No. 84-78
IN THE SUPREME COURT OF THE STATE OF MONTANA
1985
WILLIAM R. McGREGOR and LINDA KEENER
McGREGOR, d/b/a McGREGOR SERVICE,
Plaintiffs and Respondents,
HOPE CUSHYJIN MOMMER and THE ESTATE OF
PAUL CUSHMAN,
Defendants and Appellants.
APPEAL FROM: District Court of the Fifth Judicial District,
In and for the County of Madison,
The Honorable Mark Sullivan, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Johnson, Skakles & Kebe; Greg J. Skakles argued,
Anaconda, Montana
For Respondent:
Poore, Roth, & Robinson; Donald Robinson argued,
Butte, Montana
Submitted: March 28, 1985
Decided: February 6, 1986
Mr. Justice L. C. Gulbrandson delivered the Opinion of the
Court.
The defendants appeal following a four day jury trial
completed on October 10, 1983, in the District Court of the
Fifth Judicial District, Madison County, Montana. They
appeal from the District Court's denial of their motions for
directed verdict; from the judgment entered in accordance
with the jury verdict; and from the District Court's order
awarding attorney fees to plaintiffs. We reverse the
judgment and remand for a new trial.
Hope Cushman (now Hope Cushman Mommer) and Paul Cushman
(now deceased) , defendants and appellants, (hereinafter
referred to as Cushmans) , bought a gas station in Twin
Bridges, Montana in 1955. In 1970 they expanded by adding a
wholesale operation to serve ranches in the area. This
expansion required. building a loading dock and warehouse;
insta-lling four 10,000 gallon storage tanks and tanks for
customers; and buying a bulk truck to make deliveries. Paul
Cushman also began having health problems in 1970. In
September 1975 he suffered a heart attack and the doctor
advised him to sell the business because of his limited life
expectancy. They listed the property with a number of
realtors in 1976, asking $158,000.
Bill McGregor was looking for employment at the time he
hea.rd the Cushmans' station was for sale. He contacted Paul
Cushman and set up a meeting for April 1977. McGregor was
interested in the station both because of the location (his
wife taught in the Twin Bridges school system) and because he
anticipated the family farm where he worked would be sold
when his father retired.
At their first meeting McGregor received a prospectus
Mrs. Cushman had prepared in 1976 for the various realtors.
She had prepared the prospectus in order to give potential
buyers an understanding of the business. It contained the
reason the property was offered for sale, a description of
the property and inventory and a list of customers, as well
as the following statements:
I know of no ranch that would give
receipts like this business.
Net
&X+SG for 1974 was: $35,410.71
Net
eees for 1975 was: $42,803.15
Mrs. Cushman changed the word "Gross" to "Net" for both
1974 and 1975 only on the copy of the prospectus given to
McGregor and pointed out to McGregor that these changes were
correct. The net profit of the business had averaged $9,368
for 1974 and 1975. The net for 1976 was $6,183 and there was
a loss of $9,996 in the first five months of 1977. The
average net profit for 1972-76 was less than $3,300 per year.
The prospectus listed the gross profit (gross income less
cost of goods sold) for 1974 and 1975.
McGregor asked the Cushmans to provide more information
to support the figures in the prospectus. Mrs. Cushman
responded saying she would get the figures from her son for a.
later meeting. At the third meeting she gave McGregor
documents each entitled "Financial Statement" for 1974 and
1975 that concluded with the same figures as in the
prospectus and showed double underlines under those figures.
These documents did not include operating expenses. Bill
Cushman, the Cushmans' son, attended the fourth meeting
between Cushmans and McGregor in late April 1977. He had a
degree in accounting and testifed that he thought McGregor
was not sophisticated in accounting and in dealing with
financial statements; that he did not volunteer information
about the business although he was available for questions;
that the full financial statements and other documents were
lying on the table at that meeting; and that the prospectus
was misleading. McGregorls background was limited to two
basic accounting courses taken during his first year of
college. He testified that he understood the figures on the
prospectus to represent net income.
The prospectus also included the following statement
about one of the customers:
. the one at Nevada City is
exceptionally good for summer time
tourist trade. Also this station is the
only one to serve Va. city at this time
during the winter.
This station took its last delivery on April 20, 1 9 7 7 and
closed on April 3 0 , 1977. Cushmansl employee attended a
going away party for the station owner on May 1, 1 9 7 7 . Until
the closure, this station had taken deliveries about every
6-7 days and represented 35% of Cushmans' total receipts.
They did not inform McGregor tha.t this customer would no
longer be available.
