#26223, #26226-rev & rem-LSW

2013 S.D. 17

                        IN THE SUPREME COURT
                                OF THE
                       STATE OF SOUTH DAKOTA

                                   ****
ROB POEPPEL,                              Plaintiff and Appellee,

     v.

LUCAS LESTER,                             Defendant and Appellant.


                                   ****

                 APPEAL FROM THE CIRCUIT COURT OF
                   THE SEVENTH JUDICIAL CIRCUIT
                 PENNINGTON COUNTY, SOUTH DAKOTA

                                   ****

                   THE HONORABLE WALLY EKLUND
                              Judge

                                   ****

JESSICA L. LARSON
STEVEN C. BEARDSLEY of
Beardsley, Jensen, &
 Von Wald, Prof., LLC
Rapid City, South Dakota                  Attorneys for plaintiff
                                          and appellee.


MICHAEL V. WHEELER of
DeMersseman Jensen Tellinghuisen
 Stanton & Huffman, LLP
Rapid City, South Dakota                  Attorneys for defendant
                                          and appellant.


                                   ****
                                          ARGUED ON AUGUST 29, 2012

                                          OPINION FILED 02/13/13
#26223, #26226

WILBUR, Justice

[¶1.]        In 2008, Rob Poeppel brought suit against Luke Lester for breach of

contract for Lester’s failure to purchase Poeppel’s voting interest in Coldwell

Banker Lewis-Kirkeby-Hall Real Estate, Inc. (CBLKH). Following Lester’s

stipulation as to breach, a court trial was held on the issue of damages. The court

awarded damages to Poeppel in the amount of $250,000 plus prejudgment interest

and costs.

                 FACTS AND PROCEDURAL BACKGROUND

[¶2.]        Poeppel was the owner of a 25% (100 no-par shares) voting interest in

CBLKH. In March 2008, Lester, an independent contractor and broker associate at

CBLKH, approached Poeppel about purchasing Poeppel’s 25% voting interest in the

company. Also during this time, Mel Dreyer, another broker associate of the

company, approached Diana Hooper, another owner of a 25% voting interest in

CBLKH, about Dreyer purchasing Hooper’s 25% voting interest.

[¶3.]        On March 28, 2008, Poeppel and Lester entered into a contract for the

sale of the shares. The parties agreed that Poeppel would sell Lester one hundred

shares (25%) of no-par CBLKH voting stock for $500,000. The contract signed by

the parties was a form that Lester received from Dreyer. Dreyer had used the form

during his negotiations with Hooper. Lester then made changes to the contract and

presented it to Poeppel for signature. Paragraph five of the contract entitled

“Access to Information” provides:

             The parties acknowledge that Seller has provided to Buyer
             certain financial information with respect to the Shares and that
             Buyer has formed his own opinion as to the value of the Shares
             being purchased hereunder. Notwithstanding the foregoing,

                                          -1-
#26223, #26226

             prior to Closing, Seller shall, or shall cause the Company to,
             provide to Buyer and to Buyer’s counsel, accountants, or other
             representatives full access throughout the period prior to
             Closing to all of the Company’s properties, books, contracts,
             commitments, and records, and shall furnish to Buyer during
             such period all information concerning the Company’s affairs as
             the Buyer may reasonably request. SELLER MAKES NO
             WARRANTY OF THE INCOME PRODUCING ABILITY OF
             THE SHARES OR THE PROFITABILITY OF THE COMPANY.
             BUYER RECOGNIZES THAT THE VALUE OF THE SHARES
             IS DEPENDENT IN PART UPON BUYER’S SKILL AND
             ABILITY.

Additionally, paragraph seven, section c, “Warranties of Buyer,” provides: “That all

documents and records requested by Buyer have been delivered or made available

to Buyer, and Buyer’s investment decision is based upon Buyer’s own investigation

and analysis and not the representations or inducements of Seller or Seller’s

agents.”

[¶4.]        The closing date on the contract was set for May 15, 2008. Lester

failed to attend the closing and did not pay $500,000 for Poeppel’s shares.

