Farrell v. Score

• Decision Date: 10 February 1966
• Docket Number: No. 37886,37886
• Citation: 67 Wn.2d 957,411 P.2d 146
• Court: Washington Supreme Court
• Parties: John A. FARRELL and Virginia Farrell, his wife, Respondents and Cross-Appellants, v. J. R. SCORE, doing business as J. R. Score Realty, Appellant.

Page 957

67 Wn.2d 957

411 P.2d 146

John A. FARRELL and Virginia Farrell, his wife, Respondents and Cross-Appellants, v. J. R. SCORE, doing business as J. R. Score Realty, Appellant.

No. 37886.

Supreme Court of Washington, Department 1.

Feb. 10, 1966.

Watson & Codd, Donald E. Watson, Seattle, for appellant.

John L. Hay, Seattle, for respondents.

BARNETT, Judge. ^*

Plaintiffs, John and Virginia Farrell, brought this action to rescind and cancel a promissory note and a conditional sales contract assigned as security, and also for the return of $140 which had been paid on the note. Defendant counterclaimed for the unpaid balance of the note. Judgment was entered canceling the note and assignment, from which defendant appeals. Plaintiffs cross-appeal from the same judgment, insofar as it did not include an order for the return of the $140.

This lawsuit is based on alleged fraudulent misrepresentations made by defendant broker concerning the financial condition of a purchaser which he had procured for plaintiffs. The trial court found that false representations had been made, entitling plaintiffs to the cancellation of the note representing defendant's commission, and of a contract assignment given as security for the note. Defendant broker challenges this finding, which is set out as follows:

Finding of fact No. 5:

Plaintiffs were induced to enter into said contract with Mr. and Mrs. Robinson and to execute said note and assignment of contract to defendant by misrepresentations made to them by defendant concerning the financial responsibility of the Robinsons and the manner in which defendant's commission was to be paid. Defendant breached his duty to plaintiffs as a fiduciary, failed to exercise towards them the utmost good faith, and deceived the plaintiffs as to the financial responsibility of the purchasers and the manner in which his commission was to be paid. The evidence established all of the elements of fraud against defendant:

1. A representation of an existing fact;

2. Its materiality;

3. Its falsity;

4. The speaker's knowledge of its falsity or ignorance of its truth 5. His intent that it should be acted on by the person to whom it is made;

6. Ignorance of its falsity on the part of the person to whom it is made;

7. The latter's reliance on the truth of the representation;

8. His right to rely upon it;

9. His consequent damage.

A complete summary of the facts is justified. The record shows them to be substantially as follows. In the year 1960, plaintiffs, husband and wife, were the owners and operators of a laundromat business. At that time they entered into a listing agreement with defendant, a business and real-estate broker, for the sale of the laundromat. This agreement expired before a buyer could be found. In 1961, defendant brought to plaintiffs' place of business one Robinson, and inquired if the laundromat was still for sale. Plaintiffs replied that it was. Shortly thereafter, defendant informed plaintiffs that Robinson wanted to buy, and that he had $3,000 to pay down. Plaintiffs replied that $3,000 was not enough; that they wanted, as down payment, one-third of the total $20,000 purchase price. In response, defendant said that he would look to Robinson for his commission (which was to be 10 per cent of $20,000), so that, by receiving $3,000 from Robinson, and not having to pay defendant's commission, plaintiffs would be getting most of the one-third down payment that they desired. Plaintiffs agreed that, if Robinson paid $3,000, and if defendant would get his commission from Robinson, they would sell.

In discussing Robinson with plaintiffs, defendant represented that the purchaser had a good job with Standard Oil Company, which he would retain after he purchased the laundromat, while his wife would manage the newly-acquired business. Defendant further represented that Robinson had sufficient stocks and bonds in Standard Oil to 'buy out' plaintiffs if he so desired, but that he did not want to dispose of these investments at that time.

