SIEVERS, Judge.
J. Roger Eatherton (Roger) and Jane P. Eatherton, as well as Tabora Farms Bakery, Inc. (Tabora Farms), appeal from an order of the district court for Lincoln County that found the Eathertons liable as personal guarantors for amounts owing on various promissory notes held by First National Bank of North Platte (First National) in connection with the purchase of a commercial bakery located in Cozad, Nebraska. The notes were issued by the Eathertons' corporation, Tabora Farms, and the Eathertons executed personal guaranties of the notes. In their answer to First National's complaint and subsequent counterclaim, the Eathertons alleged that First National made material misrepresentations inducing them to purchase the bakery, that such misrepresentations were the proximate cause of the bakery being unprofitable, and thus, that they are not liable on their personal guaranties—the liability of Tabora Farms having been discharged in bankruptcy. For simplicity, when discussing the appellants, we will refer only to the Eathertons. Specifically, the Eathertons claim First National represented to them that the bakery's two main customers were fully supportive of the bakery, when in fact the bank knew that was not the case. We emphasize that the Eathertons do not dispute the execution of the notes and the personal guaranties, or the amounts First National claimed were owing on them. After a bench trial, the district court found generally in favor of First National, and the Eathertons now appeal.
First National took possession of a commercial bakery located in Cozad in a foreclosure action in September 2004. The bakery, called Demeter's while under First National's control, manufactured raw, frozen dough; manufactured a line of cakes and raw and prefried doughnuts; and sold such products wholesale. First National owned and operated the bakery from the time it was acquired in foreclosure until it was sold to the Eathertons on February 28, 2007.
In early 2005, the Eathertons first became aware that First National wanted to sell Demeter's, and they made contact with the bank's sales representative, Arnie McDaniel, expressing their interest in purchasing it. We note that the Eathertons had been operating a business which included a bakery in Pennsylvania since 1990. Roger, who has a bachelor of science degree in mechanical engineering, testified that he had over 25 years' experience in the bakery business prior to purchasing Demeter's. The Eathertons sought to purchase Demeter's in order to complete a like-kind exchange under the Internal Revenue Code, I.R.C. § 1031 (2006). After being notified of the Eathertons' interest in the bakery, McDaniel sent them information to facilitate the sales process, including sales data from the preceding 2 years, which indicated that 80 percent of the bakery's business was tied to two customers—Affiliated Foods (Affiliated) and Cash-Wa Distributing (Cash-Wa).
Roger flew to Nebraska in November 2005 to tour Demeter's, meet with bakery customers, and gather information. Roger testified that while he was in Nebraska, he met with Dennis Marfisi, the manager of Demeter's. According to Roger, Marfisi "had over 30 years of experience with that specific bakery. He knew every customer that was out there. They all loved him. And he knew every product the bakery made. He was skilled as a baker." Roger accompanied Marfisi to a Cash-Wa food show in order to observe the relationship between the customers and the bakery. At that time, Roger requested a list of any complaints Demeter's had received from its customers. Roger testified that he received a few written complaints regarding blistering on doughnuts, including at least one such complaint from Affiliated.
The Eathertons decided against purchasing Demeter's and communicated their decision to McDaniel in March 2006. Roger testified that the reasons they decided not to go through with the purchase at that time were because (1) First National was willing to provide them with only a $200,000 line of credit—which would "never get this thing off the ground"—and (2) 80 percent of the bakery's gross sales was tied to two customers—which Roger testified was just too risky.
However, Roger testified that sometime after August 1, 2006, his interest in purchasing Demeter's was renewed when McDaniel indicated that First National might be willing to increase the $200,000 line of credit. At that point, John Way—the executive vice president of First National at that time—was involved with the deal. Way handled the sale of the bakery to the Eathertons, including acting as a loan officer to facilitate the financing with First National. Roger testified that he, McDaniel, and Way eventually began discussing conventional financing for the purchase. Roger explained on direct examination:
The real estate was subsequently appraised at $680,000, which was significantly less than Roger had expected. Roger testified that he had to come up with $206,000 of his personal funds "[j]ust on the property alone" and approximately $80,000 in personal funds for the bakery's existing inventory in order to complete the transaction. He testified that he originally thought he would have to infuse only $75,000 in personal funds.
