No. 79-81
IN THE SUPREME COURT OF THE STATE OF MONTANA
1980
SHERWOOD MOSCHELLE and BARBARA MOSCHELLE,
Plaintiffs and Respondents,
vs .
GUY HULSE and HELEN HULSE,
Defendants and Appellants.
Appeal from: District Court of the Fifth Judicial District,
In and for the County of Madison.
Hon. Nat Allen, Judge presiding.
Counsel of Record:
For Appellants:
R. T. Garrison, Virginia City, Montana
Chester Lloyd Jones, Virginia City, Montana
Morrow, Sedivy, Olson and Scully, Bozeman, Montana
For Respondents:
Goetz and Madden, Bozeman, Montana
Submitted: May 30, 1980
Decided: (1 i ~ . ~ 2.7, / 982
Filed: A N27 198l
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Clerk
Mr. Justice Daniel J. Shea delivered the Opinion of the
Court.
The defendant sellers appeal the judgment of the Madison
County District Court which permitted rescission of a con-
tract for purchase of the defendants' bar in Virginia City.
The central issue is whether there is substantial evidence
to support the trial court's determination that the defen-
dants made misrepresentations of fact which constituted
constructive fraud within the meaning of section 28-2-406,
MCA, so as to entitle the plaintiffs to rescission of the
contract. The sellers contend that any misstatements made to
plaintiffs were nothing more than sales talk or puffing and
that they did not attempt to deliberately mislead the plain-
tiffs.
Defendants raise several issues directed at the right
of the plaintiffs to seek rescission. First, they contend
that a reasonable investigation by the plaintiffs would have
led them to the facts relevant to the transaction. Second,
they contend that the misrepresentations were not material
and that the plaintiffs should be confined only to seeking
damages. Third, they contend that by waiting nine months
after the inception of the contract to bring the action for
rescission, the plaintiffs either waived their right or are
barred by laches. The laches argument is raised for the
first time on appeal. Fourth, they contend that the plain-
tiffs were in default on their contract payments at the time
they elected to rescind and that this prevents them from
availing themselves of the rescission remedy. We affirm the
judgment .
Contact with the defendants in relation to selling
their Tavern Bar in Virginia City, was initiated in October
1975. At that time, plaintiff Barbara Wilkins (later to
become Barbara Moschelle) and her then fiance, Kevin McGuinn,
met with defendants Guy Hulse and Helen Hulse, to discuss
the possible purchase of the tavern. The defendants showed
plaintiff Barbara Wilkins their business income records for
the month of July 1975 and a tax form apparently indicating
the defendants' gross income for 1974. Defendants told
plaintiff Wilkins that income from the tavern during the
winter months was slim, but defendants refused her request
to see records of their earnings during the winter months of
that year. Plaintiff Wilkins and her fiance deposited
$2,000 earnest money but did not proceed with the transac-
tion and forfeited most of this sum. Plaintiff Wilkins,
however, remained interested in purchasing the tavern.
She interested her new husband, Brent Moschelle, in purchas-
ing the tavern.
In August 1976, Brent and Barbara Moschelle negotiated
with the defendants to purchase the tavern. The defendants
again refused to permit the plaintiffs to inspect their
business records, but Helen Hulse assured them that earnings
during the winter months would allow them to make payments
and earn living expenses. The defendants also told the
plaintiffs that income from the Labor Day holiday alone
would be sufficient to make one or two monthly payments.
These statements, it later turned out, were not entirely
accurate; indeed, they were more than a little misleading.
Defendants also made several representations to the
plaintiffs concerning the condition of the premises, and the
plaintiffs later found them to be false. Helen Hulse told
the plaintiffs that although the building was 100 years old,
it was in good condition. Guy Hulse told plaintiff Brent
Moschelle that he had installed wiring in the building.
Defendants also told plaintiffs that the tavern was con-
nected to the city sewer system.
On August 20, 1976, the parties executed a contract
calling for a purchase price of $62,000. The down payment
was $13,000 with payments to be $440 per month. On the same
day, the plaintiffs paid the down payment and assumed pos-
session of the tavern.
Shortly thereafter, the plaintiffs' problems started.
In the fall of 1976, the refrigerator and cooler stopped
operating, and the stove blew up. Plaintiff Brent Moschelle
then looked at the wiring in the building and discovered
loose wires hanging outside the building. As it appeared to
be old, Brent hired an electrician to examine the wiring.
The electrician determined that the wiring was very old and
that to bring the building up to standard it was necessary
to rewire the entire building. Plaintiffs, nonetheless,
continued to operate the tavern and made monthly payments in
October and November 1977.
