Knudsen v. Jensen

• Decision Date: 07 October 1994
• Docket Number: No. 18299,18299
• Citation: 521 N.W.2d 415
• Parties: Donald P. KNUDSEN and Lisa K. Knudsen, Plaintiffs and Appellants, v. Woodrow H. JENSEN and Dianne Jensen, Defendants and Appellees.
• Court: South Dakota Supreme Court

Page 415

521 N.W.2d 415

Donald P. KNUDSEN and Lisa K. Knudsen, Plaintiffs and Appellants, v. Woodrow H. JENSEN and Dianne Jensen, Defendants and Appellees.

No. 18299.

Supreme Court of South Dakota.

Argued Nov. 29, 1993.

Decided Aug. 31, 1994.

Rehearing Denied Oct. 7, 1994.

Patrick Duffy of Bangs, McCullen, Butler, Foye & Simmons, Rapid City, for plaintiffs and appellants.

John Stanton Dorsey of Whiting, Hagg & Hagg, Rapid City, for defendants and appellees.

AMUNDSON, Justice.

Donald and Lisa Knudsen appeal from a decision of the trial court denying them rescission of a house sale with Woodrow and Diane Jensen. We affirm.

FACTS

Plaintiffs Donald and Lisa Knudsen (Knudsens) purchased a home from the defendants Woodrow and Diane Jensen (Jensens). Unbeknownst to the parties, the home had been constructed on inadequate underground support causing structural defects which were found to be latent at the time of the sale. This defect was caused by the building contractor's gross negligence in preparing the ground supporting a wood foundation. Jensens acquired the home in 1979 from a prior owner and lived there until June of 1988 when it was sold to Knudsens.

In April 1988, Knudsens contacted a realtor and arranged to see the Jensen residence. During the showing, Knudsens took a fifteen minute walk through the home. A few days later, on April 6, 1988, Knudsens made an offer to purchase the home. Jensens accepted. Knudsens were first-time home buyers.

In mid-April, Knudsens were given a listing disclosure information sheet showing that Jensens reported no problems with the house. After signing a purchase agreement Mr. Knudsen became aware the house was built on a wooden foundation. Jensens had not disclosed this to Knudsens; rather, Mr. Knudsen learned of this fact from one of the partners in the law firm where he worked. After learning of this fact, Knudsen stopped by the house once again for a brief tour through the home. On this second tour, Knudsen noticed a crack in the basement floor which Mr. Jensen acknowledged by stating that "you see those in all basements." Knudsen also asked Jensen about the wooden basement. Jensen commented how dry the basement had stayed and that he attributed the home's energy efficiency to the basement. Knudsen asked no other questions about the wooden foundation.

Knudsens testified that shortly after moving into the home they began to notice symptoms of structural defects. They discovered the kitchen floor was not level, things spilled on the floor or countertops would roll in the direction of the downhill slope. They noticed that items which were hung level on the walls looked uneven when compared to the line of the ceiling or the floor. Evidence showed this slope was caused by settling. During their occupancy, Jensens performed the normal repair and maintenance that would be expected of a homeowner. The trial court found the settling which occurred during Jensens' occupancy was so gradual that they did not recognize it. Knudsen testified that the house had a "subtle slope not readily observable." The evidence showed at the time of the sale neither party knew the house had an inadequate foundation.

Approximately one year later, in mid-August, 1989, Knudsen discovered there was a void of eighteen to twenty-four inches between the bottom of the basement floor and the dirt underneath the floor. After viewing this condition, Knudsen immediately contacted various professionals (contractors, engineers, geologists, and soil experts) to investigate the cause of the settling and what would be required to remedy its effects. This settlement has caused the foundation of the home to buckle, resulting in damage to the home's floors, walls and ceiling. Experts opined that major reconstruction would be necessary to correct these defects. Knudsens have received estimates for repairing the home ranging from $7,500 to $31,000.

After receiving the estimates, Knudsens offered to rescind the contract by returning everything of value they received under the contract. Jensens declined. Knudsens initiated this lawsuit against Jensens on December 5, 1990, approximately two and one-half years after Knudsens initially discovered the sloped floor.

Knudsens claimed fraud, deceit, misrepresentation, mutual mistake, and failure of consideration. At trial, Knudsens were requesting the trial court rescind the contract; they dropped a claim for damages. ¹ The trial court found in favor of Jensens on all claims. Knudsens appeal.