By the fall of 2006, the Eathertons decided to go through with the purchase of Demeter's by Tabora Farms, a corporation they formed in Nebraska in November 2006. A purchase agreement entered on February 28, 2007, between Tabora Farms and First National appears in evidence. The agreement reflects a purchase price of $750,000 for the bakery, with $375,000 allocated to the real estate and $375,000 allocated to the equipment and inventory. Part IX of the agreement, labeled "CONTINGENCIES," reflects the following conditions precedent to the transfer of the bakery to the Eathertons: (1) a loan commitment from First Bank and Trust of Cozad (First Bank) in the amount of $548,000 (secured by the real estate); (2) a commitment from the Nebraska Department of Economic Development for a loan/grant in the amount of $300,000; and (3) a line of credit in the amount of $550,000 from First National.
At the closing with First National on February 28, 2007, Roger was informed that he and Jane would each have to sign personal guaranties in order to receive the $550,000 revolving line of credit from First National. Roger testified that if he had known they were going to be required to sign personal guaranties, he never would have agreed to the deal. Nevertheless, after Roger consulted with his attorney, he signed a personal guaranty on the revolving line of credit. Jane was not present at the closing, but she too, signed a personal guaranty at First National shortly thereafter. We note that the guaranties contain a "CONTINUING GUARANTY" section, which states that the initial $550,000 debt is guarantied on an open and continuing basis and applies to any debt "NOW EXISTING OR HEREAFTER ARISING OR ACQUIRED."
The Eathertons began operating Tabora Farms on March 1, 2007. Roger testified that "almost immediately" complaints started coming in from Affiliated regarding doughnuts not rising, outdated product, and misstamped or mislabeled product. Roger testified that these problems were with the inventory they purchased from First National. Roger said on direct examination: "[T]he inventory that we would have shipped for the first three or four weeks, at least, was inventory that had been produced prior to my purchase of that business. And, you know, $85,000 [in inventory] probably . . . represents about . . . twelve thousand dollars worth of sales." Roger testified that shortly after closing, he also discovered serious product complaints from Affiliated and Cash-Wa dating back to December 2005, which he asserts he and Jane were not apprised of prior to purchasing the bakery. Roger testified, "[Way] had told me about a blistering problem on doughnuts . . . but that was an easy problem to fix, and we fixed it. What I wasn't told about [was] the serious dough problems that not only Affiliated was having . . . but also Cash-Wa." Roger also stated on direct examination, "And actually, it was represented to me. . . by [Way] that Affiliated . . . and Cash-Wa were strong supporters of the bakery in Cozad. . . . The two major customers . . . were said to be solid customers. And . . . you kind of rely on what you are told."
Way testified that he provided the Eathertons with knowledge about the bakery and its operations prior to February 28, 2007, including having a conversation with Roger regarding blistering problems on doughnuts that Affiliated had complained of. Way testified that he believed Roger remedied that problem sometime after the purchase of the bakery. The evidence reflects a series of e-mails between agents of Affiliated and agents of First National regarding additional complaints Roger was allegedly not made aware of prior to closing. One such e-mail sent between agents of Demeter's and dated December 6, 2005, refers to several reasons why Affiliated was "very upset" with the bakery, including out-of-date products and incorrect invoice prices. The e-mail ends with the statement, "[Affiliated] is very serious about discontinuing our business partnership." Another e-mail sent to Demeter's from Affiliated on that same date says "[Affiliated] cannot continue to do business with [the bakery] if there are all these issues." Way testified on redirect examination, "I don't believe the blistering had been resolved. That's why I shared it with Roger. Or if it had — had or hadn't, he needed to know about that. The other issues, frankly I don't even recall those other issues."
Shortly after purchasing the bakery, Roger had a meeting with Colleen Burgett, a contact at Affiliated. Roger and Marfisi apparently presented Tabora Farms' new thaw-and-sell line of products to Burgett at that meeting. Marfisi testified that although Affiliated already had a similar line of products, he hoped the quality and pricing of their products would "get [them] into the warehouse." Roger testified that he thought the meeting went very well, which is why he was surprised when he learned that Affiliated subsequently wanted to stop doing business with Tabora Farms. Affiliated terminated its business relationship with the bakery in August 2007.
