Merritt v. Ehrman , 116 Ala. 278 ( 1896 )

COLEMAN, J.

The appellee, Ehrman, filed the present bill, praying for the rescission of a contract, made and entered into by him and appellants, who are the respondents to the bill. The court overruled a demurrer to the bill, and respondents appealed to this court. The bill avers that in February, 1896, the complainant entered into a written agreement with the Merritt & Bond Lumber Company, a corporation with a capital stock of twelve thousand dollars, in which there were one hundred and twenty shares of one hundred dollars each, sixty of which shares belonged to W. H. Merritt, and sixty to M. J. Bond. The bill avers that the agreement made with the corporation was mutually rescinded and the parties thereto returned to their former rights and conditions. The bill then avers, that complainant and W. H. Merritt entered into another agreement, by which the former became the purchaser of sixty shares of the stock, for which he agreed to pay five thousand and five hundred dollars ; a part of the purchase price was paid in cash, and the remainder secured by notes and collaterals. The bill avers that as an inducement to the purchase, Wm. IT. Merritt, who was the secretary and treasurer and sole manager of the corporation, falsely and fraudulently represented, that the corporation was indebted in an amount not exceeding two hundred dollars, and that there were sufficient assets consisting of lumber, &c., to pay and satisfy this amount of indebtedness. The bill avers that complainant “at the time of making said contract, and making said payment and delivering said securities, was ignorant of the fact that said corporation was indebted to any person or persons in any greater sum than two hundred dollars, but relied upon the statement of said Merritt in making the trade ; and remained in ignorance of any other claim against said corporation until the 8th of July, 1896, when he was informed that said Merritt asserted a claim of four or five thousand dollars, and that on the following day he inquired of said Merritt of the truth of said report, and that Merritt then and there asserted that said corporation did owe him four or five thousand dollars, which he claimed of said corporation.” The bill avers that if the claim of Merritt was enforced it would reduce the value of his stock two thousand or twenty-five hundred dollars. The bill offers to return the stock to the vendor. This is a substantial statement of the facts upon which the prayer for relief is based.

One ground of demurrer is, that the bill is-wanting in equity, in that complainant does not offer to carry out the first trade, which was rescinded to make the second and as a part thereof. "We do not think the bill shows that the first agreement was rescinded in consideration of making the second agreement. On the contrary it is averred that the first agreement failed to effect the purposes intended, that there was a mistake in its provisions, and that it was mutually rescinded. The first agreement was between the complainant and the corporation, to which neither of the stockholders as such were parties. The second agreement, the one assailed, was between the complainant and the respondents, as stockholders and individuals, by which .the complainant became the purchaser and' owner of sixty shares of the stock in the corporation, and not the assets of the corporation, as provided in the first agreement. It may be that the answer of the respondents and proof will show the facts to be different from those stated in the bill, but on this appeal we must treat the averments of the bill as true. All reference to the first agreement might well have been omitted from complainant’s bill, so far as he seeks relief from the agreement assailed.

The bill shows that complainant went into possession and control of the corporation, and it is insisted on demurrer that complainant should have offered in his bill to account for its use and occupation since the time he secured possession. The corporation is not made a party to the bill, and no relief is sought against it. The object of the bill is to obtain relief as a purchaser of stock from complainant’s vendors, to be reimbursed for payments made in the purchase, and discharged from liability for the remainder of the purchase money. No decree rendered in the present case would relieve complainant from a just liability to the corporation.

It is contended in argument that the bill does not specifically show that the debt claimed ,by respondent Merritt existed at the time of the contract of sale. It is sufficient to say this objection was not raised by the demurrer .

