#26223, #26226-rev & rem-LSW
2013 S.D. 17
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
ROB POEPPEL, Plaintiff and Appellee,
v.
LUCAS LESTER, Defendant and Appellant.
****
APPEAL FROM THE CIRCUIT COURT OF
THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON COUNTY, SOUTH DAKOTA
****
THE HONORABLE WALLY EKLUND
Judge
****
JESSICA L. LARSON
STEVEN C. BEARDSLEY of
Beardsley, Jensen, &
Von Wald, Prof., LLC
Rapid City, South Dakota Attorneys for plaintiff
and appellee.
MICHAEL V. WHEELER of
DeMersseman Jensen Tellinghuisen
Stanton & Huffman, LLP
Rapid City, South Dakota Attorneys for defendant
and appellant.
****
ARGUED ON AUGUST 29, 2012
OPINION FILED 02/13/13
#26223, #26226
WILBUR, Justice
[¶1.] In 2008, Rob Poeppel brought suit against Luke Lester for breach of
contract for Lester’s failure to purchase Poeppel’s voting interest in Coldwell
Banker Lewis-Kirkeby-Hall Real Estate, Inc. (CBLKH). Following Lester’s
stipulation as to breach, a court trial was held on the issue of damages. The court
awarded damages to Poeppel in the amount of $250,000 plus prejudgment interest
and costs.
FACTS AND PROCEDURAL BACKGROUND
[¶2.] Poeppel was the owner of a 25% (100 no-par shares) voting interest in
CBLKH. In March 2008, Lester, an independent contractor and broker associate at
CBLKH, approached Poeppel about purchasing Poeppel’s 25% voting interest in the
company. Also during this time, Mel Dreyer, another broker associate of the
company, approached Diana Hooper, another owner of a 25% voting interest in
CBLKH, about Dreyer purchasing Hooper’s 25% voting interest.
[¶3.] On March 28, 2008, Poeppel and Lester entered into a contract for the
sale of the shares. The parties agreed that Poeppel would sell Lester one hundred
shares (25%) of no-par CBLKH voting stock for $500,000. The contract signed by
the parties was a form that Lester received from Dreyer. Dreyer had used the form
during his negotiations with Hooper. Lester then made changes to the contract and
presented it to Poeppel for signature. Paragraph five of the contract entitled
“Access to Information” provides:
The parties acknowledge that Seller has provided to Buyer
certain financial information with respect to the Shares and that
Buyer has formed his own opinion as to the value of the Shares
being purchased hereunder. Notwithstanding the foregoing,
-1-
#26223, #26226
prior to Closing, Seller shall, or shall cause the Company to,
provide to Buyer and to Buyer’s counsel, accountants, or other
representatives full access throughout the period prior to
Closing to all of the Company’s properties, books, contracts,
commitments, and records, and shall furnish to Buyer during
such period all information concerning the Company’s affairs as
the Buyer may reasonably request. SELLER MAKES NO
WARRANTY OF THE INCOME PRODUCING ABILITY OF
THE SHARES OR THE PROFITABILITY OF THE COMPANY.
BUYER RECOGNIZES THAT THE VALUE OF THE SHARES
IS DEPENDENT IN PART UPON BUYER’S SKILL AND
ABILITY.
Additionally, paragraph seven, section c, “Warranties of Buyer,” provides: “That all
documents and records requested by Buyer have been delivered or made available
to Buyer, and Buyer’s investment decision is based upon Buyer’s own investigation
and analysis and not the representations or inducements of Seller or Seller’s
agents.”
[¶4.] The closing date on the contract was set for May 15, 2008. Lester
failed to attend the closing and did not pay $500,000 for Poeppel’s shares.
Additionally, Lester notified Poeppel in a letter dated May 22, 2008, that he was
unable to secure financing with the right structure for the purchase of the stock.