The following statement was also in the prospectus:
To increase my gallonage, I also run my
cash wholesale customers thru the station
and still make a larger profit (on rent
paid by Phillips paid on station
gallonage each month.) Total: per gallon
doing it this way is 6.18C profit.
This profit is termed "A-G rental payment." The Cushmans had
done this while running the business. However, this was not
permitted by the Phillips Company and Phillips would have
terminated the contract if they had known of the practice.
The Cushmans operated the station a.s "consignees"
rather than "jobbers" and recommended McGregor do the same.
A consignee required less operating capital and Phillips
carried the agricultural wholesale customer accounts on a
nine-month interest free credit basis rather than requiring
the station operator to carry these accounts. A jobber had a
slightly higher profit margin on sales than a consignee and
paid for the product as it was purchased from Phillips rather
than as it was sold to station customers. McGregor met with
a Phillips representative twice prior to entering the
purchase agreement. Neither Phillips nor the Cushmans told
McGregor that he would not be given a consignee contract and
would have to take a jobber contract if he wanted to be
affiliated with Phillips.
McGregor paid $2,000 as earnest money towards purchase
of the Cushmans' business. By this time he had received an
appraisal of $65,300 for the land, buildings, storage tanks
and dock. This did not include the truck, wrecker, hand
tools or inventory. At an inventory taken with McGregor
present, the total value assigned to the merchandise was
$27,200. The Cushmans respresented the inventory as
saleable. McGregor determined that about $2,000 worth was
out of date and unsaleable when, after a couple of years, the
tires and other parts did not sell.
On June 7, 1977, McGregor and Cushmans entered into a
contract where McGregor would pay $120,000 for the business
excluding inventory. He made a down payment of $34,800 and
made the required monthly payments of $814.51 through
November 1981. McGregorls total payments to the Cushmans
were $78,323.84. He purchased the inventory separately for
$27,000.
McGregor operated the business so that the gross
gallonage sold greatly increased each year. By 1980 his
gross sales were over five times Cushmans' best year.
However, he had difficulty maintaining an adequate cash flow
throughout this period. The two main reasons for his cash
flow problems were the debt service to Cushmans and the extra
capital requirements needed for operation as a jobber rather
than a consignee.
McGregor discovered that the figures in the prospectus
were gross income rather than net income after speaking with
a hank officer in late summer or early fall of 1981. The
officer told him there was "no future" in the business so he
went back to the information provided by the Cushmans to
analyze and compare with his figures. At that time he
realized the prospectus showed gross profit. He and a
Phillips representative had discussions with the Cushmans in
an effort to keep the business going but they did not reach
an agreement. McGregor, during this time, traded in the
truck used to make bulk deliveries and purchased a newer
model. He later sold that truck and closed the wholesale
operation. Jn addition he leased the service station out to
another person.
McGregors filed their complaint against the Cushmans on
June 22, 1982 seeking rescission of the purchase and sale
contract for the retail and wholesale gasoline business and a
return of monies paid pursuant to that agreement. The
grounds for relief alleged were fraud through misrepresenta-
tion, undue influence, and failure of consideration. The
alternative prayer for relief requested an order that Hope
Cushman execute a warranty deed and bill of sale to the
McGregors for the property. The McGregors also requested
general damages and attorneys' fees. The defendants
counter-claimed requesting payment of amounts owed under the
contract or a return of the property and damages sufficient
to return the property to the condition at the time of sale.
They also raised defenses of waiver, estoppel and laches.
The trial was scheduled to begin October 4, 1983. In
the pre-trial order the McGregors included a request for
damages because of lost interest and mental distress and
alleged that the Cushmans' conduct violated a duty of good
faith and fair dealing. The Cushmans' motion to prevent
presentation of evidence on the new damages as not
specifically pleaded and inappropriate was denied. The
jury's verdict, by way of special interrogatory, found actual
damages of $78,323 and mental anguish damages of $5,000 for
the McGregors, and awarded the Cushmans an offset of $9,000.
Pursuant to post-trial motions, the trial judge awarded
attorneys' fees of $20,032.78 and costs of $294.49 to the
McGregors and denied deposition costs.
The issues on appeal are:
(1) Was there a sufficient factual dispute for the
District Court to deny Cushmans' motions for a directed
verdict and allow the case to be submitted to the jury?
(2) Is recission available as a remedy to McGregors?
(3) Did the District Court correctly instruct the jury
on the implied covenant of good faith and fair dealing?
(4) Did the District Court err when it submitted the
question of constructive fraud to the jury?
(5) Do the doctrines of estoppel and waiver defeat
McGregors' claims as a matter of law?
