King v. Oxford

• Decision Date: 25 January 1984
• Docket Number: No. 0211,0211
• Citation: 282 S.C. 307,318 S.E.2d 125
• Court: South Carolina Court of Appeals
• Parties: James Donald KING, Respondent, v. Mary D. OXFORD, Appellant. . Heard

Page 125

318 S.E.2d 125

282 S.C. 307

James Donald KING, Respondent, v. Mary D. OXFORD, Appellant.

No. 0211.

Court of Appeals of South Carolina.

Heard Jan. 25, 1984.

Decided June 25, 1984.

A. Camden Lewis of Austin & Lewis, Columbia, for appellant.

William N. Epps, Jr., and Steven M. Krause, Anderson, for respondent.

BELL, Judge:

In this action James Donald King seeks specific performance of a contract for the sale of a business corporation wholly owned by Mary D. Oxford. The circuit court dismissed Oxford's counterclaim for fraud on a motion for summary judgment. After trial on the remaining issues, the court decreed specific performance, but retained jurisdiction to determine the value of the corporation in the event the parties waived their contractual right to arbitration. ¹ We affirm the dismissal of Oxford's counterclaim, but vacate the decree of specific performance and remand for further proceedings.

The main issue in the case is what price King should pay Oxford for her 100% ownership interest in Oxford Oil Co., Inc. From the spring to the early fall of 1979, the parties negotiated a stock sale of Oxford Oil to King. Although they did not agree on a fixed price to be paid for the business, they did agree on a formula to determine the price. King was to pay the difference between the fair market value of the corporation's assets and its liabilities on the date of sale. We shall refer to this differential as the "net asset value" of the corporation.

Oxford transferred possession of the business to King on October 31, 1979. However, the parties did not execute a written contract until November 29, 1979. After King took possession of the business, the parties could not agree on its net asset value. King contends that on October 31, 1979, corporate liabilities exceeded assets. On this basis, he claims he owes Oxford nothing for the corporate stock. Oxford, on the other hand, refuses to transfer the stock to King unless she receives substantial compensation under the contract. As a result, King brought suit for specific performance of the contract, seeking to compel transfer of the stock. Oxford counterclaimed for rescission of the sale on the grounds of fraud and mistake.

I.

Oxford asserts that if the corporation has a negative net asset value, King made fraudulent misrepresentations to her during negotiations for the sale. She claims that both King and the parties' mutual attorney assured her she would receive between $75,000 and $100,000 from the sale and says she would not have signed the contract without these assurances. Since King now maintains the corporation is worth nothing, Oxford argues the contract should be rescinded for fraud.

Fraud is not presumed; it must be established by clear, cogent, and convincing evidence. Griggs v. Griggs, 199 S.C. 295, 19 S.E.2d 477 (1942); Jones v. Cooper, 234 S.C. 477, 109 S.E.2d 5 (1959). In order to prove fraud, the following elements must be shown: (1) a representation; (2) its falsity; (3) its materiality; (4) either knowledge of its falsity or a reckless disregard of its truth or falsity; (5) intent that the representation be acted upon; (6) the hearer's ignorance of its falsity; (7) the hearer's reliance on its truth; (8) the hearer's right to rely thereon; and (9) the hearer's consequent and proximate injury. Failure to prove any one of these elements is fatal. O'Shields v. Southern Fountain Mobile Homes, Inc., 262 S.C. 276, 204 S.E.2d 50 (1974).

The evidence Oxford relied on at summary judgment was insufficient, as a matter of law, to establish several of the necessary elements of fraud. However, we need only address her failure to show she had a right to rely on the alleged misrepresentations. The absence of this element alone was enough to defeat her claim at summary judgment.

On the evidence before it, the circuit court correctly found that no confidential or fiduciary relationship existed between Oxford and King when they entered the contract. The sale of the corporation was an arm's length transaction. Oxford is a mature woman with a college education who was able to run the business from 1973 to 1979. She negotiated the contract, retained a lawyer to draft it, and had several days to study it before she signed it. The contract contained no representations as to the minimum amount Oxford would realize from the sale. Indeed, the price term in the contract shows that both parties were acutely aware the net asset value of the corporation was uncertain.

