Brown v. Norman ( 1888 )

Cooper, C. J.,

delivered the opinion of the Court.

The appellee exhibited his bill in the Chancery Court of Lawrence county, to cancel a conveyance of certain lands and personalty made by him in October, 1885, to the appellant, on the ground that it was procured by fraud and deceit. The defendant demurred to the bill, and his demurrer being overruled, he appealed.

It appears by the bill that, prior to October, 1885, the appellant was a member of the firm of Mangum, Brown & Butler, doing business in the town of Wesson, in Copiah county. At that time the said firm was insolvent, owing debts to the amount of $12,000, and having assets only to the value of $5000. A day or two before the bargain between appellee and appellant, Brown and Mangum went from the town of Wesson to the residence of appellee, which was some ten miles in the country, and proposed to him to purchase Brown’s interest in said firm, representing to him that the firm was in a solvent and prosperous condition, and that its total liabilities did not exceed $4000, while its assets were not less than $16,000, and exhibited to him false and fraudulent statements which they had prepared for the purpose of deceiving him as. to the condition of the firm. The appellee was a farmer, having no knowledge of mercantile affairs, and believing Brown and Mangum to be honest and truthful men (he having known them for many years), relied upon the representations and bargained for Brown’s interest in the firm, giving him in exchange therefor his farm and the personal property thereon (at the valuation of $3100) and paying in cash $500, and made a deed conveying the property to Brown.

In additon to the price paid by appellee, he assumed liability for the existing debts of the firm. After this contract had been made, the name of the firm was changed to Mangum, Butler & Co., the appellee being the Co. The new business was carried on until March, 1886, at which time, Mangum, at the instance of the creditors of Mangum, Brown & Butler, exhibited his bill in the chancery court, of Copiah county, for the dissolution of the firm and administration of its assets on the ground of the insolvency of said firm of Mangum, Brown & Butler. On his petition, a receiver was appointed who took possession of the entire assets and applied them, under the direction of the court, to the payment of the debts of the said firm, there being an insufficient amount to pay the debts in full. The bill charges that the appellee did not discover the insolvency of the firm of Mangum, Brown & Butler until “ shortly before ” Mangum instituted his proceedings for dissolution and administration. The bill in this cause was exhibited in August, 1886, more than five months after the appointment of the receiver in the proceedings instituted by Mangum.

The complainant stated in his bill that by reason of the proceedings by Mangum, and the administration of the firm assets by the Chancery court, he could not offer to restore the defendant to the position he had occupied before the contract was made, but that in fact the property had been applied as the rights of the other partners required, and as was contemplated by the contract between the complainant and defendant.

The grounds of demurrer are :

1. That since the status quo cannot be restored, a rescission cannot be decreed, but that complainant must resort to an action at law for the deceit practised upon him.

2. That complainant having failed to rescind presently upon the discovery of the fraud ratified and affirmed the contract.

3. That complainant having failed to promptly notify the defendant of the proceedings by Mangum, and by permitting the property to be administered in a suit to which he was a party, affirmed the contract.

4. That complainant having access to the books of the firm and the opportunity of discovering the fraud, was guilty of negligence and laches in not having pursued his inquiries within a short time after the sale, and must be treated as having known of the fraud at the time when by diligence he might have discovered it, and that by remaining in possession after that time he affirmed the contract.

It will be noticed that the objections to the relief asked resolve themselves into two classes: (1.) That there can be no rescission because the status quo cannot be restored, and (2.) that the conduct of the complainant, after he knew or should have known of the fraud, is in law a ratification of the contract.

In decisions in actions at law arising from attempted rescissions of contracts for the sale or exchange of personal property, the language of the courts is almost uniform in declaring that the defrauded party, in order to maintain his suit, must have restored or tendered to restore whatever was received by him under the contract, because of the principle that the contract must be rescinded in toto if at all, the plaintiff not being permitted to retain a benefit under an indivisible contract which he repudiates. But even in actions at law there are exceptions to the rule. If the thing received by the defrauded party be of no value, (Fitz v. Bynum, 55 Cal., 459), or if by reason of the act of the fraudulent party a return be rendered impossible, ( Masson v. Bovet, 1 Denio., 69, 43 Am. Dec. and Notes; Hammond v. Pennock, 61 N. Y., 145), a return or tender is unnecessary.

So, also, where by natural causes or reasonable use the value of the property is diminished, and perhaps where it is necessarily destroyed in discovering the fraud, the fraudulent party must receive it in its depreciated condition. Baker v. Lever, 67 N. Y., 304; Gatling v. Newell, 9 Ind. (Tanner), 574.

And, if the bona fide buyer has expended work, money or material in the improvement of the property before discovering the fraud, he may restore the property and recover for the work and labor, money or material put upon it. Farris v. Ware, 60 Me., 482.

In the two latter classes of cases there is a restitution of the thing itself to the frandulent seller, but the status quo is not restored ; for in the one case he receives the property back less valuable than it was, and in the other, he takes it improved in value; but possibly improved in a manner or to an extent he would not have desired, but he is nevertheless chargeable with the value of improvement.

