Rochholz v. Farrar

• Decision Date: 28 December 1976
• Docket Number: No. 75-1723,75-1723
• Citation: 547 F.2d 63
• Parties: Max ROCHHOLZ et al., Appellants, v. Frank L. FARRAR and Robert R. Kruger, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 63

547 F.2d 63

Max ROCHHOLZ et al., Appellants, v. Frank L. FARRAR and Robert R. Kruger, Appellees.

No. 75-1723.

United States Court of Appeals,

Eighth Circuit.

Submitted April 15, 1976.

Decided Dec. 28, 1976.

Theodore T. Duffield, Des Moines, Iowa, for appellants.

Donald A. Wine, Des Moines, Iowa, for appellees.

Before LAY and WEBSTER, Circuit Judges, and URBOM, District Judge. ^*

WEBSTER, Circuit Judge.

This is an appeal from the judgment of the District Court ¹ denying equitable rescission of a written agreement by appellants to sell the controlling interest in the Exchange State Bank of Adair, Iowa. Jurisdiction is based upon diversity of citizenship, 28 U.S.C. § 1332(a); the law of Iowa controls the outcome of this case.

The Exchange State Bank was for many years owned and operated by the Rochholz family. Due to unrelated circumstances, sale of the bank became necessary in 1971. At that time, appellants Dean Rochholz, Max Rochholz and Ila Fay, brothers and sister, owned 985 of the 1,000 shares in the bank. On March 3, 1971, the Rochholz brothers met with appellee Robert Kruger to negotiate a contract for the sale of the bank. Kruger wrote out the terms of the proposed contract, which was typed by Max Rochholz and signed by all parties present and on behalf of the sister. Kruger paid two thousand dollars at that time and closing was set for March 15.

The agreement of March 3 provided in part:

4. Sellers will guarantee loans in said Bank to be good and collectible. Classified loans until paid and all notes until paid or renewed will be guaranteed with all losses to be deducted from payments due sellers by buyers.

7. During contract agreement any recoveries from Charge Offs will be paid to Sellers on Charge Offs after closing. ²

Appellee Frank Farrar, an attorney and investor in banks, did not learn of the agreement until after the March 3 meeting. Apparently Kruger intended to interest Farrar in purchasing the bank with him, and between March 3 and March 10 they studied the bank and explored financing the purchase. On March 10, Farrar accompanied Kruger to the bank to inform the Rochholz brothers that performance of the contract as written would be impossible. At the March 10 meeting, a new agreement which had been prepared by Farrar was discussed and ultimately signed.

In addition to a modification of the purchase price, the new agreement contained the following provision relating to guaranteed loans and "charge offs":

4. In addition to the warranties contained in Paragraph 3 hereof, the Sellers, individually and collectively, guarantee to the Buyers all of the loan receivable accounts of the Exchange State Bank existing on the date of closing as provided for herein. In the case of classified loans, this guarantee shall apply until the full amount of the loans have been paid regardless of any extensions or renewals thereof. In the case of all the other loans, this guarantee shall apply until the full amount of the loans have been paid or until they have been renewed, whichever occurs first. Any additions or increases in said loans after the date of settlement are not guaranteed by the Sellers. Whenever any of the loans guaranteed herein are required to be charged off the books of Exchange State Bank by either federal or state bank examiners or under the accounting procedures regularly employed by the Exchange State Bank the amount thus written off shall be credited on a pro-rata basis against the principal and interest amounts payable to the Sellers under Paragraph 2 hereof on the date of said charge off and applied to the payments that are first due. Any subsequent amounts collected by the Exchange State Bank on guaranteed loans charged off in the manner aforesaid shall be credited to the Sellers on a pro rata basis to the extent of the amount owing under Paragraph 2 and to the extent of the charge off and not to exceed the balance owing the Sellers. All other charge offs belong to the Buyers. The Sellers shall have the right to inspect the books of the Exchange State Bank as they pertain to said charge offs or add back of loans or collections, as the case may be, but the decision on whether any of the guaranteed loans shall be charged off and the date thereof shall be within the exclusive discretion of the Exchange State Bank.

