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Thomas O'shea and Anne Donahue v. High Mark Development

April 26, 2012

THOMAS O'SHEA AND ANNE DONAHUE O'SHEA, TRUSTEES OF THE THOMAS AND ANNE O'SHEA TRUST U/D/T DATED NOVEMBER 2, 1998; GRANDVIEW CREDIT, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY; CALEB FOOTE, AN INDIVIDUAL; KATE LARKIN DONAHUE, AN INDIVIDUAL; JOHN KEVIN DONAHUE, AN INDIVIDUAL; AND SAN FRANCISCO RESIDENCE CLUB, INC., A CALIFORNIA CORPORATION;, PLAINTIFFS-APPELLANTS,
v.
HIGH MARK DEVELOPMENT, LLC, AN IDAHO LIMITED LIABILITY COMPANY; GORDON ARAVE, INDIVIDUALLY AND AS MEMBER OF HIGH MARK DEVELOPMENT, LLC; JARED ARAVE, INDIVIDUALLY AND AS MEMBER OF HIGH MARK DEVELOPMENT, LLC; BENJAMIN ARAVE, INDIVIDUALLY AND AS MEMBER OF HIGH MARK DEVELOPMENT, LLC, DEFENDANTS-RESPONDENTS.



Appeal from the District Court of the Seventh Judicial District of the State of Idaho, in and for Bonneville County. The Hon. Joel E. Tingey, District Judge.

The opinion of the court was delivered by: Eismann, Justice.

Opinion No. 67

Stephen W. Kenyon, Clerk

The judgment of the district court is affirmed.

This is an appeal from a judgment in favor of the defendants in an action alleging fraud and breach of contract in connection with the sale of a commercial building. We affirm the judgment of the district court.

I.

Background

High Mark Development, LLC, is an Idaho limited liability company whose members include Gordon Arave, Mark Arave, and Jared Arave. High Mark was the owner of a commercial building located in the City of Ammon, a suburb of Idaho Falls. On June 20, 2006, it had leased a portion of the building to The Children's Center, Inc., for a period of ten years commencing on June 19, 2006.

In June 2007, High Mark listed the real property for sale through its realtor. Thomas O'Shea, a resident of California, learned of the property through a realtor friend in Boise. Mr. O'Shea and his wife, Anne, were trustees of the "Thomas and Anne O'Shea Trust u/d/t Dated November 2, 1998," which they had formed to protect their assets and provide for their children. They decided to purchase the real property.

On August 14, 2007, the Trust entered into a real estate contract agreeing to purchase the property from Seller for $3,700,000.00. The remaining Plaintiffs, Grandview Credit, LLC, a California limited liability company; San Francisco Residence Club, Inc., a California corporation; Caleb Foote; Kate Donahue; and John Donahue, all agreed to invest in the property. When the transaction closed, the deed listed the Trust and the investors as grantees, taking the property as tenants in common with varying percentages of interest. The negotiations and exchange of information were conducted primarily through the Plaintiff's realtor and High Mark's realtor, with Mr. O'Shea being the spokesperson for the investors.

The sale of the real property closed on December 10, 2007. The Children's Center did not make any payments to Plaintiffs after they acquired the property. On March 1, 2008, the Children's Center vacated the property, and shortly thereafter it went out of business.

On July 8, 2008, Plaintiffs filed this action against High Mark and two of its principals, Gordon Arave and Benjamin Arave. Plaintiffs later added Jared Arave as a defendant by filing an amended complaint. The focus of the litigation was that the Defendants had induced the Plaintiffs to acquire the property by providing false information that the Children's Center was current in its payments of rent and/or concealing or failing to disclose that the Center had failed to pay all rent due under the lease. The Plaintiffs alleged claims for breach of contract and fraud by misrepresentation and nondisclosure against all of the Defendants, but the issues were narrowed after cross motions for summary judgment. The case was tried to a jury on the issues of: High Mark's breach of contract; High Mark's alleged fraud by misrepresentation and nondisclosure; Gordon Arave's alleged fraud by misrepresentation and nondisclosure; and Benjamin Arave's alleged fraud by nondisclosure. The jury returned verdicts in favor of all of those Defendants. The Plaintiffs filed a motion for a judgment notwithstanding the verdict on the issue of liability or, in the alternative, for a new trial, which the district court denied. The Plaintiffs then timely appealed.

II.

District Court Err in Denying the Plaintiff's Motion for a Judgment Notwithstanding the Verdict?

