Coughlin v. State Bank

COSHOW, J. It is a general rule of law uniformly applied in this country that: “Where misrepresentations are made to the public at large, or to a particular class of persons, with the intention of influencing any member of the public, or of the class, to whom they may be communicated, any one injured through proper reliance thereon may secure redress. In such a case it is not necessary that there should be an intent to defraud any particular person; but the representation must of course have been intended for the public, or for a particular class of persons to which complainant belonged. “Under the general rule, the misrepresentor is liable to anyone injured through reliance on fals,e statements contained in * * corporate statements of a public nature, such as bank and insurance reports, * * ” 26 0. J. 1121-1123 (§ 48bb). — 97 — 1 Morse on Banks and Banking (5 ed.), 285 to 289, Section 132, states the rule in this language: “It often happens that the officers of corporations put forth deceptive and fraudulent reports, and make false statements concerning its affairs, in order to keep up its good repute with the public, and to sustain or raise the price of shares by attracting purchasers. * * Directors are liable for injuries to a person who relies upon a statement issued by them, which they did not know to be° true, as well as when they knew it to be false.” Tate, Treasurer v. Bates, 118 N. C. 287 (24 S. E. 482, 54 Am. St. Rep. 719); Houston v. Thornton, 122 N. C. 365 (29 S. E. 827, 65 Am. St. Rep. 699). “A national bank is required to report five times a year its financial condition to the comptroller of the currency, and publish the reports in a newspaper. While such reports are for the information of the comptroller and stockholders and depositors, they are also for the information of those who contemplate dealing with the bank; and, where a person is misled by false report to part with his money on the security of stock in an insolvent bank, he may recover his loss in an action for deceit against the officers of the bank who signed the false report.” 3 Michie, Banks and Banking 1907, 1908. Jones National Bank v. Yates, 240 U. S. 541 (60 L. Ed. 788, 36 Sup. Ct. Rep. 429, see, also, Rose’s U. S. Notes), where it is written: “If the defendant Thompson participated in or assented to the making and publication of the official reports to the Comptroller of the Currency, which were made in the year 1892, knowing that they vere false reports, he was liable to the plaintiffs deceived and damaged thereby under the express terms of the statute; and he could not escape this liability — 98 — simply because, while he thus participated or assented, other directors gave the formal attestation.” Thomas v. Taylor, 224 U. S. 73 (56 L. Ed. 673, 32 Sup. Ct. Rep. 403, see, also, Rose’s U. S. Notes.), and other authorities cited therein. This principle is a general one and is as applicable to the reports of directors and officers of state banks as to reports of the directors and officers of national banks. All reports are made for the same purpose and apa°rt from any statutory liability the directors or officers making such false reports are liable under the common law. “An action for damages for deceit may be maintained against any one who intentionally deceived the plaintiff into making the contract, even though he was not a party to the sale. ‘In such an action it is immaterial whether the defendant did or did not receive the consideration or other benefit, because the gravamen of the action is that the plaintiff has been deceived to his injury, not that the defendant has profited by the transaction.’ So the corporation and its officers and directors may be liable to persons who are induced to purchase stock by reason of false statements in stock certificates, or in prospectuses or reports, issued by them, although they do not themselves make the sale, where the other elements of actionable fraud are present. Of course an action to rescind and to recover the consideration paid can be maintained only against the other party to the contract to whom, or to whose order, the consideration was paid.” 6 Fletcher Cyc. Corp., 6550—1, § 3878. Merchants National Bank v. Thoms et al., 28 W. L. B. 164 (Ohio), is a well-considered case. Morse v. Swits, 19 How. Pr. (N. Y.) 275, is a leading case on the rule announced, and is cited with approval in Parsons v. Johnson, 28 App. Div. 5 (50 N. Y. Supp. 780), and Habeeb v. Daas, 111 Misc. Rep. 437 (181 — 99 — N. Y. Supp. 392), decided April 10, 1920.' In Morse v. Siuits the facts were similar to the facts in