Additionally, Lester notified Poeppel in a letter dated May 22, 2008, that he was

unable to secure financing with the right structure for the purchase of the stock.

[¶5.]        After continued negotiations between the parties failed, Poeppel

brought suit for breach of contract against Lester in September 2008. In his

answer, Lester raised the defense that his consent to enter into the contract was

obtained by fraud. Lester alleged that Poeppel failed to give him important

financial information regarding the company; made a false claim about the income

producing ability of the shares of stock; and told Lester that the company held an

exclusive franchise with Coldwell Banker.



                                         -2-
#26223, #26226

[¶6.]        Poeppel moved for summary judgment on three separate occasions

alleging that the contract was unambiguous as to Lester’s receipt of CBLKH’s

financial information. Each motion was denied.

[¶7.]        A trial was scheduled for November 2-3, 2011. On the day before trial,

the trial court concluded that the terms of the contract were unambiguous and that

parol evidence as to financial documents was inadmissible. The court also granted

Poeppel’s motions in limine to exclude evidence relating to CBLKH’s financial

information and to exclude statements made by Poeppel to Lester concerning

income that was generated by the stock and the exclusive franchise agreement.

Following these rulings, Lester stipulated to the breach of contract.

[¶8.]        The issue of damages was tried in a court trial on November 3, 2011.

The trial court entered judgment against Lester for $250,000 plus prejudgment

interests and costs.

[¶9.]        On appeal, the issues presented are:

             1.        Whether the trial court erred as a matter of law in
                       concluding that the contract was unambiguous.

             2.        Whether the trial court abused its discretion in granting
                       Poeppel’s motions in limine regarding financial
                       information.

             3.        Whether the trial court erred in denying Lester’s motion
                       to amend, thus precluding any evidence of a “put” option.

             4.        Whether the trial court’s findings as to the calculation of
                       damages were clearly erroneous.

                                        ANALYSIS

[¶10.]       Before the Court begins its analysis of the issues presented, it is

important to note that after the trial on damages, the court did not enter separate,

                                             -3-
#26223, #26226

formal findings of fact and conclusions of law. The court filed a memorandum

decision and a judgment. The trial court was apparently operating under the first

sentence of the second paragraph of SDCL 15-6-52(a), as suggested in a letter to the

court from Poeppel’s counsel. There was no objection by Lester’s counsel.

[¶11.]       The second paragraph of SDCL 15-6-52(a) was amended in 2006 to

provide, in pertinent part:

             A copy of the proposed findings shall be served upon the
             attorneys of record to the action or upon the parties of record to
             the action if not represented by counsel. The It will be
             sufficient if the findings of fact and conclusions of law are stated
             orally and recorded in open court following the close of the
             evidence, or appear in an opinion or memorandum of decision
             filed by the court. Alternatively, the court may direct counsel
             for the prevailing party to prepare findings; and counsel shall,
             within ten days after announcement of the decision, unless
             otherwise ordered, prepare, serve, and submit to the court with
             copies to opposing counsel, or to the parties of record to the
             action if not represented by counsel, proposed written findings of
             fact and conclusions of law together with the proposed judgment
             or decree.

2006 S.D. Sess. Laws 484, ch. 326, Supreme Court Rule 06-52. The statute further

provides: “If an opinion or memorandum of decision is filed, the facts and legal

conclusions stated therein need not be restated but may be included in the findings

of fact and conclusions of law by reference.” SDCL 15-6-52(a).

[¶12.]       This Court has yet to specifically examine a case implementing the

Supreme Court’s 2006 amendment to SDCL 15-6-52(a). “When interpreting a

statute, we ‘begin with the plain language and structure of the statute.’” In re

Pooled Advocate Trust, 2012 S.D. 24, ¶ 32, 813 N.W.2d 130, 141 (quoting State ex

rel. Dep’t of Transp. v. Clark, 2011 S.D. 20, ¶ 10, 798 N.W.2d 160, 163).



