Cunningham v. Studio Theatre

• Decision Date: 12 April 1951
• Docket Number: No. 31596,31596
• Citation: 38 Wn.2d 417,229 P.2d 890
• Court: Washington Supreme Court
• Parties: CUNNINGHAM et al. v. STUDIO THEATRE, Inc., et al.

Page 417

38 Wn.2d 417

229 P.2d 890

CUNNINGHAM et al. v. STUDIO THEATRE, Inc., et al.

No. 31596.

Supreme Court of Washington, Department 1.

April 12, 1951.

J. Orville Humphries, Arthur E. Florer, Spokane, for appellants.

Robert Weinstein, E. A. Cornelius, Spokane, for respondents.

HILL, Justice.

In an action for rescission of an exchange of properties, misrepresentation and reliance thereon being conceded for the purposes of the appeal, the issues here are (a) whether the misrepresentations were of material facts or merely expressions of opinion, sales talke, etc., (b) whether the plaintiffs had a right to rely upon the misrepresentations made, and (c) whether the plaintiffs ratified the exchange of properties after having acquired knowledge of the falsity of the representations.

George Cunningham and his brother Glen and their wives owned a section of land with considerable timber on it. About twenty acres were cleared, and each family had a home and sheds for mink farming on the property; also, Glen had a small homebuilt sawmill, the operation of which was strictly a family affair, with Glen, his wife, and George as the only participants. The brothers valued their property at twenty-five thousand dollars.

George had a high school and Glen an eighth grade education. Their business experience was limited to their mink farm and sawmill.

They decided to dispose of their property because George wanted to secure better school facilities for his children and Glen had suffered an accident that made it impossible for him to do manual labor. In an endeavor to effect a sale or trade, they sought the assistance of a neighbor who was a broker. He introduced them to A. C. Townsend and Roy R. Torpey, who were running the Studio Theatre in Spokane and were men of considerable business experience. The ownership of the theater equipment and of the lease of the theater building was vested in a corporation, Studio Theatre, Inc., in which Townsend and Torpey and their wives owned all the stock. They had purchased the lease and theater equipment in March of 1949 for seven thousand dollars and had, since acquiring it, operated the theater at a loss.

Townsend represented to the Cunninghams that the theater had a value of twenty-five thousand dollars; also, that the replacement cost of the equipment was twenty-five thousand dollars. (There was evidence that the actual replacement cost of all the equipment Townsend and Torpey, or Studio Theatre, Inc., owned inside the theater was about twenty-four hundred dollars.)

During late July and early August, 1949, the parties negotiated for an exchange of their properties, each visiting the property of the others on more than one occasion. During the period when the Cunninghams visited the theater, what was referred to as an 'exploitation' film of the 'adult only' type was being shown. This apparently stimulated public interest, or at least the interest of a segment of the public, and resulted in an attendance that was considerably larger than normal.

Townsend prepared, in his own handwriting, two sets of figures which he explained to the Cunninghams. On one he showed receipts of ninety dollars a day and itemized expenses amounting to $57.70, leaving a net profit of $32.30 a day, which he represented as the average for their operation. The other set of figures he based on the assumption that the Cunninghams could perform certain portions of the work that made up the expense items and thus reduce the expenses to thirty-five dollars a day, thereby increasing the net profit to fifty-five dollars a day.

Believing the representations as to value and income, the Cunninghams entered into an exchange agreement with Studio Theatre, Inc., August 5, 1949, and the exchange was consummated shortly thereafter. Townsend and Torpey, rather than Studio Theatre, Inc., were named as grantees in the deed from the Cunninghams.

The Cunninghams commenced the operation of the theater August 15, 1949. For about sixty days thereafter they operated under the same policy and procedure as had their predecessors, having at Townsend's suggestion retained their manager, George Whitfield, in a like capacity. The theater lost money during that entire period. Whitfield testified that July, August, and September are the slow times of the year in the theater business, and that the 33-day race meet in Spokane in September and early October affected the show business adversely, and said: 'We weren't too alarmed the first two or three months. When we started to be alarmed was when the business didn't pick up at the normal pick-up time, or start to show an increase.'

