Melms v. Mitchell

• Decision Date: 02 August 1973
• Citation: 65 A.L.R.3d 376,512 P.2d 1336,266 Or. 208
• Parties: , 65 A.L.R.3d 376, 13 UCC Rep.Serv. 223 Byron F. MELMS and Donald R. Ells, Respondents, Cross-Appellants, v. Raymond L. MITCHELL, Appellant, Cross-Respondent. . *
• Court: Oregon Supreme Court

Page 1336

512 P.2d 1336

266 Or. 208, 65 A.L.R.3d 376, 13 UCC

Rep.Serv. 223

Byron F. MELMS and Donald R. Ells, Respondents, Cross-Appellants, v. Raymond L. MITCHELL, Appellant, Cross-Respondent.

Supreme Court of Oregon, In Banc. ^*

Argued and Submitted April 2, 1973.

Decided Aug. 2, 1973.

Robert C. Robertson, of Van Dyke, DuBay, Robertson & Paulson, P.C., Medford, argued the cause and filed briefs for appellant, cross-respondent.

Thomas C. Howser, of Cottle & Howser, Ashland, argued the cause and filed a brief for respondents, cross-appellants.

McALLISTER, Justice.

This is a suit for rescission of a contract in which defendant agreed to sell and plaintiffs to purchase a cordwood business, including hardwood stumpage growing on defendant's land and certain equipment used in cutting and hauling the wood. Defendant appeals from a decree of rescission and a money judgment for plaintiffs. Plaintiffs cross-appeal, contending that they were entitled to recover certain items of damage not allowed by the trial court.

In 1962 defendant and his wife had purchased a hillside tract of 179 acres in Jackson County covered with laurel, oak and other indigenous hardwood. Shortly thereafter defendant in his spare time began to thin the trees on the property in order to develop it for resale and later began to sell the wood resulting from his thinning program. Defendant retired from the military service in May 1968 and thereafter spent most of his time in cutting and selling cordwood.

In July 1969 defendant sustained an accidental injury which prevented him from continuing to cut wood and he decided to sell his cordwood business. He advertised the business for sale and in mid October 1969 plaintiffs responded to his advertisement. After brief negotiations the parties on October 18, 1969, signed a written agreement wherein the defendant agreed to sell to plaintiffs his wood business, including a dump truck, a jeep, two saws, a trailer, a grader and 20 cords of wood for $2,000. The contract further provided that defendant was to sell plaintiffs hardwood stumpage at $2.50 per cord payable 'in 100 cord increments (in advance) based on estimated production of 1,000 cords per year.' ¹ Plaintiffs paid the $2,000 in full and also paid defendant $100 for a gas tank containing some gasoline and $250 for the first 100 cords of wood to be cut.

The day after the contract was signed the plaintiffs took over the wood business and commenced to cut and sell wood from defendant's property. Plaintiff Ells devoted full time to the business and Melms worked part time. From the beginning they encountered difficulties and were never able to cut and sell enough wood to make a profit. Because of the lack of income Ells quit cutting wood full time late in December 1969, but Melms continued to carry on the business for another month.

In the meantime defendant became dissatisfied with the way plaintiffs were cutting wood and with their failure to account, to his satisfaction, for the wood as they cut it. By letter dated January 18, 1970, defendant suspended plaintiffs' cutting rights and stated that the cutting rights would be terminated as of February 18 unless certain conditions specified in the letter were met. On January 26, 1970, plaintiff Melms called on defendant and notified him that plaintiffs were rescinding the contract. Defendant refused to agree to a rescission.

Plaintiffs then filed this suit, alleging in their complaint that they were induced to enter the contract by certain material misrepresentations made by defendant, and praying for a decree of rescission. The trial court specifically found that defendant made no material misrepresentations, but decreed rescission on the ground that defendant had committed a material breach by his suspension and threatened termination of plaintiffs' cutting rights. Defendant contends that it was improper to grant plaintiffs relief on grounds not pleaded in the complaint. We do not reach this question, however, because we are convinced, after examination of all the evidence, that plaintiffs were entitled to relief on one of the grounds specified in their complaint.