Relying upon these statements made by defendant, plaintiffs accepted Robinson's offer. On April 6, 1961, an earnest money agreement was executed by the parties. Among its provisions was one wherein plaintiffs promised to pay defendant a $2,000 commission. Plaintiff John Farrell testified that he did not read this document when he executed it, being assured by defendant that the acquisition of his signature was 'just a formality.' That very day, plaintiff John Farrell departed for Alaska, not to return until June. He left his wife a power of attorney to conclude the sale transaction on his behalf. On April 18th, Robinson signed a conditional sales contract for the balance of the purchase price. It obligated him to make payments of $120 a month to plaintiffs. Robinson also assumed some prior debts of plaintiffs. On May 1st, plaintiff Virginia Farrell, acting for herself and her absent husband, executed a promissory note, with defendant as payee, in the amount of $2,000. At the same time, she assigned the conditional sales contract to defendant as security for the note.

Robinson went into immediate possession and began to operate the business. The various documents and instruments relating to the sale transaction were deposited in a bank, which collected the monthly installment payments made by Robinson. Out of each $120 payment, the bank applied $20 to the $2,000 promissory note owned by defendant. Robinson made seven payments, totaling $700, out of which sum defendant received $140 on his note. Unable to perform further, Robinson negotiated with plaintiffs for relief from his obligations under the sales contract. As a result of these negotiations, plaintiffs and Robinson executed an agreement of 'satisfaction,' whereby the sales contract was rescinded, the laundromat business returned to plaintiffs, and all payments previously made became forfeited.

The trial court found by substantial evidence that defendant had consented to the rescission of the sales contract. At no time prior to the institution of this suit did defendant demand further payment on the $2,000 note.

After the rescission, plaintiffs discovered that the recorded conditional sales contract beclouded the title to their business, and that the representations which defendant had made concerning Robinson's financial ability had been untrue. This suit resulted.

Defendant had told plaintiffs that Robinson would continue to hold his position with Standard Oil after purchasing the laundromat. In fact, defendant had known that Robinson could raise the $3,000 needed for the down payment only by resigning from his Standard Oil position, and thereby receiving an annuity benefit of nearly $2,000. While defendant had told plaintiffs that Robinson owned enough stocks and bonds to buy them out, if he desired, he had known that Robinson possessed only a small amount of stock in the corporation, worth no more than $320. Defendant had assured plaintiffs that he would receive his commission from Robinson so that they could receive their one-third down payment. But, later, at the behest of defendant, Mrs. Farrell executed a promissory note obligating plaintiffs to pay the commission.

It is contended by defendant that the representations which he made regarding Robinson's financial condition do not constitute actionable fraud. We disagree.

In the case of Nailor v. Western Mortgage Co., 54 Wash.2d 151, 338 P.2d 737, 72 A.L.R.2d 938 (1959), we held that misrepresentations of another's financial condition may, where the essential elements of fraud are present, constitute remedial fraud. See, also, Jorgensen v. Albertson, 129 Wash. 686, 225 P. 639 (1924). The duties and obligations of a broker to his employer are essentially those of an agent required to exercise fidelity and good faith toward his principal in all matters that fall within the scope of his employment. Westerbeck v. Cannon, 5 Wash.2d 106, 104 P.2d 918 (1940). The law exacts of his agent the utmost fidelity to his principal. Mele v. Cerenzie, 40 Wash.2d 123, 241 P.2d 669 (1952); Karle v. Seder, 35 Wash.2d 542, 214 P.2d 684 (1950). It is the broker's duty to give to his principal such information as he may have of the prospective purchaser's financial situation. If the broker has no knowledge thereof, it is his duty to disclose this fact to the principal, so that the latter may investigate it. 12 Am.Jur.2d Brokers § 89 (1964). The existence of this duty owed the principal by his broker entitles the principal to rely on such representations as the broker may make to him regarding the financial ability of the intending purchaser.

There is sufficient evidence to support the trial court's finding that all nine elements of actionable fraud were...