National Bank v. Taylor

Kellam, J. This was an action by respondent upon notes made and given to it by appellant. The defense was: That the notes were given in partial payment of 90 shares of the capital stock of the respondent bank, sold by D. L. Stick, the president and general manager of the bank, to the appellant, Taylor. That such purchase of such stock was induced and accomplished by false and fraudulent representations by said Stick to appellant as to the condition of the bank and its business and assets, and the value of said stock. The representations thus generally referred to, their falsity, and the knowledge thereof by Stick, are set out in detail in the answer. That the notes so given were made to run directly to the bank, by the consent of the directors, and with full knowledge on their part of the representations so made by Stick to appellant, and, further, that, as soon as appellant discovered that such representations were false, he notified said Stick of his rescission of the contract of purchase, and offered to return all that he received under it. The trial resulted in the direction by the court of a verdict for the plaintiff (now respondent). Upon-this verdict, judgment was entered. From such judgment, and an order refusing a new trial, defendant has appealed. As we understand the theory of the trial, and of the position of the parties, it was not, and is not, denied by plaintiff and respondent that, to induce and accomplish this sale of the stock — 104 — to appellant, D. L. Stick, the seller, made certain representations to Taylor as to the condition of the bank and the value of the stock, and it is expressly admitted that the bank had full notice of these representations, whatever they were, and of the conditions and understanding between Stick and Taylor under which such stock was so sold, and that the bank took the notes of Taylor with a full knowledge and understanding of all these matters. As a witness, Taylor testified to what these representations were. We shall not notice them particularly, for it probably could not be questioned but that they were material, and, if untrue to Stick’s knowledge, fraudulent. Taylor’s evidence tended, at least, to show them untrue. It was also in evidence that Stick was the president and active manager of the bank at the time of, and prior to, such sale and representations. It was, then, a question of fact, as distinguished from a question of law, whether such representations were true or false; and, if false, whether they were fraudulent or not. It would seem, then, that the court could not have properly directed a verdict, except upon the theory that, notwithstanding the facts that the representations which induced Taylor to buy were material and were untrue and fraudulent, and that the bank itself had full knowledge of all,, other subsequent facts were proved which estopped Taylor from taking advantage of such false representations; and this, we understand from the argument of counsel, was and is the claim of the bank, and was the theory upon which the trial court directed a verdict. The facts principally relied upon to work such estoppel are these: Soon after the purchase of the stock Taylor was made cashier of the bank, Stick still retaining the presidency. He was cashier from October 1,. 1889, until January 13, 1891. During this time he, as such cashier, signed a number of statements required by the national banking act, exhibiting tire condition of the bank. That, at the meeting of January 13th, a.t which his resignation as cashier took effect, he was re-elected — 105 — a director, qualified, and at that meeting voted his stock. It having been shown that these notes were made directly to the bank, instead oí to Stick, the seller of the stock, with the knowledge and consent of the bank through its officers and directors, and it being expressly admitted that the bank took the notes with a full knowledge of the consideration for which, and the representations under which, they v\ ere given, we think it fairly follows that the same rules as to the admissibility of the-evidence and its effect will apply and control as would if the notes had been given to Stick, and this action had been brought by him for their collection; so that the controlling question is, do these enumerated facts conclusively, and as matter oi law, preclude Taylor from rescinding the contract and interposing the attempted defense? We assume that, upon the evidence, the jury might have found that the inducing representations were material, and that they were false and fraudulent. If they were, when might Taylor have rescinded? A party may rescind a contract procured from him by fraud. Comp. Laws, § 3589. To do so, he must act promptly upon discovery of the facts which entitle him to rescind. Id. § 3591. These sections of the Code are only a restatement of common-law rules. Taylor swears that he told Stick, at the time of the purchase, that he was unacquainted with the patrons and borrowers from the bank; that in buying the stock, he was relying upon his repre • sentations. He had a right to do so, and if Stick knowingly deceived him, he was a wrongdoer, and, between those parties, nothing would condone the wrong, or estop Taylor from asserting it, but his acquiescence in it with knowledge of the facts. It would be fundamentally and essentially unjust to allow a positive and moral wrong to grow into a right by mere lapse of time. Nor can the party who thus deliberately does the wrong complain that the sufferer has not been diligent in finding it out. In Brown v. Post, 1 Hun. 304, the court says: “A person deceived by the fraudulent misstatements of another owes him no duty of active vigilance in the discovery of the fact that — 106 — they are false.” Baker v. Lever, 67 