Butwinick v. Hepner

 representations justifiable. The district court did not order respondents to
restore any of the consideration received from appellants.
On appeal, appellants argue that the district court abused its
discretion by (1) concluding that the fraud claims were supported by clear
and convincing evidence, (2) finding that rescission was timely sought, (3)
ordering restoration without requiring the respondents to restore the
benefits that they received under the agreement, and (4) finding that there
was a special relationship between the parties. Each of appellant's
contentions of reversible error are discussed below.
Fraudulent inducement
To establish a cause of action for fraud in the inducement,
plaintiff must establish by clear and convincing evidence that (1)
defendant made a false representation, (2) defendant had knowledge of the
falsity of the representation, (3) defendant intended to induce plaintiff to
rely on the representation, (4) plaintiff justifiably relied on the
representation, and (5) plaintiff suffered damages as a result of this
reliance. J.A. Jones Constr. Co. v. Lehrer McGovern Bovis, Inc., 120 Nev.
277, 290, 89 P.3d 1009, 1018 (2004). When a party asserts fraud as a
grounds for rescission, however, reliance in fact—and not justifiable
reliance—is all that is required. Pac. Maxon, Inc. v. Wilson, 96 Nev. 867,
870-71, 619 P.2d 816, 818 (1980). This court reviews a district court's
rescission on the basis of fraudulent inducement for an abuse of discretion
and the district court's factual findings for support by substantial
evidence. Awada v. Shuffle Master, Inc., 123 Nev. 613, 622, 173 P.3d 707,
713 (2007).
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In this case, the district court was within its discretion in
holding that appellants fraudulently induced respondents into executing
the agreement for the sale of the stores because substantial evidence
supports the findings underlying its holdings. It is uncontested that
appellants owned the Centennial store. Both individual respondents
testified that appellants represented that the Centennial store was owned
by Norwalk Corporate and that they would not have completed the
transaction had they known that appellants owned the Centennial store.
Giving credence to respondents' testimony, see Castle v. Simmons, 120
Nev. 98, 103, 86 P.3d 1042, 1046 (2004), substantial evidence supports the
district court's finding that appellants misrepresented the Centennial
store's ownership, that appellants knew this representation was false, that
respondents actually relied on this misrepresentation, and that damages
resulted to the extent that the transaction ultimately led to financial loss.
Thus, we conclude that the district court did not abuse its discretion in
holding appellants liable for fraudulent inducement. Accordingly, we
affirm that portion of the district court's order as to its fraudulent
inducement holding.'
Timeliness of seeking rescission
Although the district court properly found that respondents
proved fraudulent inducement to support rescission of the parties'
agreement, rescission is an appropriate remedy only when a party seeks to
'As the district court's holding of fraudulent inducement is well-
founded, we need not address the intentional misrepresentation, negligent
misrepresentation, or fraud holdings.
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rescind a contract within a reasonable time. Mackintosh v. Cal. Fed. Say.
& Loan Ass'n, 113 Nev. 393, 403, 935 P.2d 1154, 1161 (1997). The trier of
fact determines what constitutes a reasonable time, and this court reviews
its determination for substantial evidence. Id. Delay alone does not
necessarily waive the right to rescind, id., although rescission must be
sought promptly after discovering the facts that entitle the defrauded
party to rescind. See Gannett Co., Inc. v. Register Publig Co., 428 F. Supp.
818, 824 (D. Conn. 1977). The right may be lost, however, when the delay
substantially prejudices the other party. See Citicorp Real Estate, Inc. v.
Smith, 155 F.3d 1097, 1103 (9th Cir. 1998).
Although both sides briefed this issue during the litigation
process, the district court did not enter a finding on the reasonable
timeliness of respondents' seeking rescission. This court may imply
findings when the evidence clearly supports the judgment and the district
court has not made express findings. lama Corp. v. Wham, 99 Nev. 730,
734, 669 P.2d 1076, 1078 (1983). If the record does not clearly support the
judgment, however, this court will not imply findings and will remand the
case for the district court to enter findings of fact. Commercial Cabinet
Co., Inc. v. Mort Wallin of Lake Tahoe, Inc., 103 Nev. 238, 240, 737 P.2d
515, 517 (1987).
The record here does not provide decisive support for finding
that rescission was timely sought. Respondents acknowledged that they
became aware of facts giving rise to their fraud claims in November or
December 2007, but did not seek rescission in their original February 2008
complaint and instead sought rescission in their May 30, 2008, amended
complaint, by which time the value of the stores had substantially eroded.
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4
Consequently, this court will not imply a finding on this point. Thus, we
vacate the portion of the district court order rescinding and awarding
restitution, made as a result of the rescission, and we remand the matter
to the district court for proceedings on whether rescission was sought
within a reasonable time. See id. (remanding the matter when the record
did not clearly support the judgment).
