Can a party retain settlement proceeds while seeking rescission for fraud? Thurston v. Block United Explained

Background and Facts

Wright Thurston formed Block United LLC in 2017 but later withdrew from daily participation due to management disputes. In February 2019, Thurston sued Block United alleging breach of contract, conversion, and other claims. The parties reached a settlement agreement during mediation, with Block United agreeing to pay specified sums in exchange for dismissal and release. Block United performed its obligations, but Thurston refused to sign dismissal papers, claiming Block United made fraudulent misrepresentations during mediation about liabilities and assets. Nearly six months later, Thurston filed an amended complaint seeking rescission based on these alleged misrepresentations.

Key Legal Issues

The central issue was whether Thurston waived his right to rescind the settlement agreement by retaining the proceeds he received. The court also addressed whether fraud claims seeking only rescission could survive enforcement of the settlement agreement when the party failed to plead alternative theories for affirmation and damages.

Court’s Analysis and Holding

The Utah Court of Appeals affirmed the district court’s enforcement of the settlement agreement. Under established Utah contract law, a party who has been induced by fraud may either rescind the contract or affirm the contract and seek damages. However, the right to rescind is waived if the party fails to move promptly to disaffirm and continues to retain benefits. The court emphasized that “[t]he party deceived is not allowed to go on deriving all possible benefit from the transaction, and then claim to be relieved from his own obligations by seeking its rescission.” Because Thurston retained the settlement proceeds for months while alleging fraud, he waived rescission rights.

Practice Implications

This decision reinforces that parties cannot have “their cake and eat it too” when challenging settlement agreements. Practitioners should advise clients that retaining settlement proceeds while seeking rescission will likely result in waiver of rescission rights. If fraud is suspected, clients must either promptly return all proceeds to preserve rescission rights or alternatively plead claims that affirm the agreement and seek damages for the fraud. The court’s analysis of pleading requirements also demonstrates the importance of providing fair notice of alternative theories of recovery under Utah’s liberal notice pleading standards.