SCM Corp. v. Thermo Structural Products, Inc.

Citation153 Ga.App. 372,265 S.E.2d 598
Decision Date11 February 1980
Docket NumberNo. 58966,58966
CourtUnited States Court of Appeals (Georgia)

Ronald L. Reid, Orinda D. Evans, Jack H. Senterfitt, Atlanta, for appellants.

Irving K. Kaler, Jerry L. Sims, Glenville Haldi, Atlanta, for appellee.


Appellee, purchaser of a panel processing operation from appellant-corporation, instituted legal proceedings seeking to recover damages from appellants (corporation and an employee of the corporation), allegedly arising out of the sale and appellants' conduct subsequent to the sale. On appeal from a judgment entered on a general verdict in favor of appellee and against the appellants, jointly and severally, we reverse.

1. Count 1 of appellee's amended and recast complaint set forth appellee's claim that appellants had fraudulently induced appellee to enter into the purchase agreement. Essentially, Count 1 embodied appellee's claims that appellants' fraudulent representations inducing the sale and appellants' concealment of defects in the manufacturing process had ultimately caused appellee to lose its entire business investment. In several related enumerations of error, appellants submit that appellee's election to affirm the contract (which contained a merger clause reciting that no understandings, conditions, representations or warranties were made except as incorporated in the contract), necessarily precludes recovery on this count as a matter of law.

A. Appellee produced evidence that appellants had represented the paneling operation to be an established business capable of mass producing finished panels of a marketable quality, when, in fact, the paneling operation was an experimental pilot project which had never been fully perfected (60% to 70% of its output was defective).

Appellee also produced evidence that it was not able to view the manufacturing process in full operation because parts of the system were shut down for maintenance or repairs on each occasion that appellee visited the plant.

Since this evidence raised an issue as to whether appellants had prevented appellee from exercising its own judgment and had concealed and misrepresented a material defect relating to the panel processing operation, the merger clause did not necessarily as a matter of law vitiate appellee's fraud claim. Even though a party electing to affirm a contract is ordinarily bound by a merger clause contained therein (see, e. g., Cristal v. Harmon, 137 Ga.App. 153, 223 S.E.2d 210; Kot v. Richard P. Rita Personnel, etc., Inc., 134 Ga.App. 438, 214 S.E.2d 690), a merger clause is without application where the fraud allegedly perpetrated concerned intrinsic defects in the article forming the subject matter of the contract and was such as to prevent the defrauded party from exercising its own judgment. Southern v. Floyd, 89 Ga.App. 602, 80 S.E.2d 490; Batey v. Stone, 127 Ga.App. 81, 192 S.E.2d 528; Hester v. Wilson, 117 Ga.App. 435(2), 160 S.E.2d 859. Cf. Tinsley v. Gullett Gin Co., 21 Ga.App. 512 (2, 4), 94 S.E. 892. See also Gullett Gin Co. v. Seagraves, 49 Ga.App. 850, 858, 176 S.E. 922, discussing the showing necessary to establish a defect in a machine. As to an agent's individual liability for misrepresentations concerning the principal's property, see Crosby v. Meeks, 108 Ga. 126, 130-131, 33 S.E. 913.

B. Appellee concedes that the pivotal misrepresentation forming the basis for its claim for fraudulent inducement was an alleged representation that the paneling processing operation was an established business with profits, goodwill, and know-how. Appellant-corporation's contention that appellee's election to affirm the contract was fatal as to this portion of the claim is well taken.

