Doyle v. Union Bank & Trust Co. , 102 Mont. 563 ( 1936 )

The first cause of action herein is upon the theory of fraud and deceit, and the second cause of action is upon the theory that the alleged false representations constituted warranties. According to some authorities, the measure of damages upon each of these causes of action is the same. This court, however, in the case of Healy v. Ginoff, 69 Mont. 116, 123, 220 P. 539, has decided that the measure of damages for fraud, in inducing the purchase of property is "the difference between the actual value of the property at the date of the sale and the contract price." This rule is supported by a large number of authorities. (12 R.C.L. 453; see, also, extended note, 57 A.L.R. 1142.) The measure of damages for a breach of warranty in the sale of personal property is declared by section 8679, Revised Codes, as follows: "The detriment caused by the breach of a warranty of the quality of personal property is deemed to be the excess, if any, of the value which the property would have had at the time to which the warranty referred, if it had been complied with, over its actual value at that time." (See, also,Advance-Rumely Thresher Co. v. Terpening, 58 Mont. 507, 514,193 P. 752; Rickards v. Aultman Taylor M. Co., 64 Mont. 394,402, 210 P. 82.)

By virtue of the rule of damages for a breach of warranty, it devolved upon the plaintiff to show what the value of this security would have been if the representations made had been true, and her recovery would be limited to the difference between such value and what the security was actually worth at that time. By virtue of the rule of damages for false representations or fraud in the sale of personal property, it devolved upon the plaintiff to show what she paid for the debenture and what it was actually worth at the time, and her recovery would be limited to the difference between the purchase price and the actual value.

As the plaintiff made no proof whatever of the value which the debenture would have had if it had been as represented or warranted, and the evidence is overwhelming and uncontradicted that the debenture was worth the price paid therefor, according to both the market and actual value, the verdict is wholly unsupported by the evidence. (See Richards v. Aultman TaylorM. Co., supra; Dyer v. Hunter, 133 Cal. App. 267,23 P.2d 1049 (an action to recover damages for an alleged fraudulent sale of corporate stock); Davidter v. Ash, 264 Mich. 353,249 N.W. 886 (an action to recover damages for fraud in the sale of securities); Hull v. Geary, 71 W. Va. 490, 76 S.E. 960.)

If we assume, as the measure of damages, the difference between what the plaintiff paid for this debenture or what it was actually worth at that time and what it was worth at the time of the trial, there is no evidence upon which the jury could base a verdict without resorting to guessing and speculation, which is not permissible, as the jury were instructed by the court. It is conceded that the proof herein was ample to show that false representations and warranties were made to induce the sale to Mrs. Doyle. The jury has found the issues in favor of Mrs. Doyle, and we submit their findings are conclusive. (Wallace v.Wallace, 85 Mont. 492, 501, 279 P. 374, 66 A.L.R. 587.) The sole alleged error relied upon for reversal is that there is no evidence to show that plaintiff has suffered damage.

In their argument counsel for appellant make some suggestion that a different rule of law is applicable in a case of this character involving a breach of warranty than in a like case based upon fraud. However, in Hogan v. Shuart, 11 Mont. 498,511, 28 P. 969, the court quotes with approval from Sedgwick on Damages as follows:

"``The measure of damages in an action upon a warranty, and for fraud in the sale of personal property, are the same. In either case they are determined by the difference in value between the article sold, and what it should be according to the warranty or representation'; and this has usually been stated as a general rule."

We submit the law cannot require the impossible. (Moffett v.Bozeman Canning Co., 95 Mont. 347, 358, 26 P.2d 973.) It can hardly be argued that the plaintiff was not damaged. If the bond had been secured by property worth four or five times the outstanding obligations, consisting of all of the utilities in Chicago as was represented to Mrs. Doyle, and if it was just as good as a $1,000 bill, as testified to, common sense dictates that the debenture would now be worth $1,000. The debenture was not so secured and is worthless.

The case of Rickards v. Aultman Taylor M. Co., cited by appellant, we submit is not applicable. In that case there was no proof submitted as to the value of the engine there involved.Dyer v. Hunter, also cited, is not applicable in so far as in that case the complaint did not allege the actual value of the stock at the time of the sale, while here the complaint alleges the debenture was in fact valueless at the time of the sale and we submit is not in accord with the better weight of authority in so far as it holds that evidence that the stock subsequently became valueless is of no evidentiary value in determining the value at the time of the sale. In this connection, of course, it must be remembered that that case is dealing with stocks which, of course, are not secured, while in this case we are considering a debenture which was represented to be secured by a mortgage, and which was purchased for investment and not for resale. The only other case cited, Davidter v. Ash, is a very brief case giving no reasons or authorities for the decision.