Business not having improved, in the latter part of October the Cunninghams changed the name of the theater and started a combination of stage shows (burlesque) and pictures, which policy they continued until they closed the theater January 22, 1950.

Early in January the Cunninghams had consulted an attorney. His investigations revealed that Townsend and Torpey had consistently operated at a loss. The Cunninghams immediately tendered back the theater and demanded a rescission. When it was refused, they continued to operate the theater for about two weeks, then close it and commenced this action for rescission January 23, 1950.

The trial court accepted the foregoing version of the facts. After an inspection of the properties that had been exchanged, the trial judge expressed the view that the property the Cunninghams had conveyed to Townsend and Torpey was worth four or five times as must as the theater and all its equipment. From a decree granting rescission Townsend and Torpey and their wives, together with Studio Theatre, Inc., appeal.

The appellants, realizing that the trial court had a right to believe the respondents' version of the transaction, concede, for the purposes of this appeal, that they made the representations hereinbefore referred to and that those representations were false. They also concede, impliedly at least, that the respondents relied upon those representations. But they urge that the misrepresentations were not of material facts but were merely opinion or sales talk, and that, in any event, the respondents were not entitled to place reliance on them.

Appellants rely upon what they call the general rule that an expression of value is but opinion and not such a fact as may be the basis of actionable fraud. Pigott v. Graham, 48 Wash. 348, 93 P. 435, 14 L.R.A.,N.S., 1176; Jacoby v. Hollada, 78 Wash. 88, 90, 138 P. 558; Hood v. Cline, 35 Wash.2d 192, 212 P.2d 110; 23 Am.Jur. 827, Fraud and Deceit, § 57; 1 Black on Rescission and Cancellation 214, §§ 79-85.

However, this rule is not absolute, and it is not the law that an expression of value is always an opinion and never a material fact. Duffy v. Blake, 80 Wash. 643, 141 P. 1149; Horowitz v. Kuehl, 117 Wash. 16, 18, 200 P. 570; 23 Am.Jur. 830, Fraud and Deceit, § 59; 1 Black on Rescission and Cancellation, supra. Indeed, the so-called general rule has been whittled down until it can be said that it '* * * applies only where the parties stand on an equal footing, and have equal means of knowledge, and there is no relation of trust or confidence existing between them.' 23 Am.Jur. 830, Fraud and Deceit, § 59.

The same section continues: '* * * Likewise, a statement of value may be of such a character, so made and intended, and so received, as to constitute fundamental misrepresentation; and if it is made as an assertion of fact, and with the purpose that it shall be so received, and it is so received, it may amount to a fraud. Moreover, a statement of value involving and coupled with a statement of a material fact is fraud.'

The trend of the decisions on the subject is that '* * * the standards of the law are rapidly overtaking the standards of ethics, and the gap between 'moral honesty' and 'law honesty' is beginning to close.' 1 Black on Rescission and Cancellation 232, § 85.

Our investigation leads us to the conclusion that most cases involving false statements of value, such as 'This property is worth twenty-five thousand dollars,' do not actually hinge, so far as the determination of the presence or absence of fraud is concerned, upon whether the statement is an expression of opinion, sales talk, etc., or a misrepresentation of a material fact, but upon whether the person to whom the statement was made justifiably relied thereon. (Justifiable reliance is a conbination of the two elements, reliance and the right to rely.)

In this case it is not necessary for us to determine whether the statement that the value of the theater was twenty-five thousand dollars was a misrepresentation of a material fact or an expression of opinion; nor is it necessary that we determine whether the statement that it would cost twenty-five thousand dollars to replace the equipment was a misrepresentation of a material fact or an expression of opinion. It is too clear for argument that Mr. Townsend's detailed explanation of receipts and disbursements, which showed that the theater was netting $32.30 a day, was a misrepresentation of a material fact. Boehme v. Broadway Theater Co., 91 Wash. 104, 157 P. 218; Jammie v. Robinson, 114 Wash. 275, 195 P. 6; Hahn v. Brickell, 135 Wash. 189, 237 P. 305; Frahm v....