                                          -4-
#26223, #26226

[¶13.]       Based on a plain reading of the language and structure of SDCL 15-6-

52(a), it is apparent that the trial court utilized, and the parties agreed to, one of

the methods by which findings of fact and conclusions of law may be entered. Here,

the trial court entered a “memorandum of decision,” which included its findings of

fact and conclusions of law. This method is acceptable under the plain reading of

SDCL 15-6-52(a), and thus, enumerated findings of fact and conclusions of law were

not necessary.

[¶14.]       Whether the trial court erred in concluding that the contract
             was unambiguous and in granting Poeppel’s motions in limine.

[¶15.]       The trial court concluded that the language of the contract is clear and

unambiguous and that it would “stay with the language of the contract.” Based on

this conclusion, the trial court also granted Poeppel’s motion in limine to prohibit

Lester from introducing parol evidence that Poeppel had represented to Lester: (1)

that Lester could not receive financial documents until after he signed the contract;

(2) that the stocks Lester sought to purchase would generate approximately

$115,000; and (3) that the company had an exclusive franchise arrangement with

Coldwell Banker.

[¶16.]       “‘Contract interpretation is a question of law’ reviewed de novo.”

Detmers v. Costner, 2012 S.D. 35, ¶ 20, 814 N.W.2d 146, 151 (quoting Clarkson &

Co. v. Cont’l Res., Inc., 2011 S.D. 72, ¶ 10, 806 N.W.2d 615, 618). “‘When

interpreting a contract, this Court looks to the language that the parties used in the

contract to determine their intention.’” Id. (quoting Clarkson & Co., 2011 S.D. 72, ¶

15, 806 N.W.2d at 619). “‘In order to ascertain the terms and conditions of a

contract, we examine the contract as a whole and give words their plain and

                                           -5-
#26223, #26226

ordinary meaning.’” Nygaard v. Sioux Valley Hosps. & Health Sys., 2007 S.D. 34, ¶

13, 731 N.W.2d 184, 191 (quoting Canyon Lake Park, L.L.C., v. Loftus Dental, P.C.,

2005 S.D. 82, ¶ 17, 700 N.W.2d 729, 734). “‘When the words of a contract are clear

and explicit and lead to no absurd consequences, the search for the parties’ common

intent is at an end.’” Detmers, 2012 S.D. 35, ¶ 20, 814 N.W.2d at 151 (quoting

Nelson v. Schellpfeffer, 2003 S.D. 7, ¶ 8, 656 N.W.2d 740, 743).

[¶17.]       The express language of the contract, when read as a whole, is clear

and unambiguous. By signing the contract that he presented to Poeppel, Lester

represented that he received financial documents from Poeppel and that Lester

formed his own opinion as to the value of the shares.

[¶18.]       However, even though the contract was unambiguous, Lester should

have been allowed to present his defense to a jury that he was fraudulently induced

to sign the stock purchase agreement through several misrepresentations made by

Poeppel. The trial court erred as a matter of law by barring this evidence under the

parol evidence rule.

[¶19.]       South Dakota’s parol evidence rule provides: “The execution of a

contract in writing, whether the law requires it to be written or not, supersedes all

the oral negotiations or stipulations concerning its matter which preceded or

accompanied the execution of the instrument.” SDCL 53-8-5. This rule “‘is in no

sense a rule of evidence, but a rule of substantive law.’” Auto-Owners Ins. Co. v.

Hansen Housing, Inc., 2000 S.D. 13, ¶ 14, 604 N.W.2d 504, 510 (quoting 9 John

Wigmore, Evidence § 2400 at 4 (Chadbourn rev. ed. 1981)). A decision concerning

application of the parol evidence rule should be reviewed de novo as a question of


                                          -6-
#26223, #26226

law. See, e.g., Conn Acoustics, Inc. v. Xhema Const., Inc., 870 A.2d 1178, 1181

(Conn. App. Ct. 2005). In excluding Lester’s fraud evidence, the trial court ruled,

as a matter of law, that the parol evidence rule precluded any extrinsic evidence.

Yet the parol evidence rule does not apply in cases of fraud in the inducement.