The purchase price is sufficient evidence of the value the debenture would have had if the representations had been true. Mrs. Doyle surrendered a secured obligation for one that she was told was secured. The sale was induced by the defendant's false representations and warranties. As the court said in Cramer v.Overfield, 115 Kan. 580, 223 P. 1100: "The fact of a certain sum having been paid for property, the sale of which is brought about by false representations, is at least some evidence that it would have been worth that amount if the representations had been true." This is, of course, only logical reasoning. The parties agreed, respectively, to sell and to buy a secured mortgage bond and fixed the value at $910. This should be evidence that if it had been as represented it would have had an actual value of $910.

In 12 Ruling Case Law, 453, the rule as to the measure of damages for fraud is stated thus: "The price paid for the property should be taken as strong but not conclusive evidence of what its value would have been if as represented." (See, also,Reeser v. Hammond, 122 Kan. 695, 253 P. 233, 235; Divani v. Donovan, 214 Cal. 447, 6 P.2d 247, 250.) That the purchase price is prima facie the value of the property if it had been as warranted, has also been held in cases based upon breach of warranty. (Burgess v. Felix, 42 Okla. 193, 140 P. 1180,1181; Denver Horse Importing Co. v. Schafer, 58 Colo. 376,147 P. 367, 370.)

There is sufficient evidence that the debenture was worthless and had no actual value when sold to the plaintiff. As to the true value at the time of the sale, the jury had evidence before it to support its findings that at the time of the sale the debenture was worthless. Subsequent developments which have disclosed that this supposedly secured obligation is not secured by a mortgage on any property whatsoever and was worth $1.75 at the time of the trial according to counsel's own admission in open court, we submit, was sufficient to take this case to the jury. (Whiting v. Price, 172 Mass. 240, 51 N.E. 1084, 1085, 70 Am. St. Rep. 262; Cramer v. Overfield, 115 Kan. 580,223 P. 1100; Hotaling v. A.B. Leach Co., 247 N.Y. 84,159 N.E. 870, 57 A.L.R. 1138; Hindman v. First Nat. Bank, (C.C.A.) 112 Fed. 931, 57 L.R.A. 108.) In 12 R.C.L. 454, the rule is stated: "In the case of a sale of corporate stock it has been held that its value at the time of the sale is to be determined in the light of subsequent events in the history of the company, and not by the market price, since the latter may not be any real indication of its instrinsic value."

Upon the authority of the cases which are cited herein, it is submitted that the price Mrs. Doyle paid for the debenture in question was prima facie evidence of the value the debenture would have had if it had been secured by a mortgage as it was represented to be; that subsequent developments have shown the debenture, which was purchased for investment and not for resale, to be worthless for that purpose, and that the jury were authorized, under the evidence, to assess Mrs. Doyle's damage at the amount of $910 which she has actually lost.

It is submitted that the rule adopted by Massachusetts, Kansas, New York and the Circuit Court of Appeals for the Sixth Circuit, that the true value at the time of the sale may be determined in the light of subsequent events which have happened down to the time of the inquiry is the reasonable and logical rule. Here the subsequent events have shown that a debenture, represented to be as good as a $1,000 bill and to be secured by a mortgage on property of a value four or five times the amount of outstanding obligations, now has a market value of $1.75 for $1,000 of par value. In the ordinary course of business, no one would require greater or more positive proof of damages, and we respectfully submit that the plaintiff was not obliged to prove more. As this court said in Brown v. Homestake ExplorationCo., 98 Mont. 305, 337, 338: "The general rule is that, where the cause and existence of damages have been established with requisite certainty, recovery will not be denied because such damages are difficult of ascertainment. * * * A person who has violated his contract will not be permitted to reap the advantage from his own wrong by insisting upon proof which, by reason of his breach, cannot be furnished. * * * A party who has broken his contract will not be permitted to escape liability because of the lack of a perfect measure of damages caused by his breach. * * * A reasonable basis for computation and the best evidence obtainable under the circumstances and which will enable the jury to arrive at a reasonably close estimate of the loss is sufficient." This was an action to recover damages which the plaintiff alleges she suffered by reason of the purchase of a $1,000 debenture bond from the defendant early in the month of November, 1929.

The complaint was in two counts. The first count was on the theory of fraud and deceit; the second was on the theory of breach of warranty in the sale of personal property. The facts alleged in the two counts were identical, with the exception of such allegations as were necessary to develop the particular theory of liability therein alleged. The answer denied all of the allegations of the complaint, aside from those which were introductory in character.