(6) Did the District Court correctly refuse two of
Cushmans' offered jury instructions on defenses?
(7) Did the District Court correctly allow testimony
on mental distress and lost interest as part of McGregors'
damages?
(8) Did the District Court correctly award costs and
attorneys' fees to McGregors on the basis of the contract?
(9) Does the contract provision include the payment of
attorneys' fees on appeal?
In the first issue, the defendants argue that their
motions for directed verdict, made at the conclusions of
plaintiffs' and their own cases, were improperly denied
because there was insufficient evidence to allow recovery
under the theory of actu81 fraud.
"Motions for directed verdict or for
judgment N.O.V. are proper only when
there is a complete absence of any
evidence to warrant submission to a jury.
In this regard evidence and all
inferences must be considered in the
light most favorable to the party
opposing directed verdict ... "
(Citations omitted.)
Jacques v. Montana National Guard (1982), 199 Mont. 493, 504,
649 P.2d 1319, 1325, quoting Karczewski v. Ford Motor Company
(N.D. Ind. 1974), 382 F.Supp. 1346, 1348, aff'd. (7th Cir.
It would have been error to direct a verdict for
defendants if plaintiffs submitted sufficient evidence of
actual fraud at trial to make out a prima facie case, since
actual fraud is a question of fact for the jury. Healy v.
Ginoff (1923), 69 Mont. 116, 220 P. 539. The elements of
actual fraud are:
1. A representation;
2. Falsity of the representation;
3. Materiality of the representation;
4. Speaker's knowledge of the falsity of
the representation or ignorance of its
truth;
5. Speaker's intent that it be relied
upon;
6. The hearer's ignorance of the falsity
of the representation;
7. The hearer's reliance on the
representation;
8. The hea.rerls right to rely on the
representation; and
9. Consequent and proximate injury caused
by the reliance on the representation.
(Citations omitted.)
Van Ettinger v. Pappin (1978), 180 Mont. 1, 10, 588 P.2d 988,
Defendants contend that plaintiffs' evidence was
insufficient to establish a false representation or
justifiable reliance on the representation. Defendants argue
that they made no representations as to net income and even
if plaintiffs could show false statements on net income,
consignee status, legality of A-G rental payments, and the
closure of the Nevada City station, plaintiffs cannot
demonstrate justifiable reliance on those statements. The
prospectus contained "Net" figures und.er a statement
favorably comparing the "Net" to the receipts from a ranch.
The financial records Cushmans gave McGregor included
statements with these same figures. Bill Cushman testified
at trial that the financial statements would be misleading to
someone not knowledgeable in accounting. A jury could find
false representations were made on this evidence.
Further, the jury had sufficient evidence to find
McGregor reasonably relied on the representations. A
seller's superior knowledge of the financial condition of a
business is a factor in determining a purchaser's right to
rely on the seller's representations about that financial
condition. Bails v. Gar (1976), 171 Mont. 342, 349, 558 P.2d
458, 462. Cushmans, as owners and operators of the business,
had knowledge superior to McGregor's about the past income
and profits of the business. Even assuming McGregor should
have investigated the statements and ascertained their truth
or falsity, he is only required to use reasonable diligence
and whether he did so is another factual question for the
jury. McGregor questioned Cushmans, talked to the Phillips'
representative and received an appraisal of the business.
The jury had sufficient evidence to find that McGregor
adequately investigated the business and reasona-bly relied on
Cushmans' representations. We find no error in the District
Court's failure to direct a verdict for defendants on the
claim of actual fraud.
In the second issue, defendants argue that rescission
was not available as a remedy to the plaintiffs because they
sold or disposed of the wholesale operations and could not
return this important part of the business as required by
rescission. Section 28-2-1713 (2), MCA, states that the
rescinding party "must restore to the other party everything
of value which he has received from him under the contract or
must offer to restore the same, upon condition that such
party shall do likewise, unless the latter is unable or
positively refuses to do so." Section 28-2-1716, MCA, states
that " . . . the court may require the party to whom
[rescission] is granted to make any compensation or
restoration to the other which justice may require." When
this Court considered the requirement of restoration in
OIKeefe v. Routledge (1940), 110 Mont. 138, 103 P.2d 307, we
recognized the matter as one of equity and quoted the
Kentucky Court in Black Motor Co. v. Green (1934), 79 S.W.2d
409, 411:
"An absolute and literal restoration of
the parties to their former condition" is
not required; it is "sufficient if such
restoration be made as is reasonably
possible and such as the merits of the
case demand."
