Schuelke v. Wilson

• Decision Date: 21 June 1996
• Docket Number: No. S-93-1123,S-93-1123
• Citation: 250 Neb. 334,549 N.W.2d 176
• Parties: Dennis D. SCHUELKE, Appellant and Cross-Appellee, v. David L. WILSON, Appellee and Cross-Appellant, and Business Brokers of York and Maaco Enterprises, Inc., appellees.
• Court: Nebraska Supreme Court

Page 176

549 N.W.2d 176

250 Neb. 334

Dennis D. SCHUELKE, Appellant and Cross-Appellee, v. David L. WILSON, Appellee and Cross-Appellant, and Business Brokers of York and Maaco Enterprises, Inc., appellees.

No. S-93-1123.

Supreme Court of Nebraska.

June 21, 1996.

Syllabus by the Court

1. Actions: Rescission: Equity: Appeal and Error. An action for rescission is equitable in nature and as such is reviewable by an appellate court de novo on the record.

2. Appeal and Error. In a de novo review, an appellate court reaches a conclusion independent of the trial court; however, where credible evidence is in conflict on a material issue of fact, the appellate court considers and may give weight to the fact that the trial court heard and observed the witnesses and accepted one version of the facts rather than another.

3. Actions: Fraud: Proof. In order to maintain an action for fraudulent misrepresentation, a plaintiff must allege and prove the following elements: (1) that a representation was made; (2) that the representation was false; (3) that when made, the representation was known to be false or made recklessly without knowledge of its truth and as a positive assertion; (4) that it was made with the intention that the plaintiff should rely upon it; (5) that the plaintiff reasonably did so rely; and (6) that he or she suffered damage as a result.

4. Fraud: Proof: Circumstantial Evidence. In a fraud case, direct evidence is not essential, but proof of fraud drawn from circumstantial evidence must not be guesswork or conjecture; such proof must be rational and logical deductions from the facts and circumstances from which they are inferred.

5. Rescission: Fraud: Proof: Evidence. In a rescission case, the party alleging fraud must prove all elements by clear and convincing evidence.

6. Fraud. A person is justified in relying upon a representation made to him as a positive statement of fact, when an investigation would be required to ascertain its falsity.

7. Fraud. Nebraska law imposes a duty of ordinary prudence upon a party claiming fraudulent misrepresentation.

8. Actions: Fraud. While no action will lie where ordinary prudence would have prevented the deception, that rule is generally applied where the means of discovering the truth was in the hands of the party defrauded.

Terry C. Dougherty, of Knudsen, Berkheimer, Richardson & Endacott, and Terry K. Barber, Lincoln, for appellant.

Mark J. Peterson, of Erickson & Sederstrom, P.C., Omaha, for appellee Wilson.

WHITE, C.J., and CAPORALE, LANPHIER, WRIGHT, CONNOLLY and GERRARD, JJ.

WHITE, Chief Justice.

This action was brought by Dennis D. Schuelke, seeking rescission of an agreement with David L. Wilson for the purchase of an auto paint and body repair franchise in Lincoln, Nebraska. Schuelke pleaded theories of fraudulent concealment and fraudulent misrepresentation. Wilson filed a counterclaim, requesting payment of two promissory notes executed by Schuelke. The district court ordered rescission. The court, however, held that no further transfers between Schuelke and Wilson were required to return the parties to the status quo and entered an order accordingly. Schuelke appeals; Wilson cross-appeals.

Schuelke assigns two errors: (1) The trial court erred in determining the value of the franchise from a document that was offered into evidence allegedly only for the purpose of proving that Wilson had misrepresented information to Schuelke, and (2) the trial court, after determining that Schuelke was entitled to rescission, erred in holding that Schuelke's petition should be dismissed without ordering further transfers between the parties.

In his cross-appeal, Wilson contends that the district court erred in granting rescission. Because we find that Schuelke was not entitled to rescission, we reverse, and remand with directions.

In 1980, Wilson purchased an auto paint and body repair franchise in Lincoln called Maaco Auto Painting and Bodyworks (Maaco). He owned the franchise until selling it to Schuelke in 1989. Until December 1988, the actual ownership of the Maaco franchise was listed in the name of Dakin, Inc., a corporation in which Wilson was president, and he and his wife were the stockholders. The only asset held by Dakin was the Maaco business. Wilson also owned Darsco, Inc. At the time of the sale of the franchise, Darsco provided the management services for the Lincoln Maaco franchise and one other Maaco franchise in Omaha, Nebraska, which Wilson owned.

