…be careful what you ask for

Posted on May 13, 2014 in Arizona Law Regarding Business Disputes

As they say, you need to be careful what you ask for…In the summer 2006, Clint Underhill purchased 64 shares in Underhill Holding Company, Inc. (HC) from David Caruthers and Caruther’s wife for $6,000.  Several months later, the Caruthers wrote to Clinton and accused him of knowingly misrepresenting HC’s value.  The Caruthers demanded the return of their stock certificates. Next year, Caruthers filed a suit against Clinton suing w/ the kitchen sink game plan— common law fraud, consumer fraud, securities fraud, negligent misrepresentation, and breach of fiduciary duty. In late2008, the Caruthers’ lawyer sent a letter to Clinton tendering the complete rescission of the stock transactions.

On the last day of trial, the Caruthers’ counsel informed the court that the Caruthers would elect the remedy of rescission.  Clinton moved for judgment as a matter of law, arguing that the Caruthers had not demanded rescission before.

The jury returned a verdict in favor of the Caruthers on and $15,000 in punitive damages.  The parties papers on whether the Caruthers were entitled to rescission.  Reversing its earlier ruling, the court entered an order denying rescission, based on its conclusion that the Caruthers had unreasonably delayed in rescinding and had waived their right to rescission by ratifying the stock purchase transaction.

On appeal, the Court of Appeals concluded that the trial court erred in applying the election-of-remedies doctrine, but that the Caruthers invited the error.  In Arizona, the election of remedies doctrine provides that a party who has been fraudulently induced to enter into a contract must choose to either disavow the contract and seek a return to the status quo ante, or affirm the contract and sue for damages for breach.  If, however, alternative theories of recovery are factually consistent, an inconsistency does not arise until one of the remedies is satisfied and consistent remedies may be pursued concurrently even to final adjudication.  The Court of Appeals concluded that an election of remedies was never necessary in this case because the Caruthers did not seek to recover on inconsistent theories of liability.  They did not sue for breach of contract, and their case did not depend on affirmation of the agreement  Because the remedies of damages and rescission were not based on inconsistent theories, the Caruthers should not have been compelled to choose one remedy to the exclusion of the other.  The Court concluded that it could not, however, reverse the judgment on these grounds because the Caruthers invited the error by failing to object to the notion that they were required to choose between remedies.

The Court also affirmed the trial court’s ruling that the Caruthers were not entitled to a jury trial on rescission and that equitable defenses apply to rescission.  By its plain language, A.R.S. § 44-2002(A) does nothing more than authorize a seller to seek rescission.  Nothing in the statute suggests that the seller’s choice transforms rescission from an equitable remedy to a non-discretionary one.  The Court nevertheless concluded that the trial court abused its discretion by denying rescission based on its finding of prejudice.  Although the court looked to appropriate factors, it wrongly defined the delay period and misconstrued the deleterious result caused by the delay as a “prejudicial” result.

Feel free to call William A. Miller at 319-6899 to discuss. His office is in Scottsdale.

We also handle, Breach of contract, Non-compete agreements, Non-disclosure agreements, Employee theft and embezzlement, Insurance purchases and enforcement of policy coverage, Negotiation and/or enforcement of commercial leases, Negligence and gross negligence resulting in losses, Intentional acts causing a company to suffer damages, Tortious interference with contractual relationships, Unjust enrichment, Real Estate fraud, Consumer fraud, Conversion/Theft, Intentional and/or negligent misrepresentation, Business torts and Real estate title & escrow.

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