Grefe v. Ross

• Decision Date: 31 July 1975
• Docket Number: No. 2--57299,2--57299
• Citation: 231 N.W.2d 863
• Parties: Rolland E. GREFE, Trustee of the Mary A. Closz Trust, Plaintiff, v. R. L. ROSS, Defendant. R. L. ROSS, Cross-Petitioner-Appellee, v. Herbert O. HAWS and Hynes & Howes Real Estate, Inc., Defendants to Cross-Petition-Appellants.
• Court: Iowa Supreme Court

Page 863

231 N.W.2d 863

Rolland E. GREFE, Trustee of the Mary A. Closz Trust, Plaintiff, v. R. L. ROSS, Defendant.

R. L. ROSS, Cross-Petitioner-Appellee, v. Herbert O. HAWS and Hynes & Howes Real Estate, Inc., Defendants to Cross-Petition-Appellants.

No. 2--57299.

Supreme Court of Iowa.

July 31, 1975.

Joseph A. Grubisich, Shifley, Hora & Grubisich, Davenport, for appellants.

Lund & Chambers, Webster City, for appellee.

Heard before MOORE, C.J., and RAWLINGS, LeGRAND, REYNOLDSON and McCORMICK, JJ.

McCORMICK, Justice.

Cross-petition defendants appeal a judgment awarding cross-petitioner actual and exemplary damages for fraud arising out of a home construction franchise transaction. The action commenced as a suit by plaintiff Rolland E. Grefe, Trustee of the Mary A. Closz Trust, against defendant R. L. Ross, seeking specific performance of a land purchase contract. Ross cross-petitioned against Hynes & Howes Real Estate, Inc. (company) and Herbert O. Haws, seeking actual and exemplary damages on several theories including fraud. Grefe obtained judgment against Ross. That judgment was not appealed. Ross's action against the company and Haws was separately tried to the court at law, jury having been waived. The trial court found for Ross against the company and Haws on the fraud theory, did not pass on Ross's alternative theories, and awarded Ross $58,500 actual damages and $100,000 exemplary damages. The company and Haws appealed. We affirm the trial court.

The appeal presents three questions. Is the trial court's finding of fraud supported by substantial evidence? Did the trial court correctly hold Haws personally liable? And, did the trial court abuse its discretion in overruling the motion for new trial of the company and Haws?

I. The finding of fraud. In order to prove fraud, it was necessary for Ross to establish each of the following elements by a preponderance of clear, satisfactory, and convincing evidence: (1) representation, (2) falsity, (3) materiality, (4) scienter, (5) intent to deceive, (6) reliance, and (7) resulting injury and damage. Hall v. Wright, 261 Iowa 758, 766, 156 N.W.2d 661, 666 (1968).

In evaluating the sufficiency of the evidence, we view it in its light most favorable to sustaining the court's judgment. We need only consider the evidence favorable to the judgment, whether or not it is contradicted. The trial court's findings of fact are binding upon us if supported by substantial evidence. A finding of fact is supported by substantial evidence if the finding may reasonably be inferred from the evidence. Meade v. Roller, 212 N.W.2d 426, 429 (Iowa 1973). The relevant evidence will be discussed here from this viewpoint.

Ross was a tavern owner from Webster City who had owned some real estate for investment purposes. He had no experience in real estate development or home construction. Richard Obe was a Webster City real estate agent. He had once attempted to develop a housing subdivision in the town of Ellsworth, which he described as an unsuccessful venture.

The company was one of a group of related corporations headquartered in Davenport. Haws was its president. The company was attempting to sell home construction franchises, particularly in rural communities in Iowa. It claimed to offer stability, growth, and profit potential resulting from bringing 'self-supporting' and 'complementary activities' together to function as a 'congeneric.' The company described itself as the hub of a wheel with spokes consisting of expert affiliates in housing, banking, financing, insurance, and investments. Its salesmen said the wheel would carry everyone involved with it forward to prosperity.

