Edwards v. Wilcoxen

• Decision Date: 19 April 1977
• Citation: 562 P.2d 1207,278 Or. 91
• Parties: Troy EDWARDS and Thomas Jordan, Respondents, v. Homer WILCOXEN and John P. Cahill, Appellants.
• Court: Oregon Supreme Court

Page 1207

562 P.2d 1207

278 Or. 91

Troy EDWARDS and Thomas Jordan, Respondents, v. Homer WILCOXEN and John P. Cahill, Appellants.

Supreme Court of Oregon.

Argued and Submitted Jan. 6, 1977.

Decided April 19, 1977.

Paul J. Jolma, Clatskanie, argued the cause and filed briefs for appellants.

William F. Thomas, Portland, argued the cause and filed a brief for respondents.

Before DENECKE, C.J., and BRYSON, LINDE and MENGLER, JJ.

BRYSON, Justice.

Plaintiff purchasers brought this suit to rescind their contract with defendants for the purchase of the Sea Breeze Restaurant and associated real and personal property. They alleged defendant sellers fraudulently or otherwise misrepresented the gross receipts and net profits of the restaurant during the year preceding the sale. The trial court decree granted rescission of the contract and awarded plaintiffs damages. The defendants appeal, and we review de novo.

The Sea Breeze is located approximately three miles south of Seaside, Oregon, on Coast Highway 101 near its junction with the Sunset Highway. The sale was consummated by a contract between the parties dated April 11, 1973.

Plaintiffs' complaint alleged in part as follows:

'IV

'Before plaintiffs agreed to purchase said business, real property and mobile home, defendants made certain representations to plaintiffs with the intention and purpose that plaintiffs should rely thereon in purchasing the business, real property and mobile home as follows:

'(a) That said restaurant business known as the Sea Breeze Cafe which had been operated by defendants during calendar year 1972, had gross receipts of $75,306.67 and a resulting net profit of $37,661.47, per the attached Schedule C from tax return form 1040 which is attached hereto, marked 'Exhibit C', and is hereby incorporated into this complaint by reference.

'(b) That plaintiffs could expect gross receipts from their operating said business of at least $75,000 for the year following the contract purchase date of April 11, 1973.

'* * *.

'VII

'That at the time defendants made the foregoing representations to plaintiffs, defendants either knew that the representations were false or made them recklessly without knowledge of the truth or falsity thereof.

'* * *.

'IX

'That upon discovery that the representations were false, plaintiffs notified defendants that plaintiffs were rescinding the contract and were tendering back the business to defendants and demanded the return of the monies expended by the plaintiffs. Defendants have refused to comply with plaintiffs' demands.

'* * *.'

Defendants' answer alleged in part as follows:

'II

'Answering Paragraph IV thereof, defendants admit that they gave the plaintiffs the document, a copy of which is marked Exhibit 'C' to the Complaint. Defendants allege that they told the plaintiffs that defendants believed that plaintiffs could expect gross receipts from their operation of said business of $75,000.00 for the first year following the purchase of the property if plaintiffs operated the business in the same manner that the defendants had operated the same.

'* * *.

'IV

'Plaintiffs received the document referred to as Exhibit 'C' in their Complaint on or about March 5, 1973. When they received the same, they knew that it did not refer to the calendar year 1972 but to the twelve months' period ending February 28, 1973. They also knew, or should have known, that it did not contain a list of all the expenses and deductions for said period, and they knew, or should have known, that it did not purport to show net income. * * *

'* * *.'

Defendants assign as error the trial court's decree granting rescission and contend that plaintiffs waived any right to rescind the contract because they

'(a) Delayed an unreasonable length of time before electing to rescind.

'(b) Advertised the property for sale.

'(c) Maintained possession and made payments without any objection.

'* * *.'

The plaintiffs argue that '(t)he facts in the case simply do not support this thesis. * * * (A)s time passed, the plaintiffs had a growing awareness that the gross and net income had been misrepresented to them, but waiting through the summer of 1974 was not an unreasonable delay.'

The law is well settled that a party contending that a fraudulent or innocent misrepresentation was made to induce the purchase of a business must give notice of rescission promptly after the discovery of the misrepresentation.

