Morrissey v. Watts ( 2020 )

IN THE COURT OF APPEALS OF IOWA
No. 19-0404
Filed June 17, 2020
JOSEPH MORRISSEY,
Plaintiff-Appellee,
vs.
TIM WATTS and INTERNATIONAL WORKSHOP, LLC,
Defendants-Appellants,
and
PAM RICKER,
Defendant.
________________________________________________________________
Appeal from the Iowa District Court for Polk County, Sarah Crane, Judge.
Defendants appeal the district court order entering judgment for a plaintiff
on his claim of fraudulent misrepresentation and omission. AFFIRMED.
Matthew G. Sease of Kemp & Sease, Des Moines, for appellants.
William B. Serangeli and Joseph M. Borg of Dickinson, Mackaman, Tyler &
Hagen, P.C., Des Moines, for appellee.
Considered by Bower, C.J., and Doyle and Schumacher, JJ.
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DOYLE, Judge.
The defendants appeal the district court order entering judgment for the
plaintiff in the amount of $154,300 on a claim of fraudulent misrepresentation and
omission.1 The defendants challenge the sufficiency of the evidence to support
the finding that they committed actionable fraud.
This action stems from the parties’ failed business venture. Joseph
Morrissey wanted to open a woodworking shop in Ankeny. Morrissey approached
Tim Watts for information on how to go about it because Watts and his company,
International Workshop LLC (IW), operated a woodworking shop in Minnesota.
Their discussions led to the signing of a letter of intent to open a new woodworking
business in the Des Moines area, with IW owning 60% of the business and
Morrissey owning 40%. Morrissey agreed to contribute $150,000 to the venture,
with $30,000 allocated to IW as a “consulting fee” for the administrative costs of
setting up the Iowa company, $50,000 considered a loan to be repaid to Morrissey
over time, and the remaining $70,000 to build out, equip, and operate the Iowa
store. In return, IW agreed to provide management oversight and guidance,
“including policies, procedures, accounting, legal and marketing oversight,” for a
monthly fee.
The undertaking did not go according to plan. In the six months after signing
the letter of intent, costs and expenses exceeded $200,000. IW was slow to pay
bills, and so the business was unable to open its doors as expected in February
1Initially, the court also entered judgment against a third defendant, Pam Ricker,
but dismissed the claims against Ricker in its ruling on the defendants’ motion to
amend, modify, or enlarge.
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2015. In March 2015, Morrissey tried to open the business without IW. But the
business failed by July 2015 when IW stopped making rent payments.
Morrissey filed a petition alleging the defendants committed security
violations, fraud, and breach of fiduciary duty. After a bench trial, the district court
found Morrissey proved his claim that the defendants committed fraud by failing to
provide sufficient or true disclosures about the Minnesota workshop. The court
found the defendants’ false representations that the Minnesota woodworking shop
was “profitable” constituted actionable fraud. The defendants challenge that
finding on appeal.2
We review the district court’s judgment for correction of errors at law. See
Bus. Consulting Servs., Inc. v. Wicks, 703 N.W.2d 427, 429 (Iowa 2005). The trial
court’s findings are binding if supported by substantial evidence. See id. Evidence
is substantial if a reasonable mind would accept it as adequate to reach the
conclusion. See id. “When a party challenges a district court’s ruling claiming
substantial evidence does not support the decision, we must view the evidence in
the light most favorable to support the judgment and liberally construe the court’s
finding to uphold, rather than defeat, the result reached.” Papillon v. Jones, 892
N.W.2d 763, 770 (Iowa 2017) (citation omitted).
To succeed on a claim of fraudulent misrepresentation, a plaintiff must
establish the elements by a preponderance of clear and convincing proof. Van
Sickle Const. Co. v. Wachovia Commercial Mortg., Inc., 783 N.W.2d 684, 687
2 Although the defendants separately argue that failing to disclose losses by prior
investors was not actionable fraud, that failure is part of the claim the defendants
falsely represented the business was profitable.
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(Iowa 2010). These elements are: “(1) representation, (2) falsity, (3) materiality,
(4) scienter, (5) intent to deceive, (6) reliance, and (7) resulting injury and damage.”
Id. (citation omitted). The defendants allege that Morrissey failed to prove each of
these elements.
The record supports the finding that the defendants’ statements about the
profitability of the Minnesota business constitute actionable fraud. Watts told
Morrissey that the Minnesota business “was a profitable venture ‘and then some’”
and gave Morrissey literature stating that the business “is profitable and is looking
forward to a fourth year of robust growth.” But Ricker, a certified public accountant
who provided accounting services to IW, testified that it always operated at a loss.
Ricker also testified that the projections provided to Morrissey to entice him to
invest in a woodworking shop were inaccurate. Watts admitted that the business
always operated at a loss and the projections given to Morrissey did not reflect the
results of his business. And when Morrissey asked Watts “pointblank” if the
woodworking shop “was a money-making venture and whether it was going to
sustain a livelihood and provide for [Morrissey’s] family,” Watts replied that “it
would and then some.” Morrissey relied on Watts’s representations about the
profitability of his business when deciding to invest in the new venture. Sufficient
evidence supports a finding that the defendants made representations about the
profitability of the business that were false and material to Morrissey investing in
the venture. The record also supports a finding that the defendants knew the
representations were false or made them with reckless disregard as to their
veracity, which shows the defendants’ intent to deceive. See Dier v. Peters, 815
N.W.2d 1, 9 (Iowa 2012).
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The defendants claim that Morrissey was not justified in relying on these
representations because Morrissey sought advice from others who expressed
concerns before he invested in the venture. But Morrissey need not prove his
reliance was that of a reasonably prudent person. See Spreitzer v. Hawkeye State
Bank, 779 N.W.2d 726, 736 (Iowa 2009). The question is whether Morrissey was
justified in relying on the representations based on his specific qualities and
characteristics, as well as the surrounding circumstances. See id. at 737. And
that reliance cannot be blind. See id. In other words, a plaintiff cannot recover if
the misrepresentations relied on would have been found to be false with cursory
examination or investigation. See Dier, 815 N.W.2d at 9. That is not the case
here. Instead, the defendants provided Morrissey with projections that included
no background information, making it “impossible” for a person like Morrissey to
understand how they were created.
Finally, the defendants allege that Morrissey failed to show their
misrepresentations damaged him. They argue that the misrepresentations
concerned the overall profitability of a woodworking shop while Morrissey’s
investment was lost because of the costs of the build out, a matter unrelated to
profitability. But the issues are not as separate as the defendants claim. The
defendants’ projection about the business’s profitability led Morrissey to believe
that the defendants had some expertise in how to open and run a profitable
woodworking shop. As a result, Morrissey invested $150,000 in the venture with
the belief that the defendants would be providing a $150,000 “in-kind” investment
based on that expertise. The defendants never provided any such contribution,
and Morrissey’s cash contribution alone could not sustain the business when its
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expenses exceeded its income. Morrissey’s loss flows from investing in the
business venture, and his investment flows from the defendants’
misrepresentation. See Midwest Mgmt. Corp. v. Stephens, 353 N.W.2d 76, 82
(Iowa 1984) (holding that the defendant liable for the shareholders’ loss where
“[t]heir loss flows from their joining in the venture, and their joining in the venture
flows from [the defendant’s] concealment”).
Because the evidence supports the finding that the defendants committed
actionable fraud in misrepresenting the profitability of the Minnesota woodworking
shop, we affirm the judgment entered in favor of Morrissey.
AFFIRMED.