Cardiac Thoracic and Vascular Surgery, P.A. Profit Sharing Trust v. Bond

• Decision Date: 02 November 1992
• Docket Number: No. 91-296,91-296
• Citation: 840 S.W.2d 188,310 Ark. 798
• Parties: CARDIAC THORACIC AND VASCULAR SURGERY, P.A. PROFIT SHARING TRUST and Donald L. Patrick, Appellants/Cross-Appellees, v. Earl BOND and Filmtrust of Arkansas, Inc., Appellees. NATIONAL BANKING CORPORATION a/k/a National Bank of Arkansas, Appellees/Cross-Appellants, v. WORTHEN BANK AND TRUST COMPANY, N.A., Appellee, Herb SUDBURY, Intervenor/Appellant.
• Court: Arkansas Supreme Court

Page 188

840 S.W.2d 188

310 Ark. 798

CARDIAC THORACIC AND VASCULAR SURGERY, P.A. PROFIT SHARING

TRUST and Donald L. Patrick, Appellants/Cross-Appellees, v. Earl BOND and Filmtrust of Arkansas, Inc., Appellees.

NATIONAL BANKING CORPORATION a/k/a National Bank of

Arkansas, Appellees/Cross-Appellants, v. WORTHEN BANK AND TRUST COMPANY, N.A., Appellee, Herb SUDBURY, Intervenor/Appellant.

No. 91-296.

Supreme Court of Arkansas.

Nov. 2, 1992.

G. Alan Wooten, J. Randall McGinnis, Fort Smith, for Cardiac Thoracic and Vascular Surgery, P.A. Profit Sharing Trust.

Stuart W. Hankins, Sherry S. Means, No. Little Rock, for National Banking Corp.

Wright, Lindsey & Jennings, Little Rock, for Worthen Bank and Trust co., N.A.

John E. Pruniski, III, Little Rock, for Earl Bond.

DARRELL D. DOVER, Special Chief Justice.

In August 1988, Earl Bond, apparently a dabbler in land development as well as movie producing, contacted Dr. Donald L. Patrick, a Ft. Smith physician who had invested in some of Bond's movie ventures, relative to a plan Bond had conceived for the development of a 11.62 acre parcel of land in North Little Rock.

Earlier, in May 1988, Bond had entered into a purchase contract with National Bank of Arkansas (NBA), the owner of the land, providing for the purchase of the land at a price of $945,000 to be paid $445,000 in cash with a promissory note secured by a mortgage back to NBA representing the difference of $500,000. Dr. Patrick invested $400,000 cash in furtherance of Bond's plan and his $400,000 investment went toward payment of the cash portion of the purchase price. ¹

Key to Bond's plan for development of the 11.62 acre parcel was the construction of a building on a small portion of the parcel (apparently only two acres or so) and the leasing of space in the building. According to the testimony and a "Fact Sheet" intended for Bond's investors which was introduced in evidence, this would serve two purposes: (1) Completing the construction of improvements in the form of the building would satisfy some legal restrictions with possible reverter implications imposed by the City of North Little Rock as part of its urban renewal program and (2) the income stream from leases would enable Bond to obtain financing for the initial construction of the building and for future development.

Accordingly, the Bond-NBA contract provided that NBA would lease at least 3,000 square feet of space in the building to be built and NBA further agreed that it would either arrange for other tenants to lease an additional 3,500 square feet or that NBA would lease the additional 3,500 square feet itself.

The sale-purchase transaction closed on August 16, 1988. Title to the land was deeded by NBA to Bond. The cash portion of the purchase price was paid and the promissory note and the mortgage securing same were delivered by Bond to NBA. Thereafter, the leases alluded to above did not materialize and, as time passed, all parties became disenchanted with the transaction.

Dr. Patrick filed suit against Bond and NBA alleging various misrepresentations on the part of Bond which (he alleged) entitled him to rescind their transaction and to have a return of his $400,000. It was further alleged that NBA was aware of the misrepresentations and was therefore sufficiently tainted so as to justify relief against it in the form of a subordination or forfeiture of its debt/mortgage interest.

NBA filed a cross-complaint against Bond for foreclosure of its $500,000 mortgage and a third party complaint against Worthen Bank & Trust Company, N.A. to foreclose the lien of a mortgage which Bond had granted to Worthen. Worthen cross-complained against Bond for foreclosure of its mortgage and collection of the related debt.

Bond counter-cross-complained against NBA alleging that NBA had breached various material provisions of its agreement with Bond and that Bond was therefore entitled to rescission of the purchase contract and cancellation of the $500,000 purchase money note and the mortgage securing the note.

