No. 12601
IN THE SUPREME COURT OF THE STATE OF MONTANA
1974
DONALD G. DUNLAP and THELMA DUNLAP,
Plaintiffs and Counter-Defendants
and Appellants,
CHRIS NELSON and THERESE E. NELSON,
Defendants and Counter-Plaintiffs
and Respondents.
Appeal from: District Court of the First Judicial District,
Honorable Gordon E. Bennett, Judge presiding.
Counsel of Record:
For Appellants :
Gough, Booth, Shanahan and Johnson, Helena, Montana
Cordell Johnson argued, Helena, Montana
For Respondents :
Keller, Reynolds and Drake, Helena, Montana
Paul F. Reynolds argued, Helena, Montana
Submitted: May 20, 1974
Decided :
SL$ ':3.974 M I 1 7974
p
Filed :
Clerk
Mr. Justice Gene B. Daly delivered the Opinion of the Court.
This is an appeal from an action in equity for rescission
of a contract on grounds of failure of consideration and fraudu-
lent inducement heard in the first judicial district by the Hon.
Gordon R. Bennett. From a judgment denying rescission, the
appellants bring this appeal.
Appellants, Donald G. Dunlap and Thelma Dunlap (herein-
after referred to as buyers) purchased from respondents, Chris
Nelson and Therese E. Nelson (hereinafter referred to as sellers)
in April of 1971, a marina facility located at Cave Bay on Canyon
Ferry Lake near Helena, Montana. The facility is situated on
property owned by the State of Montana and managed by the Montana
Fish and Game Commission.
Buyers became aware that sellers were offering the marina
facility for sale through an advertisement in the Los Angeles
Times. Buyers were at that time living in Anaheim, California,
where Dunlap was employed as a barber and his wife managed an
apartment building.
Buyers met with sellers' son, Norman Nelson, in California
to discuss the matter. Buyers later went to Norman Nelson's house
in Pacific Palisades, California, where they met with Norman and
sellers to discuss the sale.
Buyers, in late March 1971, inspected the marina facilities.
Sellers offered the property for $125,000. Buyers responded with
a counteroffer of $75,000, which was accepted and the parties on
or about May 19, 1971, entered into a contract entitled "Escrow
Agreement".
There are three areas of dispute in the facts as they
concern the negotiations and later the action for rescission:
(1) Back taxes on the marina property, (2) liability insurance
on the property, and (3) the future leasehold from the Fish and
G a m e Commission.
There were back t a x e s owing on t h e marina p r o p e r t y a t
t h e t i m e of t h e p u r c h a s e . Buyers c o n t e n d t h a t a t t h e i n i t i a l
meeting between b u y e r s and s e l l e r s t h a t s e l l e r s r e p r e s e n t e d t o
buyers t h a t before t h e s e l l e r s could s e l l t h e property they
would r e t u r n t o Montana and " s t r a i g h t e n o u t t h e t a x e s " . Sellers'
s o n , Norman Nelson, d e n i e d any such r e p r e s e n t a t i o n and t e s t i f i e d
t h a t it was h i s u n d e r s t a n d i n g t h a t t a x r e s p o n s i b i l i t y was t h a t
o f a former marina owner, Louie F a a s , and t h a t s e l l e r s might
p o s s i b l y be r e s p o n s i b l e f o r them i f F a a s d i d n o t pay them. Buyers
d i d n o t check t h e t a x r e c o r d s i n Lewis and C l a r k County t o see
i f t h e t a x e s w e r e p a i d b e f o r e p u r c h a s i n g t h e marina. On Septem-
b e r 2 4 , 1971, f i v e months a f t e r t h e s a l e was made, s e l l e r s b r o u g h t
a q u i e t t i t l e a c t i o n i n Lewis and C l a r k County and judgment was
r e n d e r e d i n s e l l e r s ' b e h a l f which d e t e r m i n e d t h e back t a x e s on
t h e marina p r o p e r t y . These t a x e s w e r e p a i d on December 3 , 1971,
by s e l l e r s .
It i s b u y e r s 1 c o n t e n t i o n t h a t s e l l e r s r e p r e s e n t e d t o them
t h a t t h e p r o p e r t y was c o v e r e d by i n s u r a n c e , i n c l u d i n g l i a b i l i t y
i n s u r a n c e , and it would be p o s s i b l e f o r t h e b u y e r s t o t a k e o v e r
t h e e x i s t i n g i n s u r a n c e u n t i l it was n e c e s s a r y t o renew t h e p o l i c y .
