STATE OF MINNESOTA
IN COURT OF APPEALS
Steven M. Hagerty, et al.,
Filed July 13, 1999
Todd County District Court
File No. C797593
James L. Sifferle, 10209 Tenth Avenue Circle, Bloomington, MN 55420 (for respondents)
Considered and decided by Lansing, Presiding Judge, Kalitowski, Judge, and Huspeni, Judge.
In an appeal from judgment, Terry Braith contends the district court erred in finding that he and Steven Hagerty rescinded their purchase agreement for the sale of an auto-parts supply business. The district court correctly determined that a party opting for an equitable remedy in the nature of rescission is entitled only to restitutionary damages. The district court did not err in holding that Braith had no security interest in inventory Hagerty acquired after closing, or in finding that he failed to establish the value of certain inventory. We affirm.
Terry Braith owned and operated Terry's Auto Supply, an auto-parts supply store. Braith sold the business and leased the property to Steven Hagerty, who did business as S&P Services. The parties executed a purchase agreement for the furniture, fixtures, and inventory. Hagerty made a downpayment of $30,000 and signed an accompanying note, in which he agreed to pay Braith an additional $96,149.36.
S&P Services operated the business for 18 months, until Braith telephoned Hagerty with questions about Hagerty's ability to fulfill his financial obligations under the agreement. Hagerty returned the business to Braith the next day. Braith claims the parties reached no agreement about the future liability of Hagerty during the conversation. Hagerty claims Braith agreed to release him from any future liability. Both parties agree, however, that at the time Braith retook possession, Hagerty was in debt to Midwest Auto Parts for $45,154.38 and that Braith was unaware of the debt. Braith subsequently negotiated with Midwest Auto Parts, reducing the debt to $32,000, which he paid.
The purchase agreement provided that Hagerty would maintain the business's inventory level at no less than 90 percent of the inventory level at closing. Hagerty claimed the inventory remained constant and any appearance of diminution was due to a devaluation of the goods by Midwest Auto Parts, the supplier. Braith stated he conducted an accounting approximately five months after retaking possession, from which he extrapolated that the inventory on the date he retook possession was significantly less than the 90 percent required under the purchase agreement.
The purchase agreement also required Hagerty to execute a security agreement in favor of Braith in the assets sold and required that "the Seller shall have a first lien on all property being sold herein until the balance owed by Buyer to Seller is paid in full." The security agreement the parties executed, however, contained no provision for a lien on inventory acquired after the closing. The district court therefore found that Braith had no security interest in after-acquired inventory items.
Following a bench trial, the district court determined that the parties indicated by their conduct subsequent to their telephone conversation that they had rescinded their written agreements during that conversation. The court determined that because the agreement had been mutually rescinded, Braith was not entitled to seek further remedy under the terms of the note. The district court also held that Braith could not recover from Hagerty the $32,000 (plus costs and interest), which Hagerty owed Midwest Auto Parts and which Braith paid. The district court based its decision, in part, on its finding that Braith had no security interest in inventory that Hagerty acquired after the closing. The district court further found that Braith failed to adequately prove the value of the business's inventory at the time he retook possession. Braith appeals, challenging the restriction of his remedy, the denial of his security interest in the after-acquired inventory, and the finding that he did not adequately establish a reduction in value of the presale inventory.
Subsequent acts and conduct of the parties may establish implied rescission of a contract. Wolpert v. Foster, 312 Minn. 526, 532, 254 N.W.2d 348, 352 (1977); Mitchell, 225 Minn. at 150, 30 N.W.2d at 30-31. The district court found the parties came to an agreement in the nature of a rescission during their telephone conversation and ratified their agreement through their subsequent conduct. Although a strict rescission would have required Braith to return Hagerty's downpayment and Hagerty to return an unencumbered stock of inventory, Hagerty's renunciation of his right to nearly $35,000 in equity worked a roughly equitable rescission, in light of the $32,000 encumbrance Braith assumed. See Jacobs v. Farmland Mut. Ins. Co., 377 N.W.2d 441, 445-46 (Minn. 1985) (rescission restores parties to status quo ante).
Whether the parties' subsequent conduct modified the terms of the written contract is a question for the fact-finder. Poser v. Abel, 510 N.W.2d 224, 228 (Minn. App. 1994) (citing Wormsbecker v. Donovan Constr. Co., 247 Minn. 32, 41, 76 N.W.2d 643, 649-50 (1956)), review denied (Minn. Feb. 24, 1994). Hagerty's testimony and his acts of abandoning his equity and immediately returning the business to Braith support the district court's finding that the parties' intended to reach an agreement in the nature of rescission. See Minn. R. Civ. P. 52.01 (findings of fact not set aside unless clearly erroneous). Having elected to rescind the agreement, Braith may not also seek monetary damages for breach of contract. See Jacobs, 377 N.W.2d at 445 (by seeking rescission, a party seeks to establish no contract existed).
