i r c u m s t a n c e s when f r a u d u l e n t i n d u c e n t i s a l s o p l e a d e d t o v o i d t h e c o n t r a c t t h a t contains the clause. Corbin on C o n t r a c t s , 81444, p . 449 s t a t e s : " * * * The f r a u d of one p a r t y , i n d u c i n g t h e o t h e r ' s a s s e n t t o t h e whole, makes t h e whole voidable a t t h e l a t t e r ' s option; a f t e r a proper a v o i d a n c e , t h e r i g h t t o an a r b i t r a t i o n f a l l s a l o n g w i t h a l l o t h e r r i g h t s c r e a t e d by t h e o t h e r p r o m i s e s t h a t were made. In cases within t h i s p a r a g r a p h , t h e remedies f o r enforcement o f a r b i t r a t i o n agreements a r e n o t a v a i l a b l e , includi n g t h e e n f o r c i n g o r d e r a u t h o r i z e d by an a r b i t r a t i o n s t a t u t e . B e f o r e i s s u i n g such a n o r d e r t h e c o u r t must know t h a t l e g a l d u t y t o a r b i t r a t e e x i s t s ; t h i s i s a n i s s u e t h a t t h e c o u r t i t s e l f must decide." When a p a r t y t o a c o n t r a c t a t t e m p t s r e s c i s s i o n of t h a t c o n t r a c t b e c a u s e of f r a u d u l e n t inducement and t h a t i s s u e d o e s n o t come w i t h i n t h e purview of t h e a r b i t r a t i o n c l a u s e , t h e c o u r t must f i r s t d e t e r m i n e i f t h e c o n t r a c t i s v a l i d b e f o r e it c a n g r a n t r e l i e f through a r b i t r a t i o n . I n re K i n o s h i t a & Co.. 287 F.2d 951 (2nd C i r . 1 9 6 1 ) ; A t c a s v . C r e d i t C l e a r i n g C o r p o r a t i o n of America. 292 Minn. 334. 197 N.W.2d and Trad. Corp., 448; I n t e r o c e a n S h i p p i n g Co. v . N a t i o n a l S h i p p i n g 462 F.2d 673 (2nd C i r . 1 9 7 2 ) . Under t h e s e c i r c u m s t a n c e s , t h e C o u r t having found no f r a u d u l e n t inducement t o r e s c i n d t h e c o n t r a c t , w e f i n d no a b u s e o f d i s c r e t i o n by t h e t r i a l c o u r t a c t i n g i n e q u i t y i n o r d e r i n g t h e t e r m s of t h e c o n t r a c t e n f o r c e d . The judgment of t h e ---Justice W e concur: * . ------ ---------------- --- . -, 2- ; 4-- Chief J u s t i c e

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