Kaloti Enterprises, Inc. v. Kellogg Sales Co.

Brief Fact Summary.

Kaloti Enterprises, Inc. sued Kellogg Sales Co. (Kellogg) for fraudulent misrepresentation when Kellogg breached contract by directly selling its food products to grocery stores.

Synopsis of Rule of Law.

A seller has a duty to disclose a fact if: (1) the defect materially affects the value of the property, (2) the seller has knowledge of the defect in the property, (3) the defect is not readily observable and is unknown to the buyer, (4) the buyer would expect disclosure of the material defect.

Facts.

Kaloti Enterprises, Inc. (Kaloti) contracted with Kellogg Sales Co. (Kellogg) to sell Kellogg’s products. Kaloti entered into agreements to sell through Geraci& Associates, Inc. (Geraci). Geraci would solicit orders from Kaloti, Kellogg ships orders to Kaloti, and Kaloti sells the products to grocery stores. After acquiring Keebler Food Companies, Kellogg began sellings its products directly to grocery stores. Kellogg and Geraci entered into an agreement prohibiting Geraci from disclosing Kellogg’s new strategy. When Kaloti later tried to sell Kellogg’s products to stores, the stores refused because they had already purchased the products directly from Kellogg. Kaloti sued Kellogg and Geraci for fraudulent misrepresentation and the trial court granted Kellog and Geraci’s motion to dismiss. Kaloti appealed.

Issue.

Whether a seller has a duty to disclose a fact if: (1) the defect materially affects the value of the property, (2) the seller has knowledge of the defect in the property, (3) the defect is not readily observable and is unknown to the buyer, (4) the buyer would expect disclosure of the material defect?

Held.

Yes. The judgment of the trial court is reversed. Kellogg and Geraci knew that Kaloti was not aware of the change in Kellogg’s marketing strategy. Kellogg and Geraci also knew that Kaloti would not have entered into the contract if they knew Kellogg was selling their products directly to grocery stores.

Discussion.

If a seller has knowledge of facts that are material to the transaction that is not available to the other party, the knowledgeable party has a duty to disclose those facts.