Hudson v. Cobbs

797 P.2d 1322, 118 Idaho 474

• Court: Idaho Supreme Court
• Decided: September 21, 1990
• Docket: 16783
• Status: Published

Opinions

UPON REHEARING 1989 OPINION NO. 120, ISSUED AUGUST 11, 1989, IS HEREBY WITHDRAWN AND THIS OPINION IS SUBSTITUTED THEREFOR.

McDEVITT, Justice.

This case arose out of a complex real estate transaction and a series of agreements between: (1) Mark Bazeghi (the managing general partner acting on behalf of the Webster Investments #3 general partnership); (2) the Idaho First National Bank; (3) plaintiff Wayne D. Hudson; and (4) defendants Cobbs, Kennevick, and the Cobbs/Kennevick partnership.

The Webster # 3 Partnership (“Webster # 3”) owned a tract of land in Boise called the Wildwood Center. This tract of land included the Wildwood Apartments and the Wildwood Office Buildings. On August 1, 1980, Webster # 3 obtained a $580,000 loan from Idaho First to finance construction of the office buildings on the Wildwood property. Interest was payable on July 1,1981. Under the terms of the loan agreement, the loan was convertible to long-term financing only if the office building was pre-leased to the extent of 12,210 square feet prior to July 1, 1981.

On August 26, 1980, six days after entering into the loan agreement with Idaho First, Webster # 3 entered into an earnest money agreement to sell Wildwood to Wayne Hudson. On October 16, 1980, one day prior to the date set for closing, Webster #3 and Hudson modified their contract. Webster # 3 assumed direct responsibility to meet the bank’s pre-leasing requirements so that the loan could be converted to long-term financing for Hudson. Hudson agreed to assume the note with Idaho First.

On March 17, 1981, in an effort to fulfill Webster #3’s pre-lease requirements, Ab-bass Bazeghi, Webster # 3’s managing partner, procured lease agreements with the Cobbs/Kennevick Partnership for two office suites.¹ Contemporaneous to execution of the leases, Bazeghi and the Cobbs/Kennevick Partnership entered “hold harmless” agreements, whereby Bazeghi agreed to pay the rent on Cobbs’s and Kennevick’s spaces if Cobbs and Kennevick failed to occupy or sublet the spaces by July 1, 1981. This provision was designed to “save” Cobbs and Kennevick from any payments and other economic detriments that could arise from their execution of the leases. The hold-harmless agreements were not attached to the leases, they were not provided to either the Bank or to Hudson, nor were either advised of their existence. Neither Bazeghi, Cobbs nor Kennevick informed Hudson of the hold harmless agreements.

At trial Cobbs and Kennevick testified that the leases were “straw” leases which they did not intend to be bound by, and that they executed them solely to accommodate Bazeghi in meeting his tenancy obligations. Hudson testified that he was aware that the leases were “accommodation leases” for the purpose of obtaining the desired long term financing and he was aware that Cobbs/Kennevick would not occupy the space, but he was not informed that the lease payments would not be made by Cobbs/Kennevick or by sub-tenants who were yet to be procured.

Based on the lease package submitted by Mark Bazeghi, the Bank approved the long-term financing in July, 1981. On June 24, 1981, Hudson and Webster # 3 entered into an additional agreement. The June 24 agreement recited that long term financing was available but was conditioned upon obtaining lease commitments of $9,983.83 per month for three years. This agreement stated that:

Webster has met this financing condition by obtaining signed full service leases for 12,213 sq. ft. with total rental of $9,983.83 per month. The lessees under these leases may or may not actually occupy the space for which they are obligated. Webster will guarantee rent payments as per these leases from 7/1/81, until occupied or 6/30/84, whichever comes first____

On July 1, 1981, (the date of the bank deadline for the loan conversion), Webster # 3 (through Bazeghi) and Hudson entered into their final agreement. Webster #3 agreed to pay rent on any pre-leased space not actually occupied by lessees or sub-lessees. Cobbs and Kennevick were among those who had not occupied or subleased the premises by July 1, 1981.

Pursuant to the June 24 agreement, Webster # 3 managed the building and provided Hudson monthly rental payments. However, Hudson received no payments or accountings for January, February, or March, 1982. As a result, Hudson fired Webster #3, sued for back rent, and demanded that Cobbs and Kennevick pay their rent. In July, 1982, Hudson was informed that Cobbs/Kennevick contended the leases were not enforceable as against them. At that time he also became aware of the hold-harmless agreements, listed the building for sale, and stopped making payments on the long-term note.

By letter dated August 3, 1982, Wayne Hudson tendered the office building back to Webster # 3 and demanded restitution of all money paid by him. He notified the Webster #3 partners, Lyle Cobbs, and Jack Kennevick that he had defaulted on the loan and had listed the property for sale with Commercial Brokerage Company.

Hudson was unable to sell the Wildwood Office Building although he made considerable effort to do so. On January 17, 1983, Idaho First National Bank purchased the property at the foreclosure sale. No deficiency was sought.

