Misrepresentation and Nondisclosure

Syester v. Banta

133 N.W.2d 666 (Iowa 1965).

Plaintiff (Syester) won in trial and the defendant appealed.

Question

Was there misrepresentation?

Rule

First, there must be some evidence of fraud to rescind a release.

Second, to establish fraud, the plaintiff must show:

1. Defendant was the one who made the representation.
2. The representations were false.
3. That the representations “were as to material matters.”
4. The defendant knew the representations were false.
5. That the representations were made to defraud the plaintiff.
6. The plaintiff relied on the representation to enter the agreement and would not have done so otherwise.
7. Finally, that the plaintiff was damaged through the reliance.

Holding

There is no clear and convincing evidence to overturn the verdict by the jury. Affirmed.

Facts

The plaintiff was an elderly widow who went to the dance studio for dance lessons. She was easily persuaded to purchase additional hours of lessons totaling around $30,000. Several questionable tactics were used by the defendant’s to ensure that the sales occurred.

Eventually the plaintiff left the dance studio and sued for the misrepresentation. However, the defendants approached the plaintiff, convinced her to dismiss her counsel and sign a release for a settlement of around $6,000. Ultimately, this release dropped the pending lawsuit and precluded any future lawsuits the plaintiff wished to pursue.

In all, she was overcharged for many of the hours, purchased about 3,000 hours and used around 2,200. The jury returned a verdict against the defendant for 14,000 actual damages and 40,000 punitive damages.

Analysis

The instructions provided to the jury were correct. There was no challenge to those instructions. The actions and attitude of the defendant shows that there could be an element of fraud. As such, this is a jury question. Because the jury found against the defendant, the result will not be overturned.

Additional Notes

In today’s money, her bill would have been around $300,000.

Takeaways

• Without fraud, the release will bar litigation.

Hill v. Jones

725 P.2d 1115 (Arz. Ct. App. 1986).

The Hills are the plaintiffs. The court awarded summary judgment for the defendants and the plaintiffs appealed.

Question

Does the seller disclose facts related to a past termite problem?

Rule

Rule 1: Any fraud invalidates the release based on inspection. Absent fraud, the release is enforceable.

Rule 2 Restatement (2d) Contracts § 161: Duty to disclose arises when:

1. To prevent a previous statement from being a misrepresentation
2. To correct a mistake that the contract is entered into on the presumption that the contract is made in good faith
3. Again, to correct a mistake, but regarding evidence in writing
4. When there is a significant relationship between the parties that builds trust.

Practical rule: “When the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer.”

Holding

There is a duty to disclose, this is a jury question to determine if the duty was satisfied. Reversed and Remanded.

Facts

The Hills purchased the house from the Jones family. Prior to the purchase, the Hills had been to the house several times and had unrestricted access. On one of these occasions, the Hills noticed a ripple in the floor and asked if it was because of termite damage. The Jones’ responded that it was water damage but did not expand further.

The sell of the home was contingent on a termite report being passed. In this instance, the inspector came and found no evidence of termite damage. However, once the sellers moved in, they were informed by a neighbor that the home had been treated before. The inspector returned, noticed where he failed to locate the damage, why he failed, and that it should have been included in the report. Additionally, he added that the seller’s should have notified him of previous termite treatment because that is customary for conducting such reports.

So, the Hills sued saying that the contract was made with misrepresentations because the sellers failed to disclose and concealed the evidence of termite damage.

Analysis

The court determines that the existence or past existence of termites is a material fact. Because of this, it should have been disclosed to the buyers. However, it is up to the jury to determine if the buyers were put on notice because they still have a responsibility to conduct a reasonable investigation into the material facts.

There are several types of fraud (e.g. actual, silence, concealment). This case dealt with fraud by silence or concealment.

Additional Notes

A contract integration clause is not enforceable if there was a representation.

§ 161 gives instances where a party needs to disclose material facts:

1. Disclosure is necessary to prevent a previous assertion from being a misrepresentation or from being fraudulent or material.
2. Disclosure would correct a mistake of the other party as to a basic assumption to a failure to act in good faith and in accordance with reasonable standards of fair dealing.
3. The disclosure would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part.
4. The other person is entitled to know the fact because of a relationship of trust and confidence between them.

In other words, there are several ways selling party needs to disclose information. First, if asked directly (to avoid a misrepresentation). Second, when there is a basic assumption. Third, there is a duty to correct a written statement. Fourth, to any parties where there is a special relationship (such as a family member).

So, how does a buyer protect themselves? Either through an external investigation, or a clause saying that the sellers did not know of the issue, or the sellers guarantee that it does not exist (warranty).

Park 100 Investors, Inc. v. Kartes

650 N.E.2d 347 (Ind. 1995).

Park 100 is the plaintiff. They lost and appealed.

Question

“Whether Park 100 used fraudulent means to procure the signatures of the Karteses on the guaranty of the lease.”

Rule

Contract is invalid if obtained through fraudulent means. This can be determined if:

1. there was a material misrepresentation of fact, which
2. was false,
3. made with knowledge that it was false,
4. was relied on by the complaining party,
5. and the misrepresentation harmed the complaining party.

Holding

There was no error in the trial court determining fraud. Affirmed.

Facts

The Karteses owned a company called KVC which was expanding and needed new premises. They worked with Park 100 for a new location. Eventually, a lease deal was worked out. However, no part of this lease mentioned a personal guarantee and there were no discussions to include one.

Later, as the Karteses were leaving their business, they were approached by the attorney for Park 100 to sign a “Lease Agreement.” First, they asked if they could sign later (because they were leaving for a wedding rehearsal). When Park 100 said that it could not wait, the Karteses called their attorney to ask whether the agreement had been approved. The Park 100 attorney did not say anything regarding the approval. After the call, the Karteses signed, not realizing that it was a personal guarantee, nor being told that it was a personal guarantee.

Eventually, the Karteses realized that there was a personal guarantee in the agreement and disavowed it. Later still, the Karteses sold their interest in KVC, the new company defaulted on rent, and Park 100 sued to have the rent paid by the Karteses.

Analysis

The elements of fraud have been met. First, saying that the papers were lease papers and that KVC could not move into the new location without a signature was a material misrepresentation (considering that it was a personal guarantee, not a lease). Second, Park 100’s attorney knew that the document was a guarantee, so he knowingly made the false representation. Third, that the Karteses used ordinary diligence, believed the document was a lease (not a guarantee), and signed by that representation.

The fact that the document was titled “Lease Agreement” instead of “Personal Guarantee to Lease Agreement” furthers an argument that the document was meant to mislead the reader of the contents. When asking their attorney if the “Lease Agreement” had been signed, it makes sense that the Karteses would believe that this was a lease agreement that required the signature of the owners and was not a personal guarantee.

See Restatement (2d) § 163.

Disclaimer

The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.