In many of the cases for rescission in equity language is used from which it might be inferred that precisely the same principles govern in suits in equity that are applied to determine the right of the party to sue at law. In actions, whether at law or equity, .usually both of the questions presented by this record are involved, viz.: whether there had been a restoration of the status quo, and whether there has been ratification by the plaintiff after knowledge of the fraud. It is evident that ratification goes to the very root of, the controversy, and if that be shown, whether in a court of law or of equity, the plaintiff must fail. It is therefore true that in investigating and determining that question, the rule should be the same in equity as in law. But there is this marked distinction between suits at law for the recovery of the consideration paid, after rescission by plaintiff, and bills in equity for rescission. The plaintiff at law must have the legal title to the thing sued for, if it be a chattel, or a legal right to the sum demanded, at the time of the institution of his suit. If he has parted with his property by reason of the fraud of the buyer, or if, being buyer, he had parted with his money by reason of the fraud of the seller, the legal title or right has passed out of him and into the other party. The contract is not void, but voidable only, and it must be avoided to re-invest him with his legal title or right to sue. Since the law permits him to re-acquire this legal right, by his own act, it puts upon him the necessity of restitution of the thing received by him as a condition of the exercise of the right to avoid. the contract. From necessity, the law knows nothing of compensation, but requires restoration of the thing received, for to permit the plaintiff to determine what would be just compensation would be to make him judge in his own case.

But in equity the complainant does not necessarily rescind and sue; he may sue for rescission. He is required to restore the consideration, not however as a condition of acquiring the right to sue, but because of the equitable maxim that he who seeks equity must do equity. Mr. Pomeroy, thus states the rule: “ In administering these remedies, pecuniary as well as equitable, the fundamental theory upon which equity acts is that of restoration, of restoring to the defrauded party primarily, and the fraudulent party as a necessary incident to the positions they occupied before the fraud was committed, assuming that the transaction ought not to have taken place, the court proceeds as though it had not taken place, and returns the parties to that situation. Even in such cases the court applies the maxim, he who seeks equity must do equity, and will thus secure to the wrong-doer, in awarding its relief, whatever is justly and equitably is due.” 2 Pom. Eq., Sec. 910.

In Neblett v. McFarland, 92 U. S., it is said: “ The court proceeds on the principle that, as the transaction ought never to have taken place, the parties are to be placed as far as possible in the situation in which they would have stood if there had never been any such transaction.”

Other writers upon equity jurisprudence deduce the right of the defendant to have restoration of his property from the maxim of equity that imposes doing equity upon the complain, ant as a condition upon which he secures relief.

Adams’ Equity, 191; Story’s Eq. Jur., Sect. 693.

Where the complainant has a plain and adequate remedy at law, and the condition of'the parties has been so radically changed that it is difficult to put the defendant into as good position as before the sale, and the complainant has had substantially the benefits contracted for, the misrepresentation being as to a part only of the subject-matter, for which recovery of damages would be full relief, many cases may be found in which the court of equity has declined to interfere. But an examination of the cases discloses the fact that the most vigorous announcement of the rule, requiring the restoration of the status quo, is to be found in dicta, or in cases in which there has been ratification after discovery of the fraud.

In Pintard v. Martin, 1 S. & M. Ch., 126, and Johnson v. Jones, 13 S. & M., 580, relief was denied upon the ground that the complainants had ratified after knowledge of the fraud. What was said upon the other branch of the case seems to have been uncalled for, and to have been only incidentally remarked. The annotator of Adams’ Equity cites, in addition to these cases, the following other decisions. Garland v. Bowling, Hemg., 710; Coppedge v. Threadgill, 3 Sneed, 577 ; Skinner v. White, 17 John., 357 ; Clay v. Turner, 3 Bibb.

(It is curious to note how far they fall below supporting the proposition they are cited to sustain).

In Garland v. Bowling, the court held, first, that the evidence failed „to support the allegation of fraud, and, therefore, the complainant could not recover; but it also appeared that the complainant did not seek to rescind the contract. What he attempted to do was to enjoin a judgment at law recovered for the price of the property sold (slaves), and to retain the slaves Coppedge v. Threadgill was a case in which a sale of land was set aside ; but the court had neglected to require the complainant, a married woman, to restore the cash she had received. The Supreme Court held that her coverture did not relieve her of the obligation to refund, and reversed the cause, that a decree might be entered to that effect. Skinner v. White, 17 Johns., was a case in which there had been a rescission by the act of both parties, and the only question was as to the extent of the liability of one of the parties to the contract. In Clay v. Turner, 3 Bibb., the court refused either to specifically enforce a contract at the suit of one of the parties, or to rescind it at the suit of the other. On the subject of rescission, the court said that the matter complained of was not material under the terms of the contract; and, besides, that the complainant had speculated upon the chances of getting a paying bargain through a series of years, and sought relief, not because'of the want of capacity in the other party to convey, but because he found, after a long time, it would be better to rescind. A review of these cases illustrates how unreliable the work of the average annotator is often found to be.

