Guaranty M. Co. v. Flint

The complaint contains three causes of action. Each separate cause of action is upon a note given to respondent corporation for the purchase of shares of stock in the corporation. The answer admits the execution of the notes, but alleges as a defense certain false representations made by respondent or its agents in procuring the notes. Appellant also counterclaims and seeks damages by reason of the alleged false representations.

The case was tried to the court. Findings of fact and conclusions of law were made. Judgment was entered in favor of respondent for the full amount sought to be recovered. From that judgment this appeal is prosecuted.

In the answer and counterclaim, appellant sets out numerous alleged false statements and bases his defense and his right to an affirmative judgment under the counterclaim upon these alleged false representations. On the filing of the answer and counterclaim, respondent moved to strike from the counterclaim certain allegations of fraudulent representations, on the ground "that said allegations are redundant and mere surplusage." The court granted this motion in part and denied it in part. The ruling of the court in granting the motion in part is assigned as error.

The claim of false representations relied upon as a basis for defeating the judgment upon appellant's promissory notes, and as entitling the appellant to a judgment upon his counterclaim, are set out at some length in the counterclaim and appear as subparagraphs of paragraph 2, and are designated by the letters of the alphabet beginning with a and concluding with k. These allegations may be summarized as follows: (a) That the plaintiff corporation was organized under the banking laws of the state; (b) that the plaintiff was subject to regular examination by the bank commissioner, and that the affairs of the company had been examined by the bank commissioner and found to be in good financial condition; (c) "that all the money that had been invested by subscribers in preferred stock of the said corporation had been, or would be, loaned upon first mortgages on residence or business property, at not to exceed 50 per cent. of the conservative appraised value thereof"; (d) that all money to be paid by the defendant (appellant) should he become a subscriber to the preferred stock, and all money paid by other subscribers, would likewise be loaned upon first mortgages on residence or business property at not to exceed 50 per cent. of its conservative appraised value; (e) that the said plaintiff corporation, from the date of its organization, had conducted a conservative business, and was then doing so, was then solvent, and "that its capital stock was not impaired, and that its preferred stock was of a value in excess of $100 per share"; (f) that all salaries and overhead expenses of the corporation would be paid from other business conducted by it, and not from the banking business, and that neither the proceeds from the sale of the stock nor the earnings would be paid as salary; (g) that one Rasmussen and Andrews had conducted the business for $150 per month and would continue to conduct it for that sum; (h) that the preferred stock carried with it a guaranteed dividend of 7 per cent., and that the corporation then had a surplus out of which said dividends could be paid for many years without regard to future business; (i) that the management of the corporation was dependable and safe, and that the offiecrs would not take advantage of their trust relationship; that the officers had invested largely in the preferred and common stock and would look only to the dividends for the return on their investments; (j) that, by reason of the incorporation of the company under the banking laws, and the same being subject to examination by the bank commissioner, the investment was as safe and free from hazard as if deposited in a solvent bank in the state of Utah; (k) that out of the profits and income from loans of the proceeds of the sale of preferred stock on first mortgages, and from the profits then on hand, the subscribers to the preferred stock would be guaranteed the payment of dividends of 7 per cent. per annum.

The court sustained the motion of the respondent and struck from the allegations of the counterclaim subparagraphs e, f, i, j, and k, and the words "would be" of subparagraph c, and all that part of subparagraph e following the word "solvent," to wit, "that its capital stock was not impaired and that its preferred stock was of a value in excess of $100 a share."

Paragraph 7 of the counterclaim closes with this sentence:

"And defendants have been damaged by reason of the premises in the sum of $3,606.57."

In said paragraph 7 it is alleged that more than 35 actions at law had been instituted on the part of respondent on subscription notes; that many of the makers of the notes were defending the suits; that a large number of notes had been returned to the makers; that many of the subscribers for stock were insolvent, and other stock subscribers had instituted actions for the rescission of their contracts; that the preferred and common stock of plaintiff corporation was of no market value, and but little, if any, intrinsic value. The court struck these allegations from the counterclaim. The allegation, as to the amount of damages, follows the enumeration of the various alleged fraudulent representations, and is the concluding allegation of the answer and counterclaim, and that part of paragraph 7 relative to the amount of damages was not stricken.

It will thus be seen that the court refused to strike the allegations in the counterclaim that the plaintiff was organized under the banking laws of the state, and was subject to examination by the bank commissioner; that all its money had been loaned upon first mortgages on residence and business property at not to exceed 50 per cent. of its appraised value; that the preferred stock carried with it guaranteed dividends of 7 per cent.; and that said corporation had profits and surplus out of which said guaranteed dividend could be paid for years to come without regard to future business or earnings; that the corporation from the date of its organization had conducted a conservative business and was then solvent, and the amount of damages which the appellant had sustained, if any, by reason of the alleged false representations.

These remaining allegations in the answer and counterclaim were sufficient to permit the appellant to prove the falsity of the material representations claimed to have been made; to prove the solvency or insolvency of the corporation; to prove that the corporation had not been conducted on a conservative basis; that the money had not been invested in first mortgages; and show wherein any damages had resulted to the appellant by reason of such alleged false representations.