Business was very poor during the winter months. It
was necessary for plaintiff Brent Moschelle to borrow money
from his mother to make the December payment. This was the
third and final payment made by the plaintiffs, as the
tavern income was so poor in January that they could not
make the January payment from business earnings.
More problems arose in March 1977. The plaintiffs
found that the tavern foundation was in extremely bad condi-
tion. When the pipes in the women's bathroom froze, Helen
Hulse told plaintiff Brent Moschelle about a trapdoor lead-
ing to a crawl space in the basement. Brent Moschelle
proceeded to look at the floors from underneath. He found
that three floors had been built one upon another, and that
the joists supporting the bathroom floor had rotted. A
professional contractor inspected the building and deter-
mined that it would cost approximately $20,000 to bring the
building up to standard.
In the same month, the sewer line backed up and flooded
the basement with four to five feet of water. This flooding
shorted out the generator, cooler and lights, and forced the
plaintiffs to shut down the business. It was then that
plaintiff Brent Moschelle first learned that the tavern was
not directly connected with the city sewer system. Indeed,
over 200 feet of 100-year-old pipe had apparently frozen
solid as the water could not be pumped out of the basement
to free the line. The line remained blocked even after
using an electric rot0 machine, chemicals, and air blaster.
This was the final straw. The plaintiffs closed the business
and did not reopen. Later in the spring (although the busi-
ness was not then open) seepage from ground water above the
tavern caused more flooding in the basement.
The primary thrust of the defense is the contention
that no constructive fraud was committed because they did
not attempt to deliberately mislead the plaintiffs. In this
same vein, defendants contend that plaintiffs did not make
reasonable inquiry of the condition of the premises or the
income of the business, and that such inquiry would have
given them all the information they needed to know. This
argument, however, overlooks the crux of the trial court's
determination that constructive fraud was committed within
the statutory meaning of section 28-2-406, MCA. This sta-
tute provides that constructive fraud applies to "any breach
of duty which, without fraudulent intent, gains an advantage
to the person in fault . .. by misleading another to his
prejudice." (Emphasis added.) Dishonesty of purpose or
intent to deceive is not a requirement under this statute.
Other jurisdictions hold that constructive fraud is invoked
as a matter of law to prevent a party from being unjustly
enriched as a result of false statements made, even if the
1
deception is not knowingly made. See Olitkowsk~v. St.
Casimir's Saving & Loan Ass'n. (Mick 1942), 302 Mich 303, 4
N.W. 2d 664; Hernig v. Harris (N.J. 1934), 117 N.J. Eq. 146,
175 A. 169. See also 37 C. J.S. Fraud 52 (c)(1), at 211, et
seq.
Although the record does not clearly establish actual
fraudulent intent on the part of the defendants, there can
be no doubt that their representations concerning the sub-
ject of the sale amounted to constructive fraud. Several of
their statements were misleading on their face and thus
required further elaboration so as not to give the plain-
tiffs the wrong impression. Helen Hulse told the plaintiffs
that the building was in good condition, but the defects
which plaintiffs later discovered showed that further re-
pairs were needed to bring the building up to standard. Guy
Hulse told plaintiff Brent Moschelle that he had installed
new wiring in the building. He neglected to tell him that
he had done so more than thirty years before. The cost to
bring this wiring up to standard was estimated at $3,259.30.
Helen Hulse told plaintiff Brent Moschelle that the tavern
was connected to the city sewer system, but she neglected to
tell him that he would be responsible for the maintenance of
200 feet of 100-year-old pipe which ran between the tavern
and city line. Guy Hulse showed plaintiff Brent Moschelle a
sump pump which was used to pump water out of the basement
in emergencies. He told Brent that the toilet had backed up
on one occasion and caused the basement to flood. He ne-
glected to tell Brent that the tavern was subject to seasonal
flooding from high ground water seepage.
The defendants made misleading statements to the plain-
tiffs concerning the profitability of the tavern. Helen
Hulse told the plaintiffs that business earnings would
provide sufficient income to make contract payments and to
pay the plaintiffs' living expenses. Records for the year
1975, obtained through discovery, revealed cash flow was so
low during the winter months that it was necessary to depend
upon excess earnings from the summer months to meet all the
winter expenses. In January, February, and March 1975,
tavern income available for contract payments, repairs and
payroll averaged less than $500 per month. Average monthly
income during these months was not sufficient to make contract
payments, much less provide a minimal standard of living for
the plaintiffs. Plaintiffs themselves were faced with this
pattern of low winter income in 1977 when they were forced
to borrow money to keep up the contract installments.
