COURT OF APPEALS OF OHIO, EIGHTH DISTRICT COUNTY OF CUYAHOGA NO. 72352 and 72434 JAMES D. FRASER, et al. : : JOURNAL ENTRY Plaintiffs-Appellees : : and -vs- : : OPINION HORST LORENZ, et al. : : Defendants-Appellants : : DATE OF ANNOUNCEMENT APRIL 16, 1998 OF DECISION: CHARACTER OF PROCEEDING: Civil appeal from Common Pleas Court Case No. CV-282119 JUDGMENT: Affirmed. DATE OF JOURNALIZATION: APPEARANCE: For Plaintiff-Appellee For Defendants-Appellants: James D. Fraser: KENNETH B. BAKER, ESQ. THOMAS C. SIMIELE, ESQ. MICHAEL D. SLODOV, ESQ. Reminger & Reminger Javitch Block Eisen & Rathbone 113 St. Clair Building Bond Court Bldg., 14th Floor Cleveland, Ohio 44114 300 East Ninth Street and Cleveland, Ohio 44114 JAMES A. WYMAN, ESQ. 5709 Smith Road For Roger Brunswick: Brookpark, Ohio 44142 BENJAMIN S. ZACKS, ESQ. Brookpark, Ohio 44142 Schottenstein, Zox & Dunn 41 So. High St., #2600 Columbus, Ohio 43215 PATRICIA ANN BLACKMON, A.J.: Horst Lorenz, John Elgin, and Maurice Berns, defendants- appellants, and Roger Brunswick, cross-defendant-appellant, -2- (collectively as buyers) appeal a decision by the trial court in favor of James and Nancy Fraser, plaintiffs-appellees, (collectively as sellers) in a breach of contract action. Brunswick also appeals the decision in favor of Lorenz and Elgin on his cross-claim. Lorenz, Elgin, and Berns assign the following three errors for our review: I. WHETHER THE TRIAL COURT ERRED TO THE PREJUDICE OF APPELLANTS IN FINDING THAT PLAINTIFFS HAD NOT MATERIALLY BREACHED THE CONTRACT. II. WHETHER THE TRIAL COURT ERRED TO THE PREJUDICE OF DEFENDANTS IN FAILING TO OFFSET THE UNDISCLOSED LIENS AND ENCUMBRANCES AS PERMITTED UNDER THE ASSET PURCHASE AGREEMENT. III. WHETHER THE TRIAL COURT ERRED IN DENYING A RIGHT OF SETOFF ON DEFENDANTS' COUNTERCLAIM FOR FRAUD. Roger Brunswick, assigns three errors in a separate appeal: I. THE LOWER COURT ERRONEOUSLY HELD AS A MATTER OF LAW THAT THE CONTRACT COULD BE BIFURCATED RATHER THAN READING IT AS A SINGLE INTEGRATED DOCUMENT. II. THE TRIAL COURT ERRONEOUSLY ENTERED JUDGMENT ON THE NOTE AND DENIED THE ACCOMMODATION PARTIES, THE CONTRACTUAL PROTECTIONS OF FRASERS' AFFIRMATIVE REPRESENTATIONS AND OBLIGATIONS IN THE ASSET PURCHASE AGREEMENT. III. THE LOWER COURT ERRONEOUSLY HELD AS A MATTER OF LAW THAT CROSS CLAIMANT/DEFENDANT ROGER M. BRUNSWICK WAS NOT INDEMNIFIED BY HIS WRITTEN INDEMNITY AGREEMENT WITH CO-DEFENDANTS LORENZ AND ELGIN. Having reviewed the record and the legal arguments of the parties, we affirm the decision of the trial court. The apposite facts follow. The sellers sued the buyers for $50,000, which was the balance on a cognovit note. No dispute existed as to the note and -3- the amount owed. Buyers, in response, counterclaimed for breach of contract, fraud, and misrepresentation. They argued the amount owed should be set off by their claims against the sellers. The Cognovit Promissory Note states as follows: WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT OR CLAUSE. The trial court held a hearing and found as fact that sellers and their company, Kanex Corporation, agreed for valuable consideration to sell Kanex's assets to buyers and entered into a non-compete agreement for a 30-month period in seven named Northeast Ohio counties. The asset agreement was free of all liens and encumbrances except those listed in the agreement and for the sale of the assets in their present physical condition. The court also found that the amount of the purchase was $350,000, $300,000 having been paid with a balance owing of $50,000. During the trial the buyers stated that after the sale they began to experience problems. For example, when they billed customers for service and supplies, they learned that said service and supplies were prepaid. The industry standard when selling copiers is [f]or most every copier sold there is a service contract sold along with it. *** [I]t's where the money is made in the copier industry [sic] is on the service side of the business. *** (Tr. 94-95). However, in this situation, the money was no -4- longer in the company since the sellers did not defer the revenue from the service contracts. The buyers also discovered, among other things, liabilities and liens of which they had no previous