Keen v. Executors of James

The facts in this case proved by direct evidence are: That William James, at his death, owned one hundred shares of the capital stock of the Mechanics National Bank of Newark; that he died in January, 1881, leaving a will, in which he named his widow, Elizabeth James, George F. Tuttle and Oscar F. Baldwin as his executors, who, in February, 1881, took out letters testamentary upon his estate; that then, and for many years before, and afterwards, till its close on October 31st, 1881, Baldwin was cashier of the bank, and during a period of about ten years had been fraudulently abstracting its funds to such an extent that before the death of Mr. James the whole capital of the bank was wasted, and an assessment upon its stockholders to the par value of their stock would be required under the United States statute, for the payment of its debts; that during this period, Baldwin, as cashier, had, every two or three months, sworn to reports of the condition of the bank, made to the comptroller under U.S. Rev. Stat. § 5211, in which were willfully false statements respecting the credits due the bank, and showing in 1881 assets more than $1,600,000 beyond what the bank really had; that these reports, as made, were published according to law in a newspaper extensively circulated in the city of Newark; that Baldwin had also, as cashier, aided in declaring semi-annual dividends upon the bank stock, which were apparently justified by the false statements of his report, but were in fact, as he knew, wholly fictitious; that by means of these published reports and dividends, a high market value had been given to the stock, so that it sold at a premium of about eighty-five per cent.; that the complainant was a business man in Newark, and, in the ordinary course of affairs, became cognizant of these reports and dividends, and, believing them to be true and genuine, in August, 1881, offered Baldwin $930 for ten shares of the stock ($50 a share being par), and thereupon Baldwin sold and transferred to him, at that price, ten shares, which he had for sale, as an executor of Mr. James, and turned the price in to the estate.

An effort was made, by counsel for the appellants, to lead the court to the opinion that Baldwin had, individually, sold the stock to the complainant, and then had purchased it from himself as executor; but we think the circumstances clearly show a sale to the complainant by Baldwin as executor.

An inference which we consider reasonably drawn from these facts is, that Baldwin perceived, when the complainant made his offer, that the latter was relying on the reports and dividends before mentioned as being substantially true exponents of the financial condition of the bank. It is scarcely possible to think otherwise. A business man, about to invest in the stock of a bank, would be almost sure to recur to the dividends which the bank had been paying, and to the statements of its condition which, within common experience, are so frequently published in the current newspapers, for information as to the propriety of investing. No other means of forming a judgment as to the intrinsic value of the stock would be open to him. And if he should be influenced by the market price of the stock, in case there were one, still he would know that only represented in the main, the public estimate of the same data, and so would be relying upon their substantial accuracy. If, therefore, Baldwin adverted to the topic at all, he must have believed that the complainant, in making his purchase, was trusting in the truthfulness of these bases of opinion. And so great was the disparity between the price offered by the complainant and the real value of the stock, as Baldwin knew it, so enormous had been Baldwin's defalcations, which produced the disparity, that the deception under which the complainant was acting must have forced itself upon Baldwin's mind.

Upon these facts the question arising is, Whether the complainant, promptly claiming a rescission of the sale on November 19th, 1881, soon after he learned the real condition of the bank, had a right to rescind.

If the sale is to be regarded as having been induced by Baldwin's fraud, then the complainant's right of rescission is established by innumerable cases, and it would make no difference, with regard to this right, whether we consider Baldwin, the executor, as one of the owners of the stock, selling for himself and his joint owners, or as an agent selling for the estate which he and they represented. In either case, if the defrauded vendee can make restitution so as to put the vendors in the same condition with respect to the property sold as they were in at the time of the sale, he has the right to rescind. 1 Benj.on Sales, §§ 636, 674; 2 Wms. on Exrs. 946; 2 Pom. Eq. § 908 etseq.; Kennedy v. McKay, 14 Vr. 288.

Was, then, the sale, viewed from the judicial standpoint, induced by Baldwin's fraud?

There were no fraudulent representations made by Baldwin pending the negotiations, but these are not necessary to taint the contract — silence may be fraudulent.

