Kennedy v. Thomsen - 320 N.W.2d 657 (Iowa Ct. App. 1982)

Rule:

Undue influence by a third person renders a transaction voidable at the instance of the victim of the undue influence if the other contracting party had reason to know of the undue influence.

Facts:

David Thomsen worked as a farm laborer and as a truck driver for Francis Petersen. When Thomsen inherited 320 acres of Cedar County farmland from a great uncle, he agreed to sell 240 acres of the same to Petersen. Petersen subsequently obtained Thomsen's agreement to the substitution of his daughter and son-in-law, the Kennedys, as purchasers for 160 of the acres. The Kennedys provided a $50,000 down payment, but Thomsen subsequently refused to perform. The Kennedys brought an action for specific performance; in defense, Thomsen asserted that the sale had been obtained by undue influence. Thomsen then brought an action to rescind the contract of sale to Petersen, for payment of various amounts allegedly due him, and for compensatory and punitive damages for embarrassment and mental anguish. The trial court held that Petersen was in a confidential relationship with Thomsen, that the Kennedys, as well as Petersen, attempted to exploit the relationship, that the terms of the transaction were grossly unfair, and that the burden to show that the transaction was not procured by fraud or undue influence was thrown upon the Kennedys and Petersen by the confidential relationship. The Kennedys and Petersen appealed from the judgment setting aside the sales of farmland, arguing that the there was no confidential relationship between Francis Petersen and David Thomsen, thus, the burden of disproving undue influence did not shift to Petersen. It was further alleged that there was no evidence to support the award of punitive damages, and that punitive damages should not have been awarded when there was allegedly no award of compensatory damages.

Issue:

1. Was the sale voidable on the basis of undue influence?
2. Was the award of punitive damages proper?

Answer:

1) Yes. 2) Yes.

Conclusion:

The Court affirmed the lower court’s decision, holding that the record was sufficient to establish that both the deed and the contract were the product of undue influence. The Court also held that undue influence by a third person rendered a transaction voidable at the instance of the victim of the undue influence if the other contracting party had reason to know of the undue influence. Finally, the Court held that it was the fact of whether actual damages were sustained rather than whether such damages were reduced to a money judgment that satisfied the prerequisite for an award of punitive damages. The Court held that the situation was analogous to a "breach of trust" situation wherein punitive damages were approved.