Mr. Steak, Inc. v. River City Steak, Inc.

Decision Date16 May 1972
Docket NumberNo. 71-1222,71-1223.,71-1222
Citation460 F.2d 666
PartiesMR. STEAK, INC., Plaintiff-Appellant, Cross-Appellee, v. RIVER CITY STEAK, INC., Defendant-Appellee, Cross-Appellant.
CourtU.S. Court of Appeals — Tenth Circuit

Sanford B. Hertz, Denver, Colo. (Robert W. Hite, Denver, Colo., on the brief), for appellant.

Robert S. Wham, Denver, Colo. (Joffre M. Johnson and Schneider, Shoemaker, Wham & Cooke, Denver, Colo., on the brief), for appellee.

Before MURRAH, SETH, and BARRETT, Circuit Judges.

SETH, Circuit Judge.

This diversity action was brought by Mr. Steak, Inc., against River City Steak, Inc., in United States District Court for the District of Colorado, for breech of a franchise agreement, a sublease agreement, and an equipment lease agreement. The defendant filed a counterclaim based on fraud and other grounds. The case was tried to a jury which found for defendant on its counterclaim in full. The trial court however ordered a remittitur on the ground defendant had received certain benefits it should return since it had elected to rescind.

The parties executed a contract by which defendant was sold by plaintiff a franchise to operate a Mr. Steak restaurant in Sharon, Pennsylvania. Once the franchise agreement was executed, plaintiff sublet the real estate it had leased for the site to the defendant for the same rental it was paying. A third instrument provided for the leasing to defendant of all the equipment necessary in its restaurant.

Defendant opened the Sharon restaurant under this arrangement in November 1968 and closed it due to lack of business in September 1969. Mr. Steak then brought this action, alleging that defendant had breached all three "contracts." The complaint listed defendant's failure to keep various insurance policies in force, failure to pay certain of its bills, failure to pay Mr. Steak its agreed-upon percentage of gross sales, and failure to pay the rent due under its sublease during the period of June-September 1969. The complaint alleged also that defendant failed to make its equipment rental payments over this same four month period. Relying on acceleration clauses present in the sublease agreement and the equipment lease agreement, Mr. Steak sought damages.

The defendant below counterclaimed for rescission of its contract alleging that Mr. Steak breached the franchise agreement, breached its fiduciary duty to defendant, perpetrated common law fraud against it, and violated federal and Colorado security laws. Prior to trial, the court dismissed defendant's claim of security law violations, 324 F. Supp. 640. The case was tried to a jury of six, and a verdict was returned for defendant in the amount of $35,000 on its counterclaim. The court, on plaintiff's motion, however, granted a partial remittitur of all sums in excess of $20,121.

Plaintiff-appellant appeals from the verdict of the jury and the refusal of the trial court to grant full remittitur or, alternatively, for a new trial. Defendant-appellee argues in support of the jury's verdict, and cross-appeals from the partial remittitur granted by the court below and from the court's dismissal of a portion of its counterclaim based on violation of State and federal security laws by plaintiff.

Plaintiff contends that the trial court committed error in refusing to direct a verdict in its favor at the close of all the evidence. On this issue, the federal standard is applicable, as we said in Chicago, Rock Island & Pacific R. R. v. Howell, 401 F.2d 752 (10th Cir.):

"Under the federal rule a directed verdict is authorized only when the evidence is all one way or so overwhelmingly preponderant in favor of the movant that the trial court in the exercise of its sound discretion would be required to set the verdict aside."

See also Smith v. Mill Creek Court, 457 F.2d 589 (10th Cir.). To apply this standard we have examined the evidence which had been introduced. The forum state was Colorado, and there the place where the contract was made governs its nature, validity, and interpretation. Kloberdanz v. Joy Mfg. Co., 288 F.Supp. 817 (D.Colo.1968); Carlson v. Boryla, 490 P.2d 700 (Colo.App.1971). The several contracts were executed in Colorado.

The basis of defendant's counterclaim was the assertion that the contracts were induced by fraud on the part of plaintiff, that the contracts should be rescinded, and both parties returned to their former positions. Defendant made an election to rescind at the close of the evidence. Under Colorado law rescission is an available remedy where a contract is induced by fraud. Nichoalds v. McGlothlin, 330 F.2d 454 (10th Cir.). The Colorado Supreme Court set out the criteria for actionable fraud in Morrison v. Goodspeed, 100 Colo. 470, 68 P.2d 458, which are the traditional elements. See also Bemel Associates, Inc. v. Brown, 164 Colo. 414, 435 P.2d 407.

Our examination of the record leads us to the conclusion that the elements of fraud under the applicable law were established; thus the evidence relating to the counterclaim was sufficient indeed to cause the trial court to properly refuse to direct a verdict for plaintiff at the close of all the evidence. The plaintiff-appellant also asserts that its motion at the close of all the evidence to dismiss the common law fraud allegation should have been granted as the court erred in instructing the jury on the issue of fraud. As indicated above, there was ample evidence to warrant the court both in its denial of the motion to dismiss the fraud "allegations" and in submitting the fraud issue to the jury. The same conclusion must be reached as to the post-trial motions made by the plaintiff on the same issues.

The plaintiff-appellant also urges that it was error to refuse to grant a new trial or to grant full remittitur. These points are also based upon the same argument relating to proof which we have considered above, and we reach the same conclusion as to them.

The Cross-Appeal

The defendant-appellee argues on cross-appeal that the trial court erred in granting plaintiff's motion to amend the jury's verdict and granting a remittitur of all amounts in excess of $20,121. The defendant was, of course, presented with the alternative of a new trial on the counterclaim. In response, plaintiff-appellant contends that the court should have granted it a full remittitur, minus the amounts attributable to deficiencies in the parking lot and landscaping, or, alternatively, that a new trial should have been granted.

In granting the partial remittitur of all amounts above, $20,121, the court reasoned that certain amounts must be subtracted from the $35,000 judgment won by defendant-appellee, due to the fact that "the jury made no allowance for return of the consideration paid by plaintiff on behalf of defendant under said contracts." And the trial court said: "That the verdict returned by the jury was the result of a misunderstanding or a misapprehension of the law and therefore cannot stand in its present amount." The court also found that:

"The evidence clearly established that plaintiff paid out the following sums on behalf of defendant:
                  Rent (stating period)       $ 7,200
                  Equipment Rental
                    (stating period)            2,600
                  Advertising                     138
                  Tax                              53
                  Inventory                     1,342
                  Miscellaneous                 3,546
                                              ________
                  Total                       $14,879"
                

In its consideration of the remittitur, the trial court stated that the contracts are to be considered void ab initio, and each party should be placed in the position it occupied before making the contracts. The tabulation above of amounts "paid out" on behalf of defendant is what appeared in the trial court's order on remittitur. The two substantial items of "Rent" in the amount of $7,200 and "Equipment Rental" of $2,600 arose under the several related documents considered hereinabove, as did the item of $138 for insurance. On the record before us it does not appear that the others so arose directly. If these three items were induced by fraud as the jury found, obligations arising under them to plaintiff should not be considered a "benefit" received by the defendant under the Colorado authorities relating to rescission as cited by the trial court. These include Fidelity...

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