Cooper v. Empire Security Co.

Mr. Justice Gridley delivered the opinion of the court. In his report, the master, in discussing the alleged representations made to complainant by the agent, Brewer, as shown in the above statement, found that representations Nos. 3 and 4 should not be considered; that No. 4 was a mere prediction as to the future, and that No. 3 (that the company was in a prosperous condition) had not been shown by the evidence to have been false; that as to representations Nos. 1 and 2 (that the stock was fully paid and nonassessable, and was the property of the Empire Company) the evidence failed to show “that Brewer made them without believing them to be true”; that “in order to constitute fraud, the statement must not only be untrue, but the party making it must know or believe it to be untrue”; that, furthermore, “the untrue statement must have been made for the purpose of inducing the injured person to act, and it must have been an inducing cause for said action in the sense that but for his belief in the truth of the statement he would not have acted”; and that the evidence failed to show “that Brewer’s statement, that he was selling Empire Company’s stock, was made by him for the purpose of inducing complainant to buy the stock in question, or that complainant’s decision to buy it was induced by that statement.” The master concluded, in substance, that fraud could not be predicated upon representations Nos. 1 and 2; that complainant was not entitled to rescind his purchase of the stock; and that, inasmuch as the relief prayed for by complainant depended upon his right to rescind, complainant’s bill was without equity and should be dismissed. It is contended by counsel for complainant that the master’s conclusion of law, viz., that in order to constitute fraud, the statement must not only be untrue, but the party making it must know or believe it to be untrue, is erroneous. As applied to the facts in the present record, we are of the opinion that it is. In 1 Cook on Corporations, sec. 1.40, it is said: “The well-established rule now is that a corporation cannot claim or retain the benefit of a subscription which has been obtained through the fraud of its agents.” In 2 Pomeroy’s Eq. Juris (4th Ed.), sec. 909, it is said: “It is very clear that when an agent, in doing the business of his principal, and acting within the scope of the authority conferred upon him, makes fraudulent representations or concealments with the knowledge or consent of his principal, expressed or implied, so that the act of the agent is virtually that of his principal, then the principal is liable in the same manner, to the same extent, and for the same remedies as though the fraud were committed by himself personally.” In 1 Cook on Corporations, sec. 149, it is said: “Statements need not be intentionally false in order to amount to a fraudulent representation.” And in the note to the text it is said: “Corporate agents, making representations in order to obtain subscriptions, are bound to know the truth or falsity of such statements.” In 2 Pomeroy’s Eq. Juris, sec. 887, it is said: “It is well settled in equity by an overwhelming array of authority that where a person malees a statement of fact, which is actually untrue, and he has at the time no knowledge whatever of the matter, he is chargeable with fraud, and his claim to have believed in the truth of his statement cannot be regarded as at all material.” And, in sec. 888, the author states: “If a statement of fact, actually untrue, is made by a person who honestly believes it tq be true, but under such circumstances that the duty of knowing the truth rests upon him, which, if fulfilled, would have prevented him from making the statement, such misrepresentation may be fraudulent in equity, and'the person answerable as for fraud.” In Farnsworth v. Muscatine Produce & Pure Ice Co., 161 Iowa 170, 179, it is said: “Officers of corporations, who hold out to individuals, or to the public, advantages which will accrue to persons who take shares in'their corporation, and invite them to take shares on the faith of their representations, are bound to state everything with strict accuracy.” As we understand the law of Illinois, it is in accord with the principles above stated. (Allen v. Hart, 72 Ill. 104; Hicks v. Stevens, 121 Ill. 186; Borders v. Kattleman, 142 Ill. 96, 103; Coolidge v. Rhodes, 199 Ill. 24, 32; National Bank of Pawnee v. Hamilton, 202 Ill. App. 516; Rowe v. Phillips, 214 Ill. App. 582.) In the Borders case, where a bill in equity was filed to rescind a sale of property on the ground of false and fraudulent representations of the defendant whereby the complainant was induced to part with his property in exchange for a comparatively worthless note and mortgage of a third party, the court, in sustaining a decree in favor of complainant, said (142 Ill. at p. 103): “It is well settled that it is immaterial whether a party misrepresenting a material fact knows it to be false, or makes the assertion of the fact without knowing it to be true, for the affirmation of what one does not know to be true is unjustifiable, and if another act upon-the faith of it, he who induced the action must suffer, and not the other. * * * So it has been held, that where the representations relate to facts which must be supposed to be within the defendant’s knowledge, proof of their falsity is a sufficient showing of his knowledge that they were false. * * * And so, a party selling property is presumed to know whether the representations he affirmatively makes in respect to it are true or false. If he knows them to be false it is a positive fraud, and if he makes them without knowing them to be true, for the purpose of inducing another to act upon