             1. Fraud in the Inducement

[¶20.]       Fraud as an inducement to enter a contract is a question of fact for the

jury. “Actual fraud is always a question of fact.” SDCL 53-4-5. And parol or

extrinsic evidence is admissible to prove fraud. “It is generally agreed that the

parol evidence rule does not bar extrinsic evidence to show fraud as a ground for

rescission . . . .” E. Allen Farnsworth, Contracts § 7.4 at 429 (4th ed. 2004). The

parol evidence rule is simply not applicable when fraud has been employed as

enticement to enter a contract. So universal is this principle that Professor

Farnsworth writes, “[T]here is very little that the parties can do in their agreement

to prevent the use of extrinsic evidence to attack the written agreement on” grounds

of fraud. Id. at 430. Additionally, “evidence of misrepresentation is admissible even

if the agreement is completely integrated, . . . [even] in the face of the usual merger

clause . . . .” Id. Likewise, the Restatement provides:

             Agreements and negotiations prior to or contemporaneous with
             the adoption of a writing are admissible in evidence to establish

                                              ***
             (d) illegality, fraud, duress, mistake, lack of consideration, or
             other invalidating cause . . . .

Restatement (Second) of Contracts § 214(d) (1981).

[¶21.]       In South Dakota, this principle has been in place since early statehood.

“Great latitude . . . has been allowed in the admission of parol evidence to prevent

                                          -7-
#26223, #26226

fraud or injustice.” D.M. Osborne & Co. v. Stringham, 1 S.D. 406, 47 N.W. 408, 409

(1890); see M.E. Smith & Co. v. Kimble, 31 S.D. 18, 139 N.W. 348 (1913). No matter

how clear and unambiguous a contract might be, parol evidence may be offered to

show that the contract is invalid because of fraud in its inducement. See Engles v.

Ranger Bar, Inc., 2000 S.D. 1, ¶ 15, 604 N.W.2d 241, 245; Holmes v. Couturier, 452

N.W.2d 135, 137 (S.D. 1990); Sabbagh v. Prof’l & Bus. Men’s Life Ins. Co., 116

N.W.2d 513 (S.D. 1962). Were it not so, contracting parties could insulate

themselves from their own fraud.

[¶22.]         A substantial majority of jurisdictions follow the traditional, majority

view that the parol evidence rule is inapplicable in cases of fraudulent inducement.

As one California court explained, “‘A party to a contract who has been guilty of

fraud in its inducement cannot absolve himself from the effects of his fraud by any

stipulation in the contract, either that no representations have been made, or that

any right which might be grounded upon them is waived.’” Ron Greenspan

Volkswagen, Inc. v. Ford Motor Land Dev. Corp., 38 Cal. Rptr. 2d 783, 788 n.7 (Cal.

Ct. App. 1995) (additional citation omitted). Many other courts have held

similarly.* Promoting honesty in contractual relations forms part of the rationale:



*        See, e.g., Nw. Bank & Trust Co. v. First Ill. Nat’l Bank, 354 F.3d 721, 726 (8th
         Cir. 2003) (“Under Iowa law, contractual disclaimers are ineffective to bar a
         plaintiff from asserting a claim for fraudulent inducement.”); Envtl. Sys., Inc.
         v. Rexham Corp., 624 So. 2d 1379, 1383 (Ala. 1993) (“[T]he law in this state
         renders an integration, or merger, clause ineffective to bar parol evidence of
         fraud in the inducement or procurement of a contract.”); Hall v. Crow, 34
         N.W.2d 195, 198 (Iowa 1948) (“[W]here there is evidence of fraudulent
         misrepresentations in the inception of a contract such misrepresentations can
         be the basis for either an action to rescind or for damages, despite the
         limiting provisions of a contract.”); Miles Excavating, Inc. v. Rutledge
                                                               (continued . . .)
                                              -8-
#26223, #26226

“We continue to believe that parties to contracts, whether experienced in business

or not, should deal with each other honestly, and that a party should not be

permitted to engage in fraud to induce the contract.” McEvoy Travel Bureau, Inc. v.