110 Mont. at 146-147, 103 P.2d at 310. Where circumsta.nces
have changed so that complete rescission is not possible,
" [tlhe trial judge must use his discretion in doing equity,
and this Court will not reverse that decision short of a
showing of abuse of that discretion." Scott v. Hjelm (1980),
188 Mont. 375, 380, 613 P.2d 1385, 1387-1388. The record on
appeal reflects no abuse of discretion. The trial judge
acted properly in permitting the jury to consider rescission.
We hold that, under these circumstances, plaintiffs'
inability to completely restore defendants to their original
condition, alone, would not foreclose rescission as a remedy.
Section 28-2-1713 (I), MCA, requires a party use
reasonable diligence to "rescind promptly upon discovering
the facts which entitle him to rescind ... The element
of promptness corresponds with the defense of laches.
"Laches is negligence in the assertion of a right. It exists
when there has been an unexplained delay of such duration or
character as to render the enforcement of an asserted right
inequitable." Brabender v. Kit Manufacturing Co. (1977), 174
Mont. 63, 67-68, 568 P.2d 547, 549. In Brabender, the
plaintiffs purchased a mobile home from the defendants and
took delivery in November 1971. Four days later they
complained about the condition of the home and stated they
would not accept it, but refused to let defendants make any
repairs. The plaintiffs later paid all scheduled
installments due on the contract for purchase and continued
to live in the home intermittently until May 1973. There
were no further communications between the parties until
plaintiffs filed suit in February 1976 seeking rescission or
in the alternative, damages. We held that the plaintiffs'
suit for rescission was barred by laches and their suit for
damages was barred by the applicable four year statute of
limitations.
" ... Under ordinary circumstances, a
suit in equity will not be stayed for
laches before, and will be stayed after,
the time fixed by the analogous statute,
but if unusual conditions or
extraordinary circumstances make it
inequitable to allow the prosecution of a
suit after a briefer, or to forbid its
maintenance after a longer, period than
that fixed by the analogous statute, a
court of equity will not be bound by the
statute, but will determine the
extraordinary case in accordance with the
equities which condition it. When a suit
is brought within the time fixed by the
analogous statute, the burden is on the
defendant to show, either from the face
of the complaint or by his answer, that
extraordinary circumstances exist which
require the application of the doctrine
of laches. On the other hand, when the
suit 48 brought after the statutory time
has elapsed, the burden is on the
complainant to aver and prove
circumstances making it inequitable to
apply laches to his case."
Brabender, 174 Mont. at 63, 568 P.2d at 550, quoting Shell v.
.
Strong (10th Cir. 19451, 151 F . 2 d 909, 911.
.
The defendants here did not plead, nor do they argue
on appeal, that any statute of limitations bars plaintiffs'
claims. The two-year statute of limitations for fraud acts
as an aid in determining whether the delay in the assertion
of plaintiffs' claims, along with any other circumstances, so
prejudiced the defendant that laches should bar the remedy of
rescission. The plaintiffs had notice of circumstances that
should have put them on inquiry of possible fraud at the time
of sale and in 1978 when the net income did not reflect the
earlier representations. Defendants point out that the
plaintiffs, as early as August 1977, were aware that the
wholesale customer in Nevada City had closed, that a
consignee contract was not available and that A-G rental was
not available. In his testimony, McGregor stated that in
1978 he knew he was not realizing the expected net income.
He had the benefit of financial statements at the close of
each year. This information was sufficient to put him on
inquiry, thus the knowledge of misrepresentations and fraud
will be imputed to him. Lasby v. Burgess (1930), 88 Mont.
49, 62-63, 289 P. 1028, 1032. Nevertheless, the plaintiff
continued to make payments and operate the business without
complaint until about November 1981. These facts constitute
laches, or a failure to use reasonable diligence to rescind
promptly on the part of the plaintiffs. Therefore, we hold
the District Court erred in permitting the jury to consider
rescission as a remedy for the plaintiffs.
The District Court instructed the jury on the implied
covenant of good faith and fair dealing. In ruling on
objections to the instructions, the court stated that they
defined the duty required for an allegation of constructive
fraud. Defendants argue on appeal that the implied covenant
has no application in a case involving an arms-length
contract. Plaintiffs argue that defendants had a duty to
disclose the true profitability of the business after making
misleading statements, and that a breach of this duty was a
breach of the implied covenant of good faith and fair
dealing.
We recently discussed the implied covenant of good
faith and fair dealing in Nicholson v. United Pacific
Insurance Co. (Mont. 1985) , P.2d , 42 St.Rep. 1822.
