Opinion
NO. 2013-CA-001204-MR NO. 2013-CA-001344-MR
05-15-2015
JERRY JOHNSON, and JILL JOHNSON, Husband and Wife APPELLANTS/CROSS-APPELLEES v. JEFFREY CAMPBELL and DEBBIE CAMPBELL, Husband and Wife APPELLEES/CROSS-APPELLANTS
BRIEF FOR APPELLANTS/CROSS- APPELLEES: Sandra J. Reeves Corbin, Kentucky BRIEF FOR APPELLEES/CROSS- APPELLANTS: Ralph W. Hoskins Corbin, Kentucky
NOT TO BE PUBLISHED APPEAL AND CROSS-APPEAL FROM KNOX CIRCUIT COURT
HONORABLE GREGORY LAY, JUDGE
ACTION NO. 10-CI-00456
OPINION
AFFIRMING AS TO CROSS-APPEAL NO. 2013-CA-001344-MR; REVERSING AND REMANDING AS TO APPEAL NO. 2013-CA-001204-MR
BEFORE: KRAMER, J. LAMBERT, AND NICKELL, JUDGES. KRAMER, JUDGE: Jerry and Jill Johnson filed suit against Jeffrey and Debbie Campbell in Knox Circuit Court, alleging that the Campbells fraudulently induced them to purchase certain real property situated on Big Indian Creek in Knox County. Following a trial, a jury determined that the Campbells did indeed defraud the Johnsons. However, the circuit court then directed a verdict in favor of the Campbells after determining that the Johnsons had presented insufficient evidence of damages. The Johnsons appeal the Campbells' directed verdict. The Campbells, for their part, cross-appeal the jury's finding of fraud. For the reasons discussed below, we affirm regarding the Campbells' cross-appeal, but reverse and remand regarding the Johnsons' appeal.
CROSS-APPEAL: Campbell v. Johnson , No. 2013-CA-001344-MR
We will address the Campbells' cross-appeal first because it raises arguments which, if valid, would render analysis of the Johnsons' appeal advisory.
The jury determined the Campbells fraudulently induced the Johnsons to purchase the real property at issue. Specifically, the jury indicated in its verdict form that it was satisfied from clear and convincing evidence:
(a) that before the [Johnsons] signed a contract to buy the subject property, the [Campbells] told them that they would have free natural gas service to the household for as long as the [Johnsons] owned the property; AND
(b) that the [Campbells] intended for the [Johnsons] to rely on the truth of that statement in deciding whether to buy the property; AND
(c) that the [Johnsons] did in fact rely on that statement as being true and otherwise would not have bought the property and such reliance was reasonable; AND
(d) that in fact the household did not have free natural gas service and [the Campbells'] statement to [the Johnsons] that it did was not true; AND
(e) that when [the Campbells] told [the Johnsons] the household would have free natural gas service, they either knew it was not true or acted with reckless disregard for whether it was true or not.
In their cross-appeal, the Campbells do not contest any of the jury's findings. Instead, they argue that the Johnsons' fraud claim should have been dismissed as a matter of law based upon three grounds they asserted in a pretrial motion for summary judgment: (1) the statute of frauds; (2) the doctrine of merger; or (3) principles of constructive notice.
As to their first two grounds, the Campbells note that the statute of frauds generally prohibits the enforcement of promises with respect to the sale of real estate that are not in writing and the doctrine of merger generally prohibits a purchaser of real estate from relying upon any representations regarding the real estate not set forth in the deed. With this in mind, the Campbells reason that the Johnsons were prohibited from asserting a claim of fraud based upon a false promise of a right to free natural gas being included with the title to the property because the original real estate purchase agreement and the initial deed they executed with the Johnsons made no mention of such a right.
See Kentucky Revised Statutes (KRS) 371.010(6).
See, e.g., Borden v. Litchford, 619 S.W.2d 715, 717 (Ky. App. 1981).
What the Campbells omit, however, is that a few weeks after they executed the purchase agreement and initial deed, they knowingly and voluntarily executed a "deed of correction." Importantly, the deed of correction explained that there was "also granted the right to usage of free gas from an active well" on the property, and that such right was only omitted from the initial deed "due to an oversight." This deed of correction was a sufficient "writing" for the purpose of the statute of frauds. Moreover, it rendered the doctrine of merger inapplicable; it effectively amended the prior deed to include the "right to usage of free gas from an active well."
Next, the Campbells argue that an effective review of their chain of title and various recorded leases referenced in their deed would have revealed to the Johnsons that title to the property at issue did not include a right to free natural gas. As such, the Campbells argue that the Johnsons were prohibited from suing them for fraud because the Johnsons either had constructive or inquiry notice of their misrepresentation before the purchase agreement was consummated.