[¶5.] After continued negotiations between the parties failed, Poeppel
brought suit for breach of contract against Lester in September 2008. In his
answer, Lester raised the defense that his consent to enter into the contract was
obtained by fraud. Lester alleged that Poeppel failed to give him important
financial information regarding the company; made a false claim about the income
producing ability of the shares of stock; and told Lester that the company held an
exclusive franchise with Coldwell Banker.
-2-
#26223, #26226
[¶6.] Poeppel moved for summary judgment on three separate occasions
alleging that the contract was unambiguous as to Lester’s receipt of CBLKH’s
financial information. Each motion was denied.
[¶7.] A trial was scheduled for November 2-3, 2011. On the day before trial,
the trial court concluded that the terms of the contract were unambiguous and that
parol evidence as to financial documents was inadmissible. The court also granted
Poeppel’s motions in limine to exclude evidence relating to CBLKH’s financial
information and to exclude statements made by Poeppel to Lester concerning
income that was generated by the stock and the exclusive franchise agreement.
Following these rulings, Lester stipulated to the breach of contract.
[¶8.] The issue of damages was tried in a court trial on November 3, 2011.
The trial court entered judgment against Lester for $250,000 plus prejudgment
interests and costs.
[¶9.] On appeal, the issues presented are:
1. Whether the trial court erred as a matter of law in
concluding that the contract was unambiguous.
2. Whether the trial court abused its discretion in granting
Poeppel’s motions in limine regarding financial
information.
3. Whether the trial court erred in denying Lester’s motion
to amend, thus precluding any evidence of a “put” option.
4. Whether the trial court’s findings as to the calculation of
damages were clearly erroneous.
ANALYSIS
[¶10.] Before the Court begins its analysis of the issues presented, it is
important to note that after the trial on damages, the court did not enter separate,
-3-
#26223, #26226
formal findings of fact and conclusions of law. The court filed a memorandum
decision and a judgment. The trial court was apparently operating under the first
sentence of the second paragraph of SDCL 15-6-52(a), as suggested in a letter to the
court from Poeppel’s counsel. There was no objection by Lester’s counsel.
[¶11.] The second paragraph of SDCL 15-6-52(a) was amended in 2006 to
provide, in pertinent part:
A copy of the proposed findings shall be served upon the
attorneys of record to the action or upon the parties of record to
the action if not represented by counsel. The It will be
sufficient if the findings of fact and conclusions of law are stated
orally and recorded in open court following the close of the
evidence, or appear in an opinion or memorandum of decision
filed by the court. Alternatively, the court may direct counsel
for the prevailing party to prepare findings; and counsel shall,
within ten days after announcement of the decision, unless
otherwise ordered, prepare, serve, and submit to the court with
copies to opposing counsel, or to the parties of record to the
action if not represented by counsel, proposed written findings of
fact and conclusions of law together with the proposed judgment
or decree.
2006 S.D. Sess. Laws 484, ch. 326, Supreme Court Rule 06-52. The statute further
provides: “If an opinion or memorandum of decision is filed, the facts and legal
conclusions stated therein need not be restated but may be included in the findings
of fact and conclusions of law by reference.” SDCL 15-6-52(a).
[¶12.] This Court has yet to specifically examine a case implementing the
Supreme Court’s 2006 amendment to SDCL 15-6-52(a). “When interpreting a
statute, we ‘begin with the plain language and structure of the statute.’” In re
Pooled Advocate Trust, 2012 S.D. 24, ¶ 32, 813 N.W.2d 130, 141 (quoting State ex
rel. Dep’t of Transp. v. Clark, 2011 S.D. 20, ¶ 10, 798 N.W.2d 160, 163).
-4-
#26223, #26226
[¶13.] Based on a plain reading of the language and structure of SDCL 15-6-
52(a), it is apparent that the trial court utilized, and the parties agreed to, one of
the methods by which findings of fact and conclusions of law may be entered. Here,
the trial court entered a “memorandum of decision,” which included its findings of
fact and conclusions of law. This method is acceptable under the plain reading of
SDCL 15-6-52(a), and thus, enumerated findings of fact and conclusions of law were
not necessary.
