Cunningham v. Pettigrew

169 F. 335, 94 C.C.A. 457, 1909 U.S. App. LEXIS 4584

• Court: Court of Appeals for the Eighth Circuit
• Decided: January 23, 1909
• Docket: No. 2,755
• Status: Published

Opinions

ADAMS, Circuit Judge

(after stating the case as above). The bare recital of the facts of this case discloses the existence of .a flagrant breach of trust among business associates between whom a relation of confidence and trust existed for which the law ought to furnish a remedy, and we think it does. Plainly stated, Hyde and Fox devised a scheme to get one-half of the mine for nothing by inducing the complainant, Pettigrew, to become a joint purchaser of it with them under the belief that he was paying only one-half of the purchase price thereof. In the case of Walker v. Pike County Land Co., 71 C. C. A. 593, 139 Fed. 609, which involved facts very similar to those now under consideration, this court, speaking of the defendant in that case, said:

“As a joint purchaser he stood in a fiduciary relationship to his associates, and was bound to the utmost good faith in his dealings with them. The law demanded of him, not only that he should not be guilty of positive fraud, but that he should not conceal from them any fact material to the transaction. Any profit which he secured by violating this legal duty he was bound to account for to them.”

That is wholesome morals as well as sound law. If the deal had been executed according to the original design—that is, if complainant had paid on the basis of $75,000 for the mine, and Hyde and Fox had secured as a result of that payment a one-half interest in the mine with complainant as originally intended—there would be no doubt that complainant would be entitled to some form of redress against them. Does the fact that defendant, Cunningham, acquired the title in the way indicated in the statement of the case, exonerate him or the mine owned by him from responsibility? We think not. The evidence satisfies us that defendant knew of the fraud intended to be practiced on complainant, and that he aided in its accomplishment by agreeing to advance the money to Hyde and Fox for that purpose and to take one-sixth interest in the mine as his reward. The evidence, including the undisputed fact that both the false and true option agreements were exhibited to Cunningham at the outset of negotiations with him, to say nothing of the testimony of witness Fox, which is criticised, convicts Cunningham of inconceivable stupidity, or charges him with knowledge of the purpose to deceive Pettigrew while he was negotiating with Hyde; Let him speak. While testifying in his own behalf he was asked this question:

“In the conversation you had on or about the 8th day of December, what, if ■anything, was said by Mr. Hyde as to how much money he wanted you to advance, and .what .interest in the property they would give you if you did so?”

To which he made the following answer;

“Mr. Hyde stated that the net price he had to pay to Mr. Johnston was $40,000; that Mr. Pettigrew was to pay $37,500 for one-half, and that I was to advance money enough for Hyde to pay the balance; and that the subsequent payments from Senator Pettigrew were to come to me. When the final payment was made, there would be $2,500 that would still be owing on the property by him; otherwise I would have the balance refunded to me. In consideration of my doing that, loaning them the money, at 8 per cent, per annum interest, he agreed to give me as a bonus one-third interest of the profit that was realized out of their one-half interest.”

Again, on cross-examination, Cunningham was asked;

“Q. Hyde came to you and says, ‘Now, here: Fox and myself and Pettigrew are going in to buy this property from Johnston, and Fox and I, if the transaction goes through, are going to get our one-half interest at a net outlay of $2,500, and Pettigrew is going to pay the balance. I have had a contract drawn up showing the consideration to be $75,000, which I have shown Pettigrew, and Pettigrew has agreed to put up $37,000.’ That is about what Hyde told you, isn’t it? A. Well, in substance—yes.”

This and other evidence of like character given by him satisfies us of Cunningham’s intentional co-operation with Hyde a.nd Fox in the deception of Pettigrew. They all became, according to their respective interests, joint purchasers of the property in controversy, and Cunningham assumed the obligations incident to that relationship to complainant, and, like Hyde and Fox, became bound to the utmost good faith in his dealings with him.