However, Kentucky law has long recognized where a purchaser of real property alleges the seller has made a fraudulent misrepresentation as to the condition of title, the seller cannot defend by arguing that the purchaser should have examined the public records to ascertain the correct information. Stallard v. Adams, 312 Ky. 532, 228 S.W.2d 430 (1950); Cowles' Ex'r v. Johnson, 297 Ky. 454, 179 S.W.2d 674, 675 (1944); Sellars v. Adams, 190 Ky. 723, 228 S.W. 424 (1921); Young v. Hopkins, 22 Ky. (6 T.B. Mon.) 18 (1827). In other words, in the case of fraud, the victim is not required to have prevented the fraud by examining the public record to ascertain the truth of the representation.
For more recent applications of this rule, see Insko v. Ransdell, 2006-CA-001885-MR, 2008 WL 54770 (Ky. App., Jan. 4, 2008); Harris v. Brock, 2002-CA-002287-MR, 2003 WL 22872319 (Ky. App., Feb. 27, 2004). Under Kentucky Rules of Civil Procedure (CR) 76.28(4)(c), citation to unpublished Kentucky appellate decisions rendered after January 1, 2003, is permitted under narrow circumstances. We cite these cases merely to reflect continuity in our jurisprudence.
Having reviewed the balance of the Campbells' arguments set forth in their cross-appeal, and having determined that the circuit court committed no error in rejecting them, we AFFIRM in this respect.
DIRECT APPEAL: Johnson v. Campbell , 2013-CA-001204-MR
The focus of the Johnsons' appeal is the portion of the circuit court's judgment that immediately follows its determination that the Campbells fraudulently induced the Johnsons into purchasing the property. In relevant part, it provides:
After the jury returned its verdict regarding the threshold issue of whether fraud had occurred, the [Campbells] renewed their motion for a directed verdict in their favor regarding the remaining issue of damages. At trial, the [Johnsons] sought the equitable remedy of rescission of the contract of sale and presented no evidence of actual monetary damages. The Court concludes as a matter of law, however, that such equitable remedy is available only to the extent that the [Johnsons] have no adequate remedy at law; and otherwise, the measure of damages is whatever is necessary to place the injured party "in the same position he would have occupied had he not been defrauded." Johnson v. Cormney, 596 S.W.2d 23, 27 (Ky. App. 1979). The Court finds that the [Johnsons] have been receiving free natural gas service to the subject property since they moved into the dwelling house in 2008. Further, the [Johnsons'] own witness Sandy Smith testified that her employer Vinland Energy (the operator of the subject gas well) would allow the plaintiffs to continue their existing access to the same natural gas service in accordance with Vinland's standard market rates. The Court therefore finds that the plaintiffs have an adequate remedy at law, and therefore rescission of
the contract is not an available remedy. There being no basis upon which the jury could make a finding for monetary damages, no money damages having been presented by the [Johnsons], the [Campbells'] motion for a directed verdict should be granted.
The Johnsons acknowledge that they did not present evidence supporting their assertion that the market value of the land they purchased from the Campbells was, due to the Campbells' fraud, worth less than the $165,000 they paid for it. The Johnsons also acknowledge that, had they sought to affirm the agreement to purchase the property and then sue for damages on account of fraud, the difference between what they paid for the land and its actual market value would have been a proper measure of damages. See Young v. Vista Homes, Inc., 243 S.W.3d 352, 366 (Ky. App. 2007). The Johnsons' point of contention, however, is that they did not seek to affirm the agreement and sue for damages. Rather, they sought to rescind the agreement and to be placed back into the status quo. They contend the circuit court erred by prohibiting them, in its discretion, from seeking this remedy.
We agree. In Patel v. Patel, 706 S.W.2d 3 (Ky. 1986), which also involved fraudulent inducement to enter into a contract (in that case, a contract to purchase a motel), the sellers in that matter likewise argued that the proper remedy was merely for the aggrieved buyers to receive the difference between the fair market value of the motel (i.e., $136,000) and what was paid for it. The sellers similarly argued that because the buyers paid $136,000 for the motel, the buyers had no remedy and the case should have been dismissed as a matter of law. Id. at 5. In affirming the trial court's rejection of this argument, however, this Court explained:
"The rule is that where fraud has been committed in obtaining a contract it may be taken advantage of either by an affirmance of the contract and recovery of damages on account of the fraud or by a rescission of the contract." Webb v. Verkamp Corp., Ky., 254 S.W.2d 717, 719, (1953). If the buyer elects to rescind the contract, he is entitled to "a recovery of the thing parted with as the consideration". Kentucky Electric Development Co.'s Receiver v. Head, 252 Ky. 656, 68 S.W.2d 1 (1934).Id.
Patel stands for the proposition that it is the plaintiff's election and not the circuit court's discretion that determines whether a fraudulently induced contract will be affirmed or rescinded. Id. ("In this case, the buyers did not elect to affirm the contract and sue for damages as appellants suggest, but rather chose to rescind the contract and recover the $35,000 down payment. . . ." (Emphasis added.)). And, as indicated in Patel, if the plaintiff chooses the remedy of rescission, recovery is measured by a return to the status quo. As to what "status quo" means in the context of rescission, a Court from our sister state of Indiana has more fully elaborated by explaining:
The limit on a plaintiff's right to elect is that the mode of rescission
can only be adopted upon certain terms; those terms are: That he surrender or tender a surrender within a reasonable time to the other contracting party the thing which he has received under the disaffirmed contract. He is not permitted to hold on to the thing which he has received and successfully effect a restoration of the thing which he has parted with under the contract.