If estimates of value were made during the negotiations, they fall far short of fraud in the inducement. King or his agents relied on a balance sheet supplied by Oxford to estimate the value of the business. Denny Cole, a certified public accountant for Oxford Oil, testified that since his employment with the corporation in 1975, Oxford Oil had never filed audited financial statements. The unaudited information on the corporation's financial statements was supplied each month by Oxford or her bookkeeper. If that information was inadequate or inaccurate, Oxford can hardly blame King for its deficiencies. Of all those privy to the transaction, Oxford had the best access to the facts needed to make an accurate valuation of the business. If she was deceived as to its value, the problem lies in her own lack of due diligence, not in any estimates King might have made.

An argument similar to Oxford's was made in Williams v. Bruce, 110 S.C. 421, 96 S.E. 905 (1918). In that case a seller conveyed a stand of timber for $500, based on the buyer's alleged representation that $500 was its fair market value. When a third party sued the seller for the timber, allegedly worth $3,250, the seller sought damages from the buyer for fraud. The court held the seller's lack of diligence in ascertaining the value of his own timber precluded recovery for fraud. This is but one example of the often stated principle that "one cannot rely upon misstatement of facts, if the truth is easily within his reach." Flowers v. Price, 190 S.C. 392, 396, 3 S.E.2d 38, 39 (1939); O'Shields v. Southern Fountain Mobile Homes, Inc., supra; accord, Mobley v. Quattlebaum, 101 S.C. 221, 85 S.E. 585 (1915); J.B. Colt Co. v. Britt, 129 S.C. 226, 123 S.E. 845 (1924).

It is the policy of the courts not only to discourage fraud, but also to discourage negligence and inattention to one's own interests. Torres v. State Farm Fire & Casualty Co., 438 So.2d 757 (Ala.1983). Courts do not sit for the purpose of relieving parties who refuse to exercise reasonable diligence or discretion to protect their own interests. Mobley v. Quattlebaum, supra. A party must avail himself of the knowledge or means of knowledge open to him. Id. The court will not protect the person who, with full opportunity to do so, will not protect himself. J.B. Colt Co. v. Britt, supra.

II.

As an additional ground for rescission, Oxford argues she entered the contract under a mistake as to the value of the corporation.

A contract may be rescinded for mistake, if justice so requires, in the following circumstances: (1) where the mistake is mutual and is in reference to the facts or supposed facts upon which the contract is based; (2) where the mistake is mutual and consists in the omission or insertion of some material element affecting the subject matter or the terms and stipulations of the contract, inconsistent with the true agreement of the parties; (3) where the mistake is unilateral and has been induced by the fraud, deceit, misrepresentation, concealment, or imposition of the party opposed to the rescission, without negligence on the part of the party claiming rescission; or (4) where the mistake is unilateral and is accompanied by very strong and extraordinary circumstances which would make it a great wrong to enforce the agreement, sustained by competent evidence of the clearest kind. Jumper v. Queen Mab Lumber Co., 115 S.C. 452, 106 S.E. 473 (1921).

Since the value of the corporation has not yet been determined, there is no factual basis for assessing Oxford's claim that the contract was entered under a mistake as to value. Assuming, however, that the corporation has a negative net asset value, we find no basis for rescission on a theory of mistake.

For the reasons stated above, Oxford has not persuaded us that she acted under a mistake induced by fraud, misrepresentation, concealment, or imposition on the part of King. In the absence of fraud which would justify shifting the loss to the party who opposes rescission, rescission is appropriate only if both parties can be returned to the status quo prior to the contract. Rice and Santos, Inc. v. Jones, 279 S.C. 201, 305 S.E.2d 74 (1983); Hester v. New Amsterdam Casualty Co., 268 F.Supp. 623 (D.S.C.1967).

In this case, the status quo ante cannot be restored. After the business was transferred to him, King personally assumed certain liabilities of Oxford Oil Co., Inc. In order to continue the business, he obtained and delivered to Shell Oil Company a $100,000 letter of credit. He also obtained a loan of $45,000 dollars for Oxford Oil. Since November of 1979 King has run the business, investing his own time and money in its operation. King has suffered a definite and substantial change of position in reliance on the contract. The circuit court found that rescission of the contract would subject King to liability to Oxford and to third parties because of business arrangements he has made on behalf of Oxford Oil. It is apparent that Oxford cannot now return King to his status prior to the contract. In these circumstances, King would be materially prejudiced by a rescission of the contract. Because Oxford cannot, as a practical matter, restore King to his former position, we hold she is not equitably entitled to a rescission on the ground of mistake.

III.

Finding no basis for rescission of the contract, we now consider Oxford's claim that the circuit court erred in granting specific performance to King. We...