The trial court reached the same conclusion on other grounds equally ten-able. In answer to the contention of defendant’s counsel that Hyde, having the option to buy the mine for $40,000, was at liberty to sell it for any obtainable price he could get, the learned trial judge said, “This would only be true if Hyde had done nothing to conceal the fact which, was not disclosed.” Hyde, Fox, or defendant, if not occupying a confidential relation, were not bound to disclose anything to complainant. They could have observed strict silence as to terms of their option as well as concerning their interest in the purchase, and if complainant had treated with them at arm’s length, relying on his. own judgment, he could not lawfully complain; but in this case the facts are not that way. The indubitable fact is that they not only suppressed the truth, but affirmatively misrepresented and concealed material and important facts within their exclusive knowledge, and thereby distracted complainant’s attention from the real facts of the case, and caused him to enter into a contract which otherwise he would not have done. Such being the case, their conduct was fraudulent irrespective of the breach of the confidential relationship existing between them. Files v. Rankin, 82 C. C. A. 491, 153 Fed. 537, and cases cited; Laidlaw v. Organ, 2 Wheat. 178, 4 L. Ed. 214; Stewart v. Wyoming Ranch Co., 128 U. S. 383, 388, 9 Sup. Ct. 101, 32 L. Ed. 439; Tyler v. Savage, 143 U. S. 79, 12 Sup. Ct. 340, 36 L. Ed. 82; C. & A. R. R. Co. v. Shea, 66 Ill. 471.

Induced by their fraudulent conduct, complainant innocently invested $10,000 in the mine now owned- by defendant. His money to that extent aided the ultimate acquisition of title by- defendant, and went into the property. Defendant holds the legal title, but he acquired it, to the extent of one-fourth thereof, by means of the fraud practiced upon complainant. Ordinarily trusts arise from agreements, express or implied, manifesting an intention to create them. But there is another class of trusts which arise as a result of frauds committed by one party upon another, and they are known as “constructive trusts.” Perry on Trusts, § 166. Such a trust arises when, among other things, a person clothed with some fiduciary character, by fraud or other wrongful conduct, gains some advantage himself. Perry on Trusts, § 27. This court in Trice v. Comstock, 57 C. C. A. 646, 121 Fed. 620, 61 L. R. A. 176, held that a fiduciary relation and a breach of duty imposed by that relation are sufficient .to raise a constructive trust. To the same effect are Burnes v. Burnes, 70 C. C. A. 357, 137 Fed. 781, and Steinbeck v. Bon Homme Mining Co., 81 C. C. A. 441, 152 Fed. 333.

Measured by the test thus declared, the facts of the present case, in our opinion, clearly and unequivocally charge defendant and the • mine to which he holds the legal title with a constructive trust in favor of complainant to the extent of his money which went into it. The trial court by its decree awarded complainant a personal judgment against defendant for $10,000, with interest from December 20, 1901, the date of payment by complainant, and the further sum of $1,000, which will be explained later, and fastened a lien upon the mine for that aggregate amount until paid. This was perhaps less, or at any rate a different .remedy, than the complainant was entitled to. When a.constructive trust is raised in favor of another, the courts may order the trustee to hold the legal title for the benefit of the person deceived, or may decree a reconveyance of the property to the fiduciary entitled to it on such terms and conditions as are deemed best. But the complainant has not appealed, and is satisfied with his personal judgment against defendant, with the lien to secure its payment-. This relief comes fairly within the scope of the prayer for general relief, and is well warranted by precedent.

Speaking of constructive trustees, Pomeroy in his work on Equity Jurisprudence, vol. 3, § 1080, where sustaining authorities are cited,’ says:

“The trustee incurs a personal liability for a breach of trust by way of compensation or indemnification, which the beneficiary may enforce at his election. * * * The trustee’s personal liability to make compensation for the loss occasioned by a breach of trust is a simple contract equitable debt. It may be enforced by a suit in equity against the trustee himself, or against his estate after his death.”