It affirmatively appeared by the reply filed that the company was not organized under the banking laws of the state, and that it was not subject to the supervision or inspection of the bank commissioner.

It is not necessary, as we view this record, to determine whether the court erred in its order striking some of the allegations set forth in the motion, as we are of 1 the opinion that the judgment must be affirmed regardless of the ruling of the court on that motion.

The notes set out in the first, second, and third causes of action are dated respectively June 11, June 22, and July 15, 1920. This action was instituted March 8, 1924. The testimony shows that, after the appellant had given these notes, he was frequently at the place of business of respondent; that the business of the corporation was explained to him by its officers; that in 1921 he attended a stockholders' meeting and voted for the directors; that at that meeting he heard read what purported to be a financial statement of the respondent's business and was otherwise familiar with the nature and class of business conducted by respondent. It is alleged in the answer and counterclaim that appellant did not learn that the representations alleged to have been made by the agents of respondent to appellant were false, until on, or about, November 1, 1922. The court, in its oral review of the evidence, states that the appellant is a man of business experience, and that he, after having attended the stockholders' meeting, and having been advised as to the nature of the business of the respondent company, made payments upon the notes in controversy and received dividends as late as the year 1923. The court was therefore of the opinion that it must find that appellant did not rely upon the representations made, if any fraudulent representations were made. However, we are not required to, nor do we, determine whether by reason of any conduct or acts of appellant, or by reason of the knowledge acquired by him in attending the stockholders' meeting, he would now be estopped from setting up the alleged fraud as a defense 2 to respondent's action. Nor are we required to determine that appellant did not have a right to, and in fact did, rely upon the representations alleged to have been made to him.

The court, among other things, found as follows:

"VI. That it does not appear from the evidence in the case that defendant was in any manner or at all damaged by any representation made by the plaintiff, or plaintiff's agent, or by any act or conduct on the part of the plaintiff through any of its officers or agents, or that the value of the stock subscribed for by the defendant was in any manner or at all affected thereby, and the court finds that, when subscribed for by the defendant, said stock was worth, and was of its par value which, so far as appears from the evidence, has not decreased; and the court finds that the defendant has not sustained any loss by reason of any representation made by the plaintiff or plaintiff's agent, or by reason of any act or conduct on the part of the plaintiff, or any of the officers or agents of the plaintiff; that no evidence was introduced tending in any degree to prove any mismanagement or wrongful diversion of the funds or property of the corporation by any of its officers or agents, either before or after defendant entered into said contracts of subscription, and the court finds against the allegations of defendant's counterclaim with respect thereto."

That finding and other findings are assailed by the assignments of error as not being supported by the evidence and as being contrary to the evidence.

This is a law action. The complaint is based upon three promissory notes. A personal judgment is sought against appellant upon those notes. A defense based upon alleged false representations is relied upon by appellant. The counterclaim is for damages growing out of, and based 3, 4 upon, the claimed false representations made to appellant by the officers and agents of respondent. The nature of the proceeding must be determined by the pleadings. There is nothing in the answer or counterclaim asking for a rescission of the contract or for a cancellation of the notes mentioned in the complaint. The concluding clause of paragraph 7 is:

"And that appellants have been damaged by reason of the premises in the sum of $3,606.57."

Paragraph 7 is the last paragraph of the counterclaim and follows the enumeration of the alleged false representations. The prayer of the answer and counterclaim is that respondent take nothing by its first, second, and third 5 causes of action, and that appellant be given judgment for the sum claimed as damages, with interest. No other conclusion is permissible than that this is a law action, and that the defense is in the nature of an action for damages based upon fraud and deceit. The trial court was clearly of that view as appears from his oral review of the evidence.

"Whatever amounts to fraud, according to the legal conception, is also fraud in the equitable conception; but the converse of this statement is not true. The equitable theory of fraud is much more comprehensive than that of the law, and contains elements entirely different from any which enter into the legal notion." 2 Pomeroy Equit. Jur. (4th Ed.) § 872.

After diligent search through the record, we are unable to find any evidence tending to show that appellant was damaged or injured in any way by the alleged false representations, if any were made. It is a universally accepted rule that, in order to constitute actionable fraud and deceit, there must not only be an allegation of damages, but there must also be proof to support that allegation. The allegation of the counterclaim that appellant had been damaged by reason of the false representations is denied in the reply filed by respondent. That matter was therefore an issue of fact. The court's eleventh finding is not only supported by the evidence, but it is the only finding that the court could have made upon that issue, unless it be that part of the finding wherein the court finds that the stock was worth par at the date it was purchased by appellant. There is nothing in the record, unless it be the contract of purchase, to show the value of the stock at the date of purchase, or what its value was at the date appellant learned that the representations were false or at any other time.

The elements necessary to constitute actionable fraud are stated in the first headnote to Stuck v. Delta L. W. Co.,63 Utah, 495, 227 P. 791, as follows:

"Elements of `actual fraud' consist of (1) a representation; (2) its falsity; (3) its materiality; (4) speaker's knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted upon by person and in manner reasonably contemplated; (6) hearer's ignorance of its falsity; (7) his reliance upon its truth; (8) his right to rely thereon; and (9) his consequent and proximate injury."

