Summary
stating that a party may rescind the contract where it "has suffered a breach so material and substantial in nature that it affects the very essence of the contract and serves to defeat the objective of the parties"
Summary of this case from Jade Grp., Inc. v. Cottman Transmission Ctrs., LLCOpinion
Civil Action No. 03-1836.
May 13, 2004
MEMORANDUM
This Court conducted a bench trial in this case on March 9, 2004, as a de novo appeal from an arbitration award. The following constitutes the Court's findings of fact and conclusions of law, under Fed.R.Civ.P. 52.
I. Summary of Testimony
Plaintiff Soon Chon An is an individual who was born in Korea but has lived in the New Jersey for a number of years, and testified through an interpreter. The Defendant, Chong Kwon, is an individual who, according to the testimony, is the owner of the co-defendant corporation, JOA, Inc. Jurisdiction is based on diversity of citizenship 28 U.S.C. § 1332, as the parties are residents of different states and the amount in controversy exceeds $75,000.
The Plaintiff's Complaint presents three claims: Count I for fraud, Count II for breach of a Sublease Agreement Addendum, and Count III for rescission. Plaintiff testified that she wanted to lease a basement space in Upper Darby in a building which, to her knowledge, the Defendants leased from a third party. Plaintiff testified that Defendants were currently using the second floor of the building as a Korean restaurant and that she wanted to use the basement as an establishment that provided karaoke and other entertainment.
Although the document uses the term "Addendum," there does not appear to be any separate sublease agreement.
Plaintiff testified that she signed the Sublease Agreement Addendum, marked as Exhibit P-2, without reading it or having someone translate it for her. She said she did so because she believed that the Defendants' counsel, Robert Bush, was, at both the time of the transaction and at the time of trial, acting as her counsel and because she trusted the Defendants. She knew that the Sublease Agreement Addendum required a security deposit of $30,000 and monthly rental for a three-year term of $1,000 per month for the building plus $500 per month for the equipment and furniture. Under the terms of the Sublease Agreement Addendum, Plaintiff could only get her deposit back at the conclusion of the three-year lease, with several other inapplicable situations. The Sublease Agreement Addendum also provided that Plaintiff "also understands that if she wishes to terminate this sublease before the expiration, . . . she will forfeit the $30,000 security deposit."
Plaintiff began operations in August 2001 as a Korean style karaoke room. She did not have a liquor license, but sold wine and liquor that she bought, either from a state liquor store in Upper Darby or in New Jersey. Her business was successful for a period of time, but her profits began declining towards the end of 2002. She stopped operating her business at the end of December 2002 and also stopped paying rent at that time, when her counsel sent a letter notifying Defendants that she desired rescission of the Sublease Agreement Addendum.
Much of the testimony was disputed. Plaintiff asserted that the Defendants had made her promises, including the fact that she could sell liquor from the premises. Defendants asserted that, under Pennsylvania law, they could not make this promise. Plaintiff asserted that Defendants promised they would provide her with hot food from their Korean restaurant, but they no longer did this after they converted the Korean restaurant into an American-style sports bar. Plaintiff asserted that Defendant Kwon and her husband became antagonistic and mean, threatened to hit her, and refused to open the door to the second floor space so that Plaintiff could have access to her supplies and liquor to sell in her basement room when she desired to operate the business at times when the Defendants' business was not open. Plaintiff also testified that she bought liquor from the Defendants on occasion, which Defendants denied.
Testifying on behalf of the Defendants, Mr. Young Hoon Kwon, husband of Defendant Chong Kwon, said that they demanded the $30,000 deposit so as to have sufficient security for payment of all the rent and for the expensive equipment and furniture which they had in the basement room. Mr. Kwon denied substantial parts of the Plaintiff's testimony as to the formation of the Sublease Agreement Addendum. He denied that Defendants had guaranteed that the Plaintiff would make a profit in the operation of the karaoke room, denied selling Plaintiff liquor, denied that they refused to open the second floor at times convenient for the Plaintiff.
II. Discussion
The Court finds that Plaintiff has failed to sustain her burden of proof on any of the three counts, for fraud, breach of contract, and rescission. The Plaintiff was her only witness and could have called other persons who could have testified to corroborate her version of the facts. The Plaintiff admitted that she made a mistake by signing the Sublease Agreement Addendum without reading it, and was inconsistent in her answers to the Court's questions as to when she first realized what she had signed, and what were the terms and provisions of the Sublease Agreement Addendum. The Plaintiff has provided the Court with no reasons why she should not be held to the strict terms of the Sublease Agreement Addendum which she signed, and which the Court finds to be unambiguous.
As to her claim of fraud, the Plaintiff has failed to prove the requisite elements, which under Pennsylvania law are: (1) a material misrepresentation of fact, (2) which is false and (3) made with knowledge of its falsity, (4) which is intended to induce the receiver to act, and (5) upon which a party justifiably relies. Mellon Bank Corp. v. First Union Real Estate, 951 F.2d 1399, 1409 (3d Cir. 1991). The Court rejects Plaintiff's testimony that Defendants knowingly made false statements to her. Plaintiff's testimony about the promises that Defendants made to her and about the guarantee of profits is entirely too vague, not precise and contradicts the terms of the Sublease Agreement Addendum itself. Therefore, Plaintiff's claim for fraud fails.
As to the claim for breach of the Sublease Agreement Addendum, Plaintiff has provided no testimony in support of this count of the Complaint. The Defendants provided the space as agreed with the equipment as agreed. The Plaintiff subsequently, on her own, decided to stop paying rent. Although the forfeiture of the $30,000 deposit is indeed a significant amount, it is only slightly more than the balance of rent due for the 18 months of the three-year lease during which Plaintiff did not occupy the leased premises. Therefore, the Court cannot hold that the forfeiture is unconscionable or unenforceable as against public policy, or otherwise find the forfeiture of the security deposit to be unenforceable. Even though the security deposit is very high, it may not be unreasonable considering that Plaintiff was violating the state liquor control code by selling liquor in a non-licensed premises which could have put JOA, Inc., the holder of the liquor license, in jeopardy. Plaintiff entered into this business situation in a negligent manner, not reading the lease, not investigating the Pennsylvania liquor laws, and purportedly relying on the Defendant's attorney for advice.
Concerning the third count for rescission, Pennsylvania courts have held that rescission is proper when the complaining party has suffered a breach so material and substantial in nature that it affects the very essence of the contract and serves to defeat the objective of the parties. Castle v. Cohen, 676 F. Supp. 620 (E.D. Pa. 1987), aff'd in part and remanded in part, 840 F.2d 173 (3d Cir. 1988). One who wishes to rescind a contract must restore or tender a return of the property or security which was the subject matter of the contract. Fowler v. Meadow Brook Water Co., 208 Pa. 473, 57 A. 959 (1904). The Court concludes that the Plaintiff has failed to satisfy her burden of proof as to rescission, as she has not shown the requisite breach or tender.
Therefore, the Court will enter judgment in favor of Defendants on Plaintiff's Complaint. As indicated at the trial, the Court noted that Defendants did not pursue their counterclaim and the Court will, therefore, enter judgment in favor of Plaintiff and against Defendants on Defendants' counterclaim.