I t was l a t e r d i s c o v e r e d by t h e b u y e r s t h a t t h e r e w a s no l i a b i l i t y
i n s u r a n c e c o v e r a g e on t h e p r o p e r t y .
S e l l e r s , however, t e s t i f y t h a t t h e y have no r e c o l l e c t i o n
o f any s u c h c o n v e r s a t i o n . S e l l e r s ' s o n , Norman, had no r e c o l l e c -
t i o n of any d i s c u s s i o n s i n r e f e r e n c e t o i n s u r a n c e , a l t h o u g h it i s
p o s s i b l e t h a t t h e s u b j e c t w a s mentioned b u t n o t i n d e t a i l . He
t e s t i f i e d t h a t t h e f i r s t t i m e h e r e c a l l e d any c o n v e r s a t i o n i n
r e f e r e n c e t o i n s u r a n c e was i n August, 1970, and t h a t d i s c u s s i o n
t o o k p l a c e between h i m s e l f and h i s f a t h e r o n l y , t h a t he f i r s t
l e a r n e d t h a t t h e r e w a s no l i a b i l i t y i n s u r a n c e i n August, 1971.
P a r a g r a p h 10 of t h e escrow agreement p r o v i d e d t h a t b u y e r s were
t o s e c u r e f o r t h e m s e l v e s a d e q u a t e p u b l i c l i a b i l i t y and p r o p e r t y
damage i n s u r a n c e c o v e r a g e . Paragraph 1 required t h e d e p o s i t
1
o f t h e i n s u r a n c e p o l i c y o r p o l i c i e s r e q u i r e d w i t h t h e escrow
papers. P a r a g r a p h 1 3 of t h e escrow agreement s e t s f o r t h t h a t
f a i l u r e o f t h e b u y e r s t o m a i n t a i n i n s u r a n c e i s a b a s i s f o r de-
fault. Buyers upon l e a n i n g t h a t t h e r e was no l i a b i l i t y i n s u r -
ance sought t o o b t a i n a p o l i c y but claim t h a t they w e r e unable
t o do s o . T h e r e a f t e r b u y e r s had a l e t t e r of r e s c i s s i o n d a t e d
J u l y 9 , 1971, s e n t t o s e l l e r s . J u l y 2 2 , 1971, s e l l e r s o b t a i n e d
a p o l i c y of i n s u r a n c e f o r p e r s o n a l l i a b i l i t y f o r t h e marina
facilities.
A t t h e t i m e o f t h e s a l e , t h e marina p r o p e r t y was under
a t e n - y e a r l e a s e from t h e F i s h and Game Department, which r a n
u n t i l 1980. The s e l l e r s a s s u r e d b u y e r s t h a t t h e y c o u l d g e t a
t e n - y e a r l e a s e w i t h a t e n - y e a r renewable o p t i o n . P a r a g r a p h 30
of t h e escrow agreement p r o v i d e d :
" I t i s a l s o e x p r e s s l y p r o v i d e d and u n d e r s t o o d
by and between t h e p a r t i e s h e r e t o t h a t t h e s a l e
of a l l of t h e p r o p e r t y h e r e i n v o l v e d by S e l l e r s
t o Buyers i s e x p r e s s l y c o n d i t i o n e d on t h e g r a n t -
i n g o f a t e n - y e a r l e a s e o r p e r m i t by t h e S t a t e
of Montana t o Buyers f o r t h e u s e and occupancy
o f s a i d r e a l p r o p e r t y forming t h e s i t e f o r u s e a s
a r e s o r t site. I t i s f u r t h e r agreed t h a t i f such
l e a s e o r permit i s n o t granted, t h a t t h e buyers
may, a t t h e i r o p t i o n , d e c l a r e t h i s agreement n u l l
and v o i d and o f no f o r c e and e f f e c t e x c e p t t h a t
a s t o t h e down payment o r $12,500.00 which h a s
been made by Buyers t o S e l l e r s , a s h e r e i n a b o v e
s e t f o r t h , a n e q u i t a b l e p o r t i o n t h e r e o f w i l l be
r e f u n d e d by S e l l e r s t o Buyers, S e l l e r s b e i n g
p e r m i t t e d t o r e t a i n s o much t h e r e o f a s w i l l
compensate them f a i r l y and a d e q u a t e l y f o r t h e i r
l o s s o f t i m e , p r o f i t s and i n c o n v e n i e n c e i n t h e
premises. It is f u r t h e r agreed t h a t i f t h e p a r t i e s
c a n n o t d e c i d e upon t h e d i v i s i o n of s a i d down
payment, t h e y w i l l submit t h e m a t t e r s t o a r b i -
t r a t i o n , e a c h p a r t y s e l e c t i n g a n a r b i t r a t o r and
t h e s e two s e l e c t i n g a t h i r d . The d e c i s i o n o f
a m a j o r i t y of s a i d a r b i t r a t o r s on s a i d q u e s t i o n
s h a l l be b i n d i n g on t h e p a r t i e s h e r e t o . "
Buyers were n o t g r a n t e d a t e n - y e a r l e a s e , b u t o n l y a f i v e - y e a r
lease by t h e F i s h and Game Commission.
