Vavricka v. Mid-Continent-Co.

8 N.W.2d 674, 143 Neb. 94, 1943 Neb. LEXIS 50

• Court: Nebraska Supreme Court
• Decided: March 26, 1943
• Docket: No. 31435
• Status: Published

Opinions

Carter, J.

' This is an action at law to rescind a contract for the purchase of corporate stock because of fraud and to recover the purchase price. The jury returned a verdict for $1,-527.60, for which amount judgment was entered. The defendant Mid-Continent Company appeals.

On May 5,. 1937, plaintiff purchased 120 shares of the capital stock of the defendant company for $1,200. On January 6, 1940, he demanded the return of the purchase price immediately after he claims to have discovered that the sale of the stock to him had been fraudulently made. The defendant first contends that the tender of plaintiff’s stock certificate and a dividend check for $6, while retaining $226 received as dividends, was insufficient to support an action for the purchase price.

The general rule is that a party who seeks to rescind a contract must return, or offer to return, the property acquired by the contract within a reasonable time. The purpose of the rule is to prevent enrichment by the rescinding party at the expense of the other party to the contract. There are, however, exceptions to the rule. For instance, “one who attempts to rescind a transaction on the ground of fraud, mistake, or otherwise, is not bound to restore that which he has received by virtue thereof, when, in any event, he is entitled to retain it as indisputably his own whatever may be the fate of his effort to rescind the transaction.” 5 Williston, Contracts (Rev. ed.) sec. 1530.

An authoritative text states the rule as follows: “A failure to return or offer to return performance received in accordance with the rule stated in subsection (1) does not preclude avoidance if the performance * * * (c) is merely money paid, the amount of which can be credited in partial cancélation of the injured party’s claim * * * Restatement, Contracts, sec. 480. We think the rule in this state is in accord with this. The development of the exceptions to the general rule in this state will be found by an examination of the following cases: Symns & Co. v. Benner, 31 Neb. 593, 48 N. W. 472; Phenix Iron Works Co. v. McEvony, 47 Neb. 228, 66 N. W. 290; Collins v. Hughes & Riddle, 134 Neb. 380, 278 N. W. 888. In the last case cited the court said: “Nor can defendants’ contention in this case that plaintiff may not sustain his action until he has tendered back the $15 he received be conceded. It appears that ‘An exception to the rule requiring the restoration of the consideration as a condition precedent to rescission exists in those cases 'in which the party rescinding would be entitled to retain the money or property received, even thoug’h the compromise be set aside, or where the payment was a gratuity or related to- a part of the cause of action. An offer to return is also unnecessary if the judgment asked for will accomplish that result, or where plaintiff is not suing to rescind the new agreement, but his action is on his original demand.’ 12 C. J. 356.” While it is true that some of our earlier cases adopted more strict rules in requiring restoration as a condition precedent to the bringing of an action for the purchase price after a rescission of the contract for fraud, the tendency has been toward a less stringent rule in the furtherance of justice between the parties. This has resulted in several well-established exceptions, including the one which we have applied to the case at bar. The exception to the general rule here invoked has been generally adopted as is evidenced by the following cases: Beverly v. Richards, 255 Mich. 508, 238 N. W. 270; Keefe v. Jefferson, 151 Minn. 368, 186 N. W. 789; Damerel v. North American Bond & Mtg. Co., 133 Cal. App. 290, 24 Pac. (2d) 237; Kyser v. Southern Bldg. & Loan Ass’n, 224 Ala. 673, 141 So. 648. For a concise statement of the difference between rescission in equity and law, see Corse & Co. v. Minnesota Grain Co., 94 Minn. 331, 102 N. W. 728.

Consequently, even though the general rule is that a person rescinding a contract for fraud is required to restore whatever has been received under the contract in the way of money, property or other consideration as a condition precedent to an action at law for the recovery of the purchase price, yet, in order to effect justice between the parties, the following exception, among others, has become a part of the law of rescission in this state: Where the party rescinding would be entitled to retain the money or property received, either by virtue of an original liability if the contract be rescinded, or under the contract itself if. rescission be refused, no tender or offer of restoration is required. If, then, the thing to be restored consists of money, the amount of which can be credited in partial cancelation of the injured party’s claim, a failure to restore will not preclude a suit to recover the consideration paid. We conclude that the trial court properly held that a sufficient tender was made in the instant case.