the case at bar. It is there written: “I think the tendency of all the later decisions in this country and in England, is in favor of extending the liability of every one who makes a public representation which he Tmows to be false, and upon faith in which any one has been led into a business transaction, whereby he suffers damage. I do not understand that it is at all necessary to the right of action that the representations should have been intended for the party sustaining the loss, or in any way addressed to him. If it be made openly and publicly, so that it might well come to his ears, and if it does come to his ears, and he acts upon it, the party making it shall answer to him for the damages. He shall not be at liberty to sow falsehood broad-cast, without being responsible for the loss it causes. * * “The falsehoods may have been made for one purpose, and published for that; but being published, the public or any individual has a right to believe it. It must have been the intention of the persons publishing it that it should be believed. And if believing it any one of the public acts on that belief, the makers and publishers of this falsehood are to be held liable for the consequences they have caused.” Taylor v. Thomas et al., 195 N. T. 590 (89 N. E. 1113). The last case cited was affirmed in Thomas v. Taylor, 224 U. S. 73 (56 L. Ed. 673, 32 Sup. Ct. Rep. 403, see, also, Rose’s U. S. Notes). See, also, Gerner v. Mosher et al., 58 Neb. 135 (78 N. W. 384, 46 L. R. A. 244). In all probability the plaintiff would have no defense to an action or suit instituted by the Superintendent of Banks to collect his double liability. As is said in Langtry v. Wallace, 182 U. S. 536, 549 (45 — 100 — L. Ed. 1218, 21 Sup. Ct. Rep. 878, see, also, Rose’s U. S. Notes). “Upon the failure of the bank the rights of creditors attached and could not be affected by anything that the bank or its officers might, after such failure, have done or omitted to do. In Earle v. Pennsylvania, 178 U. S. 449, 455 (44 L. Ed. 1146, 20 Sup. Ct. Rep. 915, see, also, Rose’s U. S. Notes), we held that when a national bank suspends and is placed in the hands of a receiver the entire control and administration of its assets are committed to the receiver and the comptroller, subject to whatever rights of priority, if any, may have been previously acquired by proceedings lawfully instituted against the bank before its suspension. So that the only way in which the defendant could have effectively raised the question of his liability as a shareholder, arising from frauds committed by the bank or its officers before its suspension whereby he was induced to become a shareholder, was by a suit in equity against the bank and the receiver.” Under note 8 in 6 Fletcher’s Cyc. Corp., 6551,, cited by the respondents, Walker and Eckern, is this excerpt from Tarra v. Novelty Elec. Mfg. Co., 136 Minn. 216 (161 N. W. 409): “Officers of a corporation who negotiated the sale of stock belonging to it are proper parties to an action by the purchaser to recover back what he has paid, where the money was paid to them and it does not appear that they have ever paid it over to any one else.” In Section 3879 of the same valuable treatise we read: “A person who is induced to buy or sell stock in a corporation by false and fraudulent representations may rescind the contract and set up the fraud as a defense in an action by the seller for the — 101 — price, or on a note given for the price; or if the price has been paid, in whole or in part, in money or property, he may maintain an action at law or in equity, according’ to the circumstances, to recover what he has parted with; * * . And the complainant may in the same suit seek a rescission, or, if that be inequitable, then to recover his damages.” 3 Michie on Banks and Banking, 1882, Section 250 (3bb), explains the same principle in this language: “Where a subscriber for stock in a national bank became a shareholder in consequence of frauds practiced upon him by others, whether they be officers of the bank or officers of the government, he must look to them for such redress as the law authorizes, and is estopped, as against creditors, to deny that he is a shareholder, within the meaning of section 5151, if at the time the rights of creditors accrued he occupied and was accorded the rights appertaining to that position. He is not entitled to a rescission unless he affirmatively shows that there are no creditors who became such while he was a registered stockholder. Fraudulent representations by which a person is induced to become a stockholder of a national bank constitute no defense in an action at law by a receiver of the bank to enforce the statutory liability of the stockholders, as the defense is of an equitable nature, and must be asserted, if at all, in equity.” 