Sharma, Dhernder v. Mansoor Varani ( 2002 )

Affirmed and Opinion filed November 7, 2002

Affirmed and Opinion filed November 7, 2002.

In The

Fourteenth Court of Appeals

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NO. 14-01-01063-CV

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DHERENDER SHARMA, SHARENDA SHARMA, and SHTEEN SHARMA, Appellants

V.

MANSOOR VARANI, Appellee

On Appeal from the 10th District Court

Galveston County, Texas

Trial Court Cause No. 98CV0377

O P I N I O N

Appellants, Dherender Sharma, Sharenda Sharma, and Shteen Sharma, sued appellee, Mansoor Varani, to rescind a purchase agreement for a convenience store.  Varani counterclaimed to recover past due payments under the purchase agreement and an associated lease.  The trial court terminated, but refused to rescind, the purchase agreement. The trial court also awarded Varani past due rent under the lease.  In one issue, the Sharmas appeal  the trial court’s refusal to rescind the purchase agreement.  We affirm.

I. Factual and Procedural Background

On October 15, 1996, the Sharmas and Varani executed a Sale and Purchase Agreement in which the Sharmas agreed to purchase Varani’s interest in a convenience store for $250,000, payable in sixty monthly installments of $4,166.67.  This purchase included the business name, good will, and fixtures, but not the inventory or the property on which the store was located. On the same day, the Sharmas and Varani executed a Commercial Lease in which Varani agreed to lease the property on which the store was located to the Sharmas for sixty months at $1,800 per month. In the lease, Varani warranted the premises were in compliance with all local, state, and federal environmental regulations.  However, unbeknownst to the Sharmas, the Galveston County Health District had previously notified Varani the premises were not in compliance with applicable environmental regulations because he had failed to install a vapor recovery system on the store’s gas pumps.

The Sharmas took possession of the store in October 1996 and began making payments under the purchase agreement and lease.  They learned of the non-compliance in mid-1997 when a notice, addressed to Varani, came to the store.  After receiving the notice, Dherender Sharma went to the local office of the Galveston County Health District and confirmed the problem.  He also determined it would cost $80,000B$125,000 to install the system himself.  On March 12, 1998, he wrote Varani demanding that he correct the problem. Varani replied that he and the Sharmas agreed at the time of sale that Varani would charge no interest on the sale financing in return for the Sharmas= installing the vapor recovery system.^[1]

On April 23, 1998, the Sharmas filed this suit seeking to rescind the purchase agreement on the grounds it was induced by fraud.  Specifically, they requested return of the amounts they had already paid under the purchase agreement and an order that Varani buy back the inventory they had purchased from him.^[2]  In addition, on July 22, 1998, the Sharmas wrote Varani requesting rescission of the purchase agreement.

The Sharmas continued to occupy the premises and operate the store after seeking to rescind the purchase agreement.  They stopped selling gas in December 1998 because the gas pumps remained in non-compliance, and their supplier refused to deliver any more gas.  Dherender Sharma testified selling gas was the store’s primary draw for customers; therefore, business practically ceased at that time. By that time, the Sharmas had stopped making payments on both the purchase agreement and the lease. However, they continued to occupy the premises until June 1999 when Varani regained possession.  Varani subsequently counter-claimed alleging the Sharmas breached both the purchase agreement and the lease by failing to make all payments due under them.

After a bench trial, the trial court rendered judgment and entered findings of fact and conclusions of law.  With regard to the lease, the trial court concluded (1) Varani breached the lease by failing to comply with the warranty regarding environmental compliance;^[3] (2) the lease was voidable as of December 1998; (3) despite the lease being voidable as of December 1998, the Sharmas’ obligation to make payments continued until June 1999 because they occupied the premises until that time; (4) Varani was entitled to past due rent for the period the Sharmas occupied the premises without paying rent; and (5) Varani was not entitled to any past due rent beyond June 1999.

With regard to the purchase agreement, the trial court concluded (1) the value of the purchase agreement was destroyed by Varani’s breach of the lease because the sale of gasoline was a significant part of the store’s value; (2) the purchase agreement was void as of December 1998; (3) the Sharmas’ obligations to make payments under the purchase agreement ceased as of December 1998; and (4) Varani was not entitled to any past due payments under the purchase agreement. 

Finally, the trial court concluded the Sharmas were not entitled to any additional damages because they received the benefit of their bargain through December 1998.  Accordingly, the trial court entered judgment that the Sharmas take nothing, and Varani recover $14,400 in unpaid rent.  The trial court also awarded each party $4,500 in attorneys’ fees.

