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Germantown Mfg. Co. v. Rawlinson

    Brief Fact Summary.

    The trial court reopened judgment on a note signed by Defendants on the grounds of fraud, misrepresentation, duress, and lack of accountability for the amount included in the second note.Plaintiff appealed.

    Synopsis of Rule of Law.

    A contract is voidable as unconscionable if: (1) the parties’ bargaining power is significantly unequal and (2) the weaker party has no choice but to agree to the contract terms dictated by the stronger party.

    Facts.

    Robert Rawlinson (Defendant) was fired from The German town Manufacturing Company (Plaintiff) for embezzling $327,011.22. Rawlinson told his wife, Joan (Defendant), that he had taken about $20,000 from the company. Plaintiff’s representative visited the Defendants’ home and had them sign two judgment notes, consenting to the entry of judgments against them. The first note was for $160,000. The representative told the Defendants that, since they had $160,000 readily available, the judgment was effectively already satisfied. The second note was for an amount established by an affidavit from the president of Plaintiff. The affidavit was not presented to the Defendants. Plaintiff’s representative told the Defendants that Plaintiff had no interest in pursuing criminal prosecution if the Defendants cooperated. Later, the president of Plaintiff completed his affidavit, showing a total amount owed on the second note of $212,113.21, which included over $45,000 in interest. The lower court allowed Joan’s judgment on the second note to be reopened on the grounds of fraud, misrepresentation, duress, and lack of accountability for the amount included in the second note. Plaintiff appealed.

    Issue.

    Whether a contract is voidable as unconscionable if: (1) the parties’ bargaining power is significantly unequal and (2) the weaker party has no choice but to agree to the contract terms dictated by the stronger party.

    Held.

    The trial court’s ruling is affirmed.  A contract is voidable as unconscionable if: (1) the parties’ bargaining power is significantly unequal and (2) the weaker party has no choice but to agree to the contract terms dictated by the stronger party.

    Discussion.

    If the parties to a contract have significantly unequal bargaining power, and the weaker party has no meaningful choice in the formation of the contract, the contract may be voidable as unconscionable. A misrepresentation is sufficient grounds for voiding a contract if it is fraudulent or material. In this case Plaintiff’s misrepresentation was both. Although Plaintiff had Joan sign two notes totaling more than $372,000 in liability, Plaintiff implied that Joan’s liability would be limited to $160,000. A statement “uttered with such gross recklessness” is fraud. The misrepresentation was also material, meaning it was likely to induce a reasonable person to make a contract. Here, Joan would not have signed the second note if she had known its terms. The evidence also supports a finding of duress. Under § 175 of the Restatement (Second) of Contracts, if a party’s agreement is induced by an improper threat that leaves the party no reasonable alternative action, the contract is voidable by that party. A threat of criminal prosecution is an improper threat. Here, Joan interpreted Plaintiff’s statement that it would not pursue criminal prosecution if the Defendants cooperated to mean that if she signed the notes her husband would not go to jail. It is irrelevant that Plaintiff did not expressly state a threat of prosecution; it is sufficient that it was implied. Although not argued by Joan, the second note is also voidable on the basis of unconscionability. One type of unconscionability arises when there is unfair surprise. If contract terms are not typically expected by the party asked to agree to them, such as when boilerplate language includes a risk-shifting clause that the signer would not reasonably expect in the transaction, the clause may be removed as unconscionable. Here, the harsh allocation of risks was not reasonably comprehensible to Joan when she signed the second note, and Plaintiff’s representative did not attempt to explain the extent of her liability. Another type of unconscionability arises when there is apparent, but not actual, assent to an adhesion contract. Even if a party fully comprehends and agrees to the terms of an adhesion contract, actual assent is missing if the signing party has little or no choice but to accept the terms as stated. Here, Joan had no choice but to sign the second note. Finally, there is a meritorious defense based on Plaintiff’s lack of accounting to support the final amount included in the second note. There is no indication that Joan agreed to pay interest on the principal of the second note, and Plaintiff’s inclusion of more than $45,000 in interest may have been a breach of its duty to act in good faith. The judgment against Joan on the second note was properly reopened on the grounds of fraud, duress, lack of accountability, and unconscionability.


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