Gerke v. Burton Enterprises, Inc.

• Decision Date: 13 August 1986
• Citation: 723 P.2d 1061,80 Or.App. 714
• Parties: John F. GERKE and Ann R. Gerke, Respondents, v. BURTON ENTERPRISES, INC., Robert Burton and Dawn Burton, Appellants, and Administration Service Corp., Intervenor-Appellant. 8860; CA A32908.
• Court: Oregon Court of Appeals

Page 1061

723 P.2d 1061

80 Or.App. 714

John F. GERKE and Ann R. Gerke, Respondents, v. BURTON ENTERPRISES, INC., Robert Burton and Dawn Burton, Appellants and Administration Service Corp., Intervenor-Appellant.

8860; CA A32908.

Court of Appeals of Oregon.

Argued and Submitted Nov. 15, 1985.

Decided Aug. 13, 1986.

Clayton C. Patrick, Salem, argued the cause for appellants. With him on briefs were William D. Brandt and Ferder, Ogdahl & Brandt, Salem.

William P. Buck, Portland, argued the cause for intervenor-appellant. With him on brief was MacMillan & Scholz, P.C., Portland.

Roy Kilpatrick, Mt. Vernon and Marvin S. Nepom, Portland, argued the cause for respondents. On briefs was Marvin S. Nepom, Portland.

Before RICHARDSON, P.J., and WARDEN and NEWMAN, JJ.

NEWMAN, Judge.

Plaintiffs brought this action for fraud in their purchase of a motel from defendants. Defendants moved for a directed verdict at the conclusion of plaintiffs' case and after all of the evidence had been presented. The court denied the motions. The jury returned a verdict for plaintiffs for $360,000 general damages and $100,000 punitive damages. On defendants' motion, the court granted a judgment n.o.v. as to punitive damages. The court also awarded plaintiffs $75,000 attorney fees and granted them an equitable setoff against the contract balance as of August 14, 1981, the date of the contract, in the amount of the verdict plus the attorney fees. The court denied the motion of Administration Service Corp. (ASC) to intervene. It was made before the court entered judgment but after the jury verdict and after the court had granted the setoff. The court also denied defendants' motion for a judgment n.o.v. based on juror misconduct. Both defendants and ASC appeal. We remand plaintiffs' judgment for modification, otherwise affirm it and affirm on ASC's appeal.

In 1981, defendant Robert Burton (Burton) listed the Sunset Inn Motel in John Day with a realtor. The motel included a restaurant and lounge. In May, the realtor asked Burton for information for prospective buyers, and he gave the realtor gross sales figures from its 1980 operating statements. The realtor also asked Burton for income information, and he responded that he "worked toward" net spendable income of 40% of gross in the motel and 10% in the restaurant and lounge. On the basis of figures provided by Burton, the realtor calculated the net income for the complex at $167,370. The 1980 operating statements showed that the "net income" was actually $83,441.

In July, plaintiff John Gerke (Gerke) responded to an advertisement that the realtor had placed in the Wall Street Journal. The realtor then sent him a letter and enclosed an "information sheet" which stated that the net income of the complex was "$170,000 (approximately)." After inspecting the property, Gerke met with Burton. The parties' accounts of this meeting differ significantly. Gerke testified that he performed calculations at the meeting that used the $170,000 income figure and that both Burton and the realtor knew that he was using that figure. ¹ Burton and the realtor testified that, although they knew that Gerke was making calculations, they did not know of his reliance on the $170,000 figure. Gerke agreed to purchase the complex for $1,100,000, with $300,000 down. Thereafter, the parties signed the earnest money agreement, which was contingent on Gerke's receipt of a 1981 operating statement.

Burton then asked his accountant for the 1981 operating statements. The accountant indicated that he could not put them together quickly, but that he could provide a less comprehensive statement. The accountant prepared statements which contained gross, but not net, income figures. He attached a disclaimer to the statements:

"As such special purpose financial statements were prepared primarily from cash basis financial records of the company for the period without audit or verification, we do not express an opinion or any other form of assurance on them.

"Further, such statements are not intended to reflect the company's financial position or results of operations for the period since substantially all disclosures as well as the balance sheet, statements of income and retained earnings, and changes in financial position required by generally accepted accounting principles have been omitted."

The realtor delivered the statements to Gerke, who testified that, although he was dissatisfied with them, he used the "gross profit" ² figures they contained to confirm that the motel was making at least $170,000 in net income. The accountant's statements contained errors and overstated the "gross profit." The sale closed on August 14, 1981, and plaintiffs went into possession of the complex.

