Putney v. Schmidt

OPINION OF THE COURT. ROBERTS, A. J. 1 The appellant has questioned the sufficiency of the evidence to sustain the findings of facts in the lower court upon the issue of fraud, but, when we e.onsider the positive proof offered and the facts fairly deducible from the circumstances proven, we cannot say that the lower court was not justified in concluding that the fraud had been established, even to the degree which appellant claims was required, under the decision of the Supreme Court of the United States in the Maxwell Land Grant case found in 124 U. S. 381. The jury found that fraud had been proven, after hearing all the evidence and having had the opportunity of seeing the witnesses upon the stand and observing their demeanor and manner while testifying; the findings of the jury were adopted by the court and made the findings of the court; the proof satisfied the conscience of the trial court, and, as there appears to be sufficient evidence to support the finding it will not be disturbed. Appellant contends that this case comes within the rule laid down by the Supreme Court of the United States in the case of Slaughter v. Gerson, 13 Wallace 383, to the effect that a party to a contract who has opportunity to obtain knowledge with reference to representations and facts connected with the contract equal with that possessed by the other party, cannot claim immunity from the obligations of the contract if he did not avail himself of his opportunity and acquire the knowledge obtainable,, had he sought to do so. This case, and all kindred cases cited by appellant, had to do with sales and similar contracts and merely illustrate the rule of caveat emptor as applied in equity. If the principle contended for, however, did apply as between principal and .surety, even- if the appellees had investigated for themselves, they would only have been more greatly deceived. The expert bookkeeper who prepared a statement of Broyles’ affairs, and upon which the alleged fraudulent statements were based, testifying for appellant said that Broyles’ books only disclosed about $30,000 of his indebtedness, and that there was no book to be found showing the time certificates of deposit in his bank; that the amount of his indebtedness was largely made up from Broyles' own statements to him; that the statement was not accurate and that it was not possible for him to prepare an accurate ..statement; that he had included in the assets something like $50,000 of store accounts, notes an<J overdrafts in bank, without knowing anything as to whether they were collectable or not. But the appellees wore not contract creditors, they were sureties to the appellant for the debt of Broyles and the rules applicable to them, and to their relations so formed, are entirely separate and distinct from the rule contended for by appellant. ''A surety,” says Mr. Justice Swayne in McGee v. Manhattan Life Insurance Co., 92 U. S. 93, "is a favored debtor; his rights are zealously guarded, both at law and in equity, ancP the slightest fraud on the part of the creditor, touching the contract, annuls it.” In Griswold v. Hazzard, 141 U. S. 260, Mr. Justice-Bradley quoted with approval the -following from Story’s Equity Jurisprudence: “The contract of suretyship imports entire good faith and confidence between the parties in regard to the whole transaction. Any concealment of material facts, or any express or implied misrepresentation of. such facts, or any undue advantage taken of the .surety by the creditor, either by surprise or by withholding proper information, will undoubtedly furnish a sufficient ground to invalidate the contract. Again: If a party taking a guaranty from a suretjq conceals from him facts which go to increase his risk and suffers him to enter into the contract under false impression as to the real state of the facts, such a concealment will amount to a fraud, because a party is bound to make this disclosure.” The Supreme Court of Iowa, in the case of Barnes v. Century Savings Bank, 128 N. W. 541, only recently decided, says: “From our own case of Bank of Monroe v. Anderson Co., 65 Iowa 700, 22 N. W. 933, we also quote the following, which is in exact harmony with that announced by the Minnesota case: ‘We have thought it proper to lay down what we conceive to be the true rule as to the duty of a creditor, who is about to accept personal security for a debt due him, to inform the surety of facts within his knowledge which would have the effect to increase the risk or the undertaking of the surety. The contract of suretyship as a general rule is for the benefit of the creditor, while the surety derives no advantage from it. Hence the law imposes upon the creditor the duty of dealing with 'the surety at every step of the transaction with the utmost good faith. If the surety applies to him before the entering into the contract for information touching any matter materially affecting the risk of .the undertaking, he is bound, if he assumes to answer the inquiry at all, to give full information as to every fact within his knowledge, and he can do nothing to deceive or mislead the surety without vitiating the agreement. And whether he is bound before accepting the undertaking of the surety and without being applied to by him for information on the subject to inform him of facts within his knowledge which increase the risks of the undertaking depends on the circumstances of the case. .If there i.s nothing in the