Appellants signed the March 10 agreement after Farrar and Kruger left the room for some fifteen minutes to give them a chance to study the provisions of the new contract. When a dispute in accounting arose after closing, appellants brought an action in the District Court seeking declaratory relief, damages for breach of contract, and rescission. The underlying claim is based upon fraud in the inducement to execute the March 10 agreement.

At trial, appellants testified that they signed the March 10 agreement only after having been assured by appellees that payments on loans charged off before closing would be treated the same under the new agreement as in the March 3 agreement, which they understood provided that such payments would offset guaranteed loans charged off after closing. The District Court denied appellants' claim for breach of contract and likewise denied rescission, holding that under Iowa law appellants' negligence in failing to study the unambiguous terms of the agreement precluded them from obtaining rescission of the agreement. Appellants challenge both of these rulings. ³

I

The District Court found paragraph 4 of the March 10, 1971 agreement to be unambiguous as a matter of law. We agree. Paragraph 4 limited the sellers' guarantee to the loan receivable accounts of the bank "existing on the date of the closing . . .." It did not apply to any subsequent "additions or increases in said loans . . .." In the event of a lawful charge off against any such guaranteed loans, the same amount became a credit against the unpaid purchase price, thus effectuating the guarantee. Correspondingly, appellants were entitled to credit for all sums collected on "guaranteed loans" to the extent of any prior charge off, not to exceed the balance due the sellers on the purchase price. "All other charge offs belong to the Buyers." It is clear from a reading of paragraph 4 alone and in context with the other provisions of the March 10 agreement that appellants retained no interest in any charge offs of loans not guaranteed by them, nor was the purchase price to be increased by the amount of any collections made on account of such loans. Loans charged off before closing were not guaranteed by appellants, and hence the District Court properly held that they had no interest in payments made on account thereof.

From this finding, the District Court concluded that no action could lie for damages from breach of contract since no breach was established. It therefore did not submit this issue to the jury. With this conclusion we likewise agree. ⁴

II

The more difficult question is whether appellants were entitled to a rescission of the agreement because of the misrepresentations of the buyers, appellees herein. The District Court adopted the findings of its advisory jury ⁵ and expressly found that appellants believed that under the March 10 agreement they would be entitled to receive credit for all sums collected on loans charged off prior to closing against their liability for loans charged off after closing. It also found that at least one appellee had so represented the meaning and effect of the March 10 agreement. This latter finding was disputed by appellees, and at trial Frank Farrar testified to the contrary. There was substantial evidence to support the findings of the District Court, however, and we cannot say that such findings were clearly erroneous. Thus an arguable foundation was laid for reformation of the contract. ⁶ Appellants, however, did not seek reformation; rather, they sought rescission.

The District Court also found that appellants did not act as reasonable and prudent persons in their examination of the March 10 agreement and had they done so they would have had a materially different belief as to its meaning. There is substantial evidence in the record to support the conclusion that appellants simply relied upon the assurances of appellees that in respect to charge offs the provisions differed from the March 3 agreement only to the extent of limiting credits for payments to the balance due from appellants.

There was no evidence that appellants relied upon a factual misstatement of content, such as exists when a party signs a new draft without making a comparison with the old draft because the party who prepared the draft has misrepresented that both drafts are identical, whereas in fact material new language has been added or old language has been deleted. Christensen v. Harris, 190 Iowa 256, 180 N.W. 325 (1920). See Betz v. Swanson, 200 Iowa 824, 827, 205 N.W. 507, 509 (1925). Rather, in this case appellants knew that a change had been made in the agreement and that it affected charge offs; their reliance was upon appellees' representations about the effect of the change. No trick or artifice was employed to prevent their reading the new agreement. See Merriam v. Leeper, 192 Iowa 587, 185 N.W. 134 (1921). The negotiations were actually recessed and appellees left the building in order to give appellants an opportunity to study the revised agreement, discuss its contents and, if they wished, consult with counsel. The District Court concluded from these facts that appellants were negligent in failing to make a reasonable examination of the draft before...