When a trial court decides a motion for a judgment notwithstanding the verdict, it cannot weigh the evidence or pass on the credibility of witnesses. Weinstein v. Prudential Prop. and Cas. Ins. Co., 149 Idaho 299, 327, 233 P.3d 1221, 1249 (2010). It must simply determine whether reasonable minds could have reached the same conclusion as the jury when the evidence and all reasonable inferences that can be drawn therefrom are considered in the light most favorable to the nonmoving party. Id. We use that same standard when reviewing the trial court's ruling on the motion. Id. at 315, 233 P.3d at 1237.

A.

The Fraud Claim.

1. False Statement. The jury was asked to decide whether the Plaintiffs had proved, by clear and convincing evidence, that High Mark had committed fraud, either by misrepresentation or by failure to disclose; that Gordon Arave had committed fraud, either by misrepresentation or failure to disclose; and that Benjamin Arave had committed fraud by failure to disclose. The jury found that the Plaintiffs had not proved those claims. In their motion for a judgment notwithstanding the verdict, the Plaintiffs asked for a judgment establishing liability for fraud against High Mark on the claim of fraud by both misrepresentation and nondisclosure and against Gordon Arave on the claim of fraud by nondisclosure. The district court denied that motion. In their initial brief on appeal, the Plaintiffs listed as an issue the district court's denial of that motion. However, they only addressed their claim that High Mark committed fraud by making false representations. Therefore, we will not address the district court's denial of the motion with respect to High Mark's and Mr. Arave's alleged fraud by nondisclosure. Inama v. Boise County ex rel. Bd. of Comm'rs, 138 Idaho 324, 330, 63 P.3d 450, 456 (2003) ("We will not consider issues cited on appeal that are not supported by argument and propositions of law").

The only claim of fraud argued on appeal is High Mark's alleged fraud in making a false representation. Under the facts shown in the record, the Thomas and Anne O'Shea Trust u/d/t Dated November 2, 1998, did not have a fraud claim based upon an alleged false representation. There were no representations that could have fraudulently induced Mr. O'Shea on behalf of the Trust to enter into the purchase contract. The only alleged misrepresentations that occurred prior to the execution of the real estate contract were: (a) the internet posting advertising the property for sale, which was created by High Mark's realtor, and (b) a statement by the realtor to the Plaintiffs' realtor that, "as far as he knew," the tenant had made all of the rental payments. In connection with the Defendants' motion for summary judgment, the district court determined that the internet advertisement did not contain allegations of fact that could be the basis of a fraud claim, and it so instructed the jury. The court also held that the statement by High Mark's realtor could not be a statement of fact that could be the basis of a fraud claim. The Plaintiffs have not challenged those rulings on appeal. Therefore, there was no misrepresentation that induced the Trust to enter into the real estate contract.

Alleged false representations about the financial condition of the tenant made after the Trust had entered into the contract could not form the basis of a fraud claim because the contract did not provide that the Trust could terminate it if the Trust determined that the tenant was not financially sound. The buyer could only terminate the contract "[s]hould the information provided on the estoppel differ from the information provided by Seller," and there is no contention that it did. The Trust was already bound to purchase the property before the alleged false representations were made. "It is immaterial if one is induced by false representations to do what one is bound to do . . . ." 37 Am. Jur. 2d Fraud and Deceit § 283 (2001). However, the record does not reflect that the other Plaintiffs were contractually bound to invest in the property until they executed the Tenancy in Common Agreement dated November 15, 2007, which required them to contribute to the purchase price. That agreement was executed after an alleged misrepresentation regarding the tenant's payment of rent. Therefore, the other Plaintiffs would have a cause of action for fraud based upon that alleged misrepresentation. However, for the sake of simplicity, when addressing the fraud claim we will refer to the Plaintiffs, even though the Trust does not have a claim of fraud based upon the making of a misrepresentation.

The district court instructed the jury that two of the elements the Plaintiffs had to prove by clear and convincing evidence in order to establish fraud were that "the defendant stated a fact to the plaintiff" and that "[t]he statement was false." The only alleged misrepresentations that the Plaintiffs argue on appeal were included in the Income and Expense Statement faxed to their realtor on August 27, 2007, and the Estoppel Certificate dated October 17, 2007. The Plaintiffs contend that these documents "falsely represented that the Center had been paying all of its monthly rent."

