United States Court of Appeals, Tenth Circuit
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Scribd Government Docs760 F.
2d 1074
18 Fed. R. Evid. Serv. 752
Marilyn Rose Betche WAGSTAFF, Plaintiff-Appellee, CrossAppellant,
v.
PROTECTIVE APPAREL CORPORATION OF AMERICA,
INC., a New York
corporation, CCS Communication Control, Inc., a New York
corporation, CCS Communication Control of Illinois, Inc., an
Illinois corporation, and Michael Ben-Baruch, an individual,
Defendant-Appellants, Cross-Appellees.
Nos. 83-2431, 83-2477.
United States Court of Appeals,
Tenth Circuit.
May 3, 1985.
C. Elaine Hammons of Hammons & Hammons, El Reno, Okl., for
plaintiff-appellee, cross-appellant.
Linda G. Scoggins (Stephen P. Friot with her on the briefs), of Spradling,
Alpern, Friot & Gum, Oklahoma City, Okl., for defendants-appellants,
cross-appellees.
Before BARRETT and McKAY, Circuit Judges, and WINDER, District
judge. *
McKAY, Circuit Judge.
This case arises out of a business deal which resulted in the death of plaintiff's
decedent and the frustration of an on-going business relationship between the
plaintiff's decedent and the defendants.
The defendants are manufacturers and sellers of various items of security
equipment. Plaintiff's decedent was the proprietor and operator of a small
electronics business. In the fall of 1981, plaintiff's decedent became interested
in electronic security equipment for use in his electronics business. At that time
he purchased $20,000 worth of equipment from the defendants. Later he was
contacted by the defendants with the prospect of becoming one of their
distributors. He was told that to become a distributor he was required to
purchase $50,000 worth of equipment but that the $20,000 worth of equipment
that he had earlier purchased could be credited toward his distributor account.
He was also told that someone else in his area was interested in the
distributorship and that the first of the contenders to come up with the $50,000
would be named the distributor for that area. After deciding to become a
distributor for the defendants, plaintiff's decedent executed a "distributorship
agreement," paid the defendants $10,000, and promised to pay the additional
$20,000 as consideration for the distributorship. Shortly afterward, while
making a public demonstration of the defendants' protective clothing, plaintiff's
decedent was stabbed to death due to a defect in defendants' equipment.
Plaintiff filed a diversity action seeking recovery for the wrongful death of her
husband as a result of the defect in defendants' equipment, and for fraud and
rescission of the contract based on frustration of purpose.
3
The jury found for plaintiff on the wrongful death claim and that decision has
not been appealed. The trial court sustained a directed verdict on the issue of
fraud, holding that the plaintiff had failed to introduce sufficient evidence to
support this claim, but submitted the issue of rescission to the jury. The jury
returned a verdict for plaintiff on the issue of rescission. Both parties appeal.
Plaintiff claims that the district court erred in directing a verdict on the fraud
claim, and defendants claim that submission of the rescission claim to the jury
was improper.
I. Rescission
4
Defendants make two arguments why the rescission decision was incorrect.
First they argue that, under Oklahoma law, frustration of purpose is not
grounds for rescission of a contract. This argument is spurious. While 15
Okla.Stat. Sec. 233 (1966) does not specifically mention frustration of purpose
as one of the statutory grounds for rescission, the Oklahoma Supreme Court has
held:
5
Rescission
or cancellation of a contract may be ordered where that which was
undertaken to be performed in the future was so essential a part of the bargain that
the failure of it must be considered as destroying or vitiating the entire consideration
of the contract, or so indispensable a part of what the parties intended that the
contract would not have been made with that condition omitted.
Wright v. Fenstermacher, 270 P.2d 625, 627 (Okla.1954) (quoting Davis v.
Hastings, 261 P.2d 193 (Okla.1953) ). Thus frustration constitutes a failure of
consideration and is therefore within the statutory grounds for rescission
enumerated in 15 Okla.Stat. Sec. 233.
Defendants also contend that, even if frustration is a ground for rescission in
Oklahoma, the trial court's finding that frustration occurred was clearly
erroneous. In support of this contention defendants argue that the transaction
was merely a sale of goods and was therefore totally completed prior to the
death of plaintiff's decedent. The evidence presented at trial, however,
persuasively demonstrated otherwise. The transaction itself was memorialized
on a document describing it as a "distributorship agreement." In addition, the
jury listened to tapes of telephone conversations in which the decedent was told
that if he failed to obtain the needed $50,000 within a short period of time, there
was a good chance that the distributorship would be given to another. In
addition, numerous memoranda between the parties indicate that plaintiff's
decedent was greatly concerned with his ability to market the defendants' goods
and with the effectiveness of defendants' help in developing a profitable market
for the distributorship. All this evidence belies defendants' assertion that the
transaction involved was nothing but a sale of goods. Since the transaction was
not a sale of goods but truly a distributorship agreement, the court's instruction
to the jury regarding frustration and the jury's determination thereon are both
supported by the law and the facts in this case. Therefore, the district court's
decision with respect to rescission is affirmed.
