Jennings v. Lee

• Decision Date: 14 November 1969
• Docket Number: No. 9658,9658
• Citation: 105 Ariz. 167,461 P.2d 161
• Parties: Clairbel L. JENNINGS, a widow, Appellant, v. Bill LEE and Herlinda Lee, husband and wife; Carl O. Mosier, dba Mosier Realty; Elliott Holding Company, an Arizona corporation; Jack Kelman and Alice Kelman, husband and wife; and Abe Kelman and Libble Kelman, husband and wife, Appellees.
• Court: Arizona Supreme Court

Page 161

461 P.2d 161

105 Ariz. 167

Clairbel L. JENNINGS, a widow, Appellant, v. Bill LEE and Herlinda Lee, husband and wife; Carl O. Mosier, dba Mosier Realty; Elliott Holding Company, an Arizona corporation; Jack Kelman and Alice Kelman, husband and wife; and Abe Kelman and Libble Kelman, husband and wife, Appellees.

No. 9658.

Supreme Court of Arizona, In Banc.

Nov. 14, 1969.

Rehearing Denied Dec. 16, 1969.

Carl Tenney, Phoenix, for appellant.

Lester J. Hayt, Phoenix, for appellees Lee.

Rawlins, Ellis, Burrus & Kiewit, by Norman D. Hall, Jr., Phoenix, for appellee Mosier.

Burton & Weeks, by Mark Leibsohn and Phillip Weeks, Phoenix, for appellees Elliott Holding Co. and the Kelmans.

LOCKWOOD, Vice Chief Justice.

Plaintiff, Clairbel Jennings, a widow, brought suit to rescind, on the grounds of fraud, a real estate transaction in which she traded approximately thirty-seven acres located at 24th and Southern Streets in Phoenix, Arizona, for the Glen Canyon Steak House located in Page, Arizona. Defendants were Bill Lee, the lessee of the restaurant, Elliott Holding Company, the owner of the restaurant, Jack Kelman, the president of Elliott Holding Company, and Carl Mosier, a real estate broker who arranged the trade.

In the early part of 1959 Bill Lee purchased from the United States government three vacant lots in Page, Arizona. He constructed the Glen Canyon Steak House on the land and operated it from 1962 to July 1, 1963. At that time Lee entered into an agreement with Jack Kelman whereby he sold the restaurant to Elliott Holding Company for $200,000.00. Elliott paid $80,000.00 in cash and borrowed the remaining $120,000.00 from Associated Mortgage and Investment Company, giving them a first mortgage on the steak house. Concurrent with this transaction Lee and Kelman, as president of Elliott, entered into a separate agreement whereby Elliott leased the restaurant back to Lee for $2,000.00 per month with an option to buy within five years for $250,000.00.

After operating the restuarant for about five months under this arrangement, Lee began to fall behind in his rental payments to Elliott. In an attempt to solve the problem Lee and Kelman modified the original lease so that Lee was obligated to pay $1,500.00 per month during the slow winter months and $2,500.00 during the summer tourist season. Evidently this solution proved ineffective, for by June, 1964, Lee had fallen $6,000.00 in arrears in the rent. At this juncture Lee went to Kelman and, although he was only the lessee and not the owner, told Kelman that he was looking for a buyer for the restaurant. Whereupon, according to Lee's testimony, Kelman agreed to allow him to exercise the option for a lesser sum. Pursuant to this understanding Kelman entered into an agreement with Lee (evidenced by a 'scrap of paper' which Kelman has since misplaced) which provided that Lee could repurchase the restaurant for $70,000.00 plus assumption of the remainder of Elliott's $120,000.00 mortgage to Associated. (Approximately $110,000.00 remained on the mortgage so this modifications reduced the total purchase price from $250,000.00 to $180,000.00.)

Sometime during the early part of 1964 the plaintiff informed defendant Mosier that she was interested in acquiring some income-producing property, since the rents derived from her property at Southern and 24th Streets in Phoenix were insufficient to maintain her. Mosier had been a friend of the family for several years prior to this time, and the relationship between him and Mrs. Jennings was more confidential than that which normally exists between a real estate broker and a client. In August, 1964, Mosier travelled to Page, Arizona, to check on the Glen Canyon Steak House as a possible investment for Mrs. Jennings. After viewing it himself, he recommended it to Mrs. Jennings, and on September 17, 1964, drove her to Page to inspect the property. Mrs. Jennings felt that the restaurant might be a good prospect but had reservations about her ability to operate this type of business. Approximately a week after their trip to Page, Mosier called Mrs. Jennings into his office and showed her a purported monthly breakdown of the business done by the restaurant from January through August of 1964. This document showed an operating profit, before depreciation, of some $83,000.00, a figure which was nearly five times the actual profit during that period. While this operating statement bore Bill Lee's signature, Mosier testified that he did not know who gave it to him. Lee testified that the signature didn't look like his, and that he had never seen the statement prior to the lawsuit. There is no dispute as to the inaccuracy of the statement. As far as the record shows this was the only financial statement of any type ever shown to Mrs. Jennings during the course of the transaction.