[¶14.] Whether the trial court erred in concluding that the contract
was unambiguous and in granting Poeppel’s motions in limine.
[¶15.] The trial court concluded that the language of the contract is clear and
unambiguous and that it would “stay with the language of the contract.” Based on
this conclusion, the trial court also granted Poeppel’s motion in limine to prohibit
Lester from introducing parol evidence that Poeppel had represented to Lester: (1)
that Lester could not receive financial documents until after he signed the contract;
(2) that the stocks Lester sought to purchase would generate approximately
$115,000; and (3) that the company had an exclusive franchise arrangement with
Coldwell Banker.
[¶16.] “‘Contract interpretation is a question of law’ reviewed de novo.”
Detmers v. Costner, 2012 S.D. 35, ¶ 20, 814 N.W.2d 146, 151 (quoting Clarkson &
Co. v. Cont’l Res., Inc., 2011 S.D. 72, ¶ 10, 806 N.W.2d 615, 618). “‘When
interpreting a contract, this Court looks to the language that the parties used in the
contract to determine their intention.’” Id. (quoting Clarkson & Co., 2011 S.D. 72, ¶
15, 806 N.W.2d at 619). “‘In order to ascertain the terms and conditions of a
contract, we examine the contract as a whole and give words their plain and
-5-
#26223, #26226
ordinary meaning.’” Nygaard v. Sioux Valley Hosps. & Health Sys., 2007 S.D. 34, ¶
13, 731 N.W.2d 184, 191 (quoting Canyon Lake Park, L.L.C., v. Loftus Dental, P.C.,
2005 S.D. 82, ¶ 17, 700 N.W.2d 729, 734). “‘When the words of a contract are clear
and explicit and lead to no absurd consequences, the search for the parties’ common
intent is at an end.’” Detmers, 2012 S.D. 35, ¶ 20, 814 N.W.2d at 151 (quoting
Nelson v. Schellpfeffer, 2003 S.D. 7, ¶ 8, 656 N.W.2d 740, 743).
[¶17.] The express language of the contract, when read as a whole, is clear
and unambiguous. By signing the contract that he presented to Poeppel, Lester
represented that he received financial documents from Poeppel and that Lester
formed his own opinion as to the value of the shares.
[¶18.] However, even though the contract was unambiguous, Lester should
have been allowed to present his defense to a jury that he was fraudulently induced
to sign the stock purchase agreement through several misrepresentations made by
Poeppel. The trial court erred as a matter of law by barring this evidence under the
parol evidence rule.
[¶19.] South Dakota’s parol evidence rule provides: “The execution of a
contract in writing, whether the law requires it to be written or not, supersedes all
the oral negotiations or stipulations concerning its matter which preceded or
accompanied the execution of the instrument.” SDCL 53-8-5. This rule “‘is in no
sense a rule of evidence, but a rule of substantive law.’” Auto-Owners Ins. Co. v.
Hansen Housing, Inc., 2000 S.D. 13, ¶ 14, 604 N.W.2d 504, 510 (quoting 9 John
Wigmore, Evidence § 2400 at 4 (Chadbourn rev. ed. 1981)). A decision concerning
application of the parol evidence rule should be reviewed de novo as a question of
-6-
#26223, #26226
law. See, e.g., Conn Acoustics, Inc. v. Xhema Const., Inc., 870 A.2d 1178, 1181
(Conn. App. Ct. 2005). In excluding Lester’s fraud evidence, the trial court ruled,
as a matter of law, that the parol evidence rule precluded any extrinsic evidence.
Yet the parol evidence rule does not apply in cases of fraud in the inducement.