Additional facts were misstated concerning the high
volume of Labor Day trade. Helen Hulse testified she told
plaintiffs that Labor Day business would be good enough to
make several payments under the contract. The plaintiffs
could not remain open on Labor Day weekend, however, because
trouble arose with motorcycle gangs and the lack of police
protection. Helen Hulse did not deny the plaintiffs' testi-
mony that she had failed to tell them she also had been
forced to close on Labor Day weekend because of trouble with
motorcycle gangs.
The defendants' statements cannot be excused simply
because deliberate misstatements may not have been proven.
The facts indicate a pattern of repeated concealments of the
true state of affairs concerning the condition of the premises
and probable business earnings. Withholding relevant acts
c o n c e r n i n g p u r c h a s e d p r o p e r t y can be a f r a u d u l e n t a c t . See
R u s s e l l v. R u s s e l l ( 1 9 6 9 ) , 152 Mont. 461, 452 P.2d 77.
Furthermore, where a vendor by h i s c o n d u c t o r words c r e a t e s a
f a l s e i m p r e s s i o n c o n c e r n i n g a matter of v i t a l i m p o r t a n c e t o
t h e p u r c h a s e r , f u l l d i s c l o s u r e of r e l e v a n t f a c t s may be
required. See Twing v . S c h o t t (Wyo. 1 9 5 9 ) , 80 Wyo. 100, 338
P.2d 839; 1 2 W i l l i s t o n on C o n t r a c t s ( 3 r d . e d . ) 81498, a t
387; R e s t a t e m e n t o f C o n t r a c t s S472 (1)( b ) , Comment b.
Under t h e f a c t s h e r e , t h e d e f e n d a n t s w e r e under a d u t y
t o make such d i s c l o s u r e s a s would erase t h e f a l s e i m p r e s s i o n s
c r e a t e d i n t h e minds of t h e p l a i n t i f f s t h a t r e p a i r s t o t h e
p r e m i s e s w e r e n o t needed and t h a t w i n t e r e a r n i n g s w e r e
s u f f i c i e n t f o r t h e p l a i n t i f f s ' needs.
Defendants a r g u e t h a t r e l i e f s h o u l d n o t have been
g r a n t e d t o t h e p l a i n t i f f s b e c a u s e t h e y c o u l d have d i s c o v e r e d ,
by t h e i r own i n v e s t i g a t i o n , facts relevant t o the transac-
tion. Although it i s t r u e t h a t t h e c o n d u c t o f t h e p u r c h a s e r
i n making i n q u i r y i n t o t h e c o n d i t i o n of t h e p r e m i s e s and
income s t a t u s o f t h e b u s i n e s s c a n n o t be o v e r l o o k e d , Hardin
v. H i l l ( 1 9 6 7 ) , 149 Mont. 68, 73, 423 P.2d 309, 312, w e
c a n n o t s a y t h a t t h e p u r c h a s e r s h e r e s h o u l d be d e n i e d r e l i e f .
The major d e f e c t i n t h e p r e m i s e s was i t s r o t t e d f l o o r and
foundation. The r o t t i n g was p a r t i c u l a r l y bad under t h e c a f e
p o r t i o n o f t h e b u i l d i n g where t h e d e f e n d a n t s had p a t c h e d i t .
T h e - r o t t e d f o u n d a t i o n c o u l d b e d e t e c t e d o n l y by e n t e r i n g a
c r a w l s p a c e under t h e f l o o r . Although i t a p p e a r s t h a t B r e n t
Moschelle n o t i c e d t h e p a t c h e d f l o o r , h e d i d n o t e n t e r t h e
crawl space. The d e f e n d a n t s knew t h a t t h e f o u n d a t i o n was
rotten. A t t r i a l a c o n t r a c t o r t e s t i f i e d t h a t i t would
r e q u i r e a l m o s t $20,000 t o r e p a i r t h e r o t t e d f l o o r and found-
ation. The d e f e n d a n t s knew t h a t t h e f l o o r s and f o u n d a t i o n s
r e q u i r e d r e p a i r b u t d i d n o t i n f o r m t h e p l a i n t i f f s of t h i s .
B r e n t Moschelle had no e x p e r i e n c e i n c a r p e n t r y and i n d e e d
d i d n o t d i s c o v e r t h e l o c a t i o n of t h e t r a p d o o r l e a d i n g t o t h e
c r a w l s p a c e u n t i l March 1977.
Nor can w e a c c e p t t h e d e f e n d a n t s ' arguments t h a t t h e
p l a i n t i f f s had no r i g h t t o r e l y on t h e i r r e p r e s e n t a t i o n s
c o n c e r n i n g t h e w i n t e r e a r n i n g s of t h e t a v e r n b u s i n e s s .
