Gearhart v. Goehner

• Decision Date: 05 June 1985
• Citation: 74 Or.App. 95,701 P.2d 461
• Parties: Dale E. GEARHART, Appellant, v. Martin GOEHNER and Ella Goehner, husband and wife, Respondents. 21-060; CA A29958.
• Court: Oregon Court of Appeals

Page 461

701 P.2d 461

74 Or.App. 95

Dale E. GEARHART, Appellant, v. Martin GOEHNER and Ella Goehner, husband and wife, Respondents.

21-060; CA A29958.

Court of Appeals of Oregon.

Argued and Submitted Dec. 14, 1984.

Decided June 5, 1985.

Magar E. Magar, Portland, argued the cause and filed the briefs for appellant.

Timothy J. Murphy, and Walter H. Grebe, Portland, argued the cause for respondents. With Walter H. Grebe on the brief were Grebe, Gross, Peek, Osborne & Dagle, P.C., Portland.

Before BUTTLER, P.J., and WARREN and ROSSMAN, JJ.

ROSSMAN, Judge.

Plaintiff brought this action seeking specific performance of an installment land sale contract. Defendant Martin Goehner filed a counterclaim seeking rescission on the ground of misrepresentation. ¹ The trial court entered a judgment allowing rescission and restitution, and plaintiff appeals. On de novo review, we modify the judgment.

On August 17, 1980, plaintiff and defendant entered into an earnest money agreement for the sale of a house divided into two rental units, and a building, part of which held a convenience grocery store called Jiffy Market. On September 3, 1980, they entered into an earnest money agreement for the sale of plaintiff's market business, which included gasoline sales. Defendant bought the properties primarily to remodel the unused part of the building and to operate a restaurant in it. He purchased the grocery business expecting that its profits would help him support the contract payments. Defendant began remodeling the building in September, even though the transaction did not close until October 24, 1980, when the installment contract was signed.

Just before closing, defendant became concerned with his ability to make the contract payments. He asked Fay Priss, the real estate agent involved in the transaction, to arrange a meeting with plaintiff in order to examine the market's books and records. Priss, in turn, called her broker, Wallace, who arranged a meeting with plaintiff to take place that day at the market. All parties understood that the purpose of the meeting was to assess the profitability of the business.

When defendant arrived, he was informed by plaintiff that the books and records were unavailable. Defendant testified that in response he proclaimed an end to the meeting and the entire transaction but that he was then persuaded by Wallace to remain and listen to plaintiff's information about the business.

Plaintiff had just finished tallying the previous week's sales of groceries and gasoline. He handed the tally sheet to defendant, who sat down to do some computations. Plaintiff stood behind him and observed. Defendant first multiplied the week's sales figures by four to arrive at a monthly figure for groceries and gasoline. Defendant testified that he then asked for and received from plaintiff percentage figures, known as gross profit margin, that could be applied to the sales totals for groceries and gasoline to determine gross profit. Plaintiff testified that he was asked for and offered the markup percentage on the cost of the goods sold. ² It is certain, however, that plaintiff had supplied to defendant only the sales figures, not the cost of the goods sold. Defendant testified that plaintiff represented the gross profit margin to be 30 percent for groceries and 25 percent for gasoline, although the actual gross profit margin was 25 percent for groceries and 15 percent for gasoline. Plaintiff testified that he represented those figures as markup percentages; as such, they are fairly accurate.

In any event, defendant applied those percentages to the sales figures to arrive at a monthly gross profit for groceries and gasoline. Defendant then asked for and received the market's monthly operating expenses. Defendant subtracted those expenses from the gross profit to obtain a net profit of $5,171 per month. (During 1980, until the time of this transaction, the market had actually been averaging $1,400 net profit per month.)

Defendant then deducted from his calculated figure the total monthly payments on the purchase of the property and the lease payments for some of the equipment, resulting in a positive cash flow of $2,501 per month. Plaintiff then told defendant that the rental house had two apartments and that the rent totalled $450 per month. Thus, defendant concluded that he would have approximately $3,000 per month to live on.

The tally sheet with defendant's computations was handed back to plaintiff. Defendant testified that plaintiff then said, "Yes, this is okay." Plaintiff testified that he said either "It looks fine to me" or "It looks fine to him." His concerns allayed, defendant decided to complete the transaction.