In November of that same year, Cash-Wa followed suit and ended its business relationship with Tabora Farms. The senior vice president for marketing at Cash-Wa, Larry Hanks, testified that he did not get a "good feeling" from Roger the second time they met. His impression from that meeting was that "Roger was trying to run our business." Additionally, Hanks explained that Tabora Farms started using its own trucks for delivery, which Roger testified they were forced to do after Affiliated pulled out. Hanks testified that Tabora Farms thus became direct competitors with Cash-Wa's existing distribution service and "that just didn't sit very good." He testified on cross-examination that Tabora Farms' buying trucks and delivering its own products was the main reason why Cash-Wa terminated its business relationship with the bakery in November 2007.
Way testified that he first heard Cash-Wa was ending its business relationship with Tabora Farms in March 2008. He stated, "I believe I picked up the phone and called Roger and let him know that." As for Affiliated, Way testified that he first heard they stopped doing business with Tabora Farms in August 2007 when Roger informed him of that fact. Way said he had no indication prior to that time of Affiliated's intention to cease doing business with the bakery.
Roger testified that, in spite of losing 80 percent of the bakery's business, Tabora Farms pushed forward. He said that by July 2009, all of the effort they had put into the previous 2 years was finally paying off in the form of purchase orders coming in. He testified that Tabora Farms got purchase orders that totaled $2.3 million on an "annualized" basis in 2009. However, by that time, Roger no longer had a line of credit with First National, and, although he had materials in the plant, he could no longer afford to pay labor costs. Thus, the Eathertons filed for chapter 11 bankruptcy on April 22, 2009. The case was converted to chapter 7 bankruptcy on September 24. The record reflects that a sale of First National's collateral was held, the proceeds were applied to the debt, and the bankruptcy case was discharged at some point thereafter.
First National filed a complaint against the Eathertons in the district court for Lincoln County alleging two causes of action. In the first cause of action, First National alleged that the Eathertons knowingly and willfully executed a scheme to defraud the bank by fraudulently overdrawing an account previously entered into by the parties, and requested judgment in the principal amount of $233,611.95, plus interest, court costs, and attorney fees. First National's second cause of action alleged that the bank elected to declare the entire remaining balances arising under several promissory notes personally guarantied by the Eathertons due and requested judgments against them totaling $1,324,999.99, plus interest, court costs, and attorney fees.
In their answer to First National's complaint, the Eathertons denied that they were overdrawn on an account referenced in the first cause of action because said account was tied to a commercial line of credit and agents of First National represented to them that advances made on that line of credit would be covered by the bank and would not be deemed "overdrawn." They also denied that there was ever a scheme to defraud the bank, labeling such allegation "scandalous, irrelevant and frivolous." Further, the Eathertons alleged the affirmative defense that First National fraudulently or negligently misrepresented certain facts in order to induce them to purchase the bakery, to borrow funds in order to complete said purchase, and to sign personal guaranties for the loans. They alleged that as a proximate result of such misrepresentations, Tabora Farms has been unprofitable, and that the promissory notes personally guarantied by the Eathertons are invalid and without effect.
The Eathertons also filed a counterclaim in which they alleged that due to First National's fraudulent or negligent misrepresentations, they had to personally infuse $575,000 of their personal resources into Tabora Farms. They prayed for judgment against First National in that amount "and for such other, further and different relief which the Court may [d]eem just and equitable."
First National's answer to the Eathertons' counterclaim alleged that the Eathertons were sophisticated business owners who purchased the bakery after "substantial due diligence, full disclosure, and at or less than the fair market value of such business at the time of closing." Further, it denied any inducement or failure to disclose any material fact.