There, in upholding a damage award for a breach of this
implied covenant, we stated:
The nature and extent of an implied
covenant of good faith and fair dealing
is measured in a particular contract by
the justifiable expectations of the
parties. Where one party acts
arbitrarily, capriciously or
unreasonably, that conduct exceeds the
justifiable expectations of the second
party. The second party then should be
compensated for damages resulting from
the other's culpable conduct.
Nicholson, , 42 St.Rep. at 1829. A breach
of this implied covenant which results in damages can thus
give rise to an action in tort. In order to recover punitive
damages, in addition to any recovery for the tort, plaintiffs
must prove that defendants' actions in breaching the implied
covenant of good faith and fair dealing met the requirements
of 5 27-1-221, MCA. Nicholson, P.2d , 42 St.Rep. at
The jury instructions given in the case at bar stated
that good faith means honesty in fact in the conduct or
transaction concerned, apparently taken from the Uniform
Commercial Code, $ 30-1-201(19), MCA, and then equated the
implied covenant to an obligation imposed by law on
defendants to do nothing to deprive plaintiffs of the
benefits of their commercial transaction. The tort of breach
of the implied covenant of good faith and fair dealing, as
defined in Nicholson, requires more than a lack of "honesty
in fact." As discussed above, it requires, at a minimum,
that defendants ' actions were arbitrary, capricious or
unreasonable and exceeded plaintiffs' justifiable
expectations. We hold that the instructions given to the
jury on this issue inadequately defined the tort.
The fourth issue concerns whether the jury should have
been permitted to consider recovery on a theory of
constructive fraud. Section 28-2-406 (1), MCA, defines
constructive fraud as "any breach of duty which, without
fraudulent intent, gains an advantage to the person in
fault. . . by misleading another to his prejudice . . . "
Contrary to defendants' contentions, no fiduciary or
confidential relationship need exist between the parties to
justify a finding of constructive fraud. Mends v. Dykstra
(1981), 195 Mont. 440, 449-450, 637 P.2d 502, 507-508. Where
sellers, by words or conduct, create a false impression
concerning serious impairments or other important matters and
subsequently fail to disclose the relevant facts,
constructive fraud may be found. Moschelle v. Hulse (Mont.
1980), 622 P.2d 155, 159, 37 St.Rep. 1506, 1510. In
Moschelle, the sellers made misleading statements about the
rotting floor and foundation of the buildings, the wiring,
the sewer lines and the seasonal flooding in the basement.
They told the buyers that income from the business would
cover payments under the purchase contract and the buyers'
living expenses. This Court relied on the "pattern of
repeated concealments," the buyers' inability to discover the
true condition of the premises and profitability of the
business, and the buyers' lack of experience. 622 P. 2d at
159, 37 St.Rep. at 1510. In the case at bar, defendants made
general statements about the profitability of the business in
addition to the figures in the prospectus and the financial
statements. Plaintiffs claimed other facts were
misrepresented as well. When viewing this evidence most
favorably for the plaintiffs, Jacques, 199 Mont. at 504, 649
P.2d at 1325, the District Court did not err by submitting
the question of constructive fraud to the jury.
Defendants also question the special verdict's
reference to constructive fraud. Since this case is
remanded, we need not address this topic.
The defendants contend that waiver and estoppel operate
to bar any relief to the plaintiffs as a matter of law.
Waiver is the voluntary, intentional relinquishment of a
right. Kelly v. Lovejoy (1977), 172 Mont. 516, 520, 565 P.2d
321, 324. A waiver of a right of action will be declared
only when the party clearly manifests such an intention.
Koch v. Rhodes (1920), 57 Mont. 447, 458-459, 188 P. 933,
937, cited in Falls Sand and Gravel Co. v. Western Concrete
(Mont. 1967), 270 F.Supp. 495, 501. The presence of
voluntariness and the requisite intent are necessarily
questions of fact. Consequently, we hold that the District
Court did not err by presenting the issue of waiver by
plaintiffs to the jury.
The doctrine of estoppel, to successfully prevent the
assertion of a claim of fraud, requires knowledge of the
fraud at the time of the execution of the contract. 37
Arn.Jur.2df Fraud and Deceit, $386. In Montana, we have held
that estoppel "has no application where the omissions of the
party claiming estoppel brought about the problem."
Carroccia v. Todd (Mont. 1980), 615 P.2d 225, 228, 37 St.Rep.
1437, 1440; and First Sec. Bank of Bozeman v. Goddard (1979),
181 Mont. 407, 593 P.2d 1040. The evidence presented in this
case indicates the plaintiffs did not have full knowledge of
the claimed fraudulent acts at the time they entered the
contract. Further, the defendants' misrepresentations and
failure to disclose brought about the problem. The District
Court correctly refused to instruct the jury on estoppel as
requested by the defendants.
