HEFFERAN v. FREEBAIRN

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District Court of Appeal, Second District, Division 2, California.

HEFFERAN v. FREEBAIRN.

Civ. 16653.

Decided: July 01, 1949

W. I. Gilbert, Jr., Los Angeles, for appellant. Boller, Suttner & Boller, Arcadia, for respondent.

This is an action for rescission of a contract for the sale of a restaurant brought by the purchaser upon the grounds of alleged fraudulent representations of the seller. From a judgment in favor of plaintiff, defendant appeals.

The undisputed facts are as follows: Defendant was the owner of a cafe known as the Gilray Coffee Shop. He had known plaintiff for several years. About December 10, 1946, defendant stated that he intended selling the cafe, whereupon plaintiff said he had always wanted to get into the restaurant business and if it was in a good location he might be interested in buying it. The day following this conversation plaintiff ‘looked the restaurant over’ spending about ten minutes in the coffee shop. About a week after the matter of the proposed sale was again discussed at which time defendant told plaintiff he wanted $55,000 for the business. A few days later plaintiff and defendant lunched at the cafe and defendant gave plaintiff the sales figures for the month of December, 1946, taken from the daily sales reports and also the comparative figures for November. After lunch the parties went to the office of defendant's auditor where plaintiff was shown profit and loss statements for the first ten months of 1946. The two men spent about an hour with the auditor, plaintiff going over the figures and making notes. Upon leaving the auditor's office they had a further discussion about the business, terms were agreed upon and plaintiff gave defendant a check for $5,000. The following day they opened an escrow. Plaintiff took possession of the cafe on January 1, 1947, before the escrow was closed. He paid into the escrow for defendant an additional $14,000 plus prepaid rent and other charges and signed and delivered a chattel mortgage on the equipment for $35,000. Prior to the opening of the escrow defendant did not have possession of the lease but negotiations between the parties were upon the basis that the lease had 57 months to run. During the course of the escrow the lease was obtained and upon discovering it would expire in 55 months an adjustment of $1,000 was made in the purchase price and the escrow instructions amended accordingly. The escrow was closed on January 7, 1947. Plaintiff gave defendant a check for the inventory about January 27 and served notice of rescission on January 28. A certificate of business under a fictitious name was filed by plaintiff on January 29, 1947, and thereafter he continued to operate the cafe and made two payments of $1,000 each on February 1 and March 1 on the promissory note. Defendant did not accept the offer of rescission and plaintiff filed this action on March 17, 1947.

As grounds for rescission plaintiff alleges that defendant represented the Gilray Coffee Shop would net $20,000 for 1946; the equipment was all in first class condition with the exception of the dishwahser, which needed $12 in repairs; defendant owned all the equipment which was free and clear of liens and encumbrances; the lease had 57 months to run and the only reason defendant was selling the business was because he intended going to Europe for two years. Plaintiff alleged that all the representations were false and fraudulent and that he relied upon them and was thereby induced to enter into the agreement.

The court found that in order to induce plaintiff to purchase the cafe defendant made the following representations: That the only reason he desired to sell the business was because he had lost his lease on his dental office and was closing it; he desired to take a trip to Europe and did not care to leave the business in the hands of a manager and he was closing out all his business activities; the business was free and clear of liens and encumbrances; the equipment was in first class condition and working order except for the dishwasher which needed about $12 in repairs; the lease had 57 months to run; the business would earn $20,000 for the year 1946 and he, defendant, had already taken $16,000 out of the business up to and including October, 1946; The profits of the business had been kept down by price control; price ceilings had just been removed but defendant had not raised his menu prices and if plaintiff raised prices he would make greater profits. The court further found that plaintiff relied on the representations and would not have purchased the cafe had he not believed them to be true; that the representations were untrue; defendant desired to sell the cafe because it was losing money; the cafe earned only $5,666.25 during the first eleven months of 1946, $387.19 during December, and defendant had taken only $10,115 out of the business up to and including October, 1946; the business was not free of liens in that the counter stools were not paid for and certain pots and pans were claimed by a former partner of defendant; some of the equipment was not in first class condition and proper working order but was in a run down and deteriorated condition and required replacement; the counter stools were in need of repair and some had been nailed to prevent them from falling apart; the grill was defective and nearly burned out; the lease had only 55 months to run; defendant had raised his menu prices more than one month prior to representing to plaintiff that he had not raised them and the business lost money in November despite the increase in prices; plaintiff discovered the falsity of the representations after taking possession of the business; plaintiff made a casual inspection of the cafe premises and equipment prior to taking possession but such inspection did not and could not reveal the true condition of the equipment and latent defects and plaintiff was relying upon the representations of defendant as to the condition of the equipment and not upon his own inspection; the two payments of $1,000 on account of the purchase price after giving notice of rescission were made for the purpose of preventing a default on the note and mortgage pending negotiations concerning plaintiff's notice of rescission and were not intended by him as a waiver of his rights under the notice.

