Strout Realty, Inc. v. Burghoff

• Decision Date: 05 November 1986
• Docket Number: No. CA,CA
• Citation: 19 Ark.App. 176,718 S.W.2d 469
• Parties: STROUT REALTY, INC., and H.F. McFarland and T.P. McFarland, Appellants, v. Ray BURGHOFF and Carolyn Burghoff, Appellees. 85-376.
• Court: Arkansas Court of Appeals

Page 469

718 S.W.2d 469

19 Ark.App. 176

STROUT REALTY, INC., and H.F. McFarland and T.P. McFarland, Appellants, v. Ray BURGHOFF and Carolyn Burghoff, Appellees.

No. CA 85-376.

Court of Appeals of Arkansas Division I.

Nov. 5, 1986.

John Harris, Gardner, Gardner & Hardin by Stephen C. Gardner, Russellville, for appellants.

Young & Finley by Dale W. Finley, Russellville, for appellees.

COOPER, Judge.

This is an appeal from a decision of the Pope County Chancery Court granting the rescission petition of the appellees and requiring the appellants to pay $38,000.00 to the appellees as restitutionary damages. The appellant Strout Realty raises six points on appeal, and the appellants H.F. and T.P. McFarland raise six different points on appeal. We have consolidated several of these points for discussion of their merits. We find no prejudicial error on the part of the chancellor and affirm his decision.

The appellees, Ray and Carolyn Burghoff, sued to rescind a real estate contract and deed, whereby they purchased a resort known as Mack's Pines from the McFarlands. The Burghoffs also sought the return of their down payment from both the McFarlands and Strout Realty, the other appellant in this case. Strout Realty had advertised the property and acted as the agent for the seller in the transaction. The chancellor found that rescission was proper because of fraudulent misrepresentations concerning the availability of water, the income from the operation of the resort, and the amount of acreage involved in the transaction. He ordered the Burghoffs' to reconvey the property back to the McFarlands and entered judgment against all the appellants in the amount of $38,000.00, determining that contribution between the parties should be in proportion to the amount each retained from the down payment.

We first discuss the McFarlands' contention that the Burghoff's complaint failed to plead facts sufficient to constitute fraud. The McFarlands objected to the pleadings below on the ground that, while the Burghoffs alleged misrepresentation as to specific items, they did not specifically plead fraud. The appellees are required to set forth with particularity the facts and circumstances constituting fraud, Jim Halsey Co. v. Bonar, 284 Ark. 461, 683 S.W.2d 898 (1985); however, they are not required to set forth the conclusion of fraud. Tucker v. Durham, 285 Ark. 264, 686 S.W.2d 402 (1985). In other words, the word "fraud" need not be used, it is only necessary that facts set forth in the complaint lead to a conclusion of fraud. The complaint, as amended, alleges that the McFarlands and Strout Realty informed the Burghoffs that the water supply was sufficient to operate the business, that the Burghoffs relied upon these representations in purchasing the resort, and that, in fact, the water supply was insufficient. The appellees also alleged that the McFarlands "fraudently [sic ] misrepresented the income of the business as an inducement" and that Strout Realty falsely represented that the plaintiffs were to purchase more than twenty-eight acres of land. The appellees allege reliance on the claims of the defendants in their complaint. We find these allegations sufficient to state a cause of action for fraud.

Next Strout Realty contends that the chancellor erred in allowing the appellees to proceed against them for damages (1) after the appellees had elected their remedy by attempting to rescind the contract and (2) when Strout Realty was not a party to the rescinded contract. Strout Realty first raised the issue of election of remedies at the close of the trial. This is an affirmative defense which must be raised in an answer. Southern Farmers Association v. Wyatt, 234 Ark. 649, 353 S.W.2d 531 (1962); see also Ark.R.Civ.P. 8(c). By failing to raise this issue then, Strout Realty waived the right to assert this defense at trial. Furthermore, the court did not err in holding Strout liable in a rescission action when it was not a party to the contract to be rescinded. The doctrine of election of remedies "applies only between the parties to a transaction so that one party may seek cancellation and then sue a third party for procuring the transaction through fraud." 12 S. Williston, A Treatise on the Law of Contracts § 1528 (3d ed. 1970); accord, Cady v. Rainwater, 129 Ark. 498, 196 S.W. 125 (1917). In Cady, a rescission action, the Supreme Court found both the broker and vendor liable for the amount of damages necessary to restore the purchaser to her status prior to entering into the transaction. Strout Realty could properly be held liable for restitutionary damages.