Norton Co., 563 N.E.2d 188, 194 (Mass. 1990). Likewise, the Restatement (Second)

of Contracts declares that “[a] term unreasonably exempting a party from the legal

consequences of a misrepresentation is unenforceable on grounds of public policy.”

Restatement (Second) of Contracts § 196 (1981).

[¶23.]       South Dakota cases fall squarely within the traditional, majority rule.

In Holmes, we rejected the argument that a specific contract disclaimer precluded

extrinsic evidence of fraud, quoting with approval the following: “Fraud will vitiate

any contract, regardless of the fact that the contract contains a provision to the

effect that . . . the party who claims the fraud entered into the contract with

knowledge of the condition of the subject matter of the contract and agrees to accept

the same ‘as is.’” 452 N.W.2d at 137 (additional citation and quotations marks
________________________
(. . . continued)
         Backhoe & Septic Tank Servs., Inc., 927 P.2d 517, 518 (Kan. Ct. App. 1996)
         (“We hold that parol evidence is admissible to show fraud in the inducement
         of a contract even where the contract contains a provision stating the parties
         have not relied on any representations other than those contained in the
         writing.”); Gibb v. Citicorp Mortg., Inc., 518 N.W.2d 910, 919 (Neb. 1994)
         (“Citicorp cannot escape liability for the fraudulent conduct of its agent on
         the sole basis that it included a disclaimer clause in the purchase
         agreement.”); Blanchard v. Blanchard, 839 P.2d 1320, 1322-23 (Nev. 1992)
         (“[I]ntegration clauses do not bar claims for misrepresentation.”); Van Der
         Stok v. Van Voorhees, 866 A.2d 972, 975 (N.H. 2005) (“We have held that
         neither a standard merger clause . . . nor the parol evidence rule . . . bars an
         action for fraud.”) (citations omitted); Travers v. Spidell, 682 A.2d 471, 472-74
         (R.I. 1996) (holding that general merger clause does not shield defendant
         from liability for fraud); Merten v. Nathan, 321 N.W.2d 173 (Wis. 1982)
         (contract exculpatory clauses are not enforceable when the fraud is carried
         out intentionally or recklessly).


                                           -9-
#26223, #26226

omitted). Again, in Engels, we examined a contract disclaimer, much like the one

presented here. It provided: “It is agreed and understood by and between the

parties hereto that this agreement is based upon the purchaser[’]s personal

inspection and investigation of the property involved and the ledgers and books of

the Sellers and not upon any representations or warranties of the Seller other than

set out herein.” 2000 S.D. 1, ¶ 7, 604 N.W.2d at 243. We held that the defendant

was not allowed to use the disclaimer clause in the “purchase agreement or the

contract for deed to shield itself from liability for fraud.” Id. ¶ 15. That was the

state of our law until 2002.

             2. Schwaiger v. Mitchell Radiology Assocs., P.C.: A Shift to the
             Minority Rule

[¶24.]       Poeppel argues that Schwaiger controls the outcome of this appeal.

2002 S.D. 97, 652 N.W.2d 372. In Schwaiger, a 2002 split decision, this Court

declared for the first time that a claim of fraud in the inducement could be

dismissed as a matter of law because the written contract disclaimer was in “direct

contradiction” to the alleged oral misrepresentation. Id. ¶ 11. While not

announcing that it had done so, the Schwaiger Court diverged from our

longstanding precedent in fraudulent inducement cases to the nontraditional,

minority view held by a handful of jurisdictions. No mention was made of South

Dakota’s rule or of the many cases upholding it, and nothing was offered to explain

the abrupt turnabout. Moreover, the out-of-state cases cited are irreconcilable with

South Dakota law. For example, the Schwaiger Court wrote: “We agree that if a

written contract is in direct contradiction of an oral representation, reliance on that

oral representation, as a matter of law, is unjustified.” Id. ¶ 11. For this

                                          -10-
#26223, #26226

proposition, however, the Schwaiger Court cited Davidson v. Wilson, 973 F.2d 1391,

1401 (8th Cir. 1992). Davidson was a Rule 10b-5 federal securities fraud case, and

under cases interpreting the Securities Exchange Act, special rules apply to the sale

of securities governed by the Act, which include use of an eight-factor test

applicable to Rule 10b-5 lawsuits. 973 F.2d at 1400. Based on this out-of-state

authority, the Schwaiger Court found it unnecessary even to address “whether parol

evidence is admissible to prove fraud in the inducement of a contract.” 2002 S.D.