Appellant contends: (1) The findings of the court as to misrepresentation and waiver in connection with (a) the length of the lease, (b) the liens and encumbrances and (c) the profits and the equipment are not supported by the evidence; (2) even assuming fraud the court committed reversible error in permitting rescission where the complaint fails to allege and the evidence fails to prove damage; (3) there is reversible error in finding against waiver.

Lease. There is substantial evidence to justify the finding that defendant represented the lease as having 57 months to run. However, plaintiff's subsequent acceptance of the lease with a price reduction constituted a waiver and he concedes that such acceptance removed the misrepresentation as a basis for judgment in his favor.

Liens and Encumbrances. There is no evidence to support the court's finding that the business was not free of liens and encumbrances. A representative of the Bieger Showcase & Fixture Company approached plaintiff and demanded $155 for payment on the counter stools. Plaintiff testified he tried unsuccessfully to reach defendant. Nevertheless he paid the amount of the demand without having consulted defendant, who advised him later on the same day that he had paid for the stools. There is no evidence that there was any money owing on the stools and no evidence of any lien. Nor is there any evidence of a lien or encumbrance on the pots and pans. A former partner of defendant claimed to have sold him certain pots and pans and placed his claim in escrow in the amount of $92.90. Plaintiff continued to act in affirmance of the contract after knowledge that the claim had been filed and he gave defendant a check for the inventory after having paid the $155 on the stools. Having acted in affirmance of the contract with knowledge of the claims plaintiff waived the fraud, if any there was.

Profits. There is substantial evidence that defendant falsely represented the business would earn $20,000 for the year 1946. However, plaintiff testified defendant told him he would like to have him (plaintiff) examine the books and determine for himself what the restaurant was making. Plaintiff accompanied defendant to the auditor's office and was shown the profit and loss statements. Plaintiff testified he noted the statements indicated a profit of only about $8,000 rather than the $16,000 defendant had told him the cafe had made and that upon inquiry defendant told him those statements did not include the rebates. Plaintiff made no demand to see any figures on the alleged rebates. There is no evidence that plaintiff was refused access to any of the books. The auditor testified that he asked plaintiff if he wished to look at the books themselves; that plaintiff replied he thought if he just copied the balance sheet and the profit and loss statements that would be all he would require; that plaintiff sat about fifteen inches away from him on his left and was at perfect liberty to look at anything there; that they started with the month of January, 1946, and plaintiff copied the sales, purchases, payroll, depreciation, certain major expense items and other items of income for each month of the year up to the end of October or November. Plaintiff admitted having taken down figures but testified he no longer had the paper on which they were written.