Prof. Pomeroy, in his discriminating work on equity jurisprudence, very lucidly discusses the elements of fraud affecting contracts, and in treating of fraudulent concealments, lays down this proposition: "If either party to a transaction conceals some fact which is material, which is within his own knowledge, and which it is his duty to disclose, he is guilty of actual fraud." 2 Pom. Eq. § 901. This accords with the language of this court in Conover v. Wardell, 7 C.E. Gr. 492: "It is not every concealment, even of facts material to the interest of a party, which will entitle him to the interposition of a court of equity. The case must amount to a suppression of facts which one party, under the circumstances, is bound in conscience and duty to disclose to the other party, and in respect to which he cannot, innocently, be silent."

In the present transaction, no doubt Baldwin concealed facts which were within his own knowledge, and which were very material to the interest of the complainant; the only debatable topic is whether it was the duty of the former to disclose these facts.

The author just named reduces the instances in which there exists a duty of disclosure, to three classes, the first including those where there is a previous fiduciary relation between the parties, the third including transactions which are themselves essentially fiduciary, like contracts of insurance, and the second being defined as follows: "The second class embraces those instances in which * * * it appears that either one or each of the parties, in entering into the contract or other transaction, expressly reposes a trust and confidence in the other; or else, from the circumstances of the case, the nature of their dealings, or their position towards each other, such a trust and confidence in the particular case is necessarily implied. The nature of the transaction is not the test in this class — each case must depend upon its own circumstances. The trust and confidence, and the consequent duty to disclose, may expressly appear by the very language of the parties; or they may be necessarily implied from their acts and other circumstances."2 Pom. Eq. § 902.

Many cases might be cited illustrating this doctrine. Besides those mentioned in the note to the foregoing text, the following may be referred to: Martin v. Morgan, 1 Brod. B. 289; Bruce v. Ruler, 2 M. Ry. 3; Torrey v. Buck, 1 Gr. Ch. 366;Barwick v. English Joint Stock Bank, L.R. (2 Ex.) 259;Rawdon v. Blatchford, 1 Sandf. Ch. 344; Durell v. Haley, 1Paige 492.

In Martin v. Morgan, 1 Brod. B. 289, the defendants had a post-dated check, drawn by B. on the plaintiffs. Between the day it was drawn and its date they learned that B. had become insolvent, and knowing that he had no funds with the plaintiffs to meet the check, they, nevertheless, presented it, at maturity, to the plaintiffs for payment. The plaintiffs, supposing B. to be still in good credit and expecting to receive funds from him before the close of the day, paid the check. It was held that the plaintiffs were entitled to recover from the defendants the money paid, because the latter did not disclose what they had learned of B.'s insolvency, and purposely took advantage of the plaintiff's ignorance of that fact.

In Bruce v. Ruler, 2 M. Ry. 3, the defendant was a yearly tenant of the plaintiff, and wishing to quit the premises before the expiration of his term, proposed to the plaintiff another tenant whom he asked the plaintiff to accept in his stead. The defendant knew that the proposed tenant was insolvent, but did not disclose that fact to the plaintiff, and the latter accepted the new tenant. Held, that the defendant was guilty of a fraudulent concealment, because of which he remained answerable for the rent.

Brown v. Montgomery, 20 N.Y. 287, was a suit on a note given by the defendants to the plaintiffs for a post-dated check of F. sold by the plaintiffs to the defendants. After the giving of the check, and before its sale to the defendants, F., the drawer, failed. His failure was known to the plaintiffs when they sold the check, but they did not disclose the failure to the defendants, who bought in ignorance of it. On discovering it, the defendants offered to rescind the sale and tendered back the check, demanding their note. The court held that the plaintiffs ought to have communicated the fact of insolvency, and that they could not recover upon the note.

In Torrey v. Buck, 1 Gr. Ch. 366, the complainant had sold a house and lot to the defendant for $9,000, of which $5,100 had been paid in the stock of a corporation of which the defendant was cashier. In the negotiation the defendant had declined to express any opinion about the value of the stock. It was, in fact, worthless. On discovering this, the complainant offered to rescind, and filed his bill to set aside the conveyance on return of the consideration. The chancellor concluded that the defendant had known the stock to be valueless, and held that his omission to inform Torrey of the fact was a suppressio veri, which called for the abrogation of the sale.