knowledge. All payments - accounts receivable - from rentals made to sellers had to be given to a financing company, Sherman & Co ( Sherman ), in full. However, each lease agreement between sellers and Sherman gave sellers the option to buy the copier at the end of the term of the lease. Berns explained the difference between renting and leasing copiers in the industry: If a machine was on lease you wouldn't show it on the financials because it wouldn't be your asset or your liability. A rental, on the other hand, would indicate, especially if you depreciated it, *** that you had ownership of it and that's probably the triple A part of [sic] or that would be the premium part of a dealership in our industry to have such a volume of rentals out there because that would indicate worth to the company. It would be an equity position in it. (Tr. 369-370) The sellers did not follow the industry standard. Instead, they acted as a third party between the financing company and the customers. The copiers were financed, and therefore owned, by Sherman. The sellers leased the copiers from Sherman then rented them to customers for the same amount they owed to Sherman. It took the buyers thirteen months to figure out the Sellers' scheme. Ultimately, New Kanex, the buyers' company, filed for bankruptcy. The sellers countered with testimony that they provided the buyers with everything they asked for. They claimed all their files, records, books, and computer listings were open for the -5- buyers' perusal. They also claimed they never hid any information. The sellers also implied that since the buyers knew Kanex was in serious financial trouble, it was the buyers' duty to inquire and/or discover whatever information they needed to make an informed decision. The trial court found that the transaction was completed over a three to four day time frame with the buyers and their accountants exercising a due diligence inspection. The court also found that the buyers were given unlimited access to business records in order to complete their due diligence investigation and to sufficiently enable them to become aware of what they were purchasing. One reason for the low selling price was the disastrous financial condition of the business; the IRS was in the process of closing the business. Because of Kanex's poor financial condition, buyers turned down the initial suggested price. Later, sellers lowered the price to the agreed $350,000. The trial court concluded that the buyers were aware of the sellers' deep financial trouble and that the sellers were entitled to the $50,000 per the cognovit note. The trial court also concluded the buyers had not presented sufficient evidence to sustain their demands. Therefore, the trial court dismissed the counterclaim. It also dismissed Brunswick's complaint for indemnification from the other buyers. In the buyers' first assignment of error, they argue that the judge's verdict is against the manifest weight of the evidence. They argue the financial statements did not reveal the true -6- financial standing of Kanex due to the sellers' unique business practices. We disagree. The standard of review for manifest weight of the evidence was set forth in the syllabus of C.E. Morris v. Foley Construction Co. (1978), 54 Ohio St.2d 279. In C.E. Morris, the Ohio Supreme Court held that judgments supported by some competent, credible evidence going to all the essential elements of the case will not be reversed by a reviewing court as being against the manifest weight of the evidence. Id. 280, citing Chicago Ornamental Iron Co. v. Rook (1915), 93 Ohio St.152, 160; Portage Markets Co. v. George (1924), 111 Ohio St. 775 (paragraph one of the syllabus); and 3 Ohio Jurisprudence 2d. 817, Appellate Review, Section 820, and the cases cited therein. The buyers have not shown that the trial court's ruling was not based on competent, credible evidence. The facts of this case showed the buyers were aware of the financial condition of the business. Along with their accountants, buyers were given sufficient time to conduct due diligence. They also agreed to purchase the asset list in its present physical condition. Moreover, they rebuffed the original, higher purchase price offered by the