Buyers p r e s e n t t h e f o l l o w i n g f o u r i s s u e s f o r review:
1. Whether buyers are entitled to rescind the contract
for material failure of consideration?
2. Whether buyers are entitled to rescind contract,
based on fraud in the inducement?
3. Whether district court erred in admitting evidence
of insurance obtained after notice of rescission had been given?
4. What expenditures should properly be allowed in order
to make buyers whole?
The buyers contend that because of the representation
by the respondents concerning the matters of back taxes and
liability insurance that they were fraudulently induced into the
escrow agreement.
We defined fraud in Cowan v. Westland Realty Company, 162
Mont. 379, 512 P.2d 714, 716, 30 St.Rep. 707, as follows:
"In Lee v. Stockmen's Nat. Bank, 63 Mont. 262, 284,
207 P. 623, this court set down the elements which
the plaintiff must prove to make out a prima facie
case of fraud: (1) A representation; (2) its
falsity; (3) its materiality; (4) the speaker's
knowledge of its falsity, or ignorance of its truth;
(5) his intent that it should be acted upon by the
person and in the manner reasonably contemplated;
(6) the hearer's ignorance of its falsity; (7) his
reliance upon its truth; (8) his right to rely
thereon; and (9) his consequent and proximate
injury. "
The buyers maintain that had they known the back taxes
had not been "straightened out" they would not have come to
Montana in the first place to inspect the marina facilities. This
Court could get involved in a semantical discussion of the possible
meanings of the phrase "straightened out". We feel, however,
that it will suffice to say that since the back taxes were paid
5 or 6 months before this rescission action was brought, the entire
question is moot. Further a close examination of the record fails
to disclose sufficient credible evidence to meet the standard
established in Cowan. As we stated in Ray v. Divers, 72 Mont. 513,
" * * * G e n e r a l l y t h e r e p r e s e n t a t i o n s must
r e l a t e t o a f a c t , a s d i s t i n g u i s h e d from t h e
e x p r e s s i o n of an o p i n i o n ( c i t i n g c a s e ) ,
though an e x c e p t i o n t o t h a t r u l e i s i l l u s -
t r a t e d i n Como Orchard Co. v . Markham, 54
Mont. 438, 1 7 1 P . 274, and, of c o u r s e , t h e
r e p r e s e n t a t i o n s must be made w i t h r e s p e c t
t o a material m a t t e r ; t h a t i s , one which
a f f e c t s t h e complaining p a r t y i n a substan-
t i a l d e g r e e ( c i t i n g c a s e ) . ~ l of t h e s e
l
e l e m e n t s a r e f u l l y comprehended i n t h e more
general t e r m s : Representation, f a l s i t y , s c i e n t e r ,
d e c e p t i o n , and i n j u r y . ( c i t i n g c a s e ) " (Emphasis
added. )
The e v i d e n c e i n s u p p o r t o f b u y e r s ' a l l e g a t i o n o f f r a u d u -
l e n t inducement a s it p e r t a i n s t o t h e p o l i c y of l i a b i l i t y i n s u r -
a n c e f a i l s t o e s t a b l i s h knowledge on t h e p a r t of t h e s e l l e r a s
s e t f o r t h i n t h e t r i a l c o u r t ' s f i n d i n g o f f a c t No. 4 below:
"During t h e t h r e e day p e r i o d r e f e r r e d t o i n
F i n d i n g # 3 , C h r i s Nelson o r h i s s o n , Norman,
a c t i n g a s h i s agent represented t o p l a i n t i f f s
e i t h e r t h a t C h r i s Nelson had a p o l i c y of pub-
l i c l i a b i l i t y i n s u r a n c e i n f o r c e , which p o l i c y
c o u l d be t r a n s f e r r e d t o p l a i n t i f f s , o r t h a t h e
could secure such a policy. Though t h e r e i s
e v i d e n c e on b o t h s i d e s o f - t h e q u e s t i o n , a p r e -
ponderance of t h e c r e d i b l e e v i d e n c e i n d i c a t e s
t h a t C h r i s Nelson b e l i e v e d he had l i a b i l i t y
i n s u r a n c e on t h e p r o p e r t y a t t h i s t i m e . "
(Emphasis added.)