Defendant invokes the rule expressed in Upton v. Tribilcock, 91 U. S. 45, 23 L. Ed. 203, Grymes v. Sanders, 93 U. S. 55, 23 L. Ed. 798, and Richardson v. Lowe, 79 C. C. A. 317, 149 Fed. 625, and cases cited, requiring vigilance to detect fraud and prompt repudiation of a contract based on fraud as a necessary prerequisite to rescission, and conténds that complainant is barred from recovery by that rule. It is urged that complainant as early as February, 1902, either knew or had the means of knowledge of the fraud practiced by Hyde and his associates, or failed to exercise due care and diligence in discovering it, and that he failed to rescind within due time thereafter. The facts of the case afford a sufficient answer to this contention. If actual rescission was necessary as a perequisite to enforcing the constructive trust created by defendant’s fraud, as to which it is unnecessary to express an opinion, the complainant did in fact rescind the contract as soon as he had a suspicion of the fraud which had been practiced upon him. In February, 1902, when the second installment of purchase money became due, he refused to pay his portion of it; he refused to perform his contract obligation, and left his associates to their own devices. He was guilty of no vacillation. He announced his purpose and adhered to it. This was an unequivocal act of repudiation on his part. His associates so understood it, and acted accordingly; they understood he-would no longer act with them or further perform his part of the joint undertaking, and immediately made a new arrangement, totally inconsistent with any claim of continuing obligation on the part of complainant, for completing the payment of the mine. They accepted the - refusal as a conclusive act of rescission. Although complainant acted on suspicion only, he was justified in rescinding, provided his suspicions of fraud were subsequently verified. The right of rescission depends on the existence of the fraud, and not on the accuracy or conclusiveness of the party’s knowledge of it when he exercises the right. Peterson v. Chicago, Milwaukee & St. Paul Ry. Co., 38 Minn. 511, 39 N. W. 485; Lawson on Contracts, § 248. By his prompt rescission his associates were left in no uncertainty, and he was foreclosed of any opportunity to speculate on the success or failure of the venture. The die was irrevocably cast. In some cases the institution of a suit to rescind is the first act of repudiation and rescission ; but it is not the only way to bring it about. Rescission is a fact, the assertion by one party to avoidable contract of his right (if such he had) to avoid it, and when the fact is made known to the other party, whether by a suit or in any other unequivocal way, the rescission is complete. As a result of it, a suit may or may not be necessary. In the present case the facts which justified the rescission and the rescission itself affected defendant and the mine owned by him with a constructive trust in favor of complainant, and this resultant right is what complainant seeks to establish and enforce in this action. This remedy follows, and is entirely consistent with the rescission which had been accomplished.

But it is claimed that this remedy is barred by the laches of complainant. Courts of equity, in considering the defense of laches, while not bound by the provisions of statutes of limitations applicable to actions at law of like character, usually proceed in analogy with them. Boynton v. Haggart, 57 C. C. A. 301, 120 Fed. 819.

Section 2877 of the Revised Statutes of 1898 of Utah applicable to this case limits the time within which an action for relief on the ground of fraud or mistake can be brought to the period of three years after the cause of action accrued, provided, however, that the—.

“cause of action in such cases shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud.”

It may be conceded that discovery of the fraud within the purview of this statute occurs when the party invoking it has notice of the main facts constituting the fraud, or has the means of discovery in his power. Wood v. Carpenter, 101 U. S. 135, 25 L. Ed. 807; Redd v. Brun, 84 C. C. A. 638, 157 Fed. 190, and cases cited. Whether due diligence is observed for the discovery of fraud is largely dependent upon its -peculiar character in a given case. Mr. Justice Miller, speaking for the Supreme Court in Norris v. Haggin, 136 U. S. 386, 392, 10 Sup. Ct. 942, 945, 34 L. Ed. 424, said:

“It is a part of this general doctrine that, to avoid the lapse of time or statute of limitation, the fraud must have been one which was concealed from the plaintiff by the defendant, or which was of such a character as necessarily implied concealment.”