It is further contended that the bill shows upon its face, that Merritt has estopped himself from setting up any claim against tlie corporation. We clo not clearly see how the corporation can avail itself of the equitable doctrine of estoppel. It has not been induced to take any steps, or do any act, in consequence of the false representations of Merritt. No wrong was done to the corporation or its franchise, but' the wrong was solely that done by the owner of the stock to his vendee, the complainant. It has not been injured in any way. The false representations were made to the complainant. By them, complainant was induced to pay out money and incur additional liability to Merritt and not to the corporation. The condition of the corporation remains unchanged as between it and its creditors. If Merritt should sue the corporation in a court of law, we do not see how the corporation could defeat the suit by pleading a fraud perpetrated by Merritt upon complainant, in the sale of his stock to him. It may be that if complainant preferred to claim the benefit of the purchase of the stock, and Merritt should attempt to enforce his claim against the corporation, the complainant might invoke the aid of a court of equity to enjoin a recovery of a judgment against the corporation, or its enforcement after judgment, so far as it would affect the rights of complainant.

One ground of demurrer to the bill is, that complainant has a plain and adequate remedy at law. The bill nowhere seeks a discovery. It does not aver the insolvency of Merritt, nor does it aver that the note executed by complainant for the purchase money, was commercial paper, nor that the notes or mortgages, or any of them, delivered in part payment of the purchase money, consisted of commercial paper. All the property involved is personal property. The question is, whether under these circumstances, the remedy at law is as full and adequate as the remedy in equity. The authorities are not in harmony. It is clear, that upon rescission the plaintiff could maintain an action for money had and received, for money paid, or in trover for the value of the notes and securities delivered, or other property not disposed of, and he could also defend against any action upon the promissory note given for the purchase money, it not being commercial paper. It is evident that the powers of a court of law are inadequate to restore to the plaintiff the promissory notes and mortgages delivered to Merritt, and to this extent he could not be placed in statu quo, but if he could recover their full value, there would be no substantial injury. Section 700 of Story’s Equity Jurisprudence states the law as follows: “But whatever may have been the doubts or difficulties formerly entertained upon this subject, they seem by the more modern decisions to be fairly put at rest, and the jurisdiction is now maintained in - the fullest extent. And these decisions are founded on the true principles of equity jurisprudence, which is not merely remedial but is also preventive of injustice. If an instrument ought not to be used or enforced, it is against conscience for the party holding it to retain it, since he can only retain it for some sinister purpose. If it is a negotiable instrument, it may be used for a fraudulent or improper purpose to the injury of a third person. If it is a deed purporting to convey lands or other hereditaments, its existence in an uncancelled state necessarily has a tendency to throw a cloud over the title. If it is a mere written agreement, solemn or otherwise, still while it exists it is always liable to be applied to improper purposes, and it may be vexatiously litigated at a distance of time when the proper evidence to repel the claim may have been lost or obscured, or when the other party may be disabled from contesting its validity with as much abilhy and force as he can contest it at the present moment.”

In Pomeroy’s Equity Jurisprudence, Vol. 1, section 221, the rule is thus stated : “Another illustration may be drawn from the doctrines concerning the cancellation or surrender of written instruments on the ground of some actual fraud either in their original execution or in their subsequent use. Such remedy is entirely equitable ; but when the injured party has a legal estate in the subject-matter or a legal primary right, he may set up the actual fraud as a defense in an action at law, if his legal title is thereby attacked, or a recovery is thereby sought against him on the instrument. Whether, under these circumstances, and at the suit .of a party holding a legal interest or a legal primary right, the exclusive jurisdiction will be exercised for the purpose of protecting his estate or maintaining his right, by decreeing a cancellation or a surrender of the instrument thus affected by fraud, depends upon the question whether the legal remedies, either affirmative or defensive, open to the party, are inadequate to promote the ends of justice, and to afford him complete relief.”

And in Vol. 2 of Pomeroy Eq. Juris., section 914, it is said : “The doctrine is settled that the exclusive jurisdiction to grant purely equitable remedies, such as cancellation, will not be exercised, and the concurrent' jurisdiction to grant pecuniary recoveries does not exist, in any case where the legal remedy, either affirmative or defensive, which the defrauded party might obtain, would be adequate, certain, and complete.”