circumstances to indicate that the surety is being mislead or deceived, or that he is entering into the contract in ignorance of the facts materially affecting its risks, the creditor is not bound to seek him out, or, without being applied to, communicate to him information as to the facts within his knowledge. But in such case he ma}^ assume that the surety has obtained information for his guidance from other sources, or that he has chosen to assume the risks of the undertaking, whatever they may be. But if he knows or has good grounds for believing, that the surety is being deceived or mislead, or that he was induced to enter into the contract in' ignorance of facts materially increasing the risks, of which he has knowledge, and he has an opportunity before accepting his undertaking to inform him of such fact, good faith and fair dealing demand that he should make such disclosure to him; and, if he accepts the contract without doing so, the surety may afterwards avoid it. This view of the duty of the creditor is supported by the following authorities: Pidcock v. Bishop, 2 Barn & Co. 605; Owen v. Homan, 4 H. L. Cas. 997; Railton v. Matthews, 10 Clark & F. 934; Hamilton v. Watson, 12 Clark & F. 109; Franklin Bank v. Cooper, 39 Mo. 542; Franklin Bank v. Stevens, 39 Mo. 532; Graves v. Lebanon Nat. Bank, 10 Bush (Ky.) 23 (19 Am. Rep. 50); Stone v. Compton, 5 Bing (N. C.) 142; Booth v. Stoors, 75 Ill. 438; Ham v. Greve, 34 Ind. 18. See, also, Conger v. Bean, 58 Iowa 321, 12 N. W. 284; Savings Bank v. Boddicker, 105 Iowa 548; 75 N. W. 632; 45 L. R. A. 321; 67 Am. St. Rep. 310; Coles v. Kennedy, 81 Iowa 360; 46 N. W. 1088, 25 Am. St. Rep. 503; Melick v. Bank, 52 Iowa 94; 2 N. W. 1021; Harworth v. Crosby, 120 Iowa 612; 94 N. W. 1088; Crossley v. Stanley, 112 Iowa 24, 83 N. W. 806; 84 Am. St. Rep. 321. 2 There is proof in this case showing that Schmidt asked appellant’s representative if $10,000 would pay all of Broyles’ debts and he replied that it would; that it would put him on Easy Street. This was denied by appellant's representative, but he admits that he probably told appellees that the statement prepared by the expert bookkeeper showed that Broyles was $52,000 or $42,000 ta the good; having volunteered this information, admitting that his version of the conversation is true, he owed it to the appellees to disclose to them fully just how the statement was made up; how the totals were arrived at. Having undertaken to give the proposed sureties informátion in regard to Broyles’ financial condition, he should have disclosed all the facts and circumstances, affecting the risk, within his knowledge. He knew that more than $50,000 of the assets shown on the statement were made up of store accounts, notes and over drafts in hank, good, had and indifferent; he knew that all Broyles’ real estate was mortgaged to the State National Bank of Albuquerque; that all his acceptable paper was held by the Bank of Commerce as collateral security; that the value placed upon the property was merely Broyles’ own estimate and the liabilities were largely Broyles’ own figures. Appellees also testified that appellant’s representative told them that the $25,000 Bank of Commerce note was a demand note, and that while it was amply secured by collateral, the bank anight nevertheless attempt to make trouble for them, but if there was a mortgage on their stock the bank -would be more apt to rely on their collateral; that if they would make rhe mortgage, he would protect them from the Bank of Commerce free of charge; that is, force the bank to rely on its collateral, which was amply sufficient, and not trouble them. This was denied by appellant’s representative, but, if no representations of any kind had been made to them, we cannot understand why he was so particular to see that the notary asked the appellees if they signed the mortgage without being influenced by any representations made to them by appellant or his representatives. The appellant contends that by reason of Schmidt, with Story’s consent, having taken charge of all Broyles’ property and business, including $1,000 of actual cash which appellant had advanced on the note in question, appellees waived the right to any defense. We do not believe there is any merit in this contention. Schmidt took charge of the property only in a representative capacity; he was trustee for all the creditors. “ Appellant has cited many authorities to show that the appellees, as soon as they discovered the fraudulent character of the representations which had induced them to sign the note and mortgage, should have given notice to the appellant of their intention not to he hound. We think the appellant misa])prebends the principle of the cases cited. 