As a matter of fact the company had not made a profit since at least 1968. It appears that the only way the congeneric wheel was kept moving during the times material here was by sales of franchises and stock sales. It is reasonable to infer that the company's promises far exceeded its ability to keep them.

In December 1971, Obe discussed purchase of a home construction franchise with one Robert Gahn and other representatives of the company. Obe testified Gahn described the 'congeneric wheel' to him in an effort to sell him a home construction franchise. He said Gahn told him the company would provide all services including financing for development of a real estate subdivision in the Webster City area. This included advice regarding development sites, assistance with zoning changes, help in obtaining Federal Housing Authority approval of the homes, conduct of home sales seminars in the area, supplying home pricing data, providing a phone service to communicate with the company, and furnishing other development and planning services.

Based upon these representations, Obe paid the company $6000 for a franchise for the Webster City area. Gahn subsequently made these same representations to Ross who, as a result, in January 1972 purchased one-half of Obe's interest in the Webster City franchise for $3000. Gahn received a 35 percent commission upon sale of the franchise. Haws testified the company netted only $900 from the transaction. He acknowledged the company had sold few, if any, franchises previously.

The franchise gave Obe and Ross the exclusive right to use the trade name 'Hynes and Howes Construction Company' within an area including Webster City for a three-year period, subject to renewal. They were to follow various rules of the company. They were to sell pre-cut homes to be built by the company. The company was to furnish $180 worth of advertising for each house constructed and was to provide a phone service for pricing information, access to a lending institution for financing, and some bookkeeping services. Obe and Ross were to receive 50 percent of the net profit, before taxes, on each house sold. No mention was made in the agreement of the other services promised.

In February 1972, Ross paid $500 for an option in his name alone to purchase about 43 acres of land on the south city limits of Webster City for $83,000. A development planning firm was hired by Ross, with money loaned by the company, to prepare preliminary platting and development plans. In March 1972, Obe and Ross went to Davenport with these plans. Company representatives were enthusiastic and encouraged them to pursue the development. John Howes, secretary of the company, assured them of financing for the project.

Although Howes, Haws and other company witnesses denied at trial that the company promised to finance the development, Charles Staudahar, a former officer of the company, testified, 'The congenerate corporations were to provide funds through security agreements to do the development.' Staudahar also testified that time was of the essence because of rising costs, a good housing market in 1972, and a favorable climate in Webster City for housing development.

In April 1972, Haws viewed the property and 'approved it.' He refused to loan Obe and Ross money for the development as originally promised. He sais the company had no money to loan. After considerable discussion, he entered an agreement with Obe and Ross in behalf of the company, which was reduced to writing. Stock salesmen would attempt to raise $105,000 by sale of common stock of the company in the Webster City area. Obe and Ross were to help with the stock sale. If the stock sale was successful, the net proceeds were to be loaned to Obe and Ross to complete the purchase of the Closz land. With considerable assistance from Ross, the stock sale was successful. Haws testified that after payment of a 15 percent sales commission the company netted about $92,000.

In June 1972, Ross entered a contract with the Closz Trust to purchase the land. $5000 was paid down. The balance of $78,000 was to be paid October 1, 1972.

In the meantime the company did not deliver the services promised. Although a representative of the company assisted Obe and Ross in seeking FHA approval of the development site, most of the work in obtaining a zoning change in Webster City was done by Obe. No Webster City sales seminars were held. One poorly-attended seminar was held in Eagle Grove. Pricing data on homes was not supplied when requested.

After considerable delay on the part of the company, Ross began to suspect the company would not keep its promise to loan the money for the land purchase. Finally, the company refused to lend the money unless Obe and Ross would enter a new franchise agreement. Under the new franchise agreement, Obe and Ross would be the salesmen and builders. They would receive a license to build company homes for one year, subject to renewal for one year at a charge of $1000. They would be required to follow the company's operating rules, attend training schools at their own cost, construct a model home, and use only company building materials. The company promised to provide the training schools and various other materials and services, most of them for stated fees. Upon legal advice, Obe and Ross refused to enter the new franchise agreement. The...