A bench trial was held on June 16, 2010. In the court's subsequent memorandum opinion and judgment, it found generally in favor of First National and against the Eathertons. The opinion recites, "[First National] has clearly proven by the greater weight of the evidence that the Eathertons, as guarantors of the obligations of Tabora Farms . . . are indebted to [First National]." With respect to the allegation that the Eathertons were defrauded into signing personal guaranties for the indebtedness of Tabora Farms, the court determined that because Roger was represented by an attorney at the time of closing and signed the guaranty only after conferring with him, any objection to signing was thereby waived. Jane signed thereafter in the presence of an associate lending officer, and the court found that she thus also waived any objection to signing.
Regarding the Eathertons' affirmative defense of false representation, the opinion notes that the elements of the claim are derived from NJI2d Civ. 15.21 and are listed as follows: (1) "[T]he plaintiff made the claimed representation"; (2) "the representation was false"; (3) "the representation was made fraudulently"; (4) "when it made the representation, it intended that the defendants would rely upon it"; (5) "this representation substantially contributed to the defendants' decision to enter into the contract"; (6) "the defendants' reliance on this representation was reasonable"; and (7) "the defendants were damaged as a result of this reliance." The court determined that the Eathertons established each element of the defense, "by the greater weight of the evidence," with the exception of reasonable reliance. It found that prior to closing, First National, through its agents, knew that Affiliated had threatened to terminate its business relationship with the bakery, but that information was never conveyed to the Eathertons. The trial court accepted Roger's testimony that, had he known of the complaints by Affiliated, he would not have gone through with the purchase. It was with respect to only the element of reasonable reliance that the trial court found the Eathertons' proof insufficient.
Turning to the necessary element of reasonable reliance, the opinion notes that Roger testified during cross-examination that he did not talk to Affiliated or Cash-Wa about their level of support for the bakery prior to closing. The court found, had he done so, it is "highly probable" he would have discovered the complaints. Further, citing Lucky 7 v. THT Realty, 278 Neb. 997, 775 N.W.2d 671 (2009), the district court stated, "A complaining party is justified in relying on a positive statement of fact if an investigation would be required to discover the truth." The court found that any representations by Way that Affiliated and Cash-Wa were fully supportive of the bakery were "more in the nature of an opinion, rather than a positive statement of fact."
The court found that the Eathertons' counterclaim failed for the same reasons that the affirmative defense failed, as outlined above. Additionally, the district court found that as to the issue of proximate causation, the Eathertons could not recover on their counterclaim, "as they had more than sufficient time to remedy any product complaints [about the bakery's production] between the time of closing and the time when Affiliated . . . and Cash-Wa withdrew their business from the bakery." The court noted that the Eathertons had 5 months to solidify their business relationship with Affiliated before it terminated its business relationship. And, they had 7 months to correct any deficiencies in their business relationship with Cash-Wa before it took its business elsewhere. The Eathertons now timely appeal.
The Eathertons allege that the district court erred in finding their reliance on the misrepresentations of First National was not reasonable and that such misrepresentations were not the proximate cause of their claimed losses.
On cross-appeal, First National alleges that the district court erred in finding that the Eathertons established all of the elements of their affirmative defense except for the element of reasonable reliance.
In a bench trial of a law action, the trial court's factual findings have the effect of a jury verdict and will not be disturbed on appeal unless clearly erroneous. Professional Bus. Servs. v. Rosno, 268 Neb. 99, 680 N.W.2d 176 (2004).
In its July 16, 2010, memorandum opinion and judgment, the district court found that the Eathertons were unable to prove the element of reasonable reliance with respect to their negligent/fraudulent misrepresentation affirmative defense and counterclaim based on that same theory. And, that any misrepresentations by First National were not the proximate cause of $575,000 in losses alleged by the Eathertons in their counterclaim. The Eathertons contend that those requisite elements were present in both their affirmative defense and counterclaim and that the district court's determination to the contrary was thus clearly erroneous. We disagree.