In Barwick v. English Joint Stock Bank, L.R. (2 Ex.) 259, the defendant's manager gave the plaintiff a guaranty that if the plaintiff would sell D. some oats on credit, to enable D. to carry out a government contract, D.'s check to the plaintiff for the price should be paid out of the moneys received from the government in priority to any other payment except of D.'s debt to the defendant. This debt was such that it would absorb all the money to be received. The manager did not disclose this fact, and the plaintiff made no inquiries about it. The court held that if the manager knew that the guaranty would be unavailing, and intended to procure the government funds for his bank by keeping back from the plaintiff the state of D.'s account, the concealment was fraudulent.

None of the cases which I have found, however, seems to present such marked circumstances to show that one party reposed trust and confidence in the other, as does that before us. Here, it is as if the complainant, when making his offer, had said to Baldwin: "I know what declarations you have made public touching the facts on which depends the value of this stock. Your means of information were such that it is reasonable to believe those declarations indicated the truth. I have no other available means of ascertaining the bank's condition. I believe your declarations, and therefore offer you this price for your stock." Although these words were not spoken, yet we think they express the mental processes of the buyer, before making the offer, and the suggestions of the seller's own mind on receiving the offer. They indicate the ground on which the parties were consciously dealing, and therefore they form a proper basis for determining whether or not one was reposing confidence in the other. Here, then, the seller sees that the buyer is trusting him, and must trust him, and is being deceived by falsehoods which he has himself set afloat, and that if he does not remove the deception, he or those whom he represents can make a profit out of it. Certainly, in this condition of things, the seller was under a duty of disclosure; he could not, innocently, be silent; silence was equivalent, in conscience, to reassertion. For Baldwin to strike a bargain with a buyer so deceived was palpably dishonest, a willful taking advantage of his own wrong, a fraud against which a court of equity must afford relief.

Nor is it of moment that Baldwin's fraudulent acts prior to the sale had been performed by him in his office of cashier, and not in his character as executor of Mr. James. Those acts do not constitute the fraud which vitiated the contract. That was perpetrated in the sale itself by Baldwin as executor, and consisted in bargaining with the complainant, under the circumstances mentioned, without disclosing the truth. The doctrine that notice to an agent, in order to be binding upon the principal, must come to the agent in the course of his employment, is not applicable to a case of actual fraud. The fraud of the agent affects the principal for the reason that every principal impliedly warrants the integrity of his agent, at least so far as to prevent his retaining the fruits of the fraud, and if the agent, in transacting his employer's business, has unlawfully effectuated a fraudulent design, it is unimportant whence the elements of his corrupt purpose were derived.

We think it clear, then, that the complainant was entitled to rescind the sale.

On November 16th, 1881, an assessment equal to the par value of their shares was levied on the shareholders of this bank, in order to satisfy its debts, agreeably to U.S. Rev. Stat. § 5151. By reason thereof, the complainant, as holder of the shares bought from the defendants, was compelled to pay, and in December, 1881, and January, 1882, did pay, the sum of $503.75 to the bank's receiver. The decree below directs the defendants, as executors, to re-imburse the complainant for the money so paid, as well as for the original price received by them on the purchase. This is equitable. The rescission of the sale for fraud puts the parties in the position they would have occupied if the sale had not been made, and, in equity, the defendants must be regarded as having always been the holders of the stock. 2 Pom.Eq. § 915. In that capacity the estate and funds in their hands as executors would be liable to the receiver for the assessment. U.S. Rev. Stat. § 5152. The complainant having, by fraud chargeable upon the executors, been clothed with a character in which he was legally obliged to pay a debt that, in equity, ought to have been imposed upon them, is equitably entitled to re-imbursement from them, and a decree to that end, in this suit, is necessary as a part of that complete relief which a court of equity endeavors to afford in all causes brought within its cognizance.

The chancellor's decree should be affirmed.

In the appeals of the same appellants against Anna M. Keen and against Abraham V. Van Fleet, the same result is reached for the same reasons.

Decree unanimously affirmed.