                                                               II. Discussion

                                             A. Issue Presented

In one issue, the Sharmas contend the trial court erred by refusing to rescind the purchase agreement. They do not challenge the award of unpaid rent to Varani.  They request we reverse and render judgment that they recover $48,500, which represents the $62,500 they paid on the purchase agreement less the $14,000 unpaid rent.^[4]  They also request judgment for attorneys’ fees.^[5]

The Sharmas assert the trial court did not “deal” with the rescission issue in its findings of fact and conclusions of law.  We disagree. The trial court did not use the word “rescission” in its findings of fact and conclusions of law.  However, the trial court’s conclusion that the Sharmas were not entitled to additional damages because they received the benefit of their bargain through December 1998 clearly addressed the rescission issue; these additional damages sought by the Sharmas were return of their payments under the purchase agreement on the grounds the agreement should be rescinded.  Further, when the trial judge orally announced his ruling at trial, he specifically stated he declined to rescind the purchase agreement because the Sharmas continued to operate the store until December 1998 despite being aware of Varani’s breach of warranty.  Therefore, although the trial court did not use the word “rescission” in its findings of fact and conclusions of law, it concluded the purchase agreement should not be rescinded.  Accordingly, we will review that conclusion.

B. Standard of Review

The decision whether to grant an equitable remedy such as rescission rests within the sound discretion of the trial court.  Texas Capital Sec., Inc. v. Sandefer, 58 S.W.3d 760, 774 (Tex. App.CHouston [1st Dist.] 2001, pet. denied); Schenck v. Ebby Halliday Real Estate, Inc., 803 S.W.2d 361, 366 (Tex. App.CFort Worth 1990, no writ).  We will not reverse a decision that rests within the sound discretion of the trial court absent an abuse of discretion. State, By and Through Texas Dep’t of Mental Health and Mental Retardation v. Ellison, 914 S.W.2d 679, 682 (Tex. App.CAustin 1996, no writ). Under the abuse of discretion standard, we must determine whether the trial court acted without reference to any guiding rules or principles; in other words, whether the act was arbitrary and unreasonable.  Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241‑42 (Tex. 1985). We must view the evidence in the light most favorable to the action of the trial court, and indulge every legal presumption in favor of the judgment.  Holley v. Holley, 864 S.W.2d 703, 706 (Tex. App.CHouston [1st Dist.] 1993, writ denied).  There is no abuse of discretion as long as some evidence of substantive and probative character exists to support the trial court’s decision.  Id.

                                                  C. Waiver of Rescission

The Sharmas assert rescission of the purchase agreement is an appropriate equitable remedy because Varani’s misrepresentation about environmental compliance amounted to fraud. Varani does not refute the Sharmas’ grounds for rescission.  Instead, he argues the Sharmas waived rescission because they continued to receive benefits under the agreement after learning of their grounds for rescission, and they did not timely act to rescind the agreement.  The trial court did not make a specific finding of fraud although it found Varani had constructive notice he was not in compliance with environmental provisions as warranted in the lease, and this breach of warranty destroyed the value of the purchase agreement.  However, we need not address whether the Sharmas had adequate grounds for rescission because the undisputed evidence supports the trial court’s conclusion that the Sharmas are not entitled to rescission because they continued to receive benefits under the purchase agreement after learning of their grounds for rescission.

Rescission is an equitable remedy that may be granted upon a number of possible grounds, such as fraud, mistake, or breach of a material part of a contract.  Humphrey v. Camelot Ret. Cmty., 893 S.W.2d 55, 59 (Tex. App.CCorpus Christi 1994, no writ); Boyter v. MCR Constr. Co., 673 S.W.2d 938, 941 (Tex. App.CDallas 1984, writ ref=d n.r.e.).  Upon rescission, the rights and liabilities of the parties are extinguished, any consideration paid is returned, and the parties are restored to their respective positions as if no contract had ever existed. Baty v. ProTech Ins. Agency, 63 S.W.3d 841, 855 (Tex. App.CHouston [14th Dist.] 2001, pet. filed); Humphrey, 893 S.W.2d at 59. To establish a right to equitable rescission, a party must (1) give timely notice to the seller that the contract is being rescinded, and (2) return or offer to return the property received and the value of any benefit derived from its possession.  Carrow v. Bayliner Marine Corp., 781 S.W.2d 691, 696 (Tex. App.CAustin 1989, no writ); David McDavid Pontiac, Inc. v. Nix, 681 S.W.2d 831, 836 (Tex. App.CDallas 1984, writ ref’d n.r.e.).

