## Facts

- William B. Miller owned a hotel-related property in Silverado Canyon (including the Shady Brook Hotel) and sold it to Victor A. Lobdell and his wife on July 2, 1947.
- Frank O’Farrell acted as Miller’s agent in the transaction; the Lobdells inspected the property multiple times with Miller and/or O’Farrell.
- The Lobdells had restaurant experience but no hotel-business experience.
- The sale was financed in substantial part by a promissory note payable to Miller, secured by a deed of trust on the real property and a chattel mortgage on furnishings.
- The trial court found Miller and O’Farrell made material misrepresentations and concealments, including false statements about the property’s income and profitability, and that the Lobdells relied on those statements in purchasing.
- After taking possession, the Lobdells operated the property at a loss and spent significant sums over roughly two years remodeling, improving, and refurnishing.
- Miller sued in 1949 to foreclose the deed of trust and chattel mortgage; the Lobdells sued to rescind the sale and cancel the note and security instruments based on fraud. The actions were consolidated.
- The trial court denied Miller foreclosure relief, rescinded the sale, canceled the note and security interests, ordered reconveyance to Miller, and awarded the Lobdells $37,772.90 after accounting for offsets (including rental value, depreciation, and proceeds from sales), with conditional transfer of the real and personal property to Miller upon payment.

## Issues

1. Whether substantial evidence supported findings of fraud, misrepresentation, and concealment warranting rescission and cancellation of the note and security instruments.
2. Whether the trial court used a proper equitable measure of relief on rescission, including reimbursement for post-sale improvements and personal property expenditures, with offsets to restore the parties as nearly as possible to the status quo.

## Decision

- The court affirmed the judgment.
- Substantial evidence supported the trial court’s findings that defendants made material, false representations (including about income) and that plaintiffs relied on them.
- The rescission remedy and restitutionary accounting were upheld as a proper effort to restore the parties, as nearly as possible, to their pre-transaction positions.
- The court approved inclusion of plaintiffs’ expenditures for improvements and personal property acquired in reliance on the transaction, subject to offsets (e.g., reasonable rental value, depreciation, sale proceeds, and certain financing credits).

## Legal Principles

- Material misrepresentations about income or profitability of an income-producing property or business, when relied upon by purchasers, can constitute fraud supporting rescission.
- Rescission is an equitable remedy aimed at restoring the parties as nearly as possible to the status quo; when exact restoration is impracticable, courts may use conditional conveyances and money adjustments.
- In calculating rescission restitution, a rescinding party may recover expenditures reasonably made in reliance on the transaction (including improvements and furnishings), while also accounting for benefits received and deterioration or depreciation during possession.
- A seller is not insulated from reimbursing reliance expenditures merely because the property is returned with improvements; equitable offsets are used to prevent either party from receiving an unfair gain.

## Conclusion

The court upheld rescission of the sale based on fraudulent income-related representations and affirmed an equitable restitution award that reimbursed the purchasers’ reliance expenditures, including improvements and furnishings, while applying offsets to approximate restoration of the parties’ pre-contract positions.


Lobdell v. Miller, 250 P.2d 357 (Cal. Ct. App. 1952)