them, it in equity amounts to fraud.” In the Coolidge case, supra, where in a proceeding in equity it appeared that the stock of a corporation, which a director thereof sold upon his representation that it was fully paid and nonassessable, was not fully paid, but was fictitious and fraudulent, the court said (199 Ill. at p. 32): “It is not always necessary, in order to charge a vendor in equity with fraud, that he should know his statement to be false, if he has no good and reasonable ground to believe it to be true and the consequences are the same to the vendee as if he had such knowledge.” Counsel for the defendants, Little and Starnes, cite in their brief here filed the case of Gillespie v. Fulton Oil & Gas Co., 236 Ill. 188, as sustaining the master’s conclusion. In that equity case it was claimed that a certain oil lease had been obtained by fraud and misrepresentation, and our Supreme Court held (p. 206) that under the evidence the decree of the circuit court could not be sustained on the ground that the execution of said lease was procured through fraud and misrepresentation, or upon other grounds. In its opinion the court, citing Pomeroy’s Eq. Jur. sec. 876, and quoting from the case of Prentice v. Crane, 234 Ill. 302, 307, said (p. 198): “A misrepresentation which will warrant a court of equity in setting aside a contract must contain the following elements: First, its form must be a statement of fact;. second, it must be made for the purpose of inducing the other party to act; third, it must be untrue; fourth, the party making the statement must know or believe it to be untrue; fifth, the person to whom it is made must believe in and rely upon the truth of the statement; sixth, the statement must be material.” But the court, in the portion of its opinion immediately following said quotation, seemingly founded its decision upon the fact that there was no proof in the record that the person to whom the statement was made believed it and relied upon it, and upon the further fact that the statement was wanting in the essential element of materiality. In the recent case of Wisherd v. Bollinger, 293 Ill. 357, 364, it was decided in substance that, where representations are false and material and are relied upon by a party to bis injury, a court of equity is justified in refusing specific performance of a contract for the exchange of lands, and that it is immaterial whether the representations were made without knowledge of the truth or with actual intent to deceive; and the court cited with approval the Allen, Hicks and Borders cases, supra. In the present case, three of the representations or statements which complainant in his bill alleged Brewer made to him before he purchased the stock and were relied upon by him, are: (1) That the stock “was fully paid and nonassessable”; (2) that it “was the property of the Empire Company”; and (3) that the company “was in a prosperous condition.” Each of these statements was a statement of a fact, and the evidence clearly shows that each was made for the purpose of inducing complainant to purchase stock in the company. Statement No. 1 was untrue, at least as regards the common stock. The attempted issuance to H. H. Rich of the 7,000 shares of the increased common stock, of which the 100 shares purchased by complainant were a part, as fully paid and nonassessable, for the consideration and in the manner above shown, was a fraud, and the stock was not fully paid and is assessable. (Coleman v. Howe, 154 Ill. 458, 469; Coolidge v. Rhodes, 199 Ill. 24, 30.) Statement No. 2 was untrue as to the 100 shares of the common stock, and as to 30 of the 100 shares of the preferred stock. The common stock purchased by complainant was equitably owned by the defendants, Little and Starnes, with the legal title thereto in Rich, and 30 shares of the preferred stock was owned by Grrimme. And, after a careful review of the facts, as disclosed by admissions in the pleadings and by the evidence introduced on the hearing, including said financial statements, we think that statement No. 3 was untrue. While the evidence does not positively show that Brewer, when making the three statements, actually knew them to be untrue, it does show that he made them without knowing them to be true and for the purpose of bringing about complainant’s purchase, and that a previous investigation on his part would have disclosed to him the fact that they were untrue. And the evidence sufficiently shows, we think, that complainant believed in and relied upon the truth of all three of the statements. While it is a fact that complainant, as suggested by Brewer, made certain inquiries of parties to whom Brewer had recently sold both preferred and common stock, yet it is not essential that the false representations should be the sole inducement to complainant’s decision to make the purchase. (2 Pomeroy’s Eq. Juris., sec. 890; Hicks v. Stevens, 121 Ill. 186, 193.) On the question of the materiality of the representations, we are of the opinion that all three were material. (National Bank of Pawnee v. Hamilton, 202 Ill. App. 516, 521; Coolidge v. Rhodes, 199 Ill. 24, 32; Cox v. National Coal & Oil Investment Co., 61 W. Va. 291, 295, 307; Gray v. Reeves, 69 Wash. 374, 377.) It is more than probable that complainant would have declined to make any purchase had Brewer told him, that the stock offered for sale was. not all treasury stock, and that the common was equitably owned by the defendants, Little and Starnes, and that 30 shares of the preferred was owned by Grrimme. Brewer’s representations are imputable to the Empire Company (Southern Ins. Co. v. Milligan, 154 Ky. 216, 223), whether they were authorized by the company or not, for, having accepted the result of his efforts, it