N. Y. 304, was an action to have a bond and mortgage, given to secure the price of property alleged to have been sold under fraudulent misrepresentations, declared void. In its opinion the court says: “The referee has found that the plaintiff who purchased the stock had opportunities to, and might have, with reasonable diligence, ascertained the situation of the company in time to have tendered or offered to return the stock, and while it had a market value; and he was guilty of laches by omitting to do so within that time. This was not enough to show knowledge of the fraud, and not sufficient to bar the right of the plaintiffs to avail themselves of it. It might well be that opportunities to ascertain the fraud would be of no avail to persons unfamiliar with the business transactions of corporations, as was probably the fact here; and the authorities do not hold that a mere want of diligence, Avithout knowledge of the fraud, is sufficient to deprive a party of his legal right to rescind a fraudulent contract. ” Later, in the same opinion, the court remarks that occasional expressions by courts that recision must be made after the party has had reasonable opportunity to discover the fraud, and.that vigilance and care'must be exercised, are dicta applicable only to peculiar facts, and do not state the general rule. Bank v. Hiatt, 58 Cal. 234, was an action on a note given for purchase of stock. The defense was that the sale was induced by false and fraudulent representations by the seller. The trial court found that, by reasonable diligence and inquiry defendant might have known that the representations were untrue, and rendered judgment for plaintiff. The supreme court reversed the judgment, saying such finding was quite immaterial and that the seller could not escape responsibility by showing that the defendant might, b,y effort or diligence, have ascertained that the representations were false. It would seem strange law that a party may safely accept and rely upon the statements of him with whom he is dealing without investigation, and make and complete the contract — 107 — solely upon the strength oí his reliance upon their truth, but that, when he has so concluded the contract, he can no longer rely upon the truth of such representations, but that he must then investigate, and see if they are true. He has the same right to rely upon the Staten ents after, as before, the consummation of the contract. Until something came to Taylor’s knowledge reasonably calling upon him to suspect and investigate, he might, and naturally would, continue to rely upon the statements as honestly and truthfully made. Stick could not complain that Taylor had failed to exercise a vigilance that he had deliberately allayed. We do not mean by this that Taylor’s rights would not be affected.by his persistent refusal to look at and investigate facts which, coming to his knowledge, might, or did, excite his suspicion. Such conduct would operate against him, not so much because he failed to discharge a duty to investigate which he owed to Stick, as because it would indicate his satisfaction with, and acquiescence in, the situation without objection or investigation. The right of a party to rescind might be qualified by intervening interests of innocent third parties; but, so long as the question is between the original parties solely, he may continue to rely upon the representations upon which the contract was made, and loses no rights as against the wrongdoer himself, by failure to diligently ascertain the fraud. And so the court in Duffield v. Iron Works, 64 Mich. 302, 31 N. W. 310, says: “Want of diligence alone in discovering the fraud, when the rights of third parties have not intervened, will not affect the right to rescind.” It is true that nearly all the time Taylor held the stock prior to his attempt to rescind, he was the cashier of the bank; but that fact, of itself, would not, as a matter of law, make him chargeable with a knowledge of such facts as would demonstrate to him the falsity of Stick’s representations. The knowledge properly imputed to him would depend, not upon his nominal, but upon his actual, relations to the bank. He might have been cashier, but in Europe or sick in bed, or performing the duties of a tel108 lei’, all the time. Taylor testifies that when he went into the bank he was entirely unacquainted with banking business; that Stick, who was president, directed him to stand at the counter, receive deposits, and pay checks, and subsequently pointed out other duties, which he got into the habit of performing regularly; that Stick made all the loans, and had charge of them, and kept the discount register; and that he (Taylor) had practically nothing to do with the bills receivable; and that these conditions continued through his experience in the bank; and further, that, during the time that he was cashier, he was absent from the bank, and from Huron, several months. We think such facts would tend to qualify the effect of the presumption of knowledge that might, in general, follow the fact that he was the bank’s cashier. If so, the extent of such qualification should be determined by the jury. It is also claimed that Taylor is bound by, and estopped from setting up facts inconsistent with, the statements intended to exhibit the condition of the bank, and signed by him as cashier. These statements are not in the abstract, but we suppose them to be the ordinary statements made in response to the call of the comptroller. The purpose of these statements is to inform the comptroller and other supervisory authorities, and the public generally, of the financial condition of the bank. The duty of making and issuing such statements should be intelligently and conscientiously discharged, and if an official is