In the course of the opinion in that case, the substance of that headnote is copied with approval from 26 C.J. 1062. The same general statement of the law applicable is stated in 12 R.C.L. at page 239, as follows:

"The law requires good faith in every business transaction, and does not allow one intentionally to deceive another by false representations or concealments, and if he does so it will require him to make such representations good, but it does not make one party to a contract responsible in damages for every unauthorized, erroneous, or false representation made to the other, although it may have been injurious. The ground of the action of deceit is fraud and damage, and when both concur the action will lie. Moreover, both must concur to constitute actionable fraud, a common statement of the rule being that neither fraud without damage, nor damage without fraud, is sufficient to support an action."

In Ming v. Woolfolk, 116 U.S. at page 602, 6 S.Ct. 491,29 L.Ed. 740, the court quotes with approval this language from Baron Parke in Watson v. Poulson, 15 Jurist, 1111:

"`The requisites to sustain an action for deceit,' * * * are `the telling of an untruth, knowing it to be an untruth, with intent to induce a man to alter his condition, and his altering his condition in consequence, whereby he sustains damage.'"

The following cases all either quote or cite with approval the foregoing quotation from R.C.L. Hope v. Shirley (Tex.Civ.App.) 187 S.W. 973; Ore City Co. v. Rogers (Tex.Civ.App.)190 S.W. 226. See, also, McNulty v. Durham, 63 Colo. 354,167 P. 773; Hicks v. Stevens, 121 Ill. 186, 11 N.E. 241; McGar v. Williams, 26 Ala. 469, 62 Am. Dec. 739; Murray v.Jennings, 42 Conn. 9, 19 Am. Rep. 527.

The court's eleventh finding quoted is to the effect that appellant sustained no loss by reason of any representations made by respondent or its agents, or by reason of any act or conduct on the part of respondent or its agents or officers; that the value of the stock subscribed for by appellant was in no sense or at all affected by any representations, and that, so far as appears from the evidence, the value of the stock has not decreased since the date it was purchased by appellant.

We are not in this case called upon to — neither do we — determine what appellant might have been entitled to had he sought a rescission of the contract and a cancellation of the notes given to respondent. The authorities, even in cases of that nature, unless there are other 6 circumstances or facts which justify or authorize a court of equity to release a complainant from the terms of his contract, are that the party complaining must not only show fraud, but must likewise show an injury resulting from that fraud.

In 2 Pomeroy, Equit. Jur. (4th Ed.) § 898, it is said:

"Fraud without resulting pecuniary damage is not a ground for the exercise of remedial jurisdiction, equitable or legal; courts of justice do not act as mere tribunals of conscience to enforce duties which are purely moral."

Counsel for appellant in their brief have quoted extensively from text-writers, and the cases in support of their argument that the representations alleged to have been made by respondent and its agents were such representations as appellant had the right to rely upon. The rule or principle contended for, as we understand it, on the part of appellant is very clearly stated in the quotation found in their brief, taken from 2 Fletcher, Cyc. Corps. § 625, as follows:

"As a general rule, if a positive representation as to a material fact is made to a person to induce him to subscribe for stock in a corporation, with the intent that he shall rely upon it, and the fact is one as to which the person making the representation can be supposed to have knowledge, the subscriber has a right to rely upon the same, and is not bound to make independent inquiry or investigation to ascertain for himself whether it is true or false; and if a subscription, therefore, is in fact induced by a false and fraudulent representation of fact, the subscriber's right to rescind cannot be resisted by the corporation on the mere ground that he was negligent in relying upon the representation, and that he could have ascertained the truth if he had made inquiry or investigation."

No fault can or ought to be found with the rule contained in the foregoing quotation or in the numerous authorities cited, but these general rules do not relieve the party complaining of the necessity of showing damages 7 sustained by reason of acting upon the representations made. Indeed, the author of Fletcher, supra, in the section immediately following the one from which the quotation is taken, says:

"To constitute fraud, there must be some injury. In no case can a subscriber for shares avoid his subscription because of false representations, if he has not been injured or prejudiced thereby."

Other questions are discussed in the brief of counsel for appellant, but as we view this record the failure of the appellant to show wherein he had been damaged in any way is conclusive of his right to defeat a judgment against him or to recover a judgment upon his counterclaim. The issues made by the pleadings, after the court had stricken 8 such parts of the counterclaim as were stricken, were sufficiently broad to entitle the appellant to prove any damages that he had sustained by reason of the claimed false representations. The stock appellant agreed to purchase was preferred stock. The corporation could not make a valid contract binding the corporation to pay dividends upon stock of that nature, unless profits of the business authorized payment of the dividends provided for in the certificate of stock. Cook on Corps. (7th Ed.) § 271.

It follows from what has been said that there is no prejudicial error in the record. The judgment therefore should be, and accordingly is, affirmed with costs.

CHERRY, J., concurs.