Pape v. Knoll

• Decision Date: 23 October 1984
• Docket Number: Nos. 24304,CA,s. 24304
• Citation: 687 P.2d 1087,69 Or.App. 372
• Parties: H. Dean PAPE, Shirley N. PAPE, Gary D. PAPE, and Randall C. PAPE, dba Pape Investment Co., a partnership, Respondents, v. Donald R. KNOLL and Ward Cook, Inc., an Oregon corporation, Appellants. A26715.
• Court: Oregon Court of Appeals

Page 1087

687 P.2d 1087

69 Or.App. 372

H. Dean PAPE, Shirley N. PAPE, Gary D. PAPE, and Randall C.

PAPE, dba Pape Investment Co., a partnership, Respondents, v. Donald R. KNOLL and Ward Cook, Inc., an Oregon corporation,

Appellants.

Nos. 24304, CA A26715.

Court of Appeals of Oregon.

Argued and Submitted Dec. 16, 1983.

Decided Aug. 8, 1984.

Review Denied Oct. 23, 1984.

William M. Holmes, Bend, argued the cause, for appellant Donald R. Knoll. With him on the briefs was Gray, Francher, Holmes & Hurley, Bend.

Max Merrill, Bend, argued the cause and filed the brief, for appellant Ward Cook, Inc.

Dennis H. Elliott, Portland, argued the cause, for respondents. With him on the brief was Elliott & Freedman, Portland.

Before BUTTLER, P.J., and WARREN and ROSSMAN, JJ.

BUTTLER, Presiding Judge.

Plaintiffs brought this action against defendants Knoll and Ward Cook, Inc. (Cook) for fraud or, alternatively, for money had and received; also in the alternative, they sought damages against Knoll for breach of contract. Defendants appeal from a judgment entered on a jury verdict awarding plaintiffs $191,000 in compensatory damages against both defendants jointly, $50,000 in punitive damages against Knoll and $25,000 in punitive damages against Cook, for fraud or money had and received. (See n 4, infra.) Although the jury, in response to the special verdict form submitted to it, awarded plaintiffs damages against Knoll individually for breach of contract, they elected to stand on the verdict as it was incorporated in the judgment. Accordingly, the breach of contract claim is not before us.

On appeal, both defendants contend that the trial court erred in denying their motions to dismiss and for a directed verdict; Cook also assigns error to the order denying its motion for judgment notwithstanding the verdict. All of those motions challenge the sufficiency of the evidence as to each defendant on the fraud and money had and received claims and also challenge whether there was sufficient evidence to submit punitive damages to the jury. Both defendants also assert that the trial court erroneously instructed the jury as to the measure of damages applicable to an action for fraud. We review the facts in the light most favorable to plaintiffs, Blake v. Haggard, 46 Or.App. 95, 100, 610 P.2d 1235, rev. den. 289 Or. 587 (1980), and affirm.

Plaintiffs are members of a family investment partnership. In the spring of 1977, they learned that Knoll, a builder and developer, was offering the Carriage Trade Apartment complex, then under construction, for sale. They began negotiations that culminated in a contract under which plaintiffs agreed to purchase the complex in its partially completed state and defendant Knoll undertook to complete it, all for a fixed price as a completed apartment complex. The written contract, dated July 25, 1977, provided that the purchase price and the cost of completion of the project was a total of $1,632,000, subject to an adjustment of up to $118,000 in the event of increases in the cost of materials; $1,300,000 of the purchase price was to be paid by plaintiffs' assumption of a construction loan made by defendant Cook, a mortgage banking institution, to Knoll. ¹ Plaintiffs signed the assumption agreement on August 16, 1977. ²

Shortly after the contract was signed, plaintiffs and Knoll began experiencing difficulties in completing the project. Plaintiffs complained that Knoll had neither applied for a performance bond nor complied with their requests that he furnish copies of invoices showing expenditures on the project to date, as required by the contract. Plaintiffs' inspector advised them of other difficulties with the construction. Those problems led to a meeting of all parties in mid-October, 1977, at which time Knoll withdrew from the project. Plaintiffs believed that their only option was to complete the project themselves. At that time, Roy Butler, Cook's representative in charge of inspecting construction progress and approving loan disbursements, told plaintiffs that they would have to sign a second document acknowledging that $909,385.42 had been disbursed under the construction loan before Cook would advance any additional funds to finish the apartments. Plaintiffs signed that document, took over the project in October and completed it in October, 1978, ten months after the completion date specified in plaintiffs' contract with Knoll.