1 Cook on Corp. (8 ed.), 526, § 155. In the instant case the plaintiff alleges .that his name was not on the register of stockholders at the time the bank passed into the hands of the Superintendent of Banks. Other allegations are made tending to show that no credit was ever extended to the bank based on the fact that the plaintiff was a stockholder. “He claims exemption from the responsibility attaching to him, under the statute, as a shareholder, — 102 — upon the ground that in consequence of the frauds practiced upon him he was entitled to disaffirm, and that he had upon due notice to the receiver dis-affirmed, the contract under which he purchased the stock in question. He seeks to have the certificate received by him treated as canceled. Clearly such a defense is of an equitable nature, and could not be recognized and sustained except in some proceeding to which the bank, at least, was a party. If the defendant was entitled, under the facts stated, to a rescission of his contract of purchase, and to a cancellation of his stock certificate, and consequently to be relieved from all responsibility as a .shareholder of the bank, he could obtain such a relief only by a suit in equity to which the bank and the receiver were parties.” Lantry v. Wallace, 182 U. S. 536 (45 L. Ed. 1218, 1224, 21 Sup. Ct. Rep. 878, see, also, Rose’s U. S. Notes); Barcus et al. v. Gates et al., 89 Fed. 783 (32 C. C. A. 337); Bank of Gresham v. Walch. 76 Or. 272 (147 Pac. 534); Ashmead v. Colby et al., 26 Conn. 237. The Circuit Court appears to have held that plaintiff was not entitled to rescind his purchase of stock or to recover from the defendants, Walker and Eckern, in this proceeding because the plaintiff had no direct contract with them. We do not conceive that to be the law. The frauds were perpetrated by the defendants, Walker and Eckern. The false representations were made over their signatures. They are presumed to have known the condition of the finances of the bank. It was their duty to know them. It is further alleged that in addition to making the false reports which misled the plaintiff and induced him to buy the stock the defendants, Walker and Eckern, were managers of the affairs of the bank, and so mismanaged its affairs as to cause it to become insolvent. Among other things they were — 103 — charged with having made excessive loans contrary to the law. They were also charged with having made loans to corporations of which they, Walker and Eckern, were the owners. That the evidence of the indebtedness of such corporations was worthless. Other acts contributing to the insolvency of the bank are charged against them. They are responsible, therefore, either in damages or for the return of the money the plaintiff paid for the stock, for it is alleged that the shares purchased by the plaintiff were in fact shares of stock owned by Walker and Eckern although said shares were held in the name of a corporation. Plaintiff alleges that said corporation was a device of the defendants, Walker and Eckern, created and controlled by them for the express purpose of avoiding double liability on such shares of stock. They got the money paid by plaintiff for his stock. Under this state of the pleadings a suit in equity was the proper proceeding to afford the plaintiff such relief as he is entitled to. In a similar case reported in Ginn v. Almy, 212 Mass. 486, 506 (99 N. E. 276, 285), the court uses this language: “But if through any instrumentality he chose to employ, whether corporate or personal, the frauds conceived by him were committed solely in furtherance of his own purposes, and for his own profit directly or indirectly, as the report decisively shows, the company should not be held responsible.” (Authorities cited therein.) (Craft v. South Boston R. R., 150 Mass. 207 (22 N. E. 920, 5 L. R. A. 641); Ashley v. Winkley, 209 Mass. 509 (95 N. E. 932). The defendant bank itself could not be held liable under the authorities hereinbefore cited for the fraudulent acts of the defendants, Walker and Eckern. It and the Superintendent of Banks are — 104 — made parties doubtless because the plaintiff seeks to have his certificate of stock canceled. For that purpose both the defendant bank and superintendent are proper parties. The statement of the .plaintiff followed reasonably closely the complaint. The attorney for the plaintiff seemed a little confused when interrupted