In Ross v. Carlyle et ux., 216 Or. 576, 578, 339 P.2d 1114, 1115 (1959), the court stated:

'Ever since the pronouncement of Mr. Justice Robert Bean in Scott v. Walton, 32 Or. 460, 464, 52 P. 180 (1898) (sometimes called 'the standard precedent'), this court has consistently held: that upon the discovery of fraud, he who desires to rescind, must act promptly and return or offer to return what he has received under the contract. He cannot retain the fruits of the contract awaiting further developments to determine whether it will be more profitable for him to affirm or disaffirm it. Any delay on his part, and especially his remaining in possession of the property will evidence his intention to ratify and abide by the contract. Cooper v. Hillsboro Garden Tracts, 78 Or. 74, 85, 152 P. 488 (1915); Grant v. Cartozian Bros., Inc., 120 Or. 607, 611, 253 P. 531 (1927); Holmes v. Burlingame Co., 138 Or. 193, 198, 6 P.2d 44 (1931); Schuler v. Humphrey, 198 Or. 458, 480, 257 P.2d 865 (1953); Gamble v. Beahm, 198 Or. 537, 550, 257 P.2d 882 (1953); Keller v. Lonsdale, 216 Or. 339, 339 P.2d 112.'

We have continually adhered to this rule in numerous cases, the latest being Watson v. Fantus, 275 Or. 605, 610, 552 P.2d 251 (1976).

We have also that the facts and circumstances in each case determine what constitutes prompt rescission. Schuler v. Humphrey, 198 Or. 458, 480, 257 P.2d 865 (1953).

The facts in this case disclose that the plaintiffs are more experienced in accounting, finance, and business than the defendants. Plaintiff Jordan is a college graduate with a degree in finance and 20 years' work experience with credit unions and as a trust officer. Plaintiff Edwards had 20 years' work experience as a bookkeeper. Prior to purchasing the Sea Breeze, plaintiffs owned and operated a Dairy Queen franchise at Depoe Bay, Oregon. Plaintiff Edwards did all of the bookkeeping for that operation and testified that he is generally familiar with restaurant costs and operating expenses and the percentage of gross sales normally realized as net profit.

Prior to defendants' purchase of the Sea Breeze they operated a dairy farm as partners on the Oregon coast. Neither had formal education beyond high school and neither is familiar with the intricacies of accounting, bookkeeping or tax returns. While defendants operated the Sea Breeze, Wilcoxen kept daily gross receipts and expenditures which were turned over to a Mrs. Bradley, who prepared their tax returns. Mrs. Bradley had no formal education in accounting, but had done business with defendants when they operated the dairy farm, and she prepared defendants' tax returns as a favor and without charge.

Plaintiffs saw an advertisement offering the Sea Breeze for sale and prior to entering into the contract, they visited the restaurant during business hours and liked what they saw. Before signing the contract, plaintiffs requested a statement showing defendants' gross sales and income for the preceding 12 months. Mrs. Bradley prepared this information on a 'Schedule C' form for U.S. income tax returns. This form was given to the plaintiffs on March 5, 1973. There is a dispute in the testimony as to whether the figures on the 'Schedule C' form covered the calendar year 1972 or the 12-month period ending February 28, 1973.

This 'Schedule C' form incorrectly lists defendants' gross receipts as $75,306.67 and net profits as $37,661.47. The evidence shows that defendants' gross receipts for 1972 were $68,701.65 and for the 12-month period ending February 28, 1973, were $73,252.23. Net profits were $14,270 or $16,389.23, depending upon whether the gross profits for the calendar year 1972 or the period ending February 28, 1973, were used.

Defendant Wilcoxen testified that the discrepancy between the gross receipts listed on the Schedule C provided plaintiffs and the partnership's actual gross receipts was due to his accidental inclusion of an extra one-half month's receipts. The overstatement of the figures identified as 'net profits' was due to at least two factors. First, the gross receipts and expenses were mismatched in that the expenses deducted from the gross receipts generated between March 1, 1972, and February 28, 1973, were those used by defendants on their 1972 partnership tax return. Secondly, the bulk of the discrepancy is due to defendants' failure to deduct all of the items of expense necessarily and usually deducted to arrive at a net profit. The Schedule C statement given by defendants to plaintiffs shown on its face that it covered only costs of goods sold, taxes on business and business property, wages, utilities, laundry and miscellaneous supplies. It shows no deduction for depreciation, repairs, advertising, automotive expenses, supplies, postage, freight, telephone, sanitation services, or professional expenses.

The evidence shows that plaintiff Edwards handled most of the business transactions and made most of the decisions for the plaintiff partnership. Edwards testified that he was aware that defendants' profit and loss statement Schedule C showed no deductions for sanitary service, automobile expenses, depreciation, postage, freight or insurance, and that he realized that a restaurant such as the Sea Breeze would incur those types of expenses. Edwards further stated that he did not necessarily believe that defendants made as much as they had represented and that from his knowledge and experience he expected profits from the restaurant to be between 20 percent and 25 percent of the gross receipts, or...