The cause was tried before the court sitting with a jury. At the close of the evidence defendant moved for a directed verdict on the ground, in effect, that plaintiff had failed to prove any damage. The motion was denied. The cause was submitted to the jury and a verdict was returned for the sum of $910, the price paid by plaintiff for the bond. A judgment was entered on the verdict, and the appeal is from the judgment. By appropriate specifications of error defendant seeks a review of the ruling of the trial court denying its motion for a directed verdict.

Early in the month of November, 1929, plaintiff purchased from the defendant a certain Insull Utilities Investment Company debenture, Series A, of a par value of $1,000, bearing interest at 5 per cent., payable semi-annually on February 1st and August 1st, dated January 1, 1929, and due January 1, 1949, for the sum of $910. Her allegations as to the false and fraudulent representations and warranties were as follows: "That the aforesaid security was a secured bond; that it was just as good as a $1,000 bill; that the holder thereof had a first mortgage on the property of all of the utility and power companies in Chicago, Illinois; that the security thereof was the same as if the holder thereof had a first mortgage upon all of the property of the Montana Power Company; that said bond was secured by property of a value of four or five times the value of the bonds outstanding; that said debenture was a safe investment."

Evidence was produced in support of these allegations on behalf of the plaintiff, and on behalf of the defendant denying the truth of the same. It is conceded that the verdict of the jury is conclusive on the question of the fraudulent representations. It was stipulated on the trial that the Insull Utilities Investments, Inc., was incorporated in the state of Illinois to carry on an investment business and to acquire, hold, sell and underwrite securities of all kinds; that the debenture was not at any time secured by a mortgage; that the company covenanted not to mortgage or pledge any of its assets without equally and ratably securing this debenture with other obligations secured, or to be secured, by such mortgage or pledge, except that the company could mortgage or pledge its assets for the purpose of securing loans in the usual course of business for a period not exceeding one year. The corporation went into receivership in the federal court in the state of Illinois in April, 1932, and failed to pay interest maturing on August 1, 1932. The debenture was in default as to subsequent payments of interest. The undisputed evidence in the record is that the debenture, at the time plaintiff purchased it, had a market value equivalent to the amount she paid for it, and continued to have such market value for some time after its purchase. It was testified that at the time of the trial the market value of this debenture was from $17.50 to $20, and that on January 1, 1929, the company had total assets in excess of $29,000,000 and outstanding debentures to the amount of $6,000,000. The next statement published by the company as of December 31, 1929, showed total assets of $161,000,000, and liabilities of $55,000,000. It further appeared in the testimony that the assets and liabilities in the month of November, 1929, were approximately the same as of the date of December 31, 1929. The issue of the debentures of which the one involved in this case was a part, amounted to $6,000,000 originally, but at the time of the purchase the amount outstanding was $2,489,000. The gross earnings of the company, as reported for the year 1929, were $12,387,974, and the actual interest payments were $769,228. Reports disclose that in 1932 the total assets of the company were $27,000,000, and the total liabilities $148,000,000.

It was testified by persons who qualified as experts that in the month of November, 1929, at the time the bond was sold to plaintiff in this case, in their opinion the price paid was the fair value for it at that time. It appears from the record that plaintiff purchased the bond for investment and not for purposes of speculation, and that she did not discover the falsity of the representations until some time in the year 1934.

Defendant argues that the proof of plaintiff is lacking in two particulars, namely, that she failed to prove the actual value of the debenture at the time of the sale, and likewise the value which the debenture would have had if it had been as represented.

Under some authorities, the measure of damages under each of[1] the causes of action set forth in the complaint is the same. This court, in the case of Healy v. Ginoff, 69 Mont. 116,220 P. 539, said that the measure of damages for fraud inducing the purchase of property is "the difference between the actual value of the property at the date of sale and the contract price." In the case of Rickards v. Aultman Taylor MachineryCo., 64 Mont. 394, 210 P. 82, it was said that the measure of damages for breach of a warranty in the sale of personal property was the difference between the value of the thing sold if it had been as warranted, and its actual value at the time of the sale. The trial court instructed the jury that the measure of damages was the difference between the value of the debenture which plaintiff obtained and the value that debenture would have been had it been as represented.

Plaintiff contends that the evidence was sufficient to go to the jury, in that the market value at the time of the purchase was some evidence of what the value of the debenture would have been had it been as represented; that since she bought the debenture for purposes of investment and not speculation, the jury was entitled to consider subsequent developments, and that these developments sufficiently proved that the debenture was worthless at the time of its purchase.