Under the plain terms of the agreement which appellee elected to affirm, appellant-corporation agreed to sell, and appellee agreed to buy, certain "assets, business and properties including (specified items) . . . work in process, finished products, customer lists and lists of prospects and advertising plates, literature and materials of Seller's . . . manufacturing business and related businesses and trademarks, together with the goodwill symbolized by said trademarks, and processes and know-how." Insofar as this contract is concerned, appellee does not contend that it did not receive the entire property purchased (which was a panel production operation, together with goodwill symbolized by trademarks and certain property to be used in its operation (see Krys v. Henderson, 85 Ga.App. 323, 325, 69 S.E.2d 635); rather, appellee asserts that what it received was not as represented. Appellee produced no evidence showing that it signed this contract without knowledge of its contents. Since there was no representation in the contract itself relating to the established going-concern nature of the business, and since these alleged fraudulent representations do not concern concealed defects, "the buyer, by the stipulation therein to the effect that no representation, promise, or inducement not included in the contract should be binding upon the parties thereto, waived (its) right to seek damages by reason of such prior oral misrepresentations, on which (it) expressly stipulated that (it) did not rely in signing the instrument." Alpha Kappa Psi Bldg. Corp. v. Kennedy, 90 Ga.App. 587, 591, 83 S.E.2d 580, 583; Condios, Inc. v. Driver, 145 Ga.App. 537, 244 S.E.2d 85 C. Appellee's evidentiary showing as to Count 1 supported a valid claim for fraudulent inducement by reason of a concealment of a defect, even though a portion of the claim concerning certain alleged misrepresentations is not viable. This being so, appellants' motion for directed verdict as to the whole count was properly denied. Cf. Cato v. English, 228 Ga. 120(1), 184 S.E.2d 161.

2. By way of damages for the alleged fraud, appellee claimed it lost its entire business investment ($561,614). We agree that appellee's evidentiary presentation in support of this claim was not sufficient to support the general verdict of $560,000.

A. In support of this claim, appellee presented evidence of operating losses sustained over a two-year period following the sale, and capitalized research and development expenditures, inventory, and fixed asset costs which were ultimately written off when appellee-company failed. (Rather than exercise an option to purchase the physical plant housing the paneling operations, appellee ceased business operations and wrote off its entire business investment.)

Appellee presented no evidence as to any sums expended to correct the allegedly concealed defect. See, e. g., Windsor Forest, Inc. v. Rocker, 115 Ga.App. 317(2), 154 S.E.2d 627, recognizing that evidence of the reasonable cost to correct the fraudulently concealed defects will authorize an award of damages. Appellee introduced no evidence relating to the value of the operation at the time of delivery and what the value would have been if the manufacturing operation was capable of mass producing a marketable product as represented. Compare Windsor Forest, Inc. v. Rocker, supra; Spindel v. Kirsch, 114 Ga.App. 520(1, 3), 151 S.E.2d 787. Appellee produced no evidence of losses sustained in labor, time, or expenses by reason of the alleged fraud. Cf. James v. Elliott, 44 Ga. 237. The evidence which appellee did present (the total loss of its entire investment, including operating losses for a two-year period and fixed assets, inventory, and capitalized research and development write-offs) failed to show that the losses were the actual consequence of the alleged misrepresentation concerning the panel manufacturing process. While appellee was entitled to recover any consequential damages directly and proximately flowing from appellants' alleged fraudulent concealment (Rodrigue v. Mendenhall, 145 Ga.App. 666(2), 244 S.E.2d 598), appellee was not entitled to recover any and all losses sustained in its unsuccessful business venture (i. e., losses which were not the actual consequence of the misrepresentations). Cf. Walters v. Hagan, 53 Ga.App. 547, 186 S.E. 563, holding that a defrauded purchaser was not entitled to recover operating losses sustained in the purchaser's business because such losses could not proximately flow from the seller's misrepresentation that the business had been profitable in the past.

B. Appellee's failure to meet its burden of presenting evidence establishing a fair amount of compensatory damages, coupled with the court's instructions authorizing a verdict as to appellee's fraud claim for appellee's entire business loss, requires reversal of the judgment entered on the general verdict. Bechtel v. Liberty Nat. Bank, 534 F.2d 1335 (9th Cir. 1976). As to the propriety of the court's refusal to direct the verdict or grant the judgment notwithstanding the verdict, see Sisk v. Carney, 121 Ga.App. 560(4), 174 S.E.2d 456.

C. In a related enumeration of error, appellants insist that the court erred in refusing to instruct the jury as to actual damages (the difference in value between the article at the time of delivery and the value of the article as represented). Under the evidence as developed, this charge was simply not authorized by the evidence.

3. At trial, appellee was permitted, over appellants' objection, to introduce a federal tax return showing various losses sustained by appellee. Since we cannot agree that the court erred in allowing this document in evidence, we must reject appellants' argument that a directed verdict was in order had the evidence been properly excluded.

A. In determining whether the trial judge erred in denying appellants' motion for judgment n. o. v., this court must use the record as it existed at the close of the trial, and may not eliminate any evidence having probative value, on the ground that it was improperly received at trial, and then dispose of the case on...

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