In June 1989, Schuelke met with Lee Adams of Business Brokers Corporation to discuss possible investment options. Wilson, the owner of the Maaco franchise, had previously contracted with Business Brokers to sell the franchise. Adams discussed the possibility of Schuelke purchasing the Maaco franchise. Schuelke painted automobiles as a hobby and intended to manage and operate the Maaco business himself.

After meeting with Adams, Schuelke then met with Wilson to discuss purchasing the franchise. The parties held several meetings prior to the purchase. Various matters were discussed at these meetings, including profitability, the quality of the material used and work performed, the building lease where the business was located, and advertising materials and techniques.

Adams and Wilson represented that Maaco would generate approximately $400,000 per year in gross sales and produce a profit margin of 25 percent. Wilson provided Schuelke with a document containing Maaco's statements of profit for the years 1986 and 1987. The statements of profit were broken down into three areas: sales, cost of sales, and expenses. These statements of profit listed total sales at $420,360.30 for 1986 and $396,147.39 for 1987. They listed earnings before income taxes at $116,688.31 for 1986 and $102,029.95 for 1987.

Each statement of profit contained a footnote that stated, "The above expense figures have been adjusted to reflect an owner operated franchise." Several of the expense figures listed in the statements of profit were adjusted by Wilson. The adjustments were made from expenses listed on Dakin's tax returns for the corresponding years.

Wilson testified at trial that these adjustments were made to reflect expenses that would be incurred in an owner-operated franchise as opposed to an absentee-owner franchise. In his testimony, Wilson explained that he operated the franchise as an absentee-owner, employing managers to run the business. He further explained that some of the expenses would be eliminated or reduced if the business was operated as an owner-operated franchise.

At one of the meetings between Wilson and Schuelke, Wilson explained how he reached the adjusted figures listed under the expenses section of the statements of profit. Wilson testified that he provided Schuelke with the tax returns for the years 1985 through 1988 at this meeting. These tax returns contained the preadjusted figures regarding the expenses listed on the statements of profit. Wilson explained to Schuelke his reasons for making each adjustment and gave him copies of the statements of profit containing handwritten notations next to the expense column indicating the preadjusted amount which was derived from the tax returns.

Wilson further testified that he told Schuelke that these adjustments were approximations based on the history of the business. Wilson also testified that he consulted with the Lincoln Maaco's accountant, Ron Ferdig, when making the adjustments on the statements of profit. Wilson testified that because these expense figures were approximations, he recommended that Schuelke see an accountant or a lawyer to have them verified. Wilson also specifically provided Schuelke with Ferdig's name and telephone number so Schuelke could consult with Ferdig concerning these statements of profit.

In regard to the statements of profit, Schuelke testified that Wilson explained the adjustments item by item and further testified that he understood Wilson's representations of these adjustments. Schuelke also testified that he had ample opportunity to have the adjusted figures analyzed by an accountant, but chose not to do so.

In regard to the tax returns, Schuelke testified that these were provided to him with ample opportunity to review them before signing the final purchase agreement. Schuelke also testified that Wilson never avoided discussing with or explaining to Schuelke the figures that were listed on the statements of profit or the tax returns.

The most significant expense not appearing on the statements of profit was an expense characterized as an "administrative fee." This fee totaled $41,400 in 1986 and $55,200 in 1987. This fee was paid to Darsco, Wilson's other corporation, for administrative services provided by Darsco. A portion of this fee was then paid by Darsco to Wilson as an employee in the form of wages. Wilson testified that he explained to Schuelke that this fee would no longer be paid to Darsco because Darsco would no longer be providing management services.

Wilson also eliminated a large portion of the salary expense. This expense was reduced by $19,415 for 1986 and $19,088 for 1987. Wilson testified that he told Schuelke this expense would be reduced because Schuelke was to manage the operation himself and would no longer need the manager employed by Wilson.

Other expenses that were not listed on the statements of profit were depreciation, bad debt expense, and interest expense. Expenses that were reduced but not eliminated on the statements of profit included insurance expenses, office expenses, professional fees, rent, repairs and maintenance, payroll, and license expenses. Last, some expenses were not adjusted, while others were increased from the actual amount that Wilson incurred.

Ferdig testified that he believed the differences between the statements of profit and the corporate tax returns were reasonable adjustments for operating the business under an owner-operator style...