3 4 It is not disputed tliat where a party received something oí value under a contract, if he seeks to rescind the same upon the ground of fraud, he must immediately, upon discovering the fraud, restore, or offer to restore, all that he has received under the contract, as a condition precedent to his right to rescind the same. If he fails to do this, or if, after discovering the fraud, lie takes any steps in affirmance of the contract, he will bo held to have elected to affirm the same and will not thereafter be granted relief in equity from the burdens of the contract. In every case cited by appellant the parties claiming to have been defrauded had received something under the contract which they were retaining, or which they had kept and accepted the benefits of, for an unreasonable time after discovering the fraud. In no case cited, and, we believe, none can lie found, was delay held a defense where the party defending had received nothing which it was in his ]tower to restore. In Grimes v. Sanders, 93 U. S. 62, chiefly relied on by the plaintiff, the parties claiming fraud had purchased a mine, had continued to work it for some months after discovery of the alleged fraud. They had not rescinded or tendered back the deed to the property, and there were other strong equities in favor of the other party. Where a party, as in the present instance, received nothing under the contract, acted merely as trustee for another, the contract remaining wholly executory as to the party claiming fraud, there was nothing which he could return and he had a right to await suit upon the contract and then set up fraud as a defense. !\Ir. Page in his work on Contracts says, at Section 136: “If the contract is executory as to the liability of the defrauded party, he may avoid liability thereunder and interpose the defense of fraud in an action brought against him on the contract at law. This is in one sense informal rocision since no decree in equity is necessary. It differs, however, from what is ordinarily termed informal recision in that injured party is not seeking to recover what he has parted with under the contract, but is seeking to avoid further liability thereunder.” Speaking of the duty to place the adversary party in statu quo, he says: Section 137. “The party seeking relief need not restore anything not received by him under the contract, which he is seeking to avoid. * * * * If the defense of fraud is interposed in an action on an executory contract, it is not necessary as a condition precedent to making such defense to place the adversary party in statu quo.” In Section 139, the same author says: “The conduct relied on as ratification, must be such as unequivocally shows the intention of the defrauded party to be bound by the contract.” We think the principle covering this case is well stated in Kingsman v. Stoddard, 85 Fed. 750, which is quoted with approval in the case of Richardson v. Lowe, 149 Fed. 625: “We think it fallacious to say that one defrauded may so deal in respect to. an executory contract after knowledge of the fraud that he shall lose his right of defense when sued for the consideration and yet may have his action for deceit. The remedy by way of defense is allowed to avoid circuity of action and it is grounded upon, and is governed by, the same principles as the action for deceit. If the one can not prevail, the other must fall. If the one can be sustained, the other is upheld. Judgment in the one case is res adjudicata and concludes the right. Bernet v. Smith, 4 Gray, 50.” 5 Appellant insists that Schmidt, by a letter which he wrote to appellant, after he took charge of Broyles’ property as trustee, shows an affirmance of the contract. We do not think so. Judge Cooley, in his work on Torts, (star page 505), says: “Where an affirmance is relied upon, it should a]Dpear that the party having a right to complain of the fraud had freely and with full knowledge of his rights, in some form, clearly manifested his intention to abide by the contract and waive any remedy he might have for the deception.” Measured by this rule the letter falls far short of evincing any intention on the part of Schmidt to be bound by the contract. He was asking appellant to take over all of Broyles’ property, suggesting that he might' be able to settle with Broyles’ creditors on the basis of 25 cents on the dollar. 6 Appellant has assigned as error the rejection of certain evidence offered by him and the admission of evidence, over his objection on behalf of appellees, but, this being an equity case and from all the facts and circumstances shown on the trial, it is apparent that the lower court was justified in arriving at the conclusion that substantial justice had been done and that the result would not have been different if such testimony had been received in the one case, or rejected in the other. “A new trial will not be granted merely on the ground that the judge received improper testimony on the trial of the issue, or that he rejected that which was proper, if on the whole facts and circumstances the court is satisfied that justice has been done or that the result ought not ro have been different, if such testimony had been rejected in the one case or received in the other.” 11 Ency. Pl. & Pr. 728, and authorities cited. As we are satisfied that the findings of the lower court are right and are supported by the evidence, it will not be .neceessary for us to consider the error claimed in the instructions to the jury. See 11 Enc. Pl. & Pr. 729; Post v. Mason, 91 N. Y. 537. 7 Appellant contends that the findings of fact made by the jury were defective and not sufficient, even if supported by the evidence, to justify a judgment against the appellant. The proper practice required the submission only of such issues to the jury as wo'uld determine the ultimate or constitutive facts, and we believe the issues submitted, and the findings thereon, covered the matters in dispute. See Thompson on Trials, sec. 2652; Cresman v. Murray, 64 S. W. 711 (Tenn.); Daniels Chancery Practice, 5 ed., vol. 3, p. 2254. We find no error in the record, and the judgment of the lower court is affirmed, and it is so ordered. William H. Pope, C. J., concurs in the result.