This proceeding was in the lower court for nearly two years during which a record of over 2,100 pages was created. On May 10, 1990, after the initial round of pleadings, motions and hearings, the Chancellor issued a Letter Opinion in which she found that there was insufficient evidence to justify a rescission of the contract between Dr. Patrick and Earl Bond; that there was insufficient evidence to establish any relationship between Dr. Patrick and NBA and certainly no contract between those parties; but that there was sufficient evidence to establish that the contract of sale of the land in question between NBA and Bond should be rescinded on grounds of constructive fraud and that a resulting trust should be declared in favor of Dr. Patrick in at least part of the cash purchase price which she ordered refunded to Bond. ²

The Chancellor further found that rescission attempts to place the parties in the position they were in prior to the contract and she therefore ordered that NBA's obligation to return the cash down payment of $445,000.00 should be reduced by an amount equal to reasonable rental value of the land plus rents actually paid.

Following additional hearings having to do with the rental value of the property and the amount of the constructive trust in favor of Dr. Patrick, the Court entered a Decree on April 26, 1991 which dismissed Dr. Patrick's complaint against Bond for failure of proof; rescinded the contract of sale between Bond and NBA and cancelled the deed from NBA to Bond; awarded Bond judgment against NBA in the amount of the cash portion of the down payment, plus interest less rents actually paid and less the reasonable rental value of the property which the trial court found to be $194,374.87 and less real estate taxes for 1988, 1989 and 1990 (and pro rata 1991) which had become due subsequent to the conveyance by NBA to Bond but prior to the Decree, the amount of such taxes being $24,023.81. The NBA Purchase Money Note and Purchase Money Mortgage were found to be void. Worthen's Mortgage was also found to be void but, based on a stipulation of all parties except NBA, Worthen was awarded first claim against the judgment in favor of Bond and, after deduction of the amount of $18,000.00 to satisfy an attorney's lien, Patrick and Sudbury were to receive, by way of constructive or resulting trust, the balance of the judgment in favor of Bond against NBA.

The Chancellor's Decree appears to have pleased no one and virtually all of the parties have appealed and/or cross-appealed from her decision.

Despite the voluminous record in this case and the many arguments advanced by the parties below and here, the central issues which are largely dispositive of this matter number only two and they are:

(1) Is rescission of the NBA-Bond contract an appropriate remedy?

(2) If the Chancellor properly ordered rescission, was it proper to credit the fair rental value of the property against the amount to be returned to the Purchaser (Bond)?

We will discuss those issues in order.

RESCISSION

NBA argues rather strenuously that this is simply not a case in which the doctrine of rescission can be applied. We believe, however, that NBA was misled--or chose to be misled--by references in the Chancellor's letter opinion of May 10, 1990, to "fraud". The Chancellor clearly differentiated between constructive fraud and what might be characterized as "actual" or "true" fraud, and specifically stated that ".... although there was insufficient evidence to find actual fraud, there was constructive fraud and, therefore, the contract of sale should be rescinded." Letter Opinion, May 10, 1990. Nevertheless, NBA seems to us to take the position that the Chancellor could not properly rescind the NBA-Bond contract without first finding that NBA was guilty of outright, intentional fraud.

That proposition is not well taken. To the contrary, as we said in Davis v. Davis, 291 Ark. 473, 725 S.W.2d 845, 847 (1987):

"We have many times held that there may be a constructive fraud even in the complete absence of any moral wrong or evil intention."

Immediately preceding the quoted language, the Davis Court cited Lane v. Rachel, 239 Ark. 400, 389 S.W.2d 621 (1965) and the reasoning and holding of the Lane case is relevant here. The Lane case also involved an action to rescind a sales contract, cancel a deed, a note and a mortgage and for the recovery from the Seller of the amount paid by the Purchaser on the purchase of property. It appeared that the seller, or the seller's representatives, had represented to the buyer that the house in question had an adequate foundation to support its weight. That later proved to be untrue, the house settled and substantial damage resulted, followed by the action to rescind. The seller's defense was that he was unaware of the subsoil conditions which apparently caused the settling and that the assurances given to the prospective purchaser were therefore not fraudulently made. In reversing the trial court in that case and in holding for the purchaser, this Court said:

"To rescind a contract based upon fraud, it is not necessary that actual fraud exist. It is well settled that representations are construed to be fraudulent when made by one who either knows the assurances to be false or else not knowing the verity asserts them to be true. (Citing cases). In 37 C.J.S. Frauds, § 2, Pg. 211, constructive fraud is succinctly defined as 'a breach of legal or equitable duty which, irrespective of the moral guilt of the fraud feasor, the law declares fraudulent because of its tendency to deceive others * * * Neither actual dishonesty of purpose nor intent to deceive is an essential element of constructive fraud'. [Emphasis in original]

In the case at bar it is undisputed that the [purchasers] relied, to their detriment, upon the statements and assurances made to them by the [sellers] and these statements proved to be...