in his opening statement as to whether he was relying on tort or on a contract. From our view in so far as this appeal is concerned it is immaterial. He had a good cause of action against the defendants, Walker and Eckern. In any event the suit should not have been dismissed, therefore, as to them: Or. L., § 390; Simpson v. First Nat. Bank, 94 Or. 147, 162 (185 Pac. 913.) The Circuit Court seems to have recognized the principle that equity having acquired jurisdiction for one purpose will retain it, and dispose of all issues presented, whether equitable or legal, because it retained the case and determined the liability of the plaintiff on the note held by the defendant Columbia Trust and Savings Bank which was clearly an action at law. A court of equity having jurisdiction to determine the issue as to the right of plaintiff to rescind, have his stock certificate canceled and to have an injunction against the defendant Superintendent of Banks from prosecuting an action against him on his double liability had jurisdiction to determine all the issues, whether equitable or legal: Pomeroy, Eq. Jur., § 236; 21 C. J. 134; Templeton v. Bockler, 73 Or. 494, 509 (144 Pac. 405). 21 C. J., cited by respondents, Walker and Eckern, Section 808, is as follows: “Dismissing a bill at the close of plaintiff’s case, before defendant presents or rests his case, is not — 105 — correct practice in equity, in the absence of express provisions to the contrary.” In the instant case the plaintiff was not permitted to put on any of his evidence. It is a very dangerous practice to determine a case as complex and complicated as is the instant case upon statement of the counsel for plaintiff made at the beginning of the trial. We learn from the briefs that the complaint was tested by demurrer upon argument and consideration of briefs. The Circuit Court overruled the demurrer. In the light of that fact as well as correct equity practice, the plaintiff should have been permitted to adduce his evidence and the case determined upon its merits. Nothing’ herein written should be construed as an expression of an opinion of the merits of the instant case. We do hold that the complaint states a cause of suit; that all of the defendants are proper parties; that plaintiff’s open statement is in harmony with his complaint; that the Circuit Court erred in dismissing the suit as to any of the defendants, and that the court should have heard the testimony, and then decided the case according to equity and justice. The defendants, Walker and Eckern, are not entitled to a jury trial. They are rightfully in a court of equity. The fact, if it be a fact, that defendant Olson was deceived and duped by his co-defendants, Walker and Eckern, and then was used by them to further their alleged scheme to unload their worthless stock on innocent parties including the plaintiff adds another ground for equity jurisdiction. No charge is made against Olson except that he signed one of the statements of the bank’s liabilities and resources after plaintiff had purchased stock; — 106 — No relief is sought from Olson. He should be retained as a party to the suit because he participated in the sale of the stock to plaintiff, is payee in the note sought to be canceled, and indorsed said note to defendant Columbia Trust and Savings Bank. In so far as the right of the defendant Columbia Trust and Savings Bank to recover on the note from plaintiff is revealed by the record, we believe the court to have rendered the correct judgment, but in view of the allegations of the complaint and the statement of the counsel for plaintiff that the note was conceived in fraud, that the present holder had knowledge of that fraud, and the plaintiff was prevented from introducing the evidence of such alleged fraud by dismissing the suit as to the other defendants we are of the opinion that the judgment against the plaintiff should be reversed so that the entire matter can be tried and determined upon its merits. As to the effect of fraud in the inception of a promissory .note, see Sections 7848, 7850, 7851, Or. L.; American Nat. Bank v. Kerley et al., 109 Or. 205 (220 Pac. 116, 32 A. L. R 262); Bank of Jordan Valley v. Duncan, 105 Or. 122, par. 8 (209 Pac. 149); Bank of Gresham v. Walch, cited above. The judgment against plaintiff and in favor of the defendant Columbia Trust and Savings Bank and the order dismissing the suit as to all other defendants is reversed and the case remanded to the Circuit Court for further proceedings consistent with this opinion. Reversed and Remanded. McBride, C. J., and Burnett and Rand, JJ., concur.