Both Strout Realty and the McFarlands argue that there is insufficient evidence to show any fraudulent misrepresentations as to water, income, and acreage which would justify rescission. While we would agree if the decree were based solely on the representations regarding acreage, the chancellor's decree is not erroneous, as there is sufficient evidence of fraudulent misrepresentations regarding water and income to justify the rescission and the award of damages.

While we review chancery cases de novo, we will not reverse the chancellor unless his findings are clearly erroneous or against a preponderance of the evidence. Morgan v. Morgan, 8 Ark.App. 346, 652 S.W.2d 57 (1983); Ark.R.Civ.P. 52(a). Since the question of the preponderance of the evidence turns largely on the credibility of the witnesses, we defer to the superior position of the chancellor to determine the weight and credibility to be given the testimony. Andres v. Andres, 1 Ark.App. 75, 613 S.W.2d 404 (1981). A finding will be held clearly erroneous when, although there is evidence to support it, the reviewing court is left with a definite and firm conviction that an error has been made. RAD-Razorback, Ltd. Partnership v. Coney, 289 Ark. 550, 713 S.W.2d 462 (1986).

When the plaintiff is attempting to overturn a solemn written instrument by proof which alters the written terms of the contract, he must prove the fraudulent misrepresentations by clear and convincing evidence, otherwise the fraud need only be proved by a preponderance of the evidence. Clay v. Brand, 236 Ark. 236, 365 S.W.2d 256 (1963). Here, the allegation of fraud as to the amount of land to be sold directly contradicts the amount of land set forth in the contract and deed. The other allegations contradict that clause in the contract which states that the appellees are relying on their own investigation of the matter. Therefore, the allegations must be proved by clear and convincing evidence. Clear and convincing evidence is that degree of proof which produces in the factfinder a firm conviction as to the allegation sought to be established; it is not necessary that the evidence be undisputed to be clear and convincing, so long as it imparts a clear conviction to the mind of the factfinder. Kelly v. Kelly, 264 Ark. 865, 575 S.W.2d 672 (1979).

In order to establish fraudulent misrepresentations, it must be shown by the party seeking rescission that the person making the representations knew them to be false or else, not knowing, asserted them to be true; that it was the first party's intent to have the other party rely on them to its injury; and that the representations were relied on. Croley v. Baker, 237 Ark. 136, 371 S.W.2d 830 (1963); see also Kennedy v. E.A. Strout Realty Agency, 253 Ark. 1076, 490 S.W.2d 786 (1973).

We will look first at the allegations concerning the sufficiency of the water supply. The testimony regarding this, like almost all the testimony, is conflicting. The Burghoffs testified that Mr. McFarland told them in 1983, when they first looked at the property, that the water was good. Mrs. Burghoff also testified that Terry Harris, the agent for Strout Realty, told her that the water was good; that, if there ever was a water problem, it was fixed now; and that they would always have good water. The Burghoffs testified that they would not have bought the property if they had not been assured the water was sufficient. The evidence also shows that the Burghoffs had difficulty with the water system the entire time they were in possession of the property.

The appellants denied ever telling the appellees that there was a good supply of water on the property. They also contend that any problem with the water supply was the result of the appellees' inexperience with the complicated water system, consisting of four wells interconnected by a series of shutoff valves. There was, however, evidence indicating that the wells were not as productive as they once had been and that measures to conserve water were taken each summer. Mrs. Burghoff testified that Mrs. McFarland had told her after the closing that people were not to take showers or do laundry because there was not enough water. Mrs. Burghoff also stated that the McFarlands knew that the Burghoffs were considering adding a swimming pool, which would increase the demand for water. Considering the conflicting testimony, we cannot say that the chancellor's decision was clearly erroneous.

There is also sufficient evidence to support the finding regarding the misrepresentation of income. It is settled law that false representations by the seller as to present or best income of the property sold will, if relied upon by the purchaser, constitute...