Gardner v. Meiling

• Decision Date: 20 December 1977
• Citation: 280 Or. 665,572 P.2d 1012
• Parties: Robert Lee GARDNER, Respondent, v. Richard MEILING and Jon Meiling, Appellants.
• Court: Oregon Supreme Court

Page 1012

572 P.2d 1012

280 Or. 665

Robert Lee GARDNER, Respondent, v. Richard MEILING and Jon Meiling, Appellants.

Supreme Court of Oregon, Department 2.

Argued and Submitted Nov. 8, 1977.

Decided Dec. 20, 1977.

[280 Or. 666-A] Francis F. Yunker, Portland, argued the cause and filed the brief for appellants.

Gary L. Gardner, Salem, argued the cause and filed the brief for respondent.

Before HOLMAN, P. J., TONGUE and LINDE, JJ., and RICHARDSON, J. pro tem.

RICHARDSON, Justice Pro Tem.

Plaintiff, as the buyer, brought a suit for rescission of a contract providing for the sale of a tavern. He alleged three grounds for rescission; fraud, misrepresentation and mistake. The alleged misrepresentations and mistake relate to the gross income, goodwill and reputation of the tavern. Defendants counterclaimed for the payments thus far due on the purchase price.

The court granted a decree of rescission on the ground of fraudulent misrepresentations as to income and a judgment against both defendants for return of $8,000 previously paid on the purchase price. Defendants appeal.

Plaintiff, a school teacher in The Dalles who had no experience in operating a tavern, journeyed to Portland in February 1976 and contacted Business Brokers, Inc. to inquire about the purchase of a tavern. He testified he was looking for a neighborhood tavern. James Stockard, a salesman for Business Brokers, Inc., showed plaintiff the Punjab Tavern which was owned by defendants and had been listed for sale with Business Brokers, Inc. The premises were owned by a third party and leased to defendants.

Plaintiff met on two occasions with James Stockard prior to signing an earnest money receipt. On one of these two occasions Plaintiff and Stockard obtained, from the wholesale beer distributor, a report of the number of kegs of beer delivered to the tavern during an 11 month period in 1975. The monthly average was approximately 40 kegs. Stockard testified he told plaintiff as a rough rule of thumb a tavern could gross approximately $60 to $80 per keg. He explained this was a generalization about taverns and was contingent upon a number of factors.

James Stockard, after determining plaintiff was new in the tavern business, explained some of the pitfalls of tavern operation to him. He explained specifically that the success of a tavern depended in large measure on the individual who operated the tavern and the persons he employed as bartenders and that the past performance of a tavern was no guarantee the volume of business would continue. Stockard did not make any representations as to the income of the tavern and testified Business Brokers, Inc. had, in fact, received no such information from defendants.

Plaintiff testified, based on conversation with other tavern owners and with James Stockard, he calculated the tavern's gross income in 1975 was approximately $4,500 per month. This calculation was based solely on the average number of kegs of beer delivered in 1975. Plaintiff stated he was interested in the tavern's income but he did not depend on the keggage reports for income projections since they related to 1975 and that he was waiting for the income figures which would be given to the Oregon Liquor Control Commission (OLCC) to obtain transfer of the liquor license.

On February 20, 1976, the parties executed an earnest money agreement providing for a sale price of $40,000 to be paid $1,000 as earnest money, $7,000 on delivery of possessions of the business, $2,000 payable 90 days after possession, $2,000 on February 1, 1977 and the balance in monthly payments. The offer in the earnest money receipt was subject to the buyer obtaining a five year lease on the premises and further "subject to and is to be closed upon the granting of all licenses to operate the above business."

Approximately March 15, 1976, the parties executed a written agreement providing for the sale of the business. The purchase price and the terms of payment were the same as expressed in the earnest money agreement.

Paragraph 11 of the contract provided:

"CONTINGENCY: This agreement in its entirety is contingent upon Buyer obtaining the necessary city, county and state licenses to operate a tavern business as now conducted by Seller. Buyer agrees to pursue all reasonable and necessary procedures to secure the said licenses. In the event Buyer does not secure the necessary licenses to operate said business as now conducted by Seller, then this agreement in its entirety shall be null and void, and the earnest money heretofore receipted for shall be returned to Buyer, except for the necessary costs incurred to that date, including attorney's fees, escrow fees, search fees, recording fees, and the like, and this agreement shall be of no further force and effect."