The price paid for property is generally held to be strong,[2] but not conclusive, evidence of what the value of the property would have been if as represented. (12 R.C.L. 453;Reeser v. Hammond, 122 Kan. 695, 253 P. 233; Divani v.Donovan, 214 Cal. 447, 6 P.2d 247.) We think that the evidence of the market value was sufficient to take the case to the jury upon the question of what the value would have been if the debenture had been as represented.

The decided cases are in conflict on the question of what is the measure of damages in cases of fraud and deceit in the case of corporate stocks and bonds. Many of them adhere to the rule as announced by this court in Healy v. Ginoff, supra; many others, as applied to this particular type of case, have adopted the rule as announced in Rickards v. Aultman TaylorMachinery Co., supra. They are collected in the note to 57 A.L.R. 1142. It will be noted that under either rule the formula for the computation of the damages uses an identical subtrahend, namely, the actual value of the thing sold at the time of the sale. We direct our attention to this situation, as we shall presently cite cases from jurisdictions adopting either one or the other of these rules on the question of the sufficiency of the proof to establish the actual value of the debenture at the time of the sale.

Some courts hold that the market value of the stock at or about the time of sale is evidence bearing on the question of its real value, although not necessarily conclusive. (Warner v.Benjamin, 89 Wis. 290, 62 N.W. 179, and Ford v. H.W.Dubiskie Co., 105 Conn. 572, 136 A. 560.) If we adopt this rule and consider only the testimony as to the market value, plaintiff suffered no damage, for it was undisputed that she purchased the debenture at the market value.

Plaintiff contends that in cases such as is here presented,[3] where a bond, debenture or corporate stock is bought for purposes of investment and not speculation, the actual value of the corporate security controls the market value, and that the jury were at liberty to take subsequent events into account in arriving at the actual value of the debenture. Thus far many decided cases support this contention, among which are the following: Whiting v. Price, 172 Mass. 240, 51 N.E. 1084,1085, 70 Am. St. Rep. 262; Hindman v. First National Bank, (C.C.A.) 112 Fed. 931, 57 L.R.A. 108; Morrow v. Franklin,289 Mo. 549, 233 S.W. 224; Paul v. Cameron, 127 Neb. 510,256 N.W. 11; Hotaling v. A.B. Leach Co., 247 N.Y. 84,159 N.E. 870, 871, 57 A.L.R. 1136; Cramer v. Overfield, 115 Kan. 580,223 P. 1100; Davis v. Coshnear, 129 Me. 334, 151 A. 725. The reason for this rule is that, as said in the case ofWhiting v. Price, supra, "the market value of the bond at the time of the sale may have been illusory, because the public also may have been deceived." To the same effect is the case ofHindman v. First National Bank, supra, and Shwab v.Walters, 147 Tenn. 638, 251 S.W. 42. An additional reason is that of the manipulation of stock and bond transactions on the market which sometimes affect the market price. (Otis Co. v.Grimes, 97 Colo. 219, 48 P.2d 788.) If the market value at the time of the sale is an unsafe guide as to the actual value of corporate security, it must logically follow that the market value some three years or more later is likewise no evidence of the actual value at the time of the sale. If an optomistic market value is unsound, then a depressed market value is no better.

The right of the jury to consider the subsequent developments in arriving at the actual value of the thing sold was held to be proper in the cases cited, supra, but in none of them, with possibly one exception, was the question of the sufficiency of the evidence to go to the jury on the question of the actual value of the property solely upon subsequent developments, standing alone, considered by the courts. In theWhiting v. Price and Hindman v. First National BankCases, supra, the question considered was the propriety of instructions informing the jury that, in determining the actual value of the thing sold at the time of the sale, they might take into account what had happened since the purchase. In the cases of Morrow v. Franklin and Paul v. Cameron, supra, it was held that the testimony of subsequent developments was admissible for the consideration of the jury. In Cramer v. Overfield andDavis v. Coshnear, supra, other evidence as to the actual value was before the jury for consideration in addition to that of subsequent developments. In Hotaling v. A.B. Leach Co., cited supra, it was said: "The defendants should not be held liable for any part of plaintiff's loss caused by subsequent events not connected with such fraud." After this statement, the court said: "The loss proximately caused by the defendant's fraud is the difference between the price he paid and the value of what he received when put to the use contemplated by the parties. In this case that value must be determined in the light of subsequent events. As long as the fraud continued to operate and to induce the continued holding of the bond, all loss flowing naturally from that fraud may be regarded as its proximate result." However, the facts in that case are distinguishable from those under consideration here. There the plaintiff had purchased a corporate bond secured by a mortgage. The mortgage had been foreclosed, the property sold and every conceivable asset of the corporation to which the plaintiff might have looked for payment of the bond had been exhausted. In the light of those facts and circumstances, the New York court made the pronouncement quoted supra. Here, so far as the record is concerned, plaintiff has filed her claim with the receiver; as to what she will ultimately realize is pure speculation. The only proof of subsequent developments relates to the following facts: The appointment of a receiver in 1932, the default in the payment of interest in August, 1932, the unexplained decline in the assets, and the increase in the liabilities of the company in its statement of 1932, as compared to that of December 31, 1929, and the testimony as to market value heretofore discussed.