Let us now refer to cases in which the specific question has been raised and passed on by courts of equity.

In Barker v. Walters, 8 Beav., 92, and Jervis v. Berridge, Lr., 8 Ch. Appeal Cases, demurrers had been interposed to bills seeking rescission, on the ground that no offer was made to restore the status quo.. It was held that it was unnecessary to do so, since the court, on final hearing, would require the complainant to do equity. In the latter case, Lord Selborne said : “IJpon principle there appears to be no good reason why a plaintiff in equity, suing upon equitable grounds, should be required, on the face of his bill, to submit to those terms which the court at the hearing may think it right to impose as the price of any relief to which he may be entitled.”

In Savery v. King, 5 House of Lords, 627, the party seeking rescission had disposed of the part of the property received by him (a policy of insurance), and on this branch of the case Lord Cranorth said: “ The one remaining question is as to the terms on which relief ought to be given. With respect to the mortgage it is plain that Bichard must, as far as possible, put Savery in the condition in which he must have been if no such mortgage had been made, and if his security had rested solely on the life of his father, and the several policies of insurance. One of the eleven polices of insurance was sold by Bichard in January, 1846; it is impossible therefore as to that policy to restore Mr. Savery exactly to the position in which he stood in 1835; but he cannot be heard to complain of this, for by the arrangement he had made or concurred in, he had led Bichard to suppose that all the polices had become his own, and that he might deal with them as he thought ñt; indeed he, himself, suggested a sale of one or more of them as a step which it might be advisable for Richard to take. All, therefore, which can be done, as to the policy which was sold, is to charge Richard in account with Mr. Savery with the sum which it produced, together with interest from the time when it was sold.”

In Warner v. Daniels, 1 Woodb. & M., the court directed in decreeing a rescission that the complanant should re-deliver to the defendant the property received (certain shares in an incorporated company), but that if it should appear that he had disposed of any of the shares then that he should restore the value thereof with interest.

In Myrick v. Jacks, 33 Ark., 425, the court said: “ It is no objection that complainant cannot put Jacks, entirely in statu quo on rescission. The change in condition of the property was brought about by persuasi n to accomplish a transaction in which Jacks was a party, and before the fraud was discovered, and by the action of complainant in a matter she did not understand. When courts cannot place parties wholly in statu quo, they are not thereby precluded from granting relief against fraud. They may proceed to do so as nearly as possible, and make compensation.” See, also, Gatling v. Newell, 9 Ind., 574 ; Crosland v. Hall, 33 N. J. Eq., 111.

In Ogden v. Thornton, 30 N. J. Eq., 573, the court finding itself unable to rescind the contract because the fraud occurred after the conveyance remanded the cause in order that the bill might be amended, so as to enforce a lien upon the property for the price at which it had been valued ; the defendant by his fraud having prevented the complainant from receiving what he .contracted she should have.

Upon principal and authority we think it immaterial that the status quo cannot be literally restored. The defendant by the grossest fraud seduced complainant to exchange his farm for mere moonshine. What he professed to give was in fact of no value to himself or to any one else; he simply placed complainant in a position to be rendered insolvent j for by his purchase he secured nothing, except what should remain of the partnership assets after payment of debts, and the firm being hoplessly insolvent this right was of no value. It may also be noted that from the very moment of the execution of the contract it was impossible for the defendant to be placed in statu quo, either by the act of complainant, or by both his act and the consent of the defendant. The defendant had been a member of a partnership, and his act in selling his interest therein was a dissolution of the ñrm; he could not again become a member without the assent of Mangum and Butler, over whom neither the defendant nor complainant had control. By his own act therefrom a restoration of the statu quo Was made impossible.

Nor do we think the record discloses ratification by inaction.

The complainant owed the defendant no duty to investigate the condition of the firm; he had the right to rely upon the truth of the representations made by the defendant, and all that was required was that he should act when he discovered the fraud of which he was the victim.

In Rawlins v. Wickham, 3 De. G. & Jones, 304, the complainant had been inveigled into an insolvent come partnership by false representations of its condition, and acted as a partner for five years, and then having discovered the fraud exhibited his bill for rescission and for an account, and his right to rescind was upheld. See, also, Smith v. Smith, 30 Vt., 139, which was an action at law, successfully defended by the party defrauded, founded on facts strikingly similar to those involved here. It is held both at law and in equity that delay alone, before the discovery of the fraud, will not bar the right to rescind.

Notes to Bryant v. Isburgh, 74 Am. Dec., 655.

The dissolution of the new firm of Mangum, Butler & Co., by the appointment of a receiver in a suit to which the defendant was not a party does not, we think, preclude complainant of his right to rescind. It was not at his instance that the proceeding was instituted, and at last it is but the subjecting of defendant’s property for the payment of his own debts.

The demurrer was properly overruled and the decree is affirmed. '