This cause of action, except for the alleged undisclosed fraud, accrued in December, 1901, when complainant paid $10,000 of the purchase price of the mine. This suit was not instituted until October 26, 1905, but we cannot say, in view of the facts disclosed by the proof, that complainant knew, or had means of discovering, the fraud before October, 1904, when one of the participants gave him detailed information upon which, when further corroborated by papers obtained from Mrs. Cunningham in the fall of 1905, he subsequently acted and brought this suit. •

The facts are briefly' these: In the first place, the fraud complained of was in its nature secret, and required actual concealment for its successful accomplishment. The complainant resided in- South Dakota, and had no occasion to visit Utah, and did not do so after the.first of the year 1902 until about the time this suit was brought. Cunningham and Hyde, who resided in Utah, where the transaction was had, were both absent from that state a considerable portion of the time between December, 1901, and 1905. In February, 1902, complainant had a suspicion that Johnston was not getting the full sum of $75,000 for the mine, but he had no information sufficient to warrant a suit against anybody, and particularly against defendant Cunningham, the only solvent participator in the .fraud. Later, and at different times, the complainant secured the services of two men to interview Johnston, the seller of the mine, to ascertain if possible the real facts, but Johnston repeatedly refused to impart any information to them. Neither Of the parties to the original transaction nor any of their witnesses had died or disappeared, the title to the-mine had not fallen into innocent hands, and the situation of the parties in interest had not otherwise been materially changed. The facts just recited should-be kept in mind in making proper application of the equitable doctrine of laches to this case.' Mere lapse of time is interposed to protect the defendant from accountability for inequitable conduct towards one who in lawful reliance upon hi's good faith was deceived. It cannot escape observation that this is not á highly equitable attitude. This court in treating of a similar case, Stevens v. Grand Central Min. Co., 67 C. C. A. 284, 133 Fed. 28, speaking by Judge Van Devanter, said:

“Statutes of limitation, applied in courts of law, are inflexible and framed upon the theory that mere lapse of time, irrespective of other considerations, should bar the claim, while the doctrine of laches, applied in courts of equity, is sufficiently flexible to give reasonable effect to the special circumstances of any case, and rests not alone upon the lapse of time, but upon the inequity of permitting the claim to be enforced because of some change in the condition or relations of the property or the parties. * * * If unusual conditions or extraordinary circumstances make it inequitable to permit the prosecution of a suit after a briefer, or to forbid its maintenance after a longer, period than that fixed by analogous statute, the chancellor will not follow the statute, but will determine the case in accordance with the equities which arise from its own conditions or circumstances.”

The doctrine so declared applies with great force to the present case. No rights of innocent persons are here involved, and no change of circumstances has occurred which would tend to prevent the ascertainment of the truth. With these wholesome principles in view, let us consider what is claimed to constitute laches fatal to recovery by the deceived party. It is said Pettigrew ought to have inquired of Cunningham, Hyde, and Fox, or some of them, concerning the fraud, and that his failure to do so was negligence on his part. It seems to us that the unreasonableness of expecting those men, who were the perpetrators of the fraud, to voluntarily give self-inculpating evidence, excused any effort to induce them to do so. Their personal interest, the strongest of human motives, impelled them not to do so, and any attempt to secure from them information which would necessarily expose them to civil liability, at least, for their wrongful conduct, would, in our opinion, be not only an unreasonable requirement, but one which might have thwarted any ultimate discovery. • In such circumstances we cannot regard the failure to do so as fatal laches.

Attention is called to the case of Geyser-Marion Gold Min. Co. v. Stark, 45 C. C. A. 467, 106 Fed. 558, 53 L. R. A. 684, as authority for the proposition that the duty rested on Pettigrew to resort to Cunningham, Hyde, and Fox for discovery of the fraud, but we fail to find in it authority for defendant’s present contention. The facts in that case disclosed no such fraudulent conduct as is involved in this case, and no reason appeared why the officers of the bank there charged with negligence in transferring a certificate of stock should not have resorted to the trustee named in the certificate with confident expectation of securing information concerning his cestui que trust.