1. Fraud in the Inducement
[¶20.] Fraud as an inducement to enter a contract is a question of fact for the
jury. “Actual fraud is always a question of fact.” SDCL 53-4-5. And parol or
extrinsic evidence is admissible to prove fraud. “It is generally agreed that the
parol evidence rule does not bar extrinsic evidence to show fraud as a ground for
rescission . . . .” E. Allen Farnsworth, Contracts § 7.4 at 429 (4th ed. 2004). The
parol evidence rule is simply not applicable when fraud has been employed as
enticement to enter a contract. So universal is this principle that Professor
Farnsworth writes, “[T]here is very little that the parties can do in their agreement
to prevent the use of extrinsic evidence to attack the written agreement on” grounds
of fraud. Id. at 430. Additionally, “evidence of misrepresentation is admissible even
if the agreement is completely integrated, . . . [even] in the face of the usual merger
clause . . . .” Id. Likewise, the Restatement provides:
Agreements and negotiations prior to or contemporaneous with
the adoption of a writing are admissible in evidence to establish
***
(d) illegality, fraud, duress, mistake, lack of consideration, or
other invalidating cause . . . .
Restatement (Second) of Contracts § 214(d) (1981).
[¶21.] In South Dakota, this principle has been in place since early statehood.
“Great latitude . . . has been allowed in the admission of parol evidence to prevent
-7-
#26223, #26226
fraud or injustice.” D.M. Osborne & Co. v. Stringham, 1 S.D. 406, 47 N.W. 408, 409
(1890); see M.E. Smith & Co. v. Kimble, 31 S.D. 18, 139 N.W. 348 (1913). No matter
how clear and unambiguous a contract might be, parol evidence may be offered to
show that the contract is invalid because of fraud in its inducement. See Engles v.
Ranger Bar, Inc., 2000 S.D. 1, ¶ 15, 604 N.W.2d 241, 245; Holmes v. Couturier, 452
N.W.2d 135, 137 (S.D. 1990); Sabbagh v. Prof’l & Bus. Men’s Life Ins. Co., 116
N.W.2d 513 (S.D. 1962). Were it not so, contracting parties could insulate
themselves from their own fraud.
[¶22.] A substantial majority of jurisdictions follow the traditional, majority
view that the parol evidence rule is inapplicable in cases of fraudulent inducement.
As one California court explained, “‘A party to a contract who has been guilty of
fraud in its inducement cannot absolve himself from the effects of his fraud by any
stipulation in the contract, either that no representations have been made, or that
any right which might be grounded upon them is waived.’” Ron Greenspan
Volkswagen, Inc. v. Ford Motor Land Dev. Corp., 38 Cal. Rptr. 2d 783, 788 n.7 (Cal.
Ct. App. 1995) (additional citation omitted). Many other courts have held
similarly.* Promoting honesty in contractual relations forms part of the rationale:
* See, e.g., Nw. Bank & Trust Co. v. First Ill. Nat’l Bank, 354 F.3d 721, 726 (8th
Cir. 2003) (“Under Iowa law, contractual disclaimers are ineffective to bar a
plaintiff from asserting a claim for fraudulent inducement.”); Envtl. Sys., Inc.
v. Rexham Corp., 624 So. 2d 1379, 1383 (Ala. 1993) (“[T]he law in this state
renders an integration, or merger, clause ineffective to bar parol evidence of
fraud in the inducement or procurement of a contract.”); Hall v. Crow, 34
N.W.2d 195, 198 (Iowa 1948) (“[W]here there is evidence of fraudulent
misrepresentations in the inception of a contract such misrepresentations can
be the basis for either an action to rescind or for damages, despite the
limiting provisions of a contract.”); Miles Excavating, Inc. v. Rutledge
(continued . . .)
-8-
#26223, #26226
“We continue to believe that parties to contracts, whether experienced in business
or not, should deal with each other honestly, and that a party should not be
permitted to engage in fraud to induce the contract.” McEvoy Travel Bureau, Inc. v.