The Income and Expense Statement showed that from June 2006 through July 2007, the rent received from the Children's Center totaled $324,836.00. The Estoppel Certificate included a statement that "[a]ll minimum monthly rent has been paid to the end of the current calendar month, which is September 2007." The Plaintiffs contend that these statements were false because the Center's records show that it did not make rental payments during the six-month period from August 2006 through January 2007. From the evidence at trial, the jury could reasonably have concluded that there was no false statement regarding the Center's payment of rent.

In 2002, the Children's Center began its business of providing psychiatric, psychological, counseling, and therapy services to children and adolescents. It leased space in a building located at 1615 Curlew Drive, Ammon, which was owned by Arave Brothers, LLC, a company owned by Gordon Arave and his brother. Because the Center was a new business, Arave Brothers agreed that it did not have to pay any rent for the first six months of the lease. Arave Brothers later sold the building to a third party, subject to the Center's lease, and the Center continued occupying that building for the duration of the lease.

The Children's Center wanted to expand its business, and in 2004 it discussed with Gordon Arave a proposal to have a new building constructed in Pocatello. Gordon Arave agreed to do so, and Arave Construction, Inc., purchased a parcel of land near the hospital, built a building, and sold it to Crestwood Enterprises, LLC, a company in which Gordon Arave is a part owner. The Center began leasing space in that building on May 1, 2005, and Crestwood Enterprises agreed that the Center would not have to pay rent for the first six months because it was expanding into a new market.

On June 1, 2005, Gordon Arave loaned M. Smith Enterprises, LLC, a company owned by the Center's CEO, the sum of $100,000, in exchange for a promissory note payable in monthly interest-only payments until June 1, 2010, when the balance was to be paid. On October 1, 2005, Mr. Arave made another $100,000 loan to Smith Enterprises on like terms in exchange for a promissory note with the balloon payment being due on October 1, 2010.

In 2005, the Children's Center was nearing the end of its five-year lease on the building in Ammon. It discussed with Gordon Arave about constructing a new building for it to lease. Arave Construction agreed to construct a building on adjoining property at 1675 Curlew Drive. When the building was completed, it sold the property to High Mark Development, LLC.

The Children's Center began leasing the building on June 19, 2006. After it had moved in, it contacted Mr. Arave in July or August 2006*fn1 and asked if it could have the same concession as the other two leases-six months of free rent. Mr. Arave and his accountant then met with the Center to discuss the request and to review some of its financial information. The accountant was impressed with the Center's business model and felt its business was growing. Mr. Arave stated that he would not agree to six months of free rent because High Mark did not have enough money on hand to do that. High Mark needed to make the mortgage payments on the property. The Center then asked if six-month's rent could be deferred and paid over a period of seven years. Within a few days, Gordon Arave and Jared Arave agreed to loan the Center money for six month's rent plus an additional $49,975.00 from a business they had together, which was apparently Arave Livestock. As Gordon Arave testified:

And ultimately we did have some money in another company, meaning Jared and I. We opted to loan that money to Matt Smith or to The Children's Center, I guess is the appropriate answer, to The Children's Center so that they could meet their rental obligations. Same thing as borrowing from a bank, I guess, the Bank of Commerce. We made a loan to them to do that with.

It appears that the loan proceeds for the rent were remitted directly to Seller rather than to Tenant. When called as a witness by Plaintiffs, Gordon Arave testified:

A. High Mark Development did not accept a promissory note. Gordon and Jared Arave accepted a promissory note after having made a loan to The Children's Center to make those payments; that's correct.

Q. Well, the payments weren't made. A. Well, do you suppose that High Mark Development could make their payments without any money?

Q. Well, I'm asking you-

A. Someone had to give them that money.

The Children's Center was to prepare and sign the promissory note, but it did not provide the signed note until April 18, 2007. The note was made payable to Gordon Arave and Jared Arave, not to High Mark. If the note was simply to evidence the debt for the unpaid rent and to establish terms for the payment of that rent, it would have been made payable to High Mark because it was High Mark that was owed the rental payments. Thus, the jury could have found that the Center did not fail to pay six month's rent. It borrowed money from Gordon Arave and Jared Arave to pay that rent. That the money for the rent was not paid to the Center so it could pay High Mark does not mean that the transaction was not a loan. When one borrows money to pay a specific obligation, it is common for a lender to remit the loan proceeds directly to the creditor rather than to the borrower.

