Hefferan v. Freebairn

• Decision Date: 10 February 1950
• Citation: 34 Cal.2d 715,214 P.2d 386
• Court: California Supreme Court
• Parties: HEFFERAN v. FREEBAIRN. FREEBAIRN v. HEFFERAN. L. A. 20739, 20740.

Page 386

214 P.2d 386

34 Cal.2d 715

HEFFERAN v. FREEBAIRN.

FREEBAIRN v. HEFFERAN.

L. A. 20739, 20740.

Supreme Court of California, in Bank.

Feb. 10, 1950.

Rehearing Denied March 6, 1950.

W. I. Gilbert, Jr., and Henry E. Kappler, Los Angeles, for appellant.

Boller, Suttner & Boller, and T. R. Suttner, Arcadia, for respondent.

TRAYNOR, Justice.

On or about December 20, 1946, plaintiff, R. L. Hefferan, entered into a contract to purchase the 'gilray Coffee Shop' from defendant, J. R. Freebairn. He paid $20,000 in cash and $35,000 in the form of a promissory note secured by a chattel mortgage. Plaintiff took Possession of the coffee shop on January 1, 1947; the escrow was closed on January 7, 1947. Plaintiff gave defendant a check for the inventory about January 27, 1947. On January 28, 1947, he served notice of rescission. A certificate of Business Under a Fictitious Name was filed by plaintiff on January 29, 1947, and thereafter he continued to operate the cafe. On February 1, 1947, and March 1, 1947, he made two payments of $1,000 each on the promissory note. Defendant did not accept the offer of rescission. On March 17, 1947, plaintiff filed this action to rescind the contract, to cancel the note and mortgage, and to obtain restitution of his cash payment. Defendant subsequently brought an action to foreclose the chattel mortgage, and the two actions were consolidated. Judgments were entered for plaintiff, and defendant appeals.

As grounds for rescission, plaintiff alleged that defendant stated that the Gilray Coffee Shop would net over $20,000 profit for 1946 and made other misrepresentations. Plaintiff further alleged that all the representations were false and fraudulent and that he relied upon them and was thereby induced to enter into the agreement. The evidence on these matters is contradictory.

Plaintiff testified in full support of the allegations. Defendant denied ever having made the statements in question. Both agreed that they visited defendant's accountant on December 19, 1946, for the purpose of inspecting the records of the coffee shop. They agreed that the inspection was limited to the profit and loss statements for the first ten months of 1946 and gross sales records for November and part of December, 1946. Plaintiff testified that both defendant and his accountant assured him that the profits made by the business were really higher than those shown on the statements, but both defendant and the accountant denied giving any such assurance. Plaintiff further testified that the profit and loss statements showed a profit of about $8,000 instead of $16,000, but that when he asked defendant to explain the discrepancy, defendant told him that there were rebates from suppliers not shown on the statements. Defendant admitted discussion rebates but testified that they were reflected in the books of the coffee shop. Plaintiff testified that the payments made on the note after giving notice of rescission were made with the intention of protecting himself from default on the chattel mortgage.

The trial court resolved all issues of credibility and made all inferences from the testimony in favor of plaintiff. It was found that to induce plaintiff to purchase the cafe defendant made, amount otherS the following misrepresentations: that the business would earn $20,000 for the year 1946 and that defendant had already taken $16,000 out of the business up to and including October, 1946. The court further found that plaintiff relied on the representations and would not have purchased the cafe had he not believed them to be true; that the representations were untrue; that the cafe earned only $5,666.25 during the first eleven months of 1946, $387.19 during December, and that defendant had taken only $10,115 out of the business up to an including October, 1946; that plaintiff discovered the falsity of the representations after taking possession of the business; that in the course of an inspection of defendant's records, plaintiff saw only profit and loss statements for the first ten months of 1946 and gross sales records for November and part of December, 1946; that these records indicated a profit of only $5,666.25; that before any agreement by the parties, defendant had represented that the profits were much larger than those shown on the statements, inasmuch as profits were earned from trade rebates that were not accounted for in the statements. The trial judge further found that the two payments of $1,000 on account of the purchase price after giving notice of rescission were made for the purpose of preventing a default on the note and mortgage pending negotiations concerning plaintiff's notice of rescission and were not intended by him as a waiver of his rights under the notice.

Three issues of law are presented to this court. (1) Was the plaintiff justified in relying on the misrepresentations? (2) Did the plaintiff prove sufficient injury resulting from defendant's fraud to justify rescission? (3) Did the plaintiff waive the right to rescind by the payments on the note or by other actions?

I. Defendant contends that plaintiff is precluded from rescinding the contract by virtue of the knowledge that he acquired or should have acquired in the course of the negotiations with defendant.

The standards by which the buyer's acts must be judged were set forth by this court in Seeger v. Odell, 18 Cal.2d 409, 115 P.2d 977, 980, 136 A.L.R. 1291, 'Negligence on the part of the plaintiff in failing to discover the falsity of a statement is no defense when the misrepresentation was intentional rather than negligent. * * * Nor is a plaintiff held to the standard of precaution or by minimum knowledge of a hypothetical, reasonable man. Exceptionally gullible or ignorant people have been permitted to recover from defendants who took advantage of them in circumstances where persons of normal intelligence would not have been misled. (Authorities cited.) 'No rogue should enjoy his ill-gotten plunder for the simple reason that his victim is by chance a fool.' * * * If the conduct of the plaintiff in the light of his own intelligence and information was manifestly unreasonable, however, he will be denied a recovery.' Seeger v. Odell, 18 Cal.2d 409, 414-415, 115 P.2d 977, 136 A.L.R. 1291. The necessary implication of the findings and judgment below is that plaintiff's reliance was justified. Finding IV states: 'The plaintiff believed and relied upon each and all of the foregoing representations made by defendant and was thereby induced to purchase said Cafe. Plaintiff would not have purchased said Cafe had he not believed that each of said representations was true. At said time plaintiff had never been in the restaurant business, and possessed no special knowledge or information concerning restraurant fixtures and the restaurant business except some experience gained in the army.' In Finding XVII the court states: 'It is true that plaintiff inspected certain records of defendant pertaining to the profit and loss of said business but in this connection the Court finds that plaintiff was shown only profit and loss statements for the first ten months of 1946 and gross sales records for November and part of December, 1946.' Finally, the court found that after plaintiff saw the statements indicating a smaller profit than had been represented, defendant explained the discrepancy by the fact that trade rebates were not shown in the statements.

The defendant relies on Carpenter v. Hamilton, 18 Cal.App.2d 69, 71, 62 P.2d 1397, 1399, where the court said, 'If it fairly appears from the evidence that the buyer undertook to investigate for himself the matters as to which representations had been made, he cannot be allowed to later claim that he acted upon the representations, even though he voluntarily abandoned his investigation before it was completed.' In the Carpenter case, however, the defects in the property conveyed were immediately visible upon the most cursory inspection by one taking possession of the realty. The misrepresentations of earnings in the present case fall into a category for which the Carpenter case makes a specific exception, i. e., 'that a buyer is not required to employ experts to investigate matters of a technical nature as to which the seller has full knowledge and the buyer none, and if for this reason the investigation is incomplete, he may show that he relied upon the representations as to...