Union Bank v. Jones

• Citation: 411 A.2d 1338,138 Vt. 115
• Decision Date: 05 February 1980
• Docket Number: No. 256-78,256-78
• Court: Vermont Supreme Court
• Parties: The UNION BANK v. Allan F. JONES v. Douglas McLEOD, Lauren McLeod and Edward J. Hamilton, Jr. and Peter Glenn Shops, Inc. and Fashion Sports, Inc.

Page 1338

411 A.2d 1338

138 Vt. 115

The UNION BANK v. Allan F. JONES v. Douglas McLEOD, Lauren McLeod and Edward J. Hamilton, Jr. and Peter Glenn Shops, Inc. and Fashion Sports, Inc.

No. 256-78.

Supreme Court of Vermont.

Feb. 5, 1980.

Edward B. French, Jr., Office of David B. Stackpole, Stowe, for plaintiff.

Gary D. McQuesten of Richard E. Davis Associates, Inc., Barre, for Hamilton and Peter Glenn Shops.

Ryan & Ryan, Montpelier, for McLeod.

Before BARNEY, C. J., DALEY, BILLINGS and HILL, JJ., and GIBSON, Superior Judge, specially assigned.

DALEY, Justice.

In May 1977, the Union Bank obtained summary judgment against third-party plaintiff Allan Jones (plaintiff), on a $30,000 note dated December 6, 1974. This is a third-party action to determine whether the several third-party defendants (defendants) impleaded by plaintiff are liable to plaintiff for part of the bank's claim against him. See V.R.C.P. 14(a).

The claims in this action arise out of the operation and untimely demise of what was known to the public as the Peter Glenn Ski Shop of Stowe, Vermont (the Stowe shop). Four principal claims were made below, decided by the trial court, and appealed to this Court. First, plaintiff claims that defendants Douglas and Lauren McLeod were partners with him in the Stowe shop, and that the debt represented by the note was a partnership debt. Second, plaintiff claims that defendant Edward J. Hamilton, Jr. personally, or on behalf of defendant Peter Glenn Shops, Inc. (Peter Glenn), was either a partner or joint venturer in, or promoter of, the Stowe shop, and is therefore liable in part for its obligations. Third, defendants Hamilton and Peter Glenn counterclaim against plaintiff for breach of contract and tortious interference with contractual relations. Finally, defendants McLeod counterclaim against plaintiff for damages caused by plaintiff's alleged misrepresentations relating to the business.

On the first claim, the trial court found that a partnership existed between defendants Douglas and Lauren McLeod, and plaintiff; that the note represented a partnership debt; but that because of plaintiff's fraudulent misrepresentations, the partnership agreement was rescinded and therefore plaintiff was not entitled to indemnification from the McLeods. See 11 V.S.A. § 1331. Second, the court determined that partnership law supplied the appropriate theory of liability under the circumstances, and that neither defendant Hamilton nor defendant Peter Glenn were partners in the Stowe shop. Third, the court found that the counterclaim by Hamilton and Peter Glenn was barred by an accord and satisfaction, and because Hamilton was not a party to any agreement. Finally, with respect to McLeods' counterclaim, the court found that they had failed to carry their burden of proof on the issue of damages. The plaintiff appealed from the orders denying indemnification, and defendants Hamilton and Peter Glenn, and then defendants McLeod, separately cross-appealed from the denial of their respective counterclaims.

Early in 1973, defendants McLeod approached defendant Hamilton, president and chief executive officer of defendant Peter Glenn, and proposed that Peter Glenn grant them a franchise. The McLeods had only $10,000 to invest, which Hamilton did not believe was sufficient. A short time later, however, Hamilton met the plaintiff, who was well financed and who was then constructing business property to rent in Stowe. After several meetings between the McLeods, Hamilton, and Jones, an agreement was reached, which the court found to consist of the following terms:

1. A Vermont corporation would be formed, to be named Fashion Sports, Inc.

2. Plaintiff would lease the basement, main floor, and one upstairs apartment of his Stowe building, either to Fashion Sports, Inc., or to Peter Glenn for sublease to Fashion Sports, Inc., for a five year period at $500 per month.

3. Plaintiff would pledge his credit to obtain a $30,000 loan for the business; plaintiff would invest $10,000 of his own money and defendants McLeod would invest their $10,000.

4. Plaintiff would own 50% of the stock of Fashion Sports, Inc., and defendants McLeod would together own the other 50% of the stock.

5. Peter Glenn would be a franchisor, and would order and supply the Stowe shop's inventory.

The Stowe shop began operation late in December 1973, and operated continuously until early July 1974. No written lease was ever given to the shop, nor was Fashion Sports, Inc. ever formed or the franchise agreement ever executed. Plaintiff did, however, pledge his credit by signing a note for $30,000 on December 6, 1973, and by signing a renewal note on December 6, 1974. Defendant Douglas McLeod signed the 1973 note as co-maker, but did not sign the 1974 note upon which the bank obtained judgment. The proceeds of the loan were paid by the Stowe shop to Peter Glenn for inventory.