However, a party waives the right to rescission by continuing to receive benefits or consideration under a contract after learning of the grounds for rescission.  Daniel v. Goesl, 341 S.W.2d 892, 895 (1960); Guerrero v.  Hagco Bldg. Sys., Inc., 733 S.W.2d 635, 638 (Tex. App.CSan Antonio 1987, no writ).  Specifically, a buyer waives the right to rescind a contract for purchase of property if he continues to use the property after learning of the grounds for rescission. Carrow, 781 S.W.2d at 696; Guerrero, 733 S.W.2d at 637B38.

The Sharmas learned in mid-1997 that despite Varani’s warranty, the gas pumps lacked the required vapor recovery system.^[6]  Arguably, they did not know Varani’s misrepresentation amounted to fraud or a material breach sufficient to rescind the purchase agreement until March of 1998 when he declined to correct the problem.  In any event, the Sharmas certainly knew of their grounds for rescission at the latest in April 1998 when they filed suit seeking that remedy.

Although the Sharmas knew of their grounds for rescission at the latest in April 1998, they continued to operate the store and sell gas until December 1998.  In addition, they continued to occupy the premises until June 1999 although they could no longer sell gas.  In fact, Varani testified he had to file a forcible detainer suit in May 1999 to regain possession of the premises.  According to the Sharmas, they retained possession because they were attempting to dispose of inventory.  Nevertheless, they fully operated the store at least until December 1998.  The right to operate the store and use its name and good will was the consideration they bargained for under the purchase agreement. Therefore, because the Sharmas received benefits under the purchase agreement for at least eight months after learning of their grounds for rescission, they waived any right to rescission.  See Guerrero, 733 S.W.2d at 637B39 (finding land buyers waived rescission of sales contract by continuing to use and occupy land after learning of grounds for rescission); Compare Brandtjen & Kluge, Inc. v. Tarter, 236 S.W.2d 550, 554 (Tex. App.CFort Worth 1951, writ ref’d n.r.e.) (rejecting seller’s argument that buyer of defective machine waived rescission of sales contract by continued use after discovering defects; buyer notified seller of defects within four days after installation, prepared machine for seller’s disposal, and used it only to test it to try to make it work).  Accordingly, the trial court did not abuse its discretion by refusing  to rescind the purchase agreement.

                                                        D. Attorneys’ Fees

Finally, the Sharmas request we award them attorneys’ fees.  However, the trial court did award them attorneys’ fees on their meritorious breach of contract claim although this award was offset by the equal award to Varani on his meritorious claim for unpaid rent.  Therefore, we construe the Sharmas’ request as seeking additional attorneys’ fees if we find the purchase agreement should be rescinded.  Because the trial court did not abuse its discretion by refusing to rescind the purchase agreement, we overrule their request for additional attorneys’ fees.

We overrule the Sharmas’ sole issue, and affirm the trial court’s judgment.

/s/        Wanda McKee Fowler

Justice

Judgment rendered and Opinion filed November 7, 2002.

Panel consists of Chief Justice Brister and Justices Hudson and Fowler.

Do Not Publish C Tex. R. App. P. 47.3(b).

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^[1]  The Sharmas and Varani disagree on whether such a side agreement existed.  At trial, Varani testified he and Sharenda Sharma made this agreement.  Sharenda Sharma did not testify at trial, but Dherender Sharma testified he had no knowledge of any agreement.  Regardless of whether such an agreement existed, Varani declined to correct the problem based on the alleged agreement.

^[2]  Under a separate agreement, the Sharmas bought additional inventory and equipment from Varani for $48,000.

^[3]  The Sharmas originally pleaded fraud only, but the trial court allowed a trial amendment to plead  breach of warranty.

^[4]  Although the Sharmas assert in their brief they paid $62,500 on the purchase agreement, Dherender Sharma testified at trial they paid $70,833.  Varani, however, testified they paid $62,500.  In addition, the Sharmas state in their brief the amount of unpaid rent was $14,000; however, the trial court ordered payment of $14,400 in unpaid rent. Nevertheless, because we affirm the trial court’s judgment, these differences in figures are immaterial.

^[5]  Varani does not appeal any portion of the trial court’s judgment.

^[6]  In their brief, the Sharmas state they learned of the problem in March 1998; however, this statement is not supported by the record because Dherender Sharma testified they learned of the problem in mid-1997.