must be held to have adopted the methods employed to achieve the results. (Bloomquist v. Farson, 222 N. Y. 375, 381.) And the defendants, Little, Starnes and Grrimme, directors of and in control of the company, are also liable to complainant in this proceeding, for “all who get gain by fraud must bear the legal consequences of the wrong they do” (Vreeland v. New Jersey Stone Co., 29 N. J. Eq. 188,195). And their liability is not limited to the sums of money they severally received (1 Cook on Corporations, sec. 156; Cox v. National Coal & Oil Investment Co., 61 W. Va. 291, 312; Endsley v. Johns, 120 Ill. 469, 479). And complainant is not required to sue at law, but he may resort to a court of equity for relief. In his bill he not only asks for a recovery of the $12,500, with interest, but also that his name be removed from the books of the company as a stockholder. (See 1 Cook on Corporations, sec. 155; Farwell v. Colonial Trust Co., 147 Fed. 480, 482; Bosley v. National Machine Co., 123 N. Y. 550, 555.) No brief has been filed in this Appellate Court on behalf of the Empire Company, but an elaborate brief and argument has, however, been filed on behalf of the defendants, Little and Starnes, and their counsel contend that fraud was not proved in this case to that degree of certainty required by the law. The master stated in his report that complainant’s testimony “as to how he understood Brewer’s statements” (viz., that the stock was fully paid and nonassessable, and that it was the property of the Empire Company) “is thoroughly confused and contradictory.” Complainant was cross-examined at length by counsel for Little and Starnes, and while there is some confusion in his testimony, it is apparent, we think, that he relied on Brewer’s false statements, and believed that the stock he purchased was nonassessable and also was treasury stock. Counsel argue, in substance, that complainant could not have been deceived, because, by purchasing-common stock of the par value of $100 per share for $25 per share, he must have known that it was assessable, and if it was nonassessable it could not be the property of the company except under unusual circumstances. It is not unusual for stock in a private business corporation, previously fully paid to the extent of its par value in money or money’s worth, to be sold in the open market or by private sale at a price much below its par value. And it sometimes happens that stock in such a corporation, which has been fully paid for in money’s worth, is returned into the treasury of the company for the purpose of being sold for cash, where the company needs more money for running its business. Considering the entire evidence, as disclosed in this record, we are of the opinion that, at the time of complainant’s purchase of the stock in question, such false representations were made to him by Brewer, upon the truth of which complainant relied, as entitles him to the relief prayed for. The defendants, Little and Starnes, have assigned cross errors to the effect that the court abused its discretion in allowing an amendment to a paragraph of complainant’s bill on October 14, 1921, long after the master’s report had been filed in court and after the master had gone out of office, and erred in sustaining-complainant’s exceptions to the answer of said defendants to said paragraph as amended. The allegations of said paragraph, as amended, were to the effect that, since ascertaining the falsity of the statements which induced him to purchase the stock, complainant demanded of the Empire Company and of P. M. Starnes that they repay him the $12,500, with interest, and “tendered and hereby tenders and offers to return to them and each of them the said certificates of stock, * * * and tenders and offers to return to the Empire Company the July, 1917, dividend on the preferred stock, to wit, $175,” which was received prior to the discovery of the fraud, etc., but that both refused, etc. The amendment related to the tender of said July dividend of $175 (one-fourth of seven per cent on $10,000). We do not think that any error was committed by the court in the particulars mentioned. Counsel for said defendants further contend that complainant’s failure prior to the filing of the bill to actually tender said July dividend, which the proof showed he receixred on said preferred stock, is fatal to a recovery. The offer to return the amount of the dividend was sufficient. (Auman v. McKibben, 179 Ill. App. 425, 436; 5 Pomeroy’s Eq. Juris, sec. 2110; Taylor v. Taylor, 259 Ill. 524.) In the Taylor case, our Supreme Court said (p. 537): “If appellee was entitled to the relief prayed, appellant could be as effectually protected by giving him credit on the money decree rendered as if he had been tendered that sum before the bill was filed”; and further said (p. 539): “In Stewart v. Stone, 127 N. Y. 500, 28 N. E. Rep. 595, the court holds that one who attempts to rescind a transaction on the ground of fraud is not required to restore that which in any event he would be entitled to retain.” Our conclusions are that the circuit court erred in dismissing the bill for want of equity as to the defendants, Empire Company, and Little, Starnes and Grimme, and that the .decree should be reversed and the cause remanded with directions to the court to enter a decree against said defendants and in favor of complainants in accordance with the prayer of the bill, upon complainants’ tendering in open court said two certificates of stock for cancellation, and giving credit to the defendants for the amount of said July dividend of $175, together with legal interest thereon from July 1, 1917; and it is so ordered. Reversed and remanded with directions. Barnes, P. J., and Morrill, J., concur.