After a second trip to Page on October 3, 1964, Mrs. Jennings still expressed some concern that she couldn't handle the business. Both Lee and Mosier assured her that the restaurant had good potential, and that they would help her with the business in any way they could. Mrs. Jennings asked Mosier if he didn't think it would be a good idea to have her lawyer check over the transaction. Mosier replied that it was up to her, but that things were going very smoothly and the inclusion of a lawyer in the negotiations would just be another expense.

On October 6, 1964, Mrs. Jennings signed escrow instructions prepared at Mosier's request by Phoenix Title & Trust Company. This escrow contained two conditions: (1) that Lee exercise his option and obtain title to the restaurant from Elliott Holding Company; (2) that Lee obtain by December 1, 1964, a loan on Mrs. Jennings' Phoenix property in the amount of at least $120,000.00. In the latter part of November, 1964, Kelman and Lee visited the Jennings property in Phoenix. Subsequent to this inspection Kelman further modified the terms by which Lee could repurchase the restaurant. Under this modification Lee could gain title to the restaurant by (1) paying Kelman $35,000.00 in cash (instead of the original $70,000.00) (2) giving him a note for $35,000.00 secured by a second mortgage on the Jennings property, and (3) assuming the remainder of the $120,000.00 first mortgage on the restaurant. In connection with the second condition of the escrow, Lee obtained a loan of $85,000.00 from Gibralter Savings & Loan, which, along with the $35,000.00 loan from Kelman, fulfilled the requirement of $120,000.00 indebtedness on the Jennings property.

Although Lee had not completed these financial arrangements by the deadline of December 1, 1964, Mosier nevertheless phoned Mrs. Jennings on December 4, 1964, and told her that all the terms had been complied with, and she was now the owner of the steak house. Mrs. Jennings hired a couple to manage the business and took possession in the middle of December. After operating the restaurant for about two months she realized that the volume of business did not gibe with the operating statement which Mosier had showed her. Convinced that she had been fraudulently induced to trade her property for the restaurant, she filed suit for rescission, discontinued the business, and 'winterized' the premises.

The case was heard by a court in equity sitting with an advisory jury. Before submitting the case to the jury, the court dismissed the action as to Kelman and Elliott Holding Company. The jury then found in favor of Lee and against Mosier. However, the Court disregarded the jury's finding in regard to Mosier and ordered judgment in his favor.

Mrs. Jennings urges that her assent to this trade agreement was obtained by the fraudulent misrepresentation of Mosier, who was acting as agent for both her and Lee in this transaction, and that the lower court, therefore, erred in refusing to grant rescission of the contract. Lee contravenes this position on two bases: (1) Mrs. Jennings cannot maintain a suit for rescission grounded on fraud, because she saw other figures on the operation of the steak house besides the false income sheet; and (2) Even if she could show that she relied solely on the false income statement, Mosier was acting as her agent, not Lee's, in presenting it to her.

Our resolution of these questions is complicated by the trial judge's unfortunate decision to adopt as his findings of fact those submitted by Kelman and Elliott Holding Company. Since the findings of fact are nearly barren as to the roles of Mosier and Lee in the disputed transaction, we must glean our information from the transcripts before us.

The law in Arizona is well-settled in regard to what elements must be shown to establish fraudulent misrepresentation:

'* * * (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 by the person and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; (9) his consequent and proximate injury.' Carrel v. Lux, 101 Ariz. 430, 434, 420 P.2d 564, 568 (1966).

Lee argues that besides the false operating statement, Exhibit 8, Mrs. Jennings also was shown two copies of an accurate operating statement for the same period of time, Exhibits 14 and 15. Consequently, she had no right to rely on the false operating statement. Mrs. Jennings testified that she had never seen either 14 or 15 prior to the taking of her deposition. Moreover, Mosier is very vague in his testimony as to when Mrs. Jennings allegedly was shown Exhibit 14 and admits that, although he had the accurate income figures, he never discussed these with Mrs. Jennings:

'Q. * * * Is it not true that until just a few moments ago you consistently testified that you did not know when Mrs. Jennings had ever seen Exhibit 14, except that you believed it to be sometime before December 23rd, 1964? Is that...