The District Court's refusal to give two of the
instructions on defenses offered by the defendants forms the
basis of the sixth issue. One concerned the elements of
estoppel, properly refused for the reason stated above. The
second stated: "Regardless of the falsity of statements, a
party is estopped from recovery if there is a long continued
silence and failure to raise objections," citing Kelly, 172
Mont. at 520, 565 P.2d at 324. In Kelly, this Court held
that the plaintiffs, by acquiescing in the presence of
horses, waived their right to enforce a restrictive covenant
prohibiting livestock. Kelly did not concern false statements
by a party, nor did it concern a long continued silence. The
use of "estopped," both in Kelly and in the instruction, was
confusing in that the issue under discussion was waiver
rather than estoppel. We note also that defendants offered
no instructions which would explain the word "estopped" as
used in that context. The District Court did not err under
these circumstances when it refused to give this instruction.
The seventh issue concerns plaintiffs' requested.
damages for loss of interest and mental and emotional
distress in addition to recission.
On rescission of a contract, the court
will, where necessary to effect complete
justice, award to the party not in
default his expenses necessarily incident
to the contract.
17 Arn.Jur.2d1 Contracts, $519. In Silvast v. Asplund (1935),
99 Mont. 152, 42 P.2d 452, this Court permitted an award for
lost interest in addition to rescission. The historical
reason for not permitting both rescission and damages is that
a party may receive a double recovery. In this case the jury
was instructed "[Tlhat you are not allowed to award damages
which would in effect allow a double recovery." A recovery
of lost interest would not duplicate any recovery plaintiffs
might have received through rescission in this case.
Therefore, we hold that the District Court did not err by
allowing the jury to consider this item of damages.
One jury instruction stated that if they found for the
plaintiffs, they "must award them damages for all emotional
distress and mental anguish suffered as a result of the
Defendants' conduct. " (Emphasis added. ) This instruction,
in effect, directs a verdict on damages for emotional
distress even if plaintiffs recovered only on their contract
claim.
As this Court stated in Johnson v. Supersave Markets,
Inc. (Mont. 1984), 686 P.2dI 209, 41 St.Rep. 1495:
We agree with the Oregon court's
conclusion: "We do not yet live, however,
in an 'eggshell society' in which every
harm to property interests gives rise to
a right of action for mental
distress ...
"
In determining whether the distress is
compensable absent a showing of physical
or mental injury, we will look to whether
tortious conduct results in a substantial
invasion of a legally protected interest
and causes a significant impact upon the
person of plaintiff. (Emphasis in
original.) (Citations omitted.)
686 P.2d at 213, 41 St.Rep. at 1500. In Johnson, the
plaintiff had been improperly arrested and testimony from at
least one witness showed he had suffered "devastating
emotional impact" from the tortious conduct. 686 P.2d at
213, 41 St.Rep. at 1500. Although McGregor testified that
his financial problems bothered him a lot and "at times, it
would show up at home," the record reflects no serious
emotional distress or anxiety as required by the holding in
Johnson, supra. We hold that this instruction improperly
required the jury to award damages for emotional distress and
mental anguish without finding a significant impact on the
plaintiff.
In addition, plaintiffs claim that the award for mental
anguish and distress was proper as a result of defendants1
breach of the implied covenant of good faith and fair
dealing. As stated above, the jury was not properly
instructed on this tort. Thus, the award of damages for
mental anguish and distress must be reversed on this basis as
well.
The two final issues on this appeal question the award
of costs and attorneys1 fees to the prevailing party. Our
decision in this case renders these issues moot.
Reversed and remanded for a new trial.
We concur: /
Chief Justice
Justices
Mr. J u s t i c e John C . Sheehy, d i s s e n t i n g :
I dissent..
L would affirm t h e decision of t h e D i s t r i c t Court in
this case, especially because after remand and a further
trial, it appears t o m e t h a t t h e r e s u l t s w i l l be about t h e
sanie.
Ny interpretation of the majority opinion is that it
does the following things: (1) denies recovery for
rescission because of laches; (2) permits recovery for
breach of contract; (3) permits recovery for cc~nstructive
fraud; (4) 6enies recovery For a breach of the implied
covenant of good faith; and (5) denies recovery for
attorneys fees.