97, ¶ 13 n.6, 652 N.W.2d at 378 n.6.

[¶25.]       It is one thing to say that a contract’s disclaimer and merger clauses

may be considered as evidence that a party did not justifiably rely on some earlier

misrepresentation; it is quite another to rule as a matter of law that such clauses

bar even the opportunity to offer evidence of misrepresentation. Moreover,

Schwaiger’s “direct contradiction” rule cannot be understood as anything other than

dictum. This is because the Court went on to hold that “there are no specific facts

provided by Schwaiger supporting his claim for fraudulent inducement[,]” and

“[t]here are no specific material facts indicating that MRA [Mitchell Radiology

Associates] wrongfully induced Schwaiger to enter the initial employment contract

with MRA.” Id. ¶¶ 14, 15. Since there were no facts to establish fraudulent

inducement, it was a moot question whether the contract provisions directly

contradicted those (nonexistent) facts. Thus, the issue was not properly before the

Court, and the Schwaiger rule can be relegated to advisory status.

[¶26.]       To establish fraud, Lester must prove that Poeppel committed any of

the following acts:


                                         -11-
#26223, #26226

             (1) The suggestion as a fact of that which is not true by one who
             does not believe it to be true; (2) The positive assertion, in a
             manner not warranted by the information of the person making
             it, of that which is not true, though he believe it to be true; (3)
             The suppression of that which is true by one having knowledge
             or belief of the fact; (4) A promise made without any intention of
             performing it; or (5) Any other act fitted to deceive.

SDCL 53-4-5. If fraud is established, the contract can be rescinded, regardless of

whether it is unambiguous.

[¶27.]       Here, Lester alleged that Poeppel falsely represented to him that

Lester would receive the company’s financial information at the close of the contract

(when in fact he never received it), that the stocks Lester sought to purchase would

generate approximately $115,000 (when in fact an accounting firm’s report in

Poeppel’s possession concluded the value was 50% less), and that the company had

an exclusive franchise arrangement with Coldwell Banker. Accepting the truth of

Lester’s assertions, Poeppel misrepresented the value of his stock and the status of

the franchise arrangement, with a promise that Lester would see the company’s

financial status at the contract execution, which facts and representations Poeppel

used to fraudulently induce Lester to enter into the contract. Poeppel disputes

Lester’s allegations. Thus, these disputes form genuine issues of material fact on

the fraud question and are suitable for a jury.

[¶28.]       Recently, this Court wrote that reliance in a fraudulent inducement

case is a question of fact. See Stern Oil Co., Inc. v. Brown, 2012 S.D. 56, ¶ 14, 817

N.W.2d 395, 400. Thus, Lester’s fraudulent inducement evidence should not have

been kept from a jury. Because the trial court barred Lester’s fraudulent




                                         -12-
#26223, #26226

inducement evidence under the parol evidence rule, the court erred as matter of

law.

                              CONCLUSION

[¶29.]      The trial court correctly concluded that the contract was clear and

unambiguous as to Lester’s receipt of financial documents. However, even though

the contract is unambiguous, Lester should have been allowed to present evidence

to a jury that he was fraudulently induced to sign the stock purchase agreement.

The trial court erred as a matter of law by barring Lester’s fraudulent inducement

evidence under the parol evidence rule. Because of our ruling on this issue, we need

not address the other issues raised. We reverse and remand for trial.

[¶30.]      GILBERTSON, Chief Justice, and KONENKAMP, ZINTER and

SEVERSON, Justices, concur.




                                        -13-