This usually requires a plaintiff to restore any benefit he received under the contract, including a return in specie of any property received and a reasonable rental value for the use of the property, plus damages for waste, if any. Likewise, the defendant must restore any money paid by the plaintiff under the contract plus interest, monetary reimbursement for reasonable repairs, expenditures and improvements made on the property by the plaintiff, and, where a business has been sold, a reasonable amount of compensation for the value of the plaintiff's labor and services rendered during the period of time which he operated and possessed the property.Grissom v. Moran, 154 Ind. App. 419, 292 N.E.2d 627, 629 (1973) (internal citations omitted).
. . . .
A plaintiff, when seeking to rescind a contract, need only prove his right to rescind and that he is able to return in specie any property he has received under the contract, or its reasonable value if a return in specie is impossible. Once the right to rescind is established, the burden then shifts to the defendant to prove with specificity the various equities necessary to return both parties to the status quo, particularly those which will offset the amounts that he must restore to the plaintiff.
. . . .
On the basis of the plaintiff's proof that he is able to return in specie the property he has received, or its reasonable value, and the defendant's evidence of the various equities involved, the trial court will then adjust the equities and attempt to return the parties to the status quo. If the trial court has not made specific findings of fact detailing his computations in returning the parties to the status quo, absent a showing of abuse of discretion, we must assume that the trial court properly weighed the equities.[]
The case at bar was a jury trial, not a bench trial, and the jury was requested to determine all of the issues herein. Nevertheless, had the court allowed this matter to proceed to a determination of what the Johnsons were entitled to recover following rescission, it would have required a balancing of equities; that, in turn, is the prerogative of the court or the court with the assistance of an advisory jury. See Daniels v. CDB Bell, LLC, 300 S.W.3d 204, 211 (Ky. App. 2009):
[C]auses of action historically legal are triable by jury and causes of action historically equitable are triable by the court. If both legal and equitable issues are joined in a single cause of action, the appropriate mode of trial must be followed as to each. And, in fact, under CR 39.03, if desired, an advisory jury is available for actions not triable of right by a jury.Additionally, with or without the assistance of an advisory jury in balancing the equities relating to rescission, the circuit court would also have been required to make findings of fact in support of its decision. See CR 52.01.
Grissom is an Indiana appellate decision, but is also consistent with Kentucky law on this point and provides a further measure of guidance. See, e.g., Grant v. Wrona, 662 S.W.2d 227, 203 (Ky. App. 1983), providing:
Where the controversy relates to land, it is not necessary that plaintiff should abandon it pending suit and leave the buildings to destruction and the land to be injured by nonuse. It is enough if the defendant, on performing his part of the decree of rescission, may receive back what he parted with, subject to any equitable adjustment that may be ordered.(Quoting Twin Lakes Land & Water Co. v. Dohner, 242 F. 399 (6th Cir. 1917)).
Here, the Johnsons elected to rescind their contract with the Campbells. They presented evidence that would have sufficiently enabled the circuit court to determine what was necessary to return them to the status quo. This evidence included, but was not limited to: (1) the consideration they parted with to purchase the Campbells' property (i.e., $165,000); (2) improvements they made to the property shortly after purchasing it (i.e.,$4,600 for the installation of a natural gas powered heating and air conditioning system); and (3) their attorney's fees in prosecuting this matter. The circuit court had no legal basis for denying the Johnsons this remedy. Accordingly, the circuit court's decision to deny the Johnsons the remedy of rescission (and consequently dismiss their case for lack of any remedy) is REVERSED, and this matter is REMANDED for the circuit court to (1) determine, as a matter of equity and based upon the evidence presented, what is necessary to place the Johnsons back into the status quo; and (2) enter an award in favor of the Johnsons in conformity therewith.
Depending on the circumstances, a trial court may rely on its equitable powers to award attorney's fees even in the absence of a statutory or contractual obligation. See Kentucky State Bank v. AG Services, Inc., 663 S.W.2d 754-55 (Ky. App. 1984).
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ALL CONCUR. BRIEF FOR APPELLANTS/CROSS-
APPELLEES:
Sandra J. Reeves
Corbin, Kentucky
BRIEF FOR APPELLEES/CROSS-
APPELLANTS:
Ralph W. Hoskins
Corbin, Kentucky
Grant v. Wrona, 662 S.W.2d 227, 230 (Ky. App. 1983) (quoting Webb v. Verkamp Corp., 254 S.W.2d 717, 719 (Ky. 1953)). That said, the Campbells do not argue and the court did not find that this limit applied under the circumstances of this case.