P l a i n t i f f s had n e v e r b e f o r e i n v e s t e d i n r e a l e s t a t e . The
d e f e n d a n t s p r e v e n t e d them from o b t a i n i n g an a c c u r a t e p i c t u r e
of t h e t a v e r n ' s e a r n i n g p o t e n t i a l f o r t h e w i n t e r months.
Helen Hulse r e f u s e d t h e p l a i n t i f f s ' r e q u e s t t o look a t t h e
books, and i n f a c t , even o b j e c t e d t o t h e p l a i n t i f f s making
i n q u i r y around town a s t o t h e income of t h e t a v e r n . Given
t h e s e c i r c u m s t a n c e s t h e p l a i n t i f f s had l i t t l e c h o i c e b u t t o
t a k e t h e d e f e n d a n t s a t t h e i r word t h a t t h e w i n t e r b u s i n e s s
w a s s u f f i c i e n t f o r t h e p l a i n t i f f s ' needs.
Defendants a l s o a r g u e t h a t t h e i r m i s r e p r e s e n t a t i o n s
w e r e n o t material t o t h e c o n t r a c t and t h u s t h a t r e s c i s s i o n
s h o u l d n o t have been g r a n t e d . See Johnson v. Meiers (19461,
1 1 8 Mont. 258, 164 P.2d 1012. Defendants a r g u e t h a t damages
a r e a s u f f i c i e n t remedy t o compensate t h e p l a i n t i f f s . There
i s no d o u b t , however, t h a t t h e m i s r e p r e s e n t a t i o n s d i r e c t l y
r e l a t e t o t h e c o n d i t i o n of t h e p r e m i s e s . Testimony e s t a b -
l i s h e d t h a t i t would r e q u i r e o v e r $27,000 i n r e p a i r s t o
upgrade t h e t a v e r n t o a s a t i s f a c t o r y condition. The r o t t e d
f l o o r s and f o u n d a t i o n s , t h e d e c r e p i t w i r i n g , and t h e s e a s o n a l
f l o o d i n g amount t o major problems, and t h e p r o c e s s of making
r e p a i r s would p r o b a b l y r e s u l t i n a p r o l o n g e d p e r i o d t h a t t h e
t a v e r n would n o t b e open f o r b u s i n e s s . Damages under t h e s e
c i r c u m s t a n c e s would be c l e a r l y i n a d e q u a t e .
Defendants n e x t a r g u e t h a t t h e p l a i n t i f f s waived t h e i r
r i g h t t o rescind, o r w e r e g u i l t y of laches, i n waiting
a l m o s t n i n e months t o a c t . The d e c a y i n g f o u n d a t i o n and t h e
age of t h e wiring w e r e n o t r e a d i l y observable t o p l a i n t i f f s
as inexperienced laymen. The major defects in the premises
did not surface until March 1977. Almost immediately there-
after, plaintiffs consulted a lawyer. Upon the advice of a
lawyer, they stopped payments on the contract and sent
notice of rescission to the defendants. We do not find a
waiver under these facts.
The laches argument must fail because the defendants
did not plead this as an affirmative defense at the trial as
is required by Rule 8(c), M.R.Civ.P. Defendants cannot now
raise this argument for the first time upon appeal. See
Elliston Lime Co. v. Prentice Lumber Co. (1971), 157 Mont.
64, 483 P.2d 264; Bull Creek Oil & Gas Development v. Bethel
(1953), 127 Mont. 222, 258 P.2d 960.
Finally, defendants argue that plaintiffs have no right
to rescission because they defaulted on the purchase con-
tract. We first note that when plaintiffs gave notice of
rescission, they were still within the grace period permitted
by the express terms of the contract for curing default on
payments.
In making a decision to rescind rather than bring the
payments up to date, the plaintiffs did not waive. It would
be incongruous to hold that when the plaintiffs decided to
rescind rather than to bring the payments up to date, they
therefore waived their right to rescind. It would, essen-
tially, leave them without a remedy. We note, furthermore,
that a vendor's fraud vitiates the contract from its incep-
tion, and thus, even a purchaser in default may seek rescis-
sion. See Gamble v. Beahm (Ore. 1953), 198 Or. 537, 257
P.2d 882, 886; Thompson v. Huston (Wash. 1943), 17 Wash.2d
457, 135 P.2d 834, 837. Also see, 91 C.J.S. Vendor & Purchaser,
5168 at 1126.
The judgment granting rescission is affirmed.
W e concur:
, Chief
/ Just
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Justices