We have found no case which holds directly that proof of subsequent developments, standing alone, is sufficient to prove the actual value of the thing sold at the time of the sale, unless it is the New York case which we have already discussed.

In the case of Davidter v. Ash, 264 Mich. 353,249 N.W. 866, the court in its opinion said: "Plaintiff has appealed from judgment on verdict directed in an action for damages for fraud in the sale of securities. The measure of damages in such case is the difference at time of sale in value of the securities as they were represented and as they were. On this matter plaintiff was put to proof and failed; the only evidence worthy of note being that some months later a receiver was appointed for the corporation issuing the securities. This was insufficient to support an assessment of damages, as the trial court correctly held."

In Dyer v. Hunter, 133 Cal. App. 267, 23 P.2d 1049,1050, the court said: "It follows that there were no pleadings, evidence, or findings before the trial court upon which to base a finding or conclusion that any damage had been suffered by plaintiff at the time of her purchase of the stock. Nor will the evidence that the stock subsequently became valueless supply this defect. It is elemental that proof of damage is necessary to establish a cause of action for fraud."

In the case of Heidegger v. Burg, 137 Minn. 53,162 N.W. 889, 890, it is written: "But there was another issue in the case, that of whether plaintiff was damaged, and, if so, to what extent. This issue necessarily involved an inquiry as to the value of the stock at the time of the trade. It fairly enough appeared that some fifteen months afterwards the Furniture Company went out of business, and the Peck Company went into liquidation, and that the stock of both corporations was then worth less than par, if it was worth anything, but we search the record in vain for any competent evidence that the stock was not worth par at the time it was sold to plaintiff, or, if not, how much less than par it was worth. Plaintiff failed to compel the production of the books of the corporations, and the evidence of the witnesses called to testify to the value of assets, the liabilities and the value of the stock, if competent at all, was so wanting in probative force and so unsatisfactory that we cannot permit a verdict based on such testimony to stand. We need hardly say that the condition of the corporations a year and more after the transaction, not shown to have existed at that time, or to be due to causes then existing, was not evidence that had any tendency to prove the value of the stock at the time of the transaction." In fact, it is generally held that proof of subsequent events or developments tending to establish that a corporate stock or bond is valueless is insufficient to prove that the thing sold was worthless at the time of the previous sale, particularly where the corporation at the time of the sale had property. (Kinnear v. Prows, 81 Utah, 135,16 P.2d 1094; Kuehl v. Parmenter, 195 Iowa, 497, 192 N.W. 429; NorthAmerican etc. Assn. v. Phillips, 94 Colo. 554,31 P.2d 492; Morrell v. Wiley, 119 Conn. 578, 178 A. 121; Duffy v. McKenna, 82 N.J.L. 62, 81 A. 1101; Gunderson v.Havana-Clyde Min. Co., 22 N.D. 329, 133 N.W. 554.)

As we view the situation here, there was no proof before the court as to what the actual value of the debenture might have been at the time of the sale.

It is argued on behalf of the plaintiff that to compel her to[4, 5] offer some proof as to the actual value of the thing sold at the time of the sale is tantamount to denying to her the right of recovery. The question of the actual value of the debenture was something on which expert witnesses could have expressed an opinion. However, plaintiff's remedy by way of an action for damages was not the only remedy available to plaintiff, if she was defrauded. On discovering the alleged fraud, by offering to restore the property purchased, she would have been entitled, if she could have maintained her allegations as to fraud, to a return of the consideration for the purchase, without any proof as to the actual value of the debenture at the time of the sale; however, she elected to retain the debenture and sue for damages.

No evidence being present in the record as to the actual value of the debenture at the time of the sale, the trial court was in error in denying defendant's motion for a directed verdict. The judgment is reversed and the cause remanded to the district court with direction to enter a judgment of dismissal.

ASSOCIATE JUSTICES MATTHEWS, STEWART and MORRIS concur.