On remand, t h e c a u s e w i l l b e s u b r r i t t e d i n a new t r i a l on
issues of breach of contract and constructive fraud. A
b r e a c h o f c o n t r a c t a c t i o n of c o u r s e , sounds i n c o n t r a c t . Cn
t h e o t h e r hand, a c o n s t r u c t i v e f r a u d a c t i o n sounds i n t o r t .
Whether i n c o n t r a c t o r i n t o r t , t h e McGregors s h o u l d b e a b l e
to recover their payments to the Cushmans in the sum of
$78,323. T h a t amount was awarded i n the f i r s t trial. In
addition, because constructive fraud is also a basis for
recovery, the rules relating to tort damages apply. In
Gibson v . Western F i r e I n s u r a n c e Company (Mont. 19841, 682
P.2d 725, 41 St.Rep. 1048, we held that the statutory
allowance for recovery of darriages in tort cases, for all
detriment proximat.ely causd by a tortfeasor, would ellow
recovery for amounts other than simply the amount o f the
a c t u a l 6amages, as f o r example economic l o s s and e m o t i o n a l
distress. Gibson v . W e s t e r n F i r e I n s u r a n c e Company was, of
course, a bad faith action. However, by analogy, since
Gibson defined the elements of damages j.n tort cases, we
would e v e n t u a l - l y h o l d t h a t e m o t i o n a l d i s t r e s s i s a n e l e m e n t
o f r e c o v e r y i n p r o p e r c a s e s f o r damages i n t o r t , w h i c h would.
i n c l u d e a c o n s t r u c t i v e f r a u d ca-se.
It is clear t o me, t h a t i n making t h e r e p r e s e n t a t i o n
respecting net prof it, Cushnians were guilty of at least
constructive fraud, if not actual fraud. It appears t o me
t h a t a new t r i a l w i l l r e s u l t i n a t l e a s t t h e same amount of
d a ~ a g e sa s w e r e awarde2. e a r l i e r and that renand f o r r e t r i a l
i n t h i s c a s e i s a w a s t e cf j u d i c i a l r e s o u r c e s , an2 a n u n f a i r
i m p o s i t i - o n upon a plaintiff who h a s t h e r i g h t t o r e c o v e r .
T h e r e f o r e , I would a f f i r m .
;7
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Justice
Mr. Justice Frank B. Morrison, Jr., dissenting:
The majority opinion finds error in (1) granting rescis-
sion; (2) submitting an instruction on the implied covenant
of good faith and fair dealing; (3) awarding damages for
severe mental and emotional distress. The jury did not
decide the rescission question. The court granted a rescis-
sion in the judgment but any relief granted for rescission
has no effect upon the jury award for damages in the tort
case. They are separate matters. I only dissent to the
granting of a new jury trial on the damage question. It is
not necessary to discuss the $5,000 award for mental distress
as that could be simply stricken if the majority deems the
evidence insufficient for submission on that issue. The
question on mental and emotional distress is a close one and
I would not be adverse to striking that $5,000 award from the
verdict. I strongly oppose granting a new trial as there is
clearly no basis for granting same.
The majority grants a new trial on the basis of the
court having given instruction no. 24. That instruction
stated:
You are instructed that Hope and Paul
Cushman owed William and Linda McGregor
an implied-in-law duty of good faith and
fair dealing that they would do nothing
to deprive the plaintiff of the benefits
of the commercial transaction between the
parties. The duties or obligations
arising from the purchase and sale agree-
ment between the parties imposed an
obligation of good faith in the negotia-
tions, performance, and enforcement of
those duties and obligations. Good faith
is defined as honesty in fact in the
conduct or transaction concerned. If you
find that the defendants violated this
obligation imposed by law, the plaintiffs
are entitled to be compensated for all
the detriment or injury proximately
caused thereby whether that detriment or
injury could be anticipated or not.
This instruction was given prior to our decision in
Nicholson v. United Pacific Insurance Co. (Mont. 1985) ,
P.2d , 42 St.Rep. 1822. The instruction here given is,
in my opinion, better than the one given in the Nicholson
case. However, the instruction there given was tendered by
the defense and therefore could not be objected to by the
defendant on appeal.
In Nicholson, the Court did not wish to bless the in-
struction given but did, for the first time, articulate the
following rule :
The nature and extent of an implied
covenant of good faith in fair dealing is
measured in a particular contract by the
justifiable expectations of the parties.
Where one party acts arbitrarily, capri-
ciously or unreasonably, that conduct
exceeds the justifiable expectations of
the second party. The second party then
should be compensated for damages result-
ing from the others culpable conduct.
The instruction given by the court in the case at bar is
more restrictive than the new rule articulated by the court
in Nicholson. The two rules are similar in many respects.