If plaintiff had exercised ordinary care and diligence he could have had full knowledge as to the profits of the business. An ordinarily prudent person upon discovering that the profit and loss statements showed a profit of only one half that claimed by defendant would have pursued his investigation. Plaintiff contends defendant advised him that the reason the profit and loss statements showed less profit was because they did not include the rebates. Defendant then gave plaintiff some examples of rebates. He made no representation as to how much those rebates totaled except for one or two of the items, which together did not exceed a maximum of $200 a month. Under such circumstances plaintiff had no right to assume they would equal the difference between the $8,000 profit shown by the profit and loss statements and the $16,000 profit alleged to have been represented by defendant. With reasonable diligence he could have ascertained that the figures as shown on those statements included the rebates and he cannot now excuse his lack of assiduity by the fact that he relied upon defendant's representations. Having undertaken an investigation of the books and having proceeded with it without hindrance it will be assumed that plaintiff acquired all the knowledge he desired and was satisfied with what he had learned. If he became aware of facts which tended to arouse his suspicion, or if he had reason to believe that the representations made to him were false or only partially true, it was his legal duty to complete his investigation and he had no right to rely on statements of defendant. Carpenter v. Hamilton, 18 Cal.App.2d 69, 71–72, 75, 62 P.2d 1397; Cameron v. Cameron, 88 Cal.App.2d 585, 199 P.2d 443, 447.

Insofar as the representation as to the raise in prices is concerned, plaintiff testified that there was an increase in gross business in the cafe in December over the same period in November and that defendant stated the cause of the increase was the raise in prices. Plaintiff contends the increase was because of the Christmas holidays and was not due to the increase in prices. But he testified defendant gave him the comparative figures for November and December on the day he inspected the books, which was the 19th of December, and further that the comparative figures were up to about the 18th of the month. There is no evidence that the prices were increased prior to November 8th and it would therefore follow that the increase in the gross business in the first eight days of December over the first eight days of November would be due to the price increase rather than the holiday business.

Equipment. There is substantial evidence to support a finding that defendant asserted the equipment was in good working condition with the exception of the dishwasher which needed repairs. However, plaintiff inspected the restaurant before purchasing it and saw the equipment in use. Furthermore he knew the day after he took possession that the dishwasher was not functioning properly and discussed the purchase of a new machine on the second or third of January. He discussed the grill with the manager before he took possession and stated he wanted to serve steaks and chops. At that time the manager told him it would be impossible to cook such meats on the grill. The fact that the grill was warped could have been seen when defendant made his inspection of the premises had he taken the trouble to look at it.

There is evidence that the backs of the stools had fallen off and had to be nailed but there is no evidence that the stools needed repair when plaintiff took possession. Their condition was observable to plaintiff prior to that time.

Waiver. Plaintiff was in the restaurant every day between December 19th and the day he took possession. He was aware of the condition of the grill and the dishwasher at the time he entered into the agreement with defendant to adjust the purchase price because of the term of the lease and at the time he paid into escrow the balance of the money owing. Thereafter he paid for the inventory and filed a certificate of doing business under a fictitious name. Plaintiff contends that since he entered into a binding contract to purchase the cafe on December 20, 1946, when he opened the escrow, there could be no waiver of fraudulent representations which came to his knowledge after that date. Obviously if there were fraudulent representations which were grounds for rescission plaintiff had the same right to rescind the contract when he became aware of the same prior to the close of escrow as he now claims upon the same grounds. Any acts indicating an intent to abide by a contract are evidence of an affirmance thereof and a waiver of the right to rescind. Ruhl v. Mott, 120 Cal. 668, 677, 53 P. 304; Frankish v. Federal Mortgage Co., 30 Cal.App.2d 700, 708, 87 P.2d 90; LeClerca v. Michael, 88 Cal.App.2d 700, 199 P.2d 343.

Plaintiff, having undertaken to examine the books, and not having been hindered in his inspection, had no right to rely upon the representations made by defendant and cannot complain that he did not learn the truth or that he was misled. And having inspected the premises and having acted in affirmance of the contract after he knew the condition of the equipment, he waived any right he might have had to rescind.

In view of the above stated conclusions it is not necessary to discuss appellant's second ground for reversal that damage was not alleged or proved.

Judgment reversed.

WILSON, Justice.

MOORE, P. J., and McCOMB, J., concur.