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Belani v. Grover

A-5280-07T1 (N.J. Super. App. Div. 2009) (Unpublished)

CONTRACTS; FRAUD; RECISION; ATTORNEYS FEES — An award of contract recision based upon fraudulent inducement does not necessarily mean that the successful party is not entitled to collect contractually provided-for attorneys fees if there were also breach of contract claims.

An owner of an entity engaged in the sale and distribution of adult entertainment material sold his business. Prior to the sale, he made certain representations as to the net profits of the business. The parties also signed a deposit letter that confirmed those profit figures. The seller then permitted the buyer to inspect certain of the business’s financial records. Those summary records supported the seller’s representations, but the underlying records were not made available to the buyer. The contract also included the seller’s net profits representation. The warranties, covenants, and promises in the contract were to survive the closing. The business failed to reach the profits represented by the seller, and the buyer stopped making payments. The seller sued. The buyer filed a counterclaim, asserting breach of contract, rescission, legal fraud, and equitable fraud claims.

The lower court dismissed the seller’s claims, finding the buyer’s testimony to be credible. It also found that the seller, by concealing the financial soundness of his business, had intentionally misrepresented material and substantial facts prior to closing. The lower court also found that the seller had made these representations with the intent to deceive the buyer and that the buyer reasonably relied on the fraudulent misrepresentations. Accordingly, it awarded damages to the buyer equal to the amount paid under the contract, less the post-closing sales revenues retained by the buyer. Finally, despite the buyer’s assertions throughout the trial that the seller not only fraudulently induced it to enter into the contract and also breached the contract, it denied the buyer’s request for attorney’s fees. According to the lower court, when it returned the parties to their original positions, it thus had granted the buyer’s request for rescission and this meant the contract’s provision for counsel fees was no longer operative. Both parties appealed.

The Appellate Division affirmed the lower court’s decision in favor of the buyer, but reversed and remanded as to the issue of attorney’s fees. The Court held that if, as here, a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the injured party. It found the misrepresentation as to net profits was evidenced not only by the buyer’s testimony at trial which the lower court found credible, but also by the deposit letter signed by the seller. Although it agreed with the seller that, generally, the requisite reliance required for fraud cannot be established where the defrauded party undertakes to make an independent investigation on which it relies in entering a contract, it held that the principle was inapplicable in this case. According to the Court, a buyer of a business is entitled to rely on the seller’s statements about net profits or income. Only if the buyer knew that the statement was false would there be no reliance. Here, the seller permitted the buyer to review a summary of the business’s financial records but not the supporting documents. If the financial information disclosed to the buyer had been accurate, the Court might have found for the seller. However, the information shown to the buyer supported the seller’s representations. Thus, the Court concluded that the buyer did not rely on his own investigation, and had no reason not to rely on the seller’s misrepresentation.

As to attorneys fees, the Court acknowledged that New Jersey courts follow the “American Rule” that the prevailing litigant ordinarily is not entitled to collect attorney’s fees from the loser. Nevertheless, attorneys fees may be allowed where the parties have agreed to them, in advance by contract, as was the case here. The lower court had ruled that when it rescinded the contract, the buyer could either void or confirm the transaction, but not both, because rescission must be exercised to the contract in its entirety. In the instant case, the Court was satisfied that these principles were not applicable. First, it noted that the buyer never elected to rescind the contract. Second, it held that New Jersey’s court rules authorize a party asserting a claim to demand relief in the alternative. In this case, although the buyer asserted a claim seeking rescission as one of its alternative forms of relief, the Court found that the buyer made it clear throughout the trial that he was continuing to pursue his breach of contract claims. Third, it ruled that a court cannot force rescission upon a party who establishes fraud in the inducement and breach of contract. The buyer had, in fact, proved both its fraud and contract breach claims. Accordingly, it did not consider the buyer’s alternative demand for rescission to constitute an election for rescission under the contract. In fact, it found that neither party took any steps to rescind the contract. Therefore, it ruled that the lower court’s re-characterization of its award to the buyer as a rescission did not provide a basis for denial of counsel fees to which the buyer was entitled based on seller’s breach of contract.

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