The elements of fraudulent misrepresentation are (1) that a representation was made; (2) that the representation was false; (3) that when made, the representation was known to be false or made recklessly without knowledge of its truth and as a positive assertion; (4) that it was made with the intention that the plaintiff should rely upon it; (5) that the plaintiff did so rely; and (6) that he or she suffered damage as a result. See Freeman v. Hoffman-La Roche, Inc., 260 Neb. 552, 618 N.W.2d 827 (2000). Negligent misrepresentation has essentially the same elements as fraudulent misrepresentation, with the exception of the defendant's mental state. Lucky 7 v. THT Realty, 278 Neb. 997, 775 N.W.2d 671 (2009). In fraudulent misrepresentation, one becomes liable for breaching the general duty of good faith or honesty. Id. In a claim of negligent misrepresentation, one may become liable even though acting honestly and in good faith if one fails to exercise the level of care required under the circumstances. Id.
We note that at oral argument the Eathertons' counsel argued extensively about a series of 11 e-mails that his clients should have been shown by First National before deciding upon the purchase. Having reviewed the e-mails, we cannot disagree that the information contained therein was important and material to a potential purchaser. However, the fact is that the trial court obviously reached the same conclusion because it found the presence of all but one of the material elements of the Eathertons' affirmative defense—reasonable reliance.
Regarding the element of reasonable reliance in the context of a misrepresentation claim, the Nebraska Supreme Court in Lucky 7, 278 Neb. at 1003-05, 775 N.W.2d at 676-77, held:
After closely reviewing all of the evidence and considering the totality of the circumstances, we find that it was not clearly erroneous for the district court to find that the Eathertons were not reasonable in relying on any statements they claim were made by agents of First National that Affiliated and Cash-Wa were "strong supporters" of the bakery. Roger testified that he had a bachelor of science degree in mechanical engineering and over 25 years' experience in the bakery business prior to purchasing Tabora Farms. Roger is properly viewed as a sophisticated businessperson and experienced in operating a bakery. Thus, statements made by Way about Affiliated's past complaints regarding blistering problems with doughnuts should have put Roger on notice that there were potential problems and that reason and ordinary prudence would dictate that he make direct contact with Affiliated about its future plans.
Further, Roger engaged in lengthy negotiations with First National for a significant period of time prior to his ultimate decision to purchase the bakery in February 2007. Roger had ample opportunity in that timeframe to determine Affiliated's and Cash-Wa's level of support, especially in light of his testimony that the risk associated with 80 percent of the business being connected to only two customers played heavily into his decision not to purchase the bakery in March 2006. Roger also attended a food show in 2005 with agents from both companies present; however, he testified that he failed to discuss their support for the bakery at that time. Clearly, Roger failed to exercise ordinary prudence when he blindly relied on Way's alleged statement that Affiliated and Cash-Wa were fully supportive of the bakery despite the fact that the "means of discovering the truth was in [Roger's] hands." Lucky 7 v. THT Realty, 278 Neb. 997, 1003, 775 N.W.2d 671, 676 (2009). Thus, the district court did not err when it determined that the Eathertons' affirmative defense failed on this ground.
Next, the Eathertons allege that the district court erred when it determined that their counterclaim—which is based on the same legal theory and operative facts as their affirmative defense—failed because any misrepresentation by First National was not the proximate cause of the Eathertons alleged losses. Because the elements of the Eathertons affirmative defense and counterclaim are the same, our previous determination that reasonable reliance was lacking with respect to the Eathertons' affirmative defense applies equally to a lack of proof on that ground with respect to their counterclaim. Thus, we need not discuss this assignment of error. An appellate court is not obligated to engage in an analysis which is not needed to adjudicate the controversy before it. In re Interest of Angelica L. & Daniel L., 277 Neb. 984, 767 N.W.2d 74 (2009).
Similarly, we need not delve into First National's cross-appeal, which is that the district court erred in finding that the Eathertons proved each material element of their fraudulent/negligent misrepresentation affirmative defense with the exception of reasonable reliance. Our previous findings in favor of First National and against the Eathertons render analysis of this issue entirely unnecessary. See id.
For the foregoing reasons, we find that the district court was not clearly erroneous when it determined the Eathertons were not reasonable in relying on material misrepresentations by First National that Tabora Farms' two main customers were fully supportive of the bakery and that such reliance was not the proximate cause of the $575,000 loss alleged in their counterclaim.
AFFIRMED.
CASSEL, Judge, participating on briefs.