The installment contract was signed on October 24, 1980, and on the next day defendant began to operate the market. Within two to three months defendant became concerned that the market was not producing the anticipated income. Testimony by a third party indicates that in February defendant raised this issue with plaintiff who reaffirmed the figures given and computations made during the meeting in the grocery store. On March 1, 1981, defendant opened the restaurant. Later in March, defendant asked his accountant to analyze the market's operations, and his accountant expressed reservations. Defendant then sought legal advice and was advised to withhold further contract payments. During April and May, defendant and plaintiff attempted to meet to resolve their problems. Finally, on May 28, 1981, a meeting was arranged between them and their attorneys to look for a solution. They failed to reach an accord. On July 1 plaintiff filed his action for specific performance and on July 2, defendant gave notice of rescission.

Plaintiff's five assignments of error raise the following issues: (1) did defendant prove by clear and convincing evidence that plaintiff misrepresented the market's profitability, either innocently or intentionally; (2) did defendant justifiably rely on plaintiff's representations in making his decision to purchase the property; (3) if there was a misrepresentation, did defendant, after discovery, promptly rescind the contract; (4) if the misrepresentation established was innocent, does the merger clause in the contract preclude relief; (5) should the contract have been partially rescinded; (6) if rescission is allowed, are defendant's losses on equipment and costs for labor and material recoverable; (7) for purposes of setoff, should the trial court have reopened the case to allow plaintiff the opportunity to present evidence on the market's rental value and on the diminution in the value of its inventory; and (8) as part of an equitable judgment, may a trial court impose an equitable lien on the interest of a contract vendee.

Plaintiff contends that he made no false representations during the meeting in the office of the grocery store. However, he testified that, when he was handed defendant's worksheet, he affirmed, or at least did not dispute, its erroneous conclusion that the market netted approximately $5,000 per month, even though he knew that the market did not generate a net profit close to that amount. It is not necessary to discern plaintiff's precise words. If he said "It looks fine to me," he affirmatively misrepresented the market's net monthly profit, and if he said, "It looks fine to him," he implicitly misrepresented the profit, because plaintiff had, at that time, a duty to clarify defendant's misapprehension. See, e.g., Heise et ux v. Pilot Rock Lbr. Co., 222 Or. 78, 89-92, 352 P.2d 1072 (1960); Caldwell v. Pop's Homes, Inc., 54 Or.App. 104, 113, 634 P.2d 471 (1981); Williams v. Collins, 42 Or.App. 481, 490, 600 P.2d 1235 (1979); Paul v. Kelley, 42 Or.App. 61, 65, 599 P.2d 1236 (1979); Prosser and Keeton, The Law of Torts, § 106 (5th ed 1984). We conclude that plaintiff intentionally misrepresented the market's profitability.

We are presented, therefore, with plaintiff's contention that defendant was not justified in relying on plaintiff's misrepresentation. That contention is based on the uncontroverted testimony of Priss, which indicates that plaintiff warned defendant "that a tape of any one particular week would not be indicative of what [the market] would do the rest of the year" and that "he couldn't guarantee what was going to happen when anybody else ran it."

Plaintiff's contention is flawed for two reasons. First, defendant's claim relates to plaintiff's misrepresentation of the immediate past profitability of the market. As to that misrepresentation, plaintiff's disclaimers about the future performance of the business are immaterial. Having been led falsely to believe that the market would net approximately $5,000 per month, defendant was not put on notice as to any different state of affairs by those disclaimers as to future performance. Second, even if we assume that plaintiff's warnings should have alerted defendant against drawing any conclusions about the market's past profitability, plaintiff cannot depend on those warnings to defeat defendant's claim for rescission.

"A purchaser who has, in fact, been induced to enter a contract by an intentional misrepresentation may rescind the contract even though his reliance may have been negligent." Bodenhamer v. Patterson, 278 Or. 367, 374, 563 P.2d 1212 (1977).

See also Hampton v. Sabin, 49 Or.App. 1041, 1049-50, 621 P.2d 1202 (1980). Thus defendant has established his claim of intentional misrepresentation. We turn, therefore, to the question of whether defendant waived his right to assert his claim by failing to rescind the contract promptly.

What constitutes prompt rescission depends on when the rescinding party became reasonably certain of the misrepresentation and whether it thereafter continued to treat the contract as viable for any considerable length of time. See, e.g., McDonald v. Shore, 285 Or. 151, 157, 590 P.2d 218 (1979); Bodenhamer v. Patterson, supra, 278...