Hudson filed his original complaint in May 1982, alleging Cobbs, Kennevick and the Cobbs/Kennevick Partnership breached the lease agreements by failing to pay their rent. Hudson also alleged breach of a contract guarantee for failure to pay rent as against Webster #3 and its partners. A writ of attachment hearing was conduct ed on July 27, 1982, at which time Hudson first learned of the existence of the hold harmless agreements. Subsequently, Hudson amended his complaint by adding an allegation of fraud. Later, Hudson again amended his complaint alleging that Webster # 3, its partners, and Cobbs and Kennevick violated the Racketeering Act, I.C. §§ 18-7801 thru -05. At trial, Hudson proceeded on four basic causes of action:

1. Common law fraud against Cobbs, Kennevick and Mark Bazeghi.

2. Negligence against Cobbs and Kennevick and the Cobbs/Kennevick partnership.

3. Rescission against Webster Investments # 3 and its individual partners, based upon a material breach of its obligation to meet the pre-leasing requirements for long term financing and its obligation to guarantee lease payments pursuant to the agreement entered on June 24, 1981.

4. Fraud against Webster #3 and its partners.

Two claims, based on the federal Racketeer Influenced and Corrupt Organizations Act and the Idaho Racketeering Act, were dismissed prior to trial. The trial court dismissed the Idaho Racketeering Act claim in its Summary Judgment Order filed October 29, 1985, prior to trial. While Hudson’s federal RICO claim survived summary judgment, he dismissed it prior to trial.

At the close of the jury trial on Hudson’s fraud and negligent misrepresentation action, Cobbs and Kennevick moved for a directed verdict. The court denied this motion and submitted the case to the jury on both theories of fraud and negligent misrepresentation. The jury found for Cobbs and Kennevick on the fraud cause of action. However, it found in special verdicts for Hudson on the negligent misrepresentation cause of action against Cobbs, Kennevick and the Cobbs/Kennevick Partnership and Mark Bazeghi. The jury attributed 25% of the negligence to the Cobbs/Kennevick Partnership, the remaining 75% being attributed to Webster #3, with zero negligence being attributed to Hudson. The jury awarded Hudson $513,-909.09 as compensatory damages, $163,-391.98 of which consisted of attorney fees.

Cobbs and Kennevick timely moved for a judgment n.o.v. Although the trial court had denied their motion for a directed verdict, it granted the motion for judgment notwithstanding the verdict approximately seven months after entering judgment against the defendants on the jury verdict. The court ruled that negligent misrepresentation was not at present a viable cause of action in Idaho, no Idaho appellate decision having recognized the tort. It further ruled that even if such a tort were recognized in Idaho, the evidence did not support a finding for Hudson on that theory. The court ruled that it had erred in allowing the negligent misrepresentation claim to proceed to the jury. Thereafter, the court denied Hudson’s motion for a new trial, and his motion to amend the judgment n.o.v. Hudson appeals.

I.NEGLIGENT MISREPRESENTATION

In Idaho Bank & Trust Co. v. First Bancorp of Idaho, 115 Idaho 1082, 772 P.2d 720 (1989), the Idaho Supreme Court recognized the tort of negligent misrepresentation in the area of accountants’ liability to non-contractual third parties. In reaching its decision, the Supreme Court first noted that the New York, Court of Appeals, in Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931), “refused to hold, [an] auditor liable to all persons who foreseeably would rely on ... negligently audited financial statements, ...” Idaho Bank & Trust Co., 772 P.2d at 721. The Supreme Court then recognized that “[o]ther jurisdictions have departed from the doctrine of Ultramares, holding that public accountants may be liable to third parties, not always precisely identifiable, but who belong to a limited class of persons whose reliance on the accountant’s representations is specifically foreseen.” Id. at 722. Finally, and most significantly for this case, the Supreme Court cited the New York Court of Appeals opinion in Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 483 N.E.2d 110 (1985), noting that the Credit Alliance court:

“has reaffirmed the basic principles articulated in Ultramares, but has interpreted the Ultramares doctrine [²] to include non-contractual parties when certain other prerequisites are satisfied, i.e.,

1. the accountants must ahve [sic] been aware that the financial reports were to be used for a particular purpose or purposes;

2. in the furtherance of which a known party or parties was intended to rely; and

3. there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties’ reliance.

Credit Alliance v. Arthur Andersen & Co., id. 493 N.Y.S.2d at 443, 483 N.E.2d at 118.

Hence, the New York court has expanded its traditional rule set forth in Ultramares. We agree and adopt the extension of the traditional rule as expounded in Credit Alliance.”

Idaho Bank & Trust Co., 772 P.2d at 722.

After adopting the Credit Alliance test, this Court declined the plaintiff’s request to adopt the definition of negligent misrepresentation found in section 552 of the Restatement (Second) of Torts. Idaho Bank & Trust Co. 772 P.2d at 722.