Knowledge on t h e p a r t o f t h e p e r s o n making t h e r e p r e s e n t a t i o n ,
a t t h e t i m e i t was made, and knowledge t h a t i t was f a l s e , i s
n e c e s s a r y t o s u p p o r t a f i n d i n g of f r a u d . Without i t , t h e b u y e r s
f a i l i n t h e i r proof. L e e v . Stockmen's Nat. Bank, 63 Mont. 262,
207 P . 623.
The a d m i s s i o n i n t o e v i d e n c e t h a t s e l l e r s o b t a i n e d l i a -
b i l i t y i n s u r a n c e on t h e p r e m i s e s i n q u e s t i o n a f t e r t h e l e t t e r o f
r e s c i s s i o n w a s s e n t by t h e b u y e r s h a s been a r g u e d by t h e b u y e r s
a s i m m a t e r i a l e v i d e n c e and e r r o r . T h i s b e i n g an e q u i t y a c t i o n
t r i e d t o t h e c o u r t and t h e s u b j e c t m a t t e r under c o n s i d e r a t i o n by
t h e c o u r t b e i n g f r a u d , t h e c o u r t h a s wide d i s c r e t i o n w i t h r e s p e c t
t o admission of evidence e i t h e r t o prove o r disprove t h e a l l e g a -
t i o n of f r a u d . B e r b e r i a n v . M a r t i n , 214 A.2d 189 ( R . I . 1965).
I n Koch v . Rhodes, 57 Mont. 447, 452, 188 P . 933, we
held :
"Where f r a u d i s a l l e g e d , g r e a t l a t i t u d e of proof
i s a l l o w e d , and e v e r y f a c t o r c i r c u m s t a n c e from
which a l e g a l i n f e r e n c e o f f r a u d may be drawn
i s admissible. (Citing cases. ) "
T h e r e f o r e under t h e s e c i r c u m s t a n c e s t h e t r i a l c o u r t d i d n o t a b u s e
its discretion.
Buyers n e x t c o n t e n d t h a t t h e i r f a i l u r e t o o b t a i n a 1 0 -
y e a r renewable l e a s e from t h e F i s h and Game Commission amounted
t o a f a i l u r e of c o n s i d e r a t i o n f o r t h e escrow agreement. Buyers
f u r t h e r c o n t e n d t h a t s e l l e r s ' f a i l u r e t o demand a r b i t r a t i o n under
p a r a g r a p h 30 of t h e escrow agreement, t h e i r f a i l u r e t o p l e a d
a r b i t r a t i o n a s a d e f e n s e and t h e i r c o u n t e r c l a i m amounted t o a
waiver of t h e a r b i t r a t i o n c l a u s e i n t h e c o n t r a c t , and c i t e a s
authority: E. I . DuPont D e Nemours & Co. v . L y l e s & Lang C o n s t .
Co., 219 F.2d 328; Trubowitch v . Riverbank Canning Co., 30 Cal.2d
335, 182 P.2d 182; F i n l a y s o n v . W a l l e r , 64 I d a . 618, 134 P.2d 1069;
and Anderson v . Twin C i t y Rapid T r a n s i t Co., 250 Minn. 1 6 7 , 84
N.W.2d 593.