Restitution
Although we remand to the district court for a determination
of whether rescission was timely sought, we further point out that
rescission generally requires restoring both parties to the status quo.
Mackintosh, 113 Nev. at 407, 935 P.2d at 1163; but see Graber v. Comstock
Bank, 111 Nev. 1421, 1429, 905 P.2d 1112, 1116-17 (1995) (providing that,
when the fault of the defendant constitutes the basis for the rescission, the
general rule that rescission requires full restoration does not apply, and it
is appropriate that the defendant bear the loss in the transaction); Collins
v. Burns, 103 Nev. 394, 398-99, 741 P.2d 819, 822 (1987) (noting that the
defrauded party may recover out-of-pocket losses to cover the difference
between the amount paid and the amount received).
Here, as necessary to restore respondents to their status quo,
the district court properly ordered appellants to repay respondents' down
payment, subsequent payments made pursuant to the contract, and
reasonable operating business expenses. Mackintosh, 113 Nev. at 407,
935 P.2d at 1163. By declining to require respondents to restore the
benefits that they received under the contract, however, the district court
erroneously failed to effect restitution. See id. It is uncontested that
appellants provided value to respondents, although the assets conferred
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and their values are contested. The district court should have determined
the value that respondents received, taking into account the decrease in
value attributable to appellants' fraud, and incorporated that in
determining the restoration due to appellants. 2 Id. Thus, if the district
court finds on remand that rescission was sought within a reasonable
time, it should recalculate the restitutionary award in a manner that
restores both parties to the status quo, to the extent possible, consistent
with Mackintosh.
2Appellants argue that the district court erred in reasoning that, as
an alternative to ordering respondents to restore the value that appellants
conferred in the transaction, the court would otherwise identify and award
additional damages suffered by respondents as a result of appellants'
other torts. We agree with appellants that the district court's reasoning
fails because the other torts are related to the same transaction and are
not severable, such that damages in addition to rescission would
constitute double recovery. In particular, the transactions regarding the
accounts payable, open sales orders, and the noncompete agreement
constituted part of the same transaction as the asset purchase
agreement—which the district court rescinded for fraudulent
inducement—and were not severable from it. See Sprouse v. Wentz, 105
Nev. 597, 605, 781 P.2d 1136, 1140-41 (1989) (holding that whether a
contract is severable is a question of law and concluding that damages
may not be ordered on part of a contract that cannot be severed from the
rescinded contract). Moreover, the district court found, and substantial
evidence supports, respondents' lack of due diligence in entering into the
asset purchase agreement, which precludes recovery of damages. Pac.
Maxon, 96 Nev. at 870-71, 619 P.2d at 818 (noting that actual and
justifiable reliance are required to recover damages for fraud-based
claims).
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Special relationship
Finally, appellants challenge the district court's conclusion
that the parties had a special relationship on the basis of appellants acting
as both the seller and lender in this transaction. For the court to find that
a special relationship was present, respondents were required to show (1)
that they placed confidence in appellants because of appellants' position
and (2) that appellants knew or should have known of that confidence.
Mackintosh, 113 Nev. at 401-02, 935 P.2d at 1159-60 (finding a
presumption of a special relationship when a seller also acts as a lender in
a transaction, yet noting that the totality of facts must be considered in
reaching the factual determination whether a special relationship exists).
Appellants, however, only became lenders in this transaction shortly
before the transaction closed, after the terms of sale had been negotiated
and agreed to, and after respondents had given credence to appellants'
related misrepresentations. Respondents could not have placed a
heightened degree of trust in appellants' representations on the basis of
seller-lender status before that status came into being. Thus, we conclude
that the district court's finding on this issue was not supported by
substantial evidence and we vacate that portion of the district court's
order concluding that a special relationship was present. 3
3 The district court's conclusion that the inadequacy of respondents'
due diligence would preclude recovery on misrepresentation absent a
special relationship is incorrect as to rescission because respondents relied
in fact on appellants' misrepresentations. Pac. Maxon, 96 Nev. at 870-71,
619 P.2d at 818. Although this error in finding a special relationship
would be harmless as to an award of rescission if on remand the district
court determines that rescission was timely sought, we vacate to ensure
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For the reasons discussed above,
we ORDER the judgment of the district court AFFIRMED IN
PART as to the district court's fraudulent inducement holding, VACATED
IN PART as to the order of rescission and award of restitution, AND
REMANDED for proceedings as to whether rescission was sought within a
reasonable time and, if so, recalculating the award of restitution.
Hardesty
cc: Hon. Elizabeth Goff Gonzales, District Judge
Howard Roitman, Settlement Judge
Woodbury, Morris & Brown, d/b/a Woodbury Law
Marquis Aurbach Coffing
Eighth District Court Clerk
...continued
that this erroneous finding does not affect subsequent proceedings on
remand.
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