Norton Co., 563 N.E.2d 188, 194 (Mass. 1990). Likewise, the Restatement (Second)
of Contracts declares that “[a] term unreasonably exempting a party from the legal
consequences of a misrepresentation is unenforceable on grounds of public policy.”
Restatement (Second) of Contracts § 196 (1981).
[¶23.] South Dakota cases fall squarely within the traditional, majority rule.
In Holmes, we rejected the argument that a specific contract disclaimer precluded
extrinsic evidence of fraud, quoting with approval the following: “Fraud will vitiate
any contract, regardless of the fact that the contract contains a provision to the
effect that . . . the party who claims the fraud entered into the contract with
knowledge of the condition of the subject matter of the contract and agrees to accept
the same ‘as is.’” 452 N.W.2d at 137 (additional citation and quotations marks
________________________
(. . . continued)
Backhoe & Septic Tank Servs., Inc., 927 P.2d 517, 518 (Kan. Ct. App. 1996)
(“We hold that parol evidence is admissible to show fraud in the inducement
of a contract even where the contract contains a provision stating the parties
have not relied on any representations other than those contained in the
writing.”); Gibb v. Citicorp Mortg., Inc., 518 N.W.2d 910, 919 (Neb. 1994)
(“Citicorp cannot escape liability for the fraudulent conduct of its agent on
the sole basis that it included a disclaimer clause in the purchase
agreement.”); Blanchard v. Blanchard, 839 P.2d 1320, 1322-23 (Nev. 1992)
(“[I]ntegration clauses do not bar claims for misrepresentation.”); Van Der
Stok v. Van Voorhees, 866 A.2d 972, 975 (N.H. 2005) (“We have held that
neither a standard merger clause . . . nor the parol evidence rule . . . bars an
action for fraud.”) (citations omitted); Travers v. Spidell, 682 A.2d 471, 472-74
(R.I. 1996) (holding that general merger clause does not shield defendant
from liability for fraud); Merten v. Nathan, 321 N.W.2d 173 (Wis. 1982)
(contract exculpatory clauses are not enforceable when the fraud is carried
out intentionally or recklessly).
-9-
#26223, #26226
omitted). Again, in Engels, we examined a contract disclaimer, much like the one
presented here. It provided: “It is agreed and understood by and between the
parties hereto that this agreement is based upon the purchaser[’]s personal
inspection and investigation of the property involved and the ledgers and books of
the Sellers and not upon any representations or warranties of the Seller other than
set out herein.” 2000 S.D. 1, ¶ 7, 604 N.W.2d at 243. We held that the defendant
was not allowed to use the disclaimer clause in the “purchase agreement or the
contract for deed to shield itself from liability for fraud.” Id. ¶ 15. That was the
state of our law until 2002.
2. Schwaiger v. Mitchell Radiology Assocs., P.C.: A Shift to the
Minority Rule
[¶24.] Poeppel argues that Schwaiger controls the outcome of this appeal.
2002 S.D. 97, 652 N.W.2d 372. In Schwaiger, a 2002 split decision, this Court
declared for the first time that a claim of fraud in the inducement could be
dismissed as a matter of law because the written contract disclaimer was in “direct
contradiction” to the alleged oral misrepresentation. Id. ¶ 11. While not
announcing that it had done so, the Schwaiger Court diverged from our
longstanding precedent in fraudulent inducement cases to the nontraditional,
minority view held by a handful of jurisdictions. No mention was made of South
Dakota’s rule or of the many cases upholding it, and nothing was offered to explain
the abrupt turnabout. Moreover, the out-of-state cases cited are irreconcilable with
South Dakota law. For example, the Schwaiger Court wrote: “We agree that if a
written contract is in direct contradiction of an oral representation, reliance on that
oral representation, as a matter of law, is unjustified.” Id. ¶ 11. For this
-10-
#26223, #26226
proposition, however, the Schwaiger Court cited Davidson v. Wilson, 973 F.2d 1391,
1401 (8th Cir. 1992). Davidson was a Rule 10b-5 federal securities fraud case, and
under cases interpreting the Securities Exchange Act, special rules apply to the sale
of securities governed by the Act, which include use of an eight-factor test
applicable to Rule 10b-5 lawsuits. 973 F.2d at 1400. Based on this out-of-state
authority, the Schwaiger Court found it unnecessary even to address “whether parol
evidence is admissible to prove fraud in the inducement of a contract.” 2002 S.D.