II. Fraud
8
Plaintiff's argument that the defendants were guilty of fraud relied principally
on two alleged misrepresentations by the defendants. The first was the
statement on an envelope in which the distributorship agreement materials were
mailed to the plaintiff's decedent that the defendants were suppliers of security
equipment to the U.S. Olympics. The second was defendants' representations
that they had a good reputation and particularly that they were highly respected
by police departments. Plaintiff asserted that both of these representations were
false. The evidence showed that defendants were not suppliers of security
equipment to the U.S. Olympics and that defendants were guilty of several
violations of the law that would tend to blemish their reputation with law
enforcement personnel. Defendants argue that the assertion that the defendants
had a good reputation with law enforcement officials was merely a matter of
opinion and therefore could not form the basis of a fraud claim and that
plaintiffs failed to show that plaintiff's decedent relied upon the assertion that
defendants were suppliers to the U.S. Olympics. It is doubtful that these
arguments would be sufficient to support the district court's directed verdict
even were these misrepresentations the only evidence of fraud that plaintiff
produced. Plaintiff introduced other evidence of fraud, however, that makes it
clear that a directed verdict was improper.
9
The evidence clearly established that plaintiff's decedent was interested in
establishing a successful distributorship. The jury listened to tape-recorded
telephone conversations between representatives of the defendants and the
plaintiff's decedent in which the defendants assured the plaintiff's decedent that
a viable distributorship could be operated in the Oklahoma City area and that
the defendants would participate with plaintiff's decedent in the establishment
of such a distributorship. One of defendants' own employees testified that there
was no real expectation within defendants' organization that a distributorship
would be successful and continue, and that one of defendants' top executives
had stated on more than one occasion that none of the distributors could
possibly be successful. Given this evidence, a jury could have concluded that
defendants had represented to plaintiff's decedent that he was purchasing a
distributorship from the defendants that had a genuine potential of success
whereas, in fact, the defendants knew that the distributorship could not be
successful and did not intend to put forth their best efforts to help establish it.
10
Fraud may be perpetrated by making a promise to perform a future act with the
present intention not to perform. State ex rel Southwestern Bell Tel. Co. v.
Brown, 519 P.2d 491 (Okla.1974). As we pointed out above, the plaintiff's
decedent was extremely interested in establishing a successful distributorship.
Therefore, it would not have been unreasonable for a jury to conclude that
plaintiff's decedent relied upon defendants' representations that a successful
distributorship could be established and that he was purchasing their help in its
establishment, and that these misrepresentations were material.
11
Defendants assert that, even if there was fraud, plaintiff failed to prove damage
resulting from that fraud. However, the evidence shows that plaintiff's decedent
paid $50,000 for what he believed to be a successful distributorship opportunity
when, in fact, the defendants intended to sell nothing more than the particular
goods the plaintiff was purchasing. While the goods may have had some
intrinsic value, a jury could infer that plaintiff's decedent would not have paid
$50,000 for the goods themselves, even if this were their market value, had the
defendants not represented that the package included the promise to help
establish a successful distributorship. Therefore, defendants' claim that plaintiff
failed to introduce sufficient evidence of damage resulting from defendants'
misrepresentations to support a jury verdict is without merit. Plaintiffs did fail
to prove by any substantial evidence the amount of actual damages caused by
defendants' fraud. However, under Oklahoma law, plaintiffs can recover
punitive damages upon the showing of nominal damages from defendants'
fraud. Moyer v. Cordell, 228 P.2d 645 (Okla.1951). Plaintiff clearly introduced
sufficient evidence from which a jury could have found at least nominal
damages.
12
Defendants' claim that a judgment of rescission and a judgment finding fraud
cannot both result from the same contractual transaction. However, we do not
read Oklahoma law as precluding both rescission of a contract and
compensation for injuries inflicted or services rendered during the period for
which the contract was thought to be in existence by the parties. Frickenschmidt
v. Garner, 51 P.2d 537 (Okla.1935). Therefore, while plaintiff will not be
allowed to recover compensation for actual damages resulting from the fraud
because she has failed to prove those damages, plaintiff is entitled to a retrial on
the issue of punitive damages, which are not precluded under Oklahoma law by
the rescission judgment. Therefore, the district court's judgment with respect to
the fraud claim must be reversed and the case remanded for a new trial on the
issue of plaintiff's entitlement to punitive damages for the fraud of the
defendants.
13
In view of our decision to reverse the district court's determination with respect
to the fraud issue, we must examine plaintiff's claim that the district court
improperly refused to admit into evidence certain reprints of newspaper articles
that were delivered by defendants to plaintiff's decedent. The reprints make
statements about defendants' financial situation that are claimed to be inflated
representations relevant to the fraud inquiry. In the first trial the district court
ruled that these newspaper reprints were inadmissible as hearsay. This decision
was incorrect. Fed.R.Evid. 801(d)(2) provides that a statement is not hearsay if
it is offered against a party and is "a statement of which he has manifested his
adoption or belief in its truth." By reprinting the newspaper articles and
distributing them to persons with whom defendants were doing business,
defendants unequivocally manifested their adoption of the inflated statements
made in the newspaper articles. Therefore, it was an abuse of discretion for the
district court to refuse to admit this very relevant evidence of fraud.
14
Defendants argue that even if the district court was wrong in refusing to admit
the reprints on the basis of hearsay, the evidence should nonetheless have been
excluded because defendants did not give the reprints to plaintiff's decedent
until after he had signed the contract in question. This contention must fail for
two reasons. First, it is not shown clearly in the record when plaintiff's decedent
received these reprints from defendants. Second, even if plaintiff's decedent
received these reprints after signing the contract, this evidence would still be
relevant to the issue of the fraudulent character of the transaction. On remand,
therefore, plaintiff must be allowed to introduce the reprints and to explain the
circumstances under which the reprints were delivered to plaintiff's decedent.
15
With respect to the district court's judgment of rescission, the case is affirmed.
The district court's judgment on the fraud claim is reversed and the case is
remanded for a new trial on defendants' liability for punitive damages arising
from the fraud claim.
Honorable David K. Winder, United States District Judge for the District of
Utah, sitting by designation