called to account for making an untrue statement, either by the government criminally, or by an injured party civilly, he cannot evade responsibility by showing that he made the statement without personal knowledge; but, as between the bank itself and its official agent who makes the statement, there can be no such unyielding rule. Suppose, immediately after his installment as cashier, and before it could be claimed that he had opportunity to inform himself as to the condition of the bank, he had signed such statement. In a criminal prosecution he probably could not shield himself behind his inexperience — 109 — and want of knowledge; bnt would the signing of the statement under such circumstances deprive him of the right to show, as against the bank or Stick, that he was deceived and misled by one of them, with the knowledge of the other, and that he had m ade a statement which, at the time, he believed to be. true, but which was in fact untrue? On the evening of January 13, 1891, when his resignation as cashier took effect, and after he knew of the alleged fraud which had been perpetrated upon him in the sale of the stock, he was re-elected as a director of the bank, and then and there qualified, and at that meeting, but never afterwards, he voted his stock. We think there is nothing about either of these facts of themselves, and with attending circumstances, to conclude his rights, as matter of law. It is affirmatively shown that, after this evening, Taylor did not attend or participate in any meeting, either of directors or stockholders. It does not appear for or against what measures or motions he voted. He may have been there to see that his resignation was finally effective, and simply voted on a motion to adjourn. It is true that Morawetz, in his work on Corporations. (Section 208) lays down the broad rule, as cited by respondent, “that a person who was induced by fraud to purchase shares in a corporation cannot avoid his contract if, after having acquired notice of the fraud, he has received any benefit from his shares, or in any manner has acted as a stockholder.” But the reason for a rule is the life of the rule, and the reason for such rule is given in the many cases cited by the author to support the text: and it is that a person who, with knowledge of such fraud, continues to act with and hold himself out to others as a part of, such corporation, inviting them to do business with it on the strength of his credit, ought not then to be allowed then to withdraw, to their injury. This is the principle upon which the rule rests, and the learned author just quoted does not mean that a single act of a stockholder or director, without regard to its character, or the reason for, or the circumstances under, — 110 — which it is performed, must inexorably work a forfeiture of his right to avoid a sale for fraud. Could not a number of stockholders who had been deceived into subscribing for and taking stock unite in a call as stockholders for a general meeting for the very purpose of returning their stock, without, by such act, defeating any rights they otherwise would have had? The rule is no broader than the principle on which it rests. It does not appear that anybody was, or could have been, misled or injured by Taylor’s attendance at this meeting. He immediately took steps to sever his relations with the bank by returning the stock. His so attending the meeting and voting as a stockholder did not, and could not have, affected any innocent person. Assuming, then, that Stick and the bank, which- knew all the facts, Taylor was not required to suspect a wrong and investigate, did he act with the required promptness after the discovery? He testifies that his suspicions were first positively aroused by a conversation between D. L. Stick and D. Stick, president and vice-president of the bank, and Maxwell, a stockholder and member of the discount committee. This occurred on Saturday, the 20th day of December, 1890. That he then and there commenced to investigate, and kept it up until the 6th day of January, when he became satisfied that he had been deceived, and so notified Stick, and that he had called a meeting of the directors for that evening, and intended to resign, This -is another act to which the rule quoted from Morawetz would not apply, and which we think he might do without affecting his right to avoid the contract. As an officer or director of the bank, he might call a meeting, and attend and participate in it, for the purpose of withdrawing from the organization, without thereby exposing himself to the suggested peril of acting “in any manner” as a stockholder or director of' the bank. Without following this discussion further, we will say that, while the questions are not entirely free from doubt, we believe that in this action, where the parties stand as the original actors, and it not appearing that the interests or rights of inno — 111 — cent third parties are involved, the several acts and omissions of Taylor should be construed in the light of attending circumstances, and that whether he unreasonably and negligently refuse to open his eyes to facts which he ought to have seen, or whether, after discovery, Ms conduct was such as to indicate his acquiescence in the situation as it was, were questions of fact for the jury; and that neither nor all of the acts proved, construed in connection with the surrounding circumstances, and the inferences which a jury would be at. liberty to deduce therefrom, were so definite and conclusive in effect as to eliminate all questions of fact, and lead directly to one unavoidable legal result, and thus justify the court in deciding the case purely as question of law. The judgment is reversed, and the cause remanded for a new trial. All the judges concur.