Although the evidence is not clear it appears the plaintiff negotiated a new lease on the premises on June 10, 1976.

On May 20, approximately two months after the contract was executed, the plaintiff and defendant Jon Meiling met with an investigator from the OLCC to discuss transfer of the liquor license. The investigator asked for the gross income figures from the tavern business for the months of February, March and April, 1976. Although there is a conflict in the evidence regarding where the figures were obtained, Jon Meiling gave the investigator gross income figures for the three months. The figures given were $5,710.50, $4,918.57 and $5,009.51 respectively. The required OLCC license was subsequently granted on June 6, 1976, and plaintiff took possession of the tavern on June 10, 1976, after the transaction was closed.

The gross income figures given to the OLCC investigator in plaintiff's presence are the only representation received by After taking possession of the tavern and operating it for two days plaintiff discovered the income was very low and that there were few female patrons. He contacted the bookkeeping service utilized by the sellers and learned the gross income of the tavern had been approximately $1,400 to $2,000 during February, March and April of 1976. On June 16, 1976, a few days after taking possession, plaintiff, through his attorney, wrote to defendants demanding rescission on the basis of fraudulent misrepresentation. ¹ Rescission was refused by defendants. Plaintiff continued to operate the tavern, on advice of counsel, until January 9, 1977, as he stated, in order to protect the OLCC license.

plaintiff regarding the tavern's gross income and are the basis of his claim of fraud and misrepresentation.

Plaintiff seeks rescission based on three theories; fraud, misrepresentation and mistake. He sets forth his allegations in three counts. Count I alleges that before he agreed to purchase the tavern and lease the premises defendants represented the gross income of the tavern to be $4,400 to $4,700 per month and that the tavern had valuable goodwill and a good reputation in the community. He alleged that he relied upon these representations and would not have purchased the tavern otherwise. He further alleges the representations were false and that defendants either knew they were false or made them recklessly without knowledge as to their truth or falsity.

In Count II he realleges all the matter in Count I but deletes the allegation that the representations were knowingly or recklessly made by defendants.

Count III, titled "Mistake," claims the earnest money agreement and the sale contract were executed under a mistake of fact as to the gross income of the tavern and that the tavern had goodwill and possessed a good reputation in the community. This count further alleges the defendants were either mistaken as to these facts or concealed them from plaintiff.

Plaintiff presented the case to the trial court on the basis of fraudulent misrepresentation. The court granted rescission on that ground and made no findings regarding other grounds for rescission. Defendants, on appeal, argue principally that the representations were not made to the plaintiff but were made to the OLCC investigator for the purposes of obtaining transfer of the liquor license. On appeal we review the record de novo and make our own findings and conclusions. If the evidence supports any theory of rescission propounded in plaintiff's complaint the decree should be affirmed. We find, however, the plaintiff has failed to establish a basis for rescission on either of the three theories in his complaint and reverse.

I. FRAUDULENT MISREPRE- SENTATIONS

A. Gross Income

Comprehensively stated, the elements of actionable fraud allowing avoidance of a contract consist of: (1) a representation, (2) its falsity, (3) its materiality, (4) the speaker's knowledge of its falsity or ignorance of its truth, (5) his intent that it should be acted upon, (6) the injured party's ignorance of its falsity, (7) his reliance upon the truth of the representation, and (8) his right to rely on its truth. Conzelmann v. N. W. P. & D. Prod. Co., 190 Or. 332, 225 P.2d 757 (1950). The person alleging fraud has the burden of proving each of the elements and failure to prove any one or more of the elements is fatal to the cause of action. Conzelmann v. N. W. P. & D. Prod. Co., supra; Condit v. Bodding, 147 Or. 299, 33 P.2d 240 (1934).

Implicit in the element of reliance is a requirement the plaintiff prove a causal relationship between the representation and his entry into the bargain. In other words As we view the evidence an enforceable contract arose at the time the earnest money agreement was signed by both parties on February 20, 1976. The formal written contract of March 15, 1976, was merely a memorialization of this agreement. prior to the execution of the earnest money agreement no representation regarding the gross income of the tavern had been made. Plaintiff conceded, during oral argument in this court, that the representations of May 20, 1976, made to the OLCC investigator in plaintiff's presence are the only...