ISSUES

1. Should Knudsens be granted equitable rescission for mutual mistake?

2. Should Knudsens be granted equitable rescission for material failure of consideration?

3. Did Knudsens fail to mitigate their damages?

DISCUSSION

An action for rescission may be brought as a legal action pursuant to SDCL ch. 53-11, or as an equitable action pursuant to SDCL ch. 21-12. "If the action is in equity, the rescission is accomplished by court decree." Jones v. Bohn, 311 N.W.2d 211, 213 (S.D.1981). Knudsens brought this action seeking equitable rescission for mutual mistake. Therefore, our first step is to review whether there was a mistake entertained by one or both parties to this contract and, if so, the significance of that mistake.

SDCL 53-4-9 defines mistake of fact as [A] mistake not caused by the neglect of a legal duty on the part of the person making the mistake and consisting in:

(1) An unconscious ignorance or forgetfulness of a fact past or present, material to the contract; or

(2) Belief in the present existence of a thing material to the contract which does not exist, or in the past existence of such a thing which had not existed.

See McDonald v. Miners & Merchants Bank Inc., 310 N.W.2d 591 (S.D.1981). Restatement (Second) of Contracts Sec. 151, p. 383, states: "A mistake is a belief that is not in accord with the facts." With these definitions to guide us, we review the trial court's ruling. A trial court's findings of fact will not be disturbed unless shown to be clearly erroneous. Holmes v. Couturier, 452 N.W.2d 135 (S.D.1990).

The trial court's findings show neither Jensens nor Knudsens were aware of the foundation defect at the time of the sale. Both parties entered the contract under the mistaken assumption that the home was structurally sound. Jensens testified they knew nothing about the inadequate substructure support at the time of the sale. Similarly, the Listing Disclosure Sheet completed by Jensens shows they had never experienced a "problem" with any structural elements of the house. A letter from Jensens to Knudsens states they believed the house was sound and had no defects. Knudsens asked about the fitness of the wooden foundation and were told that Jensens had encountered no problems with the wood foundation and it was possibly the reason the house was so energy efficient. Knudsens entered the contract under the assumption that the house was structurally sound.

Despite the parties' ignorance, it is undisputed that the basement was inadequately supported at the time of sale and the parties were operating under a mutual mistake of fact. Therefore, the trial court's finding that no mutual mistake existed is not supported by the evidence.

This mistake alone does not automatically warrant rescission of the contract. "The equitable relief of rescission, being extraordinary, should never be granted, except where the evidence is clear and convincing." Vermilyea v. BDL Enterprises, Inc., 462 N.W.2d 885, 888 (S.D.1990) (citing Windedahl v. Harris, 37 S.D. 7, 156 N.W. 489 (1916)).

Before rescission can be granted, we must determine whether the mistake had a material effect on the contract. ² Beatty v. Depue, 78 S.D. 395, 103 N.W.2d 187 (1960). "Whether a mistake concerns a thing material to the contract must of necessity depend upon the facts and circumstances in the situation being considered.... It must be so fundamental in character that because of it the minds of the parties did not meet." Beatty, 78 S.D. at 403, 103 N.W.2d at 191 (citing School District of Scottsbluff v. Olson Construction Co., 153 Neb. 451, 45 N.W.2d 164 (1950)). This court has recognized the following test of materiality:

'A mistake as to a matter of fact, to warrant relief in equity, must be material, and the fact must be such that it animated and controlled the conduct of the party. It must go to the essence of the object in view, and not be merely incidental. The court must be satisfied, that but for the mistake the complainant would not have assumed the obligation from which he seeks to be relieved.'

Beatty, 78 S.D. at 403-04, 103 N.W.2d at 191-92 (quoting Grymes v. Sanders, 93 U.S. 55, 23 L.Ed. 798 (1876)) (emphasis added).

At trial, Mr. Knudsen testified that he would not have purchased the house had he known the house was constructed on inadequate support. Jensens acknowledge nobody would purchase the home if they knew of the latent defect. The evidence presented at trial clearly indicates the mistake was material.

The next step in determining whether a party has a right to equitable rescission of a contract for mutual mistake is to ascertain who bears the risk of mistake. Restatement (Second) of Contracts Sec. 152 page 385. In Holmes v. Couturier, this court required that "a party seeking rescission based upon mistake of fact must have exercised reasonable diligence." 452 N.W.2d at 137. The trial court determined Knudsens had failed to make an adequate inquiry and examination of the property. The trial court held " '[a] mistake of fact is a mistake not caused by the neglect of a legal duty on the part of the person making the mistake [it] must not result from the want of such care and diligence as would be exercised by a person of reasonable prudence under the circumstances' " Beatty, 78 S.D. at 402, 103 N.W.2d at 191.

The trial court found this house had a "latent and hidden defect" and Knudsens "should have been more cautious." The trial court's conclusion that...