The same rule is repeated in section 1377 of the third volume of the same author.

•The rule that prevails in the English courts is, that equity has jurisdiction in all cases of fraud, and will interfere for the protection of the party injured by the fraud, and this rule prevails in some of the States.— Waters v. Mattingley, 1 Bibb 244; 4 Am. Dec. 631, and note. We are of opinion that before it can be said'that the remedy at law is full and complete, it must appear that the defrauded party can obtain immediate relief, either by affirmative or defensive action, or as stated by Mr. Justice Story, supra, that he can not be subjected to ‘ ‘vexatious litigation at a distance of time, when the proper evidence to repel the claim may have been lost or obscured, or when the other party may be disabled from contesting its validity with as much ability and force as he can contest it at the present moment.” The bill shows that the defendant holds the promissory note of the complainant for two thousand dollars. He is powerless to compel the holder of the note to institute an action at law on the note. It may be that by delay he would lose the benefit of important evidence of the fraud. It is certain under our statute, that if the holder of the note should die, and his administrator should sue on the note, and complainant’s defense depended on his own testimony, he would not be a competent witness to prove the fraud; or if under these circumstances the plaintiff should die, the evidence of the fraud would be lost, and his estate would be subjected to irreparable damage. The facts averred in the bill, bring the case fairly within the principle declared by Mr. Justice Story, to entitle complainant to invoke equitable intervention. We are of opinion that a different rule has not been declared in this State. The rule in this State is, that “fraud itself is' never a distinctive ground of equity jurisprudence ; it is never of itself a foundation which will uphold a bill in equity.” “No matter how .gross the fraud may be, if the party can have full, complete and'adequate redress at law, he can not go into a court o'f equity.” These expressions can be found in many cases. — Smith v. Cockrell, 66 Ala. 77, and cases cited. An examination of the cases in which it was held that a party was not entitled to equitable relief, on account of the application of the foregoing principles, will disclose the fact, that the complainant by immediate affirmative action could obtain relief by suit at law, or where suit was then pending against him, and the defense could be made in defense of the action. In the case of Dickinson v. Lewis, 34 Ala. 638, the complainant was being sued on a note, and the defendant in the court of law filed a bill to enjoin the suit and to cancel the .notes upon the ground of fraud. His defense was perfect in a court of law, and it was held that his bill was without equity. In other cases the facts showed that complainant was in a position to institute an action in a court of law, and have the question of fraud fully tried in that court. — Sadler v. Robinson, 2 Stew. 520; Knotts v. Tarer, 8 Ala. 743; Youngblood v. Youngblood, 54 Ala. 486; Smith v. Cockrell, 66 Ala. 64. There is nothing in the case of Russell v. Little, 28 Ala. 160, but when properly construed asserts the same principle. The principle upon which this court has held that a party out of possession of land could not apply to a court of equity to remove a cloud from his title, was that, being out of possession, he could by affirmative action, establish his title in a court of law; and that the reason why a party in possession was entitled to the aid of a court of equity was, that being in possession, he could not compel a suit against him in a court of law to test the question, and that he might lose important evidence by delay. The same principle applies with equal force where there is an outstanding note against a party procured by fraud.

We are of opinion that complainant’s bill has equity upon another ground. Although complainant might enjoin the enforcement of the claim of respondent against the corporation, so far as it affects the value of the stock purchased by complainant, he could not obtain such relief, except through the aid of a court of equity. If the fraud of the respondent is such, that complainant can not obtain relief, except in a court of equity, no sound principle of law will deprive the complainant, who is free from fault, in selecting his equitable remedy. The respondent can not -take advantage of his own fraud, and reap any benefit from it.

In any aspect the bill is viewed, it contains equity, and the decree of the chancellor must be affirmed.

Affirmed.