Plaintiffs alleged, and defendant admitted, that prior to the execution of the contract defendant stated to plaintiffs that his property contained 'a large number of cords of dry wood suitable for immediate cutting and sale.' The testimony shows that this representation was made as part of a discussion of the operation of the cordwood business in which defendant told plaintiffs that cordwood was customarily sold in a mixture of one-half dry wood and one-half green wood. This practice was confirmed by other evidence. Plaintiffs were thus led to believe that defendant's property contained enough dry wood to enable them to cut, for immediate sale, wood in a marketable mixture.

As plaintiffs had purchased from defendant 20 cords of dry wood already cut and stacked, they had no immediate need to search for dry wood for cutting. They used this 20 cords, mixed with the green wood which they began to cut, to fill their orders. When that 20 cords was gone, however, they began to have difficulties.

Although the evidence does not precisely define the dry wood which plaintiffs were told was on the property, it appears that the parties were concerned with standing trees or parts of trees which were dead but still sound; the laurel, especially, tended to grow in clumps, and some of these clumps contained an occasional dead trunk that was dry and suitable for firewood. Plaintiffs discovered, however, that in the areas where defendant had asked them to begin cutting, there was not enough suitable dry wood to enable them to cut one-half dry and one-half green at the rate necessary to fill current orders. They attempted to find dry wood in greater quantities in other areas on defendant's land. These efforts were time-consuming, as plaintiffs had to clear access roads into the new areas, and the quantities of dry wood they found were not great enough to justify the time spent in developing access into these areas. When plaintiffs complained to defendant about the lack of dry wood, he assured them that the wood was there if they would just go and get it. Their continuing efforts were, however, unsuccessful and plaintiffs eventually found it necessary to purchase approximately 20 cords of cut dry wood, at $15 a cord, from another source in order to meet their customers' demands.

We are of the opinion that the evidence shows that defendant's representation as to the quantity of dry wood available was both false and material. We are convinced by the above evidence that the available dry wood on the property was insufficient for the current operation of the business, which was offered to the plaintiffs as a going business with orders waiting to be filled. Plaintiffs were told that the orders were to be filled with about fifty per cent dry wood, and that on defendant's property there were large or substantial quantities of dry wood suitable for immediate cutting and sale. Plaintiffs reasonably understood defendant's statement to mean that the quantity of dry wood was sufficient to enable them to fill current orders with a proper proportion of dry wood. Without dry wood in that quantity, plaintiffs would have to purchase dry wood elsewhere, as they did, or curtail immediate sales while they cut and stockpiled green wood to dry out for sale the following year. There was no understanding at the time of the sale that such a delay and long-term investment would be required.

Having determined that there was a material misrepresentation as to the amount of available dry wood, we turn to the question of the applicable law.

Although the trial court held otherwise, we are of the opinion that this transaction is governed by the Sales Article of our Commercial Code (ORS Chapter 72). ORS 72.1020 provides:

'Unless the context otherwise requires, ORS 72.1010 to 72.7250 apply to transactions in goods; * * *'

'Goods' are defined in ORS 72.1050(1):

"Goods' means all things * * * which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities and things in action. 'Goods' also includes * * * growing crops and other identified things attached to realty as described in ORS 72.1070 on goods to be severed from realty.'

ORS 72.1070(2) provides:

'A contract for the sale apart from the land of * * * timber to be cut is a contract for the sale of goods within ORS 72.1010 to 72.7250 whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.' ²

The contract in the present case covered certain equipment and existing inventory of cut wood, as well as wood to be cut. The trial court was of the opinion that the contract was, however, not a sale of goods, but a contract for the sale of a going business. The written contract is headed 'Sale of Wood Business,' but the entire purchase price is allocated by its terms among the various items of tangible property which are within the statutory definitions of goods. The Code makes no exception for sales of goods which are the assets of a going business.

In the only case which we have found in which a similar question was decided under the Uniform Commercial Code, it was held that the Code applies to the tangible assets of a business. In Foster v. Colorado Radio Corporation, 381 F.2d 222 (10th Cir. 1967) the court held that even though the main purpose of the contract in issue was the transfer of a radio station as a going concern, the sale of those assets which were within the Code's definition of 'goods' was governed by the provisions of the Sales Article. This court reached a similar conclusion in Allen v. Baker, 109 Or. 443, 447, 220 P. 574 (1923), where it was held that the...