Carpenter v. Curtis

• Decision Date: 03 July 1990
• Docket Number: No. A90A0644,A90A0644
• Citation: 196 Ga.App. 234,395 S.E.2d 653
• Parties: CARPENTER v. CURTIS.
• Court: Georgia Court of Appeals

Page 653

395 S.E.2d 653

196 Ga.App. 234

CARPENTER v. CURTIS.

No. A90A0644.

Court of Appeals of Georgia.

July 3, 1990.

Alston & Bird, John I. Spangler III, Atlanta, for appellant.

Moore & Rogers, Stephen C. Steele, David P. Oliver, Marietta, for appellee.

BEASLEY, Judge.

Curtis sued Carpenter for fraud in the inducement (count one) and breach of contract (count two) arising out of the sale by Carpenter to Curtis of stock issued by Millwood Mouldings, Ltd., a privately held company. Curtis sought damages in the first two counts and rescission of the contract in the third count. Defendant Carpenter moved for partial summary judgment on rescission, which was granted, and on fraud, which was denied.

His application for interlocutory review of the denial was permitted.

Carpenter owned 80 percent of Millwood, a wood molding manufacturer. The company had continuing financial problems and Carpenter loaned it over $300,000 during 1985, evidenced by promissory notes. Millwood also procured $1,250,000 in industrial revenue development bonds which were purchased by First National Bank of Columbus. The bank then loaned an amount equal to the face value of the bonds to Millwood, which loan Carpenter personally guaranteed. Despite this, Millwood's net assets were zero or less.

Carpenter determined to sell his shares and sent out solicitation letters. Curtis responded and met with Carpenter on three occasions, during which Carpenter showed Curtis the manufacturing equipment and the company's inventory and explained the company's operations.

Curtis then sent Carpenter a letter of intent which contained provision for Millwood to supply information to Curtis and provide access for him to inspect its plants, offices and records. Curtis sent his son, Dan P. Curtis, who had an accounting degree and work experience in that field, to inspect some of the current financial records of the company. The son reviewed the preliminary December 1985 financial statement. He found that some entries did not balance with Millwood's subsidiary ledgers; there were variances pertaining to accounts payable and receivable. At his request they were redone. The son then prepared the company's financial statements for January 1986, which showed a negative net worth of $86,758. Curtis himself reviewed some unaudited financial statements but otherwise did not conduct any further investigation of Millwood.

Through his attorneys, Curtis prepared a purchase and sale agreement for the stock. A merger or integration clause provided: "Agreement Complete ; ... This Agreement contains the entire understanding between the parties hereto with respect to the transactions contemplated hereby; all prior negotiations and agreements between the parties hereto are superseded by this Agreement; and there are no representations, warranties, understandings, or agreements other than those expressly set forth herein, except as modified in writing concurrently herewith or subsequently hereto, which writing shall be executed by duly authorized officers of Buyer and Seller, respectively."

Because of Millwood's negative net worth, purchaser Curtis required that Carpenter, as a condition for proceeding with the transaction, invest an additional $60,000 in the company at closing. On February 28, 1986, the transaction closed with Curtis purchasing 55 percent of the company's outstanding shares. As consideration, Curtis issued a letter of credit to Millwood for $150,000 and assumed 75 percent of the bank note guaranty by Carpenter, who retained 25 percent.

Curtis took control of the company and operated it for approximately 4 months when he elected to close down. Millwood had borrowed over $400,000 against the bond from First National, which called the debt due. Carpenter and Curtis honored their apportioned share of the guarantee and were assigned the security held by First National in Milwood's assets. Curtis repossessed and sold Millwood's assets at public auction, recovering some $80,000. He sold Millwood's wood inventory and foreclosed on its real property. Ten months later he sued Carpenter.

Carpenter contends that Curtis' proceeding under the contract for fraud is foreclosed because the merger clause controls, and that the trial court's ruling of no basis for rescission disposes of the count predicated upon fraud.

Two actions are available to one who was fraudulently induced by misrepresentations into entering a contract: he can affirm the contract and sue for breach or seek to rescind and sue in tort for fraud and deceit. City Dodge v. Gardner, 232 Ga. 766, 768, 208 S.E.2d 794 (1974). Accord Brown v. Techdata Corp., 238 Ga. 622, 234 S.E.2d 787 (1977). Affirmance of the contract by the defrauded party does not necessarily deprive him of the right to sue for damages for fraud, as the right to affirm and the right to fraud damages coexist. However, he must do nothing to waive the fraud. Touche v. Dearborn, 161 Ga.App. 188, 191(2), 291 S.E.2d 35 (1982).

One situation whereby a defrauded party accepts the contract with the fraud in it and thereby waives the fraudulent misrepresentations is where the contract contains a clause which provides in essence that no representation, promise or inducement not included in the contract shall bind any party. Condios v. Driver, 145 Ga.App. 537(1), 244 S.E.2d 85 (1978). This is an entire agreement and the merger provision controls, preventing a fraud-in-the-inducement defense unless it can be shown that the party claiming fraud lacked knowledge of the contract's contents. Del Mazo v. Sanchez, 186 Ga.App. 120, 124, 366 S.E.2d 333 (1988). Where a purchaser affirms a contract containing a merger provision, "he is estopped from asserting that he relied upon the seller's misrepresentation and his action for fraud must fail." Roth v. Bill Heard Chevrolet, 166 Ga.App. 583, 584, 305 S.E.2d 31 (1983).

The presence of a merger clause in the underlying contract is determinative if the defrauded party has not rescinded but has elected to affirm the contract. He is relegated to recovery under the contract, and the clause will prevail. If the party rescinded, the merger clause is avoided and will not prevent recovery under a tort theory. Potomac Leasing Co. v. Thrasher, 181 Ga.App. 883, 886(2), 354 S.E.2d 210 (1987); Del Mazo v. Sanchez, supra 186 Ga.App. at 128, 366 S.E.2d 333. Critical to rescission is the tender of benefits, the prompt restoration or offer to restore whatever the complaining party received by virtue of the contract. OCGA § 13-4-60; Brown, supra 238 Ga. at 626, 234 S.E.2d 787; Manget v. Cunningham, 166 Ga. 71, 87(2), 142 S.E. 543 (1928).

These principles determine the outcome when applied to...