§ - 6.3.1 Fraud

• Jurisdiction: Arizona

§ 6.3.1 Fraud . Any species of fraud will support rescission. Fraud in the inducement and fraud subsequent to the making of the contract are both possible bases, if substantial in character.

A typical case in which rescission was granted is Cavazos v. Holmes Tuttle Broadway Ford, Inc., 104 Ariz. 540, 456 P.2d 910 (1969). After losing at both the trial court and the court of appeals levels, plaintiff Cavazos took her case up to the Arizona Supreme Court. The Arizona Supreme Court used a different legal analysis than had the lower courts, reversed, and returned the matter to the trial court.

The basis for the Cavazos action was primarily misrepresentation, but it was coupled with fraud and mistake. The defendant sold the plaintiff a new car, misrepresenting to her the financing agreement. When her credit union denied her financing, the defendant/seller repossessed the new car and refused to return her trade-in. The plaintiff sued for the return of her trade-in or the fair market value of her trade-in.

The factual pattern was one that would readily evoke judicial sympathy. The plaintiff had limited finances. The salesman talked her into buying a new car, which she needed to transport her to her job. The salesman had her sign both a work order and a conditional sales contract. Id. at 541, 456 P.2d at 911. The manager signed both the work order and the conditional sales contract. Id. It was not the usual custom to use both documents. (Note to practitioner: It now is the custom.) Title remained in the dealer’s name.

Plaintiff was allowed to drive the new car home, which meant that she could not bring it back or renege and that the salesman got his commission. Id. at 542, 456 P.2d at 912. When she learned a few days later that the credit union would not make the loan to her, the salesman would not return her trade-in. When the payment date for the new car passed, defendant repossessed the new car.

The legal theories used by the plaintiff were: (1) conversion; (2) misrepresentation; and (3) fraud. The Arizona Supreme Court concluded that the two documents had to be read together. It rejected the trial court’s colorful language, such as “[T]his is the craziest case I have seen in a long time***” and the trial court’s “judicial notice” that “[n]obody ever gave me that kind of a deal.” Id. The Arizona Supreme Court observed that there are indeed instances where a dealer will turn over a new car contingent on a buyer’s obtaining financing. It stated that the crucial issue was not the dealer’s intention in this particular case. Id. More important was what the two contracts said, when read together.

Essentially what the Arizona Supreme Court did was consider the sales contract revoked or rescinded. Thus, to return the parties to the status quo, it ordered the trial court to determine the value of the trade-in so that the seller could pay that amount to the plaintiff. It also made special note that the seller had no action for a deficiency, pursuant to a representation to that effect by defendant’s attorney at trial. Id. at 543, 456 P.2d at 913.

Smith v. Hurley, 121 Ariz. 164, 589 P.2d 38 (Ct. App. 1978), involved a pharmacy buy-out. Counsel for Smith relied on breach of contract as the main legal basis for the request for rescission, with fraud as an additional basis. The action was brought seeking a dissolution of the partnership and an accounting. A counterclaim sought the sum allegedly due under the buy-out agreement. The trial court entered summary judgment for the defendant, which was affirmed by the Arizona Court of Appeals.

“The primary issue in this appeal is whether the obligor under a ‘buy-out’ agreement is relieved from performance because of the breach by the obligee of a contemporaneous partnership agreement.” Id. at 165, 589 P.2d at 39. The amended complaint sought rescission of both the buy-out contract and partnership. Both parties moved for partial summary judgment on the rescission issue. There was summary judgment for the defendant on the counterclaim, and a jury trial in regard to whether the Arizona Pharmacy was an asset of the partnership. Id. at 166, 589 P.2d at 40. The jury decided that the pharmacy and the lease were both partnership assets.

The issue on appeal was whether defendant’s conduct justified rescission. Defendant had started the...