Arizona Court of Appeals Division One Holds That When A Plaintiff Sues on a Single Theory of Fraud-In-The-Inducement, an Election of Remedies is not Required.

In July 2006, Clinton Underhill purchased 64 shares in Underhill Holding Company, Inc. (“UHC”) from David Caruthers and Caruther’s wife (collectively, “The Caruthers”) for $6,000.  Several months later, the Caruthers wrote to Clinton and accused him of knowingly misrepresenting UHC’s worth.  The Caruthers demanded the return of their stock certificates and voting rights pending an agreement to adjust the purchase price.  The following year, the Caruthers filed a complaint against Clinton asserting claims for common law fraud, consumer fraud, securities fraud, negligent misrepresentation, and breach of fiduciary duty.

In December 2008, the Caruthers’ counsel sent a letter to Clinton’s counsel tendering the complete rescission of the stock transactions.  Clinton did not agree to the tendered rescission.  The Caruthers thereafter moved to amend their complaint to request complete rescission as the alternative to damages. 

The matter proceeded to a ten-day jury trial.  On the sixth day of trial, the Caruthers’ counsel informed the court that the Caruthers would elect the remedy of rescission.  Clinton moved for judgment as a matter of law, arguing that the Caruthers had not timely demanded rescission.  Plaintiff moved that that question of rescission be decided by the jury.  The court denied both motions, concluding that Clinton had not shown that he was prejudiced by the Caruthers’ delay in asserting rescission but that the Caruthers were not entitled to a jury trial on that remedy because it was equitable in nature. 

The jury returned a verdict in favor of the Caruthers on common law fraud, consumer fraud, securities fraud, and breach of fiduciary duty, and returned an advisory finding that the Caruthers were entitled both to rescission and $15,000 in punitive damages.  The parties then submitted posttrial memoranda on whether the Caruthers were entitled to rescission.  Reversing its earlier ruling, the court entered an order denying rescission, based on its conclusion that the Caruthers had unreasonably delayed in rescinding and had waived their right to rescission by ratifying the stock purchase transaction.  The Caruthers timely moved for new trial, which the court denied. 

On appeal, the Court of Appeals concluded that the trial court erred in applying the election-of-remedies doctrine, but that the Caruthers invited the error.  In Arizona, the election of remedies doctrine provides that a party who has been fraudulently induced to enter into a contract must choose to either disavow the contract and seek a return to the status quo ante, or affirm the contract and sue for damages for breach.  If, however, alternative theories of recovery are factually consistent, an inconsistency does not arise until one of the remedies is satisfied and consistent remedies may be pursued concurrently even to final adjudication.  The Court of Appeals concluded that an election of remedies was never necessary in this case because the Caruthers did not seek to recover on inconsistent theories of liability.  They did not sue for breach of contract, and their case did not depend on affirmance of the contract.  Because the remedies of damages and rescission were not based on inconsistent theories, the Caruthers should not have been compelled to choose one remedy to the exclusion of the other.  The Court concluded that it could not, however, reverse the judgment on these grounds because the Caruthers invited the error by failing to object to the notion that they were required to choose between remedies. 

The Court did, however, reverse the judgment on grounds that the trial court erred by denying damages after deeming rescission unavailable.  The Caruthers did not acquiesce to dismissal of their damages claim until after the court ruled that the evidence did not support the defendants’ objections to rescission, and the Caruthers reasonably expected that they were not legally barred from obtaining rescission.  Under these circumstances, there was no reason that the damages remedy should not have been revived when the court reversed its earlier ruling and found that rescission was unavailable.  To hold otherwise would be to extend the scope of the election-of-remedies doctrine beyond its just purposes and permit a doctrine of equitable origin to be used to accomplish and inequitable result.

The Court also affirmed the trial court’s ruling that the Caruthers were not entitled to a jury trial on rescission and that equitable defenses apply to rescission.  By its plain language, A.R.S. § 44-2002(A) does nothing more than authorize a seller to seek rescission.  Nothing in the statute suggests that the seller’s choice transforms rescission from an equitable remedy to a nondiscretionary one.  The Court nevertheless concluded that the trial court abused its discretion by denying rescission based on its finding of prejudice.  Although the court looked to appropriate factors, it wrongly defined the delay period and misconstrued the deleterious result caused by the delay as a “prejudicial” result. 

Judge Swann authored the opinion; Judges Norris and Downie concurred.