However, the conduct referred to in instruction no. 24 con-
templates that the duties and obligations arising from the
purchase and sale agreement be breached in a dishonest way by
one of the contracting parties for a cause of action to arise
under "implied-in-law duty of good faith and fair dealing. "
The standard articulated in Nicholson is broader in that the
reasonable expectation of the parties can be breached by
arbitrary, capricious and unreasonable conduct. In other
words, under the standard adopted by this Court in Nicholson,
one can incur liability for breach of the covenant where one
acts negligently. The instruction given by the District
Court in this case would appear to require that the
contracting parties act honestly and only if they fail in
that regard, is there a remedy.
The majority's insistence on reversing the verdict in
this case based upon the giving of instruction no. 24 j.s
appalling. Not only was the instruction narrower than the
one approved in Nicholson, but the duty of good faith and
fair dealing was not even submitted to the jury in the ver-
dict form. The following excerpt is taken from the "special
verdict" :
ISSUE NO. 1
(The burden of getting a "yes" answer is
on the plaintiffs. )
Have the plaintiffs proven by a prepon-
d-erance of the evidence that defendants
engaged in actual or constructive fraud
in the course of the transactions and
dealings between the parties that led to
the consummation of a contract between
them on June 7, 1977?
X YES
If your answer t-o the preceding issue is
"yes," then please answer the following
issue no. 2; if your answer to the pre-
ceding issue is "no," then please proceed
to answer issue no. 4.
The jury was not asked about the implied covenant of
good faith and fair dealing. They found fraud. They were
properly instructed on both constructive fraud and actual
fraud. The jury then, in issue no. 3, found the amount of
actual damages to be $78,323, the amount of mental anguish to
he $5,000, and awarded an offset of $9,000. Judgment was
thereupon entered by the District Court in accordance with
the jury verdict. It is cl-ear that the jury made no findings
with reference to the implied covenant of good faith and fair
d-ealing and the giving of instruction no. 24 could in no way
have created reversible error,
We recently decided the case of Martin J. Kleinsasser v.
Superior Derrick Service, Inc., et al. (Mont. 1985), 708 P.2d
568, 42 St.Rep. 1662. The case was determined by a
five-judge panel consisting of Chief Justice Turnage, Justic-
es Gulbrandson, Hunt, Morrison and Sheehy. Justice Sheehy
dissented. In that case, the issue here involved was pre-
sented four square. Plaintiff contended that the instruc-
tions given on strict liability were incomplete and
misleading. Indeed, court's instruction no. 16 was most
incomplete in its attempt to define strict liability. Howev-
er, the jury, in a special verdict form, was only submitted
the negligence theory. The jury found no negligence. Strict
liability was not submitted to the jury although the court
gave incomplete instructions on strict liability. In that
case, the majority said:
Plaintiff contends that the instructions
given on strict liability offer an incom-
plete and misleading statement of the
law. Any error alleged is harmless when
the plaintiff did not object to a special
verdict form which required the jury to
decide the case on negligence alone.
Given a jury instruction on strict lia-
bility in tort, no matter how incomplete,
would not have cured counsel's failure to
offer a verdict form which would. have
allowed a jury to consider strict liabil-
ity in tort.
In the Rleinsasser case, I voted with the majority to
affirm a verdict in favor of defendant because only the
negligence theory was submitted to the jury on a special
verdict form. In this case, only constructive fraud and
fraud were submitted in the special verdict form and the jury
found in favor of the plaintiff on these theories. No men-
tion was made of the implied covenant of good faith and fair
dealing and it could not be prejudicial error to have given
an incomplete instruction defining a tort which was not
submitted to the jury.
The bottom line is that in Kleinsasser, the majority
wished to affirm the defense verdict and so properly relied
upon the fact that the incomplete instruction was not preju-
dicial because the verdict form only considered negligence.
Since the majority was right in its application of legal
principles, I voted. with the majority opinion although I
personally disagreed with the jury verdict finding in favor
of the defendant.
Now we have a case where the jury has found in favor of
the plaintiff and the majority wishes to reverse the verdict.
The majority reverses on an instruction which the majority
erroneously finds to be incomplete. However, assuming argu-
endo that the instruction is incomplete, well established
legal principles, affirmed and applied in Kleinsasser, dic-
tate a finding by this Court that any incompleteness could
not have infiltrated a jury verdict based upon constructive
fraud or fraud.
This Court continues to apply whatever legal principles
are desired to achieve the necessary result. Again, the
people of this State and the practicing members of the trial
bar are left with a revolving door approach to the resolution