97, ¶ 13 n.6, 652 N.W.2d at 378 n.6.
[¶25.] It is one thing to say that a contract’s disclaimer and merger clauses
may be considered as evidence that a party did not justifiably rely on some earlier
misrepresentation; it is quite another to rule as a matter of law that such clauses
bar even the opportunity to offer evidence of misrepresentation. Moreover,
Schwaiger’s “direct contradiction” rule cannot be understood as anything other than
dictum. This is because the Court went on to hold that “there are no specific facts
provided by Schwaiger supporting his claim for fraudulent inducement[,]” and
“[t]here are no specific material facts indicating that MRA [Mitchell Radiology
Associates] wrongfully induced Schwaiger to enter the initial employment contract
with MRA.” Id. ¶¶ 14, 15. Since there were no facts to establish fraudulent
inducement, it was a moot question whether the contract provisions directly
contradicted those (nonexistent) facts. Thus, the issue was not properly before the
Court, and the Schwaiger rule can be relegated to advisory status.
[¶26.] To establish fraud, Lester must prove that Poeppel committed any of
the following acts:
-11-
#26223, #26226
(1) The suggestion as a fact of that which is not true by one who
does not believe it to be true; (2) The positive assertion, in a
manner not warranted by the information of the person making
it, of that which is not true, though he believe it to be true; (3)
The suppression of that which is true by one having knowledge
or belief of the fact; (4) A promise made without any intention of
performing it; or (5) Any other act fitted to deceive.
SDCL 53-4-5. If fraud is established, the contract can be rescinded, regardless of
whether it is unambiguous.
[¶27.] Here, Lester alleged that Poeppel falsely represented to him that
Lester would receive the company’s financial information at the close of the contract
(when in fact he never received it), that the stocks Lester sought to purchase would
generate approximately $115,000 (when in fact an accounting firm’s report in
Poeppel’s possession concluded the value was 50% less), and that the company had
an exclusive franchise arrangement with Coldwell Banker. Accepting the truth of
Lester’s assertions, Poeppel misrepresented the value of his stock and the status of
the franchise arrangement, with a promise that Lester would see the company’s
financial status at the contract execution, which facts and representations Poeppel
used to fraudulently induce Lester to enter into the contract. Poeppel disputes
Lester’s allegations. Thus, these disputes form genuine issues of material fact on
the fraud question and are suitable for a jury.
[¶28.] Recently, this Court wrote that reliance in a fraudulent inducement
case is a question of fact. See Stern Oil Co., Inc. v. Brown, 2012 S.D. 56, ¶ 14, 817
N.W.2d 395, 400. Thus, Lester’s fraudulent inducement evidence should not have
been kept from a jury. Because the trial court barred Lester’s fraudulent
-12-
#26223, #26226
inducement evidence under the parol evidence rule, the court erred as matter of
law.
CONCLUSION
[¶29.] The trial court correctly concluded that the contract was clear and
unambiguous as to Lester’s receipt of financial documents. However, even though
the contract is unambiguous, Lester should have been allowed to present evidence
to a jury that he was fraudulently induced to sign the stock purchase agreement.
The trial court erred as a matter of law by barring Lester’s fraudulent inducement
evidence under the parol evidence rule. Because of our ruling on this issue, we need
not address the other issues raised. We reverse and remand for trial.
[¶30.] GILBERTSON, Chief Justice, and KONENKAMP, ZINTER and
SEVERSON, Justices, concur.
-13-