The c a s e s from t h e f o r e i g n j u r i s d i c t i o n s c i t e d t o s u p p o r t
waiver a r e n o t f a c t u a l l y i n p o i n t w i t h t h e problem we have b e f o r e
t h e Court. The cases c i t e d d e a l w i t h s u i t s b r o u g h t i n l i e u of
a r b i t r a t i o n and c o n c e r n t h e s u b j e c t m a t t e r which t h e a r b i t r a t i o n
c l a u s e w a s designed t o cover. The c a s e b e f o r e u s , however, n o t
o n l y d e a l s w i t h t h e s u b j e c t m a t t e r of t h e a r b i t r a t i o n c l a u s e , i . e .
f a i l u r e t o o b t a i n a 10-year renewable l e a s e from t h e F i s h and Game
Department, b u t a l s o d e a l s w i t h f r a u d u l e n t inducement i n t h e e n t e r -
i n g of t h e escrow agreement.
S e l l e r s a r g u e t h a t because b u y e r s a r e c l a i m i n g r e s c i s s i o n
on t h e grounds of f r a u d u l e n t inducement, i t would have been non-
r e s p o n s i v e t o demand a r b i t r a t i o n under p a r a g r a p h #30. For i f r e s -
c i s s i o n r e s u l t s b e c a u s e of f r a u d u l e n t inducement, t h e y a r g u e , s o
would any r i g h t t o a r b i t r a t i o n .
N e i t h e r b u y e r s n o r s e l l e r s c i t e any a u t h o r i t y d i r e c t l y
on t h e q u e s t i o n of whether a n a r b i t r a t i o n c l a u s e c o n c e r n i n g
f a i l u r e of c o n s i d e r a t i o n i s waived under t h e s e c i r c u m s t a n c e s
when f r a u d u l e n t i n d u c e n t i s a l s o p l e a d e d t o v o i d t h e c o n t r a c t
t h a t contains the clause.
Corbin on C o n t r a c t s , 81444, p . 449 s t a t e s :
" * * * The f r a u d of one p a r t y , i n d u c i n g t h e
o t h e r ' s a s s e n t t o t h e whole, makes t h e whole
voidable a t t h e l a t t e r ' s option; a f t e r a proper
a v o i d a n c e , t h e r i g h t t o an a r b i t r a t i o n f a l l s
a l o n g w i t h a l l o t h e r r i g h t s c r e a t e d by t h e
o t h e r p r o m i s e s t h a t were made. In cases within
t h i s p a r a g r a p h , t h e remedies f o r enforcement o f
a r b i t r a t i o n agreements a r e n o t a v a i l a b l e , includ-
i n g t h e e n f o r c i n g o r d e r a u t h o r i z e d by an a r b i -
t r a t i o n s t a t u t e . B e f o r e i s s u i n g such a n o r d e r
t h e c o u r t must know t h a t l e g a l d u t y t o a r b i t r a t e
e x i s t s ; t h i s i s a n i s s u e t h a t t h e c o u r t i t s e l f must
decide."
When a p a r t y t o a c o n t r a c t a t t e m p t s r e s c i s s i o n of t h a t c o n t r a c t
b e c a u s e of f r a u d u l e n t inducement and t h a t i s s u e d o e s n o t come
w i t h i n t h e purview of t h e a r b i t r a t i o n c l a u s e , t h e c o u r t must
f i r s t d e t e r m i n e i f t h e c o n t r a c t i s v a l i d b e f o r e it c a n g r a n t r e l i e f
through a r b i t r a t i o n . I n re K i n o s h i t a & Co.. 287 F.2d 951 (2nd C i r .
1 9 6 1 ) ; A t c a s v . C r e d i t C l e a r i n g C o r p o r a t i o n of America. 292 Minn.
334. 197 N.W.2d 448; I n t e r o c e a n S h i p p i n g Co. v . N a t i o n a l S h i p p i n g
and Trad. Corp., 462 F.2d 673 (2nd C i r . 1 9 7 2 ) .
Under t h e s e c i r c u m s t a n c e s , t h e C o u r t having found no
f r a u d u l e n t inducement t o r e s c i n d t h e c o n t r a c t , w e f i n d no a b u s e
o f d i s c r e t i o n by t h e t r i a l c o u r t a c t i n g i n e q u i t y i n o r d e r i n g
t h e t e r m s of t h e c o n t r a c t e n f o r c e d .
The judgment of t h e
----
Justice
W e concur:
*
4- --
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Chief J u s t i c e