Ainger v. Michigan General Corp.

United States Court of Appeals for the Second Circuit · Contracts

Contractsexpress warrantyfrauddamagesbreach of warrantyfraudreliancemisrepresentation

Facts

Plaintiffs sold a paperback book publishing company to defendant. Before the purchase, defendant knew that the written contract with author Donald Pendleton did not give plaintiffs ownership of "The Executioner" series or rights in its central character, but defendant did not know that Pendleton intended to assert ownership and had told plaintiffs so. In the sales agreement, plaintiffs warranted that the seller had not been notified of any claims that could give rise to litigation, and plaintiffs also wrote that Pendleton accepted that the books were the publisher's property, not the author's. Pendleton later asserted ownership, leading to litigation and to defendant's counterclaims for breach of warranty and fraud.

Issue

Whether the sellers were liable for breach of warranty and fraud for failing to disclose Pendleton's asserted ownership claim and for affirmatively misrepresenting his position. Also, whether the purchaser could recover all claimed damages flowing from that breach and fraud, including litigation expenses, lost profits, and settlement-related losses.

Rule

When a seller warrants that it has not been notified of claims that could give rise to litigation, and in fact knows of such a claim while also misrepresenting the claimant's position, the buyer may recover for breach of contract and fraud if the buyer relied on the misstatement. Damages may include litigation expenses caused by the undisclosed claim, but recovery may be denied for losses not adequately proved or for claimed losses that are inconsistent with the buyer's prior knowledge of the underlying contractual risks.

🔒

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Seattle, Nora Kline sold Rain Harbor Audio, a fictional audiobook publisher, to Cedar Vale Media. The purchase agreement stated that the seller had not been notified of any claims that could give rise to litigation, but Nora had already received an email from a narrator asserting ownership rights in a lucrative series and threatening suit; Cedar Vale knew the underlying talent contract was incomplete but did not know about the email.

If Cedar Vale later incurs attorney's fees defending the narrator's lawsuit, what is the strongest argument for recovery under the majority's rule?

Explanation. The majority held that liability exists where the seller warranted that no claims existed that could give rise to litigation, even though the seller had been notified of such a claim. The buyer's knowledge of unfavorable contract terms did not bar liability where the buyer did not know the claimant had asserted rights. Litigation expenses caused by that undisclosed claim were recoverable, and affirmative statements misstating the claimant's position supported fraud as well. (Derived from Ainger v. Michigan General Corp. (n.d.).)