On May 7, 1982, defendants assigned their sellers' interest in the contract to ASC to secure their note to it for $220,000. The assignment was recorded. After the sale closed, Gerke concluded that the figures he had been given were wrong, and plaintiffs filed the action on March 1, 1983.

In their first two assignments of error, defendants contend that the court erred in denying their motions for directed verdict. A motion for directed verdict is a request "for a ruling on the sufficiency of the opposing party's evidence; it is not a request to weigh the evidence when there is sufficient evidence to go to the jury." Godell v. Johnson, 244 Or. 587, 591, 418 P.2d 505 (1966). (Emphasis in original.) In determining whether the trial court erred by denying defendants' motions, we interpret the evidence in the light most favorable to plaintiffs, giving them the benefit of every reasonable inference supported by the record. Schlosser v. Clackamas Water District, 60 Or.App. 617, 619, 655 P.2d 194 (1982).

To establish fraud, a plaintiff must plead and prove: (1) a representation; (2) its falsity; (3) its materiality; (4) the defendant's knowledge of its falsity or his recklessness in that respect; (5) the defendant's intent that plaintiff should act on it in the manner reasonably contemplated; (6) the plaintiff's ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; and (9) his damage. Musgrave et ux v. Lucas et ux, 193 Or. 401, 410, 238 P.2d 780 (1951); Banks v. Martin, 78 Or.App. 550, 554, 717 P.2d 1192 (1986). A person alleging fraud has the burden of proving the elements by clear and convincing evidence. Miller et ux v. Protrka et ux, 193 Or. 585, 592, 238 P.2d 753 (1951); Coy v. Starling, 53 Or.App. 76, 80, 630 P.2d 1323, rev. den. 291 Or. 662, 639 P.2d 1280 (1981).

Defendants first contend that the representation that the net income of the complex was $170,000 was not false. They argue that the term "net income" is vague and that, under some acceptable methods of calculation, the net income was $170,000 for 1980. Their argument is unpersuasive. Defendants' figures are substantially different from the net income figures in the 1980 operating statements, which Burton possessed throughout the transaction but did not deliver or show to Gerke before the closing. Moreover, the jury could have found that, on the basis of his meeting with Gerke, Burton knew that Gerke interpreted the term "net income" as it was used in those statements. Under the circumstances, there was sufficient evidence to go to the jury that he misrepresented the net income of the complex. See Heverly v. Kirkendall, 257 Or. 232, 234, 478 P.2d 381 (1970).

Next, defendants argue that Burton had no knowledge that the representations were false. The jury could have inferred from the evidence that he was aware of the "net income" figures in the 1980 operating statements when he gave the realtor the gross sales figures from those statements. Moreover, the realtor should have been aware of the very rough nature of the $170,000 figure that he calculated. Accordingly, the jury could have found that both Burton and his agent, the realtor, were at least reckless in initially representing to Gerke that the net income was "$170,000 (approximately)" and in acquiescing in Gerke's use of that figure at their meeting.

Defendants also argue that Gerke had no right to rely on Burton's representations concerning net income. In Coy v. Starling, supra, we held that the purchaser of a motel had no right to rely on the seller's representation of gross income. We stated:

"In order to secure relief on the ground of fraud, the person claiming reliance must have a right to rely upon the representation. Generally speaking, there is a duty on the part of a purchaser to use some measure of protection and precaution to safeguard his interests." 53 Or.App. at 80, 630 P.2d 1323.

We relied heavily on Miller et ux v. Protrka et ux, supra, in which the court said:

"A purchaser must use reasonable care for his own protection and cannot rely blindly on the seller's statements but must make use of his means of knowledge and, failing to do so, cannot claim that he was misled." 193 Or. at 598, 238 P.2d 753.

The facts here are substantially different from the facts in Coy and Miller. The purchasers in those cases did nothing to confirm the representations that the sellers had made, and they declined to inspect the books when the sellers offered them.

Gerke requested the 1981 operating statements which Burton promised to deliver but failed to provide. Moreover, Gerke testified that, although the statements that he did receive from Burton's accountant instead of the 1981 operating statements were incomplete, he used them to confirm the $170,000 net income figure. The jury could have found that Gerke tried to confirm the representation of net income and for that purpose had a right to use the statements which he had received from the accountant. Under the circumstances, there was sufficient evidence to go to the jury on the question of Gerke's right to rely on the representation. Pape v. Knoll, 69 Or.App. 372, 380, 687 P.2d 1087, rev. den. 298 Or. 150, 690 P.2d 506 (1984); ...