Braith argues on appeal that his accession to rescission was ineffective because Hagerty did not disclose his indebtedness to Midwest Auto Parts during the parties' conversation. The district court's determination that rescission was effective constitutes an application of law, which we review de novo. See Frost-Benco Elec. Ass'n v. Minnesota Pub. Utils. Comm'n, 358 N.W.2d 639, 642 (Minn. 1984). A rescission is contractual in nature. See Restatement, supra, Chapter 12, Topic 3, Introductory Note. A contractual agreement is voidable when one "party's manifestation of assent is induced by either a fraudulent or material misrepresentation by the other party, upon which the recipient is justified in relying." Id. § 164, cited by Carpenter v. Vreeman, 409 N.W.2d 258, 261 (Minn. App. 1987).
It is undisputed that Hagerty failed to inform Braith that the business had incurred an encumbrance on the inventory exceeding $45,000 (more than half the original value of the inventory at closing). See Restatement, supra, § 161(b) (nondisclosure may constitute a misrepresentation); MCC Invs. v. Crystal Properties, 415 N.W.2d 908, 910 (Minn. App. 1987) (misrepresentation of outstanding $45,000 judgment material to $1,250,000 transaction), review denied (Minn. Feb. 12, 1988). Braith, however, did not testify that he relied on Hagerty's misrepresentation when he orally agreed to rescind the contract. Cf. MCC Invs., 415 N.W.2d at 910-11 (reliance shown when buyer testified that knowledge of tenant's failure to pay rent would have affected decision to purchase property). Because Braith failed to demonstrate reliance, the agreement to rescind is enforceable. See id. at 911; see generally Lunning v. Land O' Lakes, 303 N.W.2d 452, 459 (Minn. 1980) (plaintiff must show reliance on representation or concealment). That the purchase agreement contained a clause prohibiting modification, except in writing, does not alter the parties' ability to orally rescind the contract. See Larson v. Hill's Heating & Refrigeration, Inc., 400 N.W.2d 777, 781 (Minn. App. 1987) (oral rescission of written contract and conduct in conformity with rescission is valid regardless of written contract provision prohibiting modification except in writing) (citations omitted), review denied (Minn. Apr. 17, 1987); Restatement, supra, § 283, cmt. b. The district court did not err by applying an equitable remedy calculated to uphold the parties' rescission.
The district court determined that Braith had no security interest in inventory items Hagerty purchased from Midwest Auto Parts after the closing because the purchase agreement referred only to the items in possession at the time of the sale, not after-acquired goods. The parties' UCC-1 financing statement describes the secured property as
[b]usiness equipment listed in attached Exhibit A, and including inventory, accounts receivable, and products and proceeds of collateral, and name known as Terry's Auto Supply.
Exhibit A contains an itemized list of equipment.
A UCC filing is intended merely to give notice that the secured party who has filed may have a security interest in the collateral described. World Wide Tracers, Inc. v. Metropolitan Protection, Inc., 384 N.W.2d 442, 447 (Minn. 1986) (citing U.C.C. § 9-402, cmt. 2). Thus, a description of collateral is to be liberally interpreted. See id. Nonetheless, a statement that makes no reference to after-acquired goods will not perfect an interest in those goods. Compare World Wide Tracers, 384 N.W.2d at 448 ("any property of the debtor acquired after [the date of the transaction]" was too ambiguous a description to create a security interest in the debtor's accounts receivable) with James Talcott, Inc. v. Franklin Nat'l Bank, 292 Minn. 277, 284-85, 194 N.W.2d 775, 780-81 (1972) ("all goods * * * whether now owned or hereafter acquired" was sufficient to perfect a security interest in the debtor's after-acquired motor vehicles and construction equipment). The parties' reference to "inventory" and "accounts receivable" does not create an interest in after-acquired tangible property.
The district court found that Braith did not meet his burden of proof on his claim that Hagerty allowed the inventory to fall below 90 percent of its level at the time of closing. "A trial court's findings of fact will not be set aside under the clearly erroneous standard if `they are reasonably supported by the evidence in the record considered as a whole.'" Larson, 400 N.W.2d at 780 (quoting Hubbard v. United Press Int'l, 330 N.W.2d 428, 441 (Minn. 1983)).
Although Braith submitted an affidavit in which he contended the value of the inventory at the time of rescission was significantly lower than its value at closing, the district court credited Hagerty's testimony that any loss in value was due to a devaluation by the supplier, Midwest Auto Parts. The district court noted that Braith visited the business nearly every day that Hagerty owned it and would have observed and acted on a significant decrease in the inventory. Braith made no condition requiring a 90-percent inventory level when he took the business back. The district court reasonably found Hagerty's testimony more credible than Braith's, and we will not disturb that finding on appeal. See, e.g., id. at 781 (citing Fontaine v. Hoffman, 359 N.W.2d 692, 694 (Minn. App. 1984)).