Despite repeated requests by defendants McLeod, plaintiff avoided the subject of his promised $10,000 investment with the stock answer that "we're too good friends to talk about money." Defendants McLeod likewise never invested their $10,000. By May 1974, defendant Hamilton became concerned about this deadlock, and he met with plaintiff in Stowe. A new, tentative arrangement was reached, in which Hamilton would try to find $5,000 to invest, Jones would put up $5,000, and the McLeods would invest their $10,000. Hamilton reported this to the McLeods, and they believed that the deadlock had been broken.

This tentative arrangement, however, was never consummated. Late in June, the McLeods suddenly found that their credit was cut off by Peter Glenn, allegedly because plaintiff was no longer backing the business. Douglas McLeod telephoned plaintiff, who replied that he wasn't going to invest another nickel. Shortly thereafter, the McLeods determined that they could not continue without plaintiff's support, and they transferred the remaining inventory back to Peter Glenn, and ceased operation.

To resolve this appeal, we address the following key issues:

1. Whether the court's finding of fraud sufficient to effect a rescission of the partnership is supported by the evidence;

2. Whether the court's finding that neither Hamilton nor Peter Glenn Shops, Inc. are liable to plaintiff is correct;

3. Whether the court erred in dismissing the counterclaim of Hamilton and Peter Glenn; and

4. Whether the cross-appeal of defendants McLeod from the court's denial of their counterclaim for damages is properly before us.

I. Rescission of the Partnership Agreement

The trial court implied a partnership from the carrying on of the business in accordance with certain agreements, despite the lack of corporate status. This finding is not challenged here, and, indeed, appears sound in light of the copious evidence that plaintiff and the McLeods intended to share net profits and losses. See 11 V.S.A. § 1162(4). It is immaterial to finding a partnership that the parties do not call the business a partnership, or realize that they are partners. In re Estate of Foreman, 269 Cal.App.2d 180, 189, 74 Cal.Rptr. 699, 706 (1969); Anderson Hay & Grain Co. v. Dunn, 81 N.M. 339, 341, 467 P.2d 5, 7 (1970).

Furthermore, the law is well settled that a court of equity may, upon application of the defrauded party, rescind a partnership agreement for fraud in the inducement. Oteri v. Scalzo, 145 U.S. 578, 588, 12 S.Ct. 895, 898, 36 L.Ed. 824 (1892); Maruca v. Phillips, 139 Conn. 79, 83, 90 A.2d 159, 161 (1952). Section 1331 of Title 11, while not expressly authorizing rescission of the partnership agreement for fraud, assumes that this remedy is available by providing for the rights of the parties after such rescission has been decreed.

The narrow question here, therefore, is whether there is evidence to support the court's conclusion of fraud. We have scrutinized the transcript and exhibits, and find that it is not supported.

An action for fraud and deceit will lie upon an intentional misrepresentation of existing fact, affecting the essence of the transaction, so long as the misrepresentation was false when made and known to be false by the maker, was not open to the defrauded party's knowledge, and was relied on by the defrauded party to his damage. Fayette v. Ford Motor Credit Co., 129 Vt. 505, 510, 282 A.2d 840, 843 (1971); Anderson v. Knapp, 126 Vt. 129, 133, 225 A.2d 72, 76 (1966). An action for fraud and deceit will also lie for false promises if these promises can be shown to be essential to a scheme to defraud. Conover v. Baker, 134 Vt. 466, 469, 365 A.2d 264, 266-67 (1976). As an extension of this rule, we have stated that an intentional misrepresentation of future action may constitute a misrepresentation of existing fact because insofar as the actor presently intends to act differently in the future, he has misrepresented his present intention. Fayette v. Ford Motor Credit Co., supra, 129 Vt. at 511, 282 A.2d at 844.

The law, however, recognizes a distinction between the strict elements of an action for fraud and deceit, and the constructively fraudulent misrepresentations, made negligently or innocently, which may provide grounds for a rescission of an agreement in equity. General Finance Corp. v. Keystone Credit Corp., 50 F.2d 872, 878 (4th Cir. 1931), cert. denied, 284 U.S. 684, 52 S.Ct. 201, 76 L.Ed. 578 (1932); Hudspeth v. Zorn, 292 S.W.2d 271, 275-76 (Mo.1956); Ultramares Corp. v. Touche, 255 N.Y. 170, 186, 174 N.E. 441, 447, 74 A.L.R. 1139, 1149 (1931) (Cardozo, C. J.). But whenever rescission is sought upon a misrepresentation that is negligent or innocent, mere promises to act in the future cannot constitute the requisite misrepresentation of existing fact that is essential to fraud. Paiva v. Vanech Heights Construction Co., 159 Conn. 512, 515, 271 A.2d 69, 71 (1970); Vandeputte v. Soderholm, 298 Minn. 505, 508-09, 216 N.W.2d 144, 147 (1974). The reason is that in the case of a negligent or...