sellers. Since the trial court believed the sellers and since the record supports the trial court's belief, we sustain the trial court's finding. Consequently, the buyers are not entitled to a setoff based on the liens and encumbrances or for fraud, as they claim in their second and third assignments of error. The law in Ohio is clear. To establish a claim for fraud, there must exist (1) a -7- representation or, where there is a duty to disclose, concealment of a fact, (2) which is material to the transaction at hand, (3) made falsely, with knowledge of its falsity, or with such utter disregard and recklessness as to whether it is true or false that knowledge may be inferred, (4) with the intent of misleading another into relying upon it, (5) justifiable reliance upon the representation or concealment, and (6) a resulting injury proximately caused by the reliance. Burr v. Stark Cty. Bd. Of Commrs. (1986), 23 Ohio St.3d 69, paragraph two of the syllabus. The question for the trial court was whether the business practice was so latent with defects as to render them undiscoverable through ordinary due diligence. See Copeland v. Delvaux (1993), 89 Ohio App.3d 1. The vendee is chargeable with knowledge of all things which a normal inspection under the circumstances would reveal, and as to defects either known or which should have been known by a proper inspection, such defects are waived. As to such defects, whether the vendee has knowledge thereof and whether the defects were patent or latent are questions of genuine issues of fact for the [trier of fact] under proper instructions of the court. *** Whether the defendant has knowledge of a material fact which he failed to disclose to the plaintiff is a matter for the [trier of fact]. Koester v. Rule (Dec. 19, 1990), Defiance App. Nos. 4-89-10 & 4-89- 15, unreported, citing Bowlds v. Smith (1961), 114 Ohio App. 21, 27. Although the sale between the sellers and the buyers was not a real estate transaction, the same rule of law is applicable. The trial court found that although the sellers' business practice was unusual, it was not a mystery. Thus, with due diligence any defects could have been discovered. Besides, the -8- assets were purchased in their present physical condition. This along with other facts justified the trial court's dismissal of the fraud claim. Consequently, the cognovit note prevails. We conclude that the buyers' assignments of error are not well taken. In light of this conclusion, Brunswick's first and second assigned errors are resolved, as they are homogeneous with the buyers' assignments of error. As for his third error, Brunswick asserts that the trial court erroneously ruled that the evidence was insufficient to enforce the indemnity clause of the agreement between the buyers and himself. Brunswick and the buyers entered into a Settlement Agreement regarding a different litigation with another of their companies. The Settlement Agreement, which was signed by all parties, stated: Lorenz and Elgin indemnify and hold Brunswick harmless from any and all liability resulting from or claimed to arise as a result of decisions or actions by officers and directors of said corporations. The buyers argue that the above statement does not indemnify Brunswick from liabilities regarding the Kanex litigation. We agree. Judgment affirmed. -9- It is ordered that Appellees recover of Appellants their costs herein taxed. The Court finds there were reasonable grounds for this appeal. It is ordered that a special mandate issue out of this Court directing the Common Pleas Court to carry this judgment into execution. A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of the Rules of Appellate Procedure. Exceptions. NAHRA, J., and ROCCO, J., CONCUR. PATRICIA ANN BLACKMON PRESIDING JUDGE N.B. This entry is an announcement of the court's decision. See App.R. 22(B), 22(D) and 26(A); Loc.App.R. 27. This decision will be journalized and will become the judgment and order of the court pursuant to App.R. 22(E) unless a motion for reconsideration with supporting brief, per App.R. 26(A), is filed within ten (10) days of the announcement of the court's decision. The time period for review by the Supreme Court of Ohio shall begin to run upon the .