It is suggested that the bill itself fails to disclose sufficient excuse for the delay in bringing this suit beyond the period permitted by the statute of limitation; but we think this is not so. The facts which under the statute of Utah excused the bringing of the action within the time limited by the statute, to which we have already called attention, appear by direct averment or by necessary implication in the bill, were fully proved at the trial, and, in our opinion, wére sufficient to postpone the running of the statute. They were certainly sufficiently specific to satisfy the defendant, as no exception was taken to the bill on that account. It is also suggested that the complainant might, after his suspicion had been aroused, have instituted a suit, either a bill for discovery or an action at law against Hyde, Fox, and Cunningham, or some of them, and by the discovery, or by a deposition taken in the case, might have learned the fraud. We do not think the rule of diligence applicable to this matter requires such an experimental and expensive proceeding in court. This suit was instituted well within the time prescribed therefor by the statute of Utah after the discovery of the facts constituting the fraud, and we perceive no reason why we should not observe the analogy of that statute in this equitable action.

It is next contended that complainant does not come into court with clean hands, and should therefore be dismissed without .relief. _ The inequitable conduct charged against him is briefly this: He, claiming an interest in the mine by reason of the use of his money in acquiring title to it, and by reason of the fact that he had expended money in developing it, and Fox, claiming some interest in it by reason of work done and money expended by him, in the early part of the year 1905, endeavored to protect their interests in another way. Defendant, Cunningham, claiming that he had acquired Hyde’s and' Fox’s interest in the mine, applied for a patent for the claims as originally located. Pending this application complainant and Fox, maintaining that there were defects in the original locations, and that there had been a failure to do some of the annual assessment work, relocated some of the claims, filed adverse claims to defendant’s application, and instituted the requisite suits in support thereof. Defendant invokes the principle that complainant as a co-tenant, and bound by the obligations which mutual interests imposed, could acquire no outstanding title to the exclusion of his co-tenant, and that the attempt to do so was inequitable. Conceding the rule stated to be correct, its application to this case is not perceived. Defendant strenuously denies the existence of any obligations incident,to the relationship of co-tenants between him and complainant. Complainant makes no claim of any co-tenancy after he rescinded his contract of purchase on suspicion of the fraud which had been practiced upon him. Accordingly, in 1905, when complainant and Fox undertook to relocate the mining claims, there was no rule of law which prevented it. The true attitude was that of belligerency. Complainant had a cause of action against the defendant for relief on the ground of fraud, and nothing more. We can perceive no reason why he might not properly and equitably reenforce his position to secure the money invested by him by acquiring the outstanding legal title to the mining claims in which he had-an equitable right. He owed defendant no duty springing from any existing confidential relation which stood in his way.

If, however, it be conceded that the conduct of complainant in 1905 was inequitable in the respect complained of, it would not affect complainant’s right to relief for the wrong done in 1901 and 1902 now sued for. The one is quite independent of the other. The supposed inequity involved in the attempt made in 1905 to prevent the complainant from securing a patent has no relation in time, character, or circumstance to the equity sought to be enforced in this action. It is well settled that the inequity which will repel one from courts of ^equity under the maxim that “he who comes into a court of equity must do so with clean hands” must relate directly to the very transaction concerning which he complains. Shaver v. Heller & Merz Co., 48 C. C. A. 48, 108 Fed. 821, 834, 65 L. R. A. 878; Trice v. Comstock, supra, and cases cited therein.

The trial court awarded complainant a judgment and lien for $1,000 <md interest, in addition to the $10,000 and interest already considered. This first-mentioned sum appears to have been advanced by complainant to Hyde prior to December, 1901, before defendant had any connection with the purchase of the mine. It was advanced under an agreement that Hyde should use it for development purposes. The proof fails to show that it was secured by any fraudulent conduct of Hyde, and much less of defendant, Cunningham. It also fails to show that the money was actually expended in any way beneficial to the mine. We see no reason for charging defendant, Cunningham, with, or subjecting his property to, a lien for this money.

The decree below must be modified by reducing the amount of complainant’s recovery to the extent of $1,000 and interest allowed thereon ; in all, $1,457.77. In all other respects the decree as rendered was right, and is affirmed. One-tenth of the costs of this appeal and one-tenth of cost of the transcript will be taxed against the appellee, the remainder against the appellant. The cause is remanded to the Circuit Court, with directions to make the required modification.