In the instant case, the district court ruled that negligent misrepresentation was not a viable cause of action in Idaho, and that even if it were, two factors prevent its application in this case. First, Cobbs’s and Kennevick’s only duty to Hudson arose from a lease agreement contract. Therefore, Hudson’s proper cause of action was for their breach of contract, not negligent misrepresentation. Secondly, the “pecuniary interest” element of negligent misrepresentation under the Restatement (Second) of Torts, § 552, was not present in this case.

We need not address whether the issue of pecuniary interest provided a sufficient basis for the court’s judgment n.o.v. because the court was correct in ruling that the facts of this case were not sufficient to show the duty necessary to make out a prima facie case for negligent misrepresentation. The duty that Cobbs and Kennevick allegedly breached was a duty created by contract. In Carroll v. United Steelworkers of America, 107 Idaho 717, 692 P.2d 361 (1984), the Idaho Supreme Court stated that it is well settled that:

an alleged failure to perform a contractual obligation is not actionable in tort____ “To found an action in tort, there must be a breach of duty apart from non-performance of a contract.” [Quoting Taylor v. Herbold, 94 Idaho 133, 483 P.2d 664 (1971) ]____ Mere nonfeasance, even if it amounts to a willful neglect to perform the contract, is insufficient to establish a duty in tort.

Carroll, 107 Idaho at 719, 692 P.2d at 363 (footnote omitted, emphasis in original). See also Steiner Corp. v. American Dist. Tel., 106 Idaho 787, 683 P.2d 435 (1984); Browns Tie & Lumber Co. v. Chicago Title Co., 115 Idaho 56, 764 P.2d 423 (1988).

As noted by the district court, neither Cobbs nor Kenneviek, nor the Cobbs/Kennevick partnership had any affirmative duty to Hudson other than the duty created by their lease agreement. Thus, while Hudson could have sued Cobbs/Kennevick in contract for breach of their lease agreement, he had no cause of action in tort.

As pecuniary interest is not an element of this Court’s definition of negligent misrepresentation, the district court’s finding that Cobbs and Kenneviek had no pecuniary interest would, by itself, be an insufficient basis for the court’s judgment n.o.v. However, the fact that Hudson’s claim for relief lay in breach of contract rather than negligent misrepresentation is all the reason that is needed to hold that the district court’s judgment n.o.v. was proper.

This leads to the issue raised by Cobbs and Kenneviek on rehearing; whether or not the district court’s judgment n.o.v. should be reinstated as opposed to ordering a new trial.

II. JUDGMENT N.O.V.—NEW TRIAL

In ruling on a motion for judgment n.o.v., the trial court must view the facts as if the moving party has admitted the truth of all the non-moving parties evidence. I.R.C.P. 50(b); Mann v. Safeway Stores, Inc., 95 Idaho 732, 736, 518 P.2d 1194 (1974); Quick v. Crane, 111 Idaho 759, 763, 727 P.2d 1187 (1986). If, after reviewing the evidence in this manner, the court finds that the evidence is of sufficient quantity and probative value that reasonable minds could have reached the same conclusion as did the jury, then the jury’s verdict will be upheld. Quick v. Crane; Smith v. Praegitzer, 113 Idaho 887, 749 P.2d 1012 (Ct.App.1988) review denied, 116 Idaho 467, 776 P.2d 829 (1988). Furthermore, the determination of whether the evidence before the Court considering the judgment n.o.v. is sufficient to create an issue of fact is purely a question of law. Quick v. Crane, 111 Idaho at 759, 727 P.2d at 1187 (1986). And, in determining whether a judgment n.o.v. should have been granted, the appellate court applies the same standard as does the trial court which originally ruled on the motion. Id.

Hudson’s proper cause of action was in contract, not tort. Accordingly, as a matter of law, we must hold that the judgment n.o.v. was proper. It could be argued that the negligent misrepresentation cause of action should never have been submitted to the jury. However true this might be, it does not affect the validity of the trial court’s judgment n.o.v. A motion for judgment n.o.v. has been described as a delayed motion for directed verdict and it can be used by the district court to correct its error in denying a directed verdict. Hibbler v. Fisher, 109 Idaho 1007, 712 P.2d 708 (Ct.App.1985).

In conclusion, this Court holds that although negligent misrepresentation, as recognized in Idaho Bank & Trust Co. v. First Bancorp of Idaho, 115 Idaho at 1082, 772 P.2d at 720 (1989), is a viable cause of action in Idaho, the trial court’s judgment n.o.v. was proper.

Costs are awarded to respondents.

BAKES, C.J., and JOHNSON, BOYLE, JJ., concur.

1 . In the lease agreements the lessee was denominated as the Cobbs/Kennevick partnership; however, the signature pages and an amendment dated April 4, 1981, were signed by Lyle Cobbs and Jack Kennevick individually. Thus, the indication is that Cobbs and Kennevick were bound as individuals and as partners in the Cobbs/Kennevick partnership.

2 . Specifically, the Ultramares doctrine was that the public accountants could only be held liable to the other party to the contract of engagement.