The Income and Expense Statement stated that "Rent Received from 6/2006 through 7/2007" was $324,836.00. It did not make any representation as to the source of the funds used to pay the rent. The Estoppel Certificate stated that "[t]he Lease . . . has not been . . . altered or amended in any respect (except as indicated in the following sentence) . . . ." and that "[a]ll minimum monthly rent has been paid to the end of the current calendar month, which is September 2007 . . . ." It also did not represent the source of the funds used to pay the rent, and Gordon and Jared Arave's agreement to loan the Children's Center the funds to pay the rent did not constitute an alteration or amendment of the lease. Thus, there was sufficient evidence from which reasonable jurors could have concluded that the statements in the Income and Expense Statement and the Estoppel Certificate were truthful.

The Defendants' attorney did not argue to the jury the significance of Gordon Arave's testimony regarding him and Jared Arave making a loan to the Children's Center so it could meet its rental obligations. However, a jury is not bound to consider only the arguments made by counsel. The district court instructed the jury at the beginning of the trial, "Your duties are to determine the facts, to apply the law set forth in these instructions to those facts, and in this way decide the case." The jury is not limited by counsel's understanding of the case, of the evidence, or of the law. It can determine the facts for itself and then apply them to the law as stated in the court's jury instructions in order to reach its verdict.*fn2

2. Causation. The Defendants' counsel did not argue that the statements concerning the payment of rent were accurate. However, he did argue that under the evidence presented a reasonable jury could have found that the alleged misrepresentations did not cause the Plaintiffs any damages, and the district court agreed. The court had instructed the jury that the Plaintiffs were required to prove by clear and convincing evidence that they "suffered damages proximately caused by reliance on the false statement." Based upon the evidence in the record, the jury could reasonably have found that the Plaintiffs failed to prove that their damages were caused by any representations in the Income and Expense Statement or the Estoppel Certificate, even if they were false.

The jury could reasonably have concluded that the Plaintiffs' actions showed that they would have purchased the property even had they known that the tenant did not pay rent from August 2006 through January 2007, assuming that it had not. After Mr. O'Shea learned that the property was for sale, he saw the internet advertisement and the website of the tenant. On August 7, 2007, Mr. O'Shea's realtor friend e-mailed High Mark's realtor stating that the trust would like to make an offer on the property. He stated in the email, "The family trust will be an all cash purchase and can close in 30 days."

On August 14, 2007, Mr. O'Shea signed the contract for the trust to purchase the property without ever having seen the property or having made an investigation into the financial condition of the tenant. There was no provision in the contract making the buyer's obligation to purchase contingent upon the buyer being satisfied with the financial condition of the tenant. During trial, Mr. O'Shea testified that he would have liked to ask the tenant some questions such as "how long he's been in business and how his operation was doing and how he saw the future of the operation," but he made no attempt to contact the tenant to obtain that information, even though he had the tenant's telephone number from the tenant's website.

The contract provided that High Mark was to provide "2005 and 2006 federal tax returns of tenant and a current balance sheet showing assets and liabilities." In late August 2007, the Plaintiffs' realtor was provided with copies of the Children's Center's 2005 and 2006 federal and state income tax returns and a profit and loss statement for the Center covering the period from January 1 through June 7, 2007. The realtor only forwarded to Mr. O'Shea copies of two pages of each year's tax returns. They were the page showing total income and the page showing expenses, which was probably the schedule of "Other Deductions." Those documents showed that in 2005, the Center had total income of $4,228,949 and total deductions (excluding depreciation) of $3,938,412, for a net gain of $290,537. It was then able to take a net operating loss carried forward from a prior year in the sum of $165,908. In 2006, the Center had total income of $5,817,303 and total deductions (excluding depreciation) of $6,183,462, for a net loss of $366,159. The profit and loss statement for the first six months of 2007 showed total income of $2,643,751.34, total expenses of $2,654,572.04, for a net loss of $10,820.70.

Mr. O'Shea testified that there was "some concerns" about the loss in 2006, but their realtor informed them that the Children's Center was expanding its business, it had moved into a new building, and it was hiring additional doctors and staff. They considered these very legitimate reasons for the high expenses in 2006. Mr. O'Shea also testified that he did not consider the loss in 2006 significant, but he put great significance upon the fact that during the first six months of 2007 the Center's loss had dropped to only about $10,000.

The Plaintiffs did not make any inquiry about the Children's Center's long-term debt, nor did they inquire as to its sources of income. They did not inquire as to how in 2006 it was able to pay out ...


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