In late 1977 and early 1978, plaintiffs became aware that defendant Knoll had used some of the Carriage Trade construction loan proceeds to pay for other projects in which he was involved and for which Cook had advanced various sums as the construction lender. All witnesses agreed that in July and August, 1977, the time period during which plaintiffs signed their contract with Knoll and the agreement by which they assumed the construction loan made by Cook to Knoll, no disclosures were made to plaintiffs of the diversion by Knoll of $191,000 of the Carriage Trade construction loan proceeds to pay off existing obligations on three of his other projects being financed by Cook.

Butler testified that it was his practice to make inspections to ensure that the materials and labor for which payment had been requested had actually been used or were available for use on the Carriage Trade site. He further testified that none of his inspections caused him to have any suspicions that Carriage Trade loan funds were being used to pay for any other project. There was evidence, however, that the project builders' cost estimates were used to determine whether the project was over or under budget and whether the percentage of completion was in line with the percentage of disbursement of funds. The first four draw requests by Knoll, under which Cook disbursed $490,275, included, for example, a request for approximately $14,000 for fireplace materials. The Carriage Trade Apartments contained no fireplaces. The estimated lumber costs for the first 56 units was approximately $52,800, but the first four draw requests approved by Butler authorized lumber payments of over $130,000. Trusses were estimated at $8,000, but the draw request for them were for $23,000, which was disbursed.

As of mid-April, 1977, the first three draw requests drew approximately 73.5 percent of the total loan available to build the first 56 units, yet Butler estimated that in June, 1977, the project was only 50 to 60 percent complete. Knoll testified that he informed Cook that he was using the Carriage Trade loan proceeds to pay for other projects, that Cook had no objection to his doing so and that such things happen all the time. Butler also testified that Cook was handling all of Knoll's loans and that it was sometimes the practice to pay bills for one project out of a loan for another.

Randy Pape testified that during the initial contract negotiations he had inquired about the invoices that had been paid on the project prior to July 25, 1977, and that he was given assurances by Knoll and Cook that the loan proceeds had been spent on the project. Adkins, the Papes' attorney, testified that when the question of Papes' assuming the Cook construction loan came up, he contacted Butler, who told him that the loan funds were used to purchase materials for the Carriage Trade and that Cook had a procedure to ensure that the funds were so applied. Adkins stated that he passed that information on to the members of the partnership. In addition, there is evidence that Knoll also told plaintiffs that the construction loan proceeds had been used in the Carriage Trade project.

Randy Pape testified that he relied on the representations and assurances given by Knoll and Butler when he signed the purchase contract and that knowledge of the diversion of $191,000 of the loan funds from the project would have been a material factor in his decision to purchase the property. Randy and Gary Pape both testified that they would not have agreed to assume the $1.3 million construction loan if they had known that some of the loan proceeds had been diverted to Knoll's other projects.

In the winter of 1978, plaintiffs requested that Cook restore $250,000 to the construction loan, that being the amount that plaintiffs then thought had been diverted by Knoll from the Carriage Trade to his other projects, or to reduce the loan assumed by plaintiffs by that amount. Cook refused both requests and demanded payment in full of the $1.3 million loan before it would release its lien against the property. Rather than lose their favorable permanent financing commitment, plaintiffs closed their permanent loan to pay off Cook in full, under protest. Cook then satisfied its mortgage. This action followed.

We turn first to defendants' contention that the trial court erred in refusing to grant their respective motions by which they contended that there was insufficient evidence to submit the fraud claim to the jury. To establish a case for actionable fraud, a plaintiff must prove:

" '(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 on 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; and (9) his consequent and proximate injury.' * * * " Webb v. Clark, 274 Or. 387, 391, 546 P.2d 1078 (1976).

See also Caldwell v. Pop's Homes, Inc., 54 Or.App. 104, 111, 634 P.2d 471 (1981); Coy v. Starling, 53 Or.App. 76, 80, 630 P.2d 1323, rev. den. 291 Or. 662, 639 P.2d 1280 (1981). Fraud must be proved by clear and convincing evidence. Webb v. Clark, supra, 274 Or. at 391, 546 P.2d 1078.

Cook contends that it made no representations that the loan funds were actually expended on the Carriage Trade project. Although it appears to acknowledge Adkins' testimony that Butler did make the statements attributed to him, it relies...