The record in this case shows the following: Prior to 1937 one George Vance organized a corporation known as Midwest Company Number One with a capital stock of $25,000. When the stock had been sold he organized Midwest Company Number Two with a capital stock of $25,-000. When the stock in this company had also been sold, a third company known as Midwest Company Number Three was organized with a capital stock of $25,000, and its stock similarly disposed of. The Mid-Continent Company was thereupon organized with a capital stock of $25,000, which authorized capital stock has been increased from time to time until it reached the amount of $250,000 on January 11, 1937. On January 31, 1937, the three Midwest companies were consolidated with the Mid-Continent Company, the defendant herein. On December 14, 1936, Vance also organized the Mid-Continent Sales Company with an authorized capital stock of $5,000, and on December 29, 1937, the Royalty Purchasing Company was also incorporated with an authorized capital stock of $10,000. The purpose of the three Midwest companies and the Mid-Continent Company, with which they were later consolidated, was to engage in the purchase of oil royalties for profit. The purpose of the Mid-Continent Sales Company was to sell the stock of the Mid-Continent Company and any stock or securities of which they might become possessed by trading- Mid-Continent Company stock therefor. The purpose of the Royalty Purchasing Company was to engage in the buying of oil royalties in Oklahoma, Texas, Kansas and other oil producing states primarily, we think the evidence shows, for resale to the Mid-Continent Company at a marked up price.

The record further shows that all of these corporations maintained their offices at the same location. That Vance participated in the organization of all these corporations is established. He was the president of all of them. The other incorporators of the Mid-Continent Company were B. V. Foster, E. E. Erskine and G. P. Fair, all of whom had been connected with the three Midwest companies prior to their consolidation with the defendant company. The incorporators of the Mid-Continent Sales Company were E. M. Sanmann, Georgia P. Fair and E. E. Erskine, the latter two of whom were officers of the Mid-Continent Company.

The plaintiff alleges, and there is evidence to sustain the allegations, that on May 5, 1937, the Mid-Continent Company, through its agents, in order to induce plaintiff to purchase 120 shares of its capital stock, represented to plaintiff that the Mid-Continent Company was a good, sound and substantial company whose stock had a value of $10 per share and would soon be valued at $12.50 per share, that the stock was earning in excess of 10 per cent, per annum, and that a reserve was being maintained for the repurchase of the company’s stock whenever plaintiff desired to sell. It was also represented that the expenses of the corporation did not exceed 5 per cent, of the income of the company and that the men in control of the company were experienced oil men. Plaintiff contends that these representations were all false.

The evidence shows that the Mid-Continent Company paid a 20 per cent, commission for the sale of its stock, which resulted in a total expenditure as of May 7, 1937, of $26,913.50 for organization and stock-selling expense. No reserve was established to wipe out this impairment of capital. The evidence also shows that all of the royalties purchased by the Mid-Continent Company were bought from the Royalty Purchasing Company, or George Vance, at an amount much in excess of their cost. The evidence reflects that the Mid-Continent Company paid approximately $20,-000 more for the royalties owned by it on May 7, 1937, than the Royalty Purchasing Company or Vance paid for them, although the money used was on all occasions that of the Mid-Continent Company. The evidence further shows that the dividends paid out by the defendant company exceeded the income of the company as of February 28, 1941, by $12,653.18, some part of which not shown by the record amounted to an impairment of the .capital stock of the company prior to May 5; 1937. It is further shown by the record that oil royalties are depleting assets requiring, as a matter of good business, the setting up of a reserve in excess of 25 per cent, of the annual income from the royalties to implement the capital assets of the company when they no longer produce a profit. As of May 7, 1937, the total of the items amounting to deductions from capital assets including selling expense and organization, cost of royalties over and above the cost to Vance or the Royalty Purchasing Company, the depletion of royalties and the deficit shown by the books of the .company, was $53,564.74. At the same time the companies’ assets amounted to $154,570.10. It can readily be seen that this evidence indicates a capital impairment of more than one-third of the capital assets of the company on the day that plaintiff purchased bis stock. It is true that there is expert evidence in the record that the royalties held by the Mid-Continent Company on May 7, 1937, were worth from $275,000 to $300,000, even though the market value 'in Tulsa, Oklahoma, the place where most of the royalties were purchased, was from $87,000 to $90,-000. The evidence shows that the dividends paid out exceeded the company’s earnings and that it was not in fact earning annual dividends of 10 per cent, as represented. The evidence further shows that no reserve was set up for the repurchase of any of the company’s own stock as represented to the plaintiff. It is further shown that the 5 per cent, of 'income deducted for expenses did not cover all the expenses of the company, especially the expense connected with the purchase of royalties which was paid in the form of a profit to the Royalty Purchasing Company, or Vance, as the case might be. It was further disclosed from the record that the officers of the company were not men experienced in the oil business. In fact, it is shown that B. V. Foster was Beulah V. Foster, the mother of George Vance, that E. E. Ersk'ine was Elva E. Erskine, a stenographer in the office, and that G. P. Fair was Georgia P. Fair, a beauty shop operator and friend of Vance. There is no attempt made to show that any of these three officers of the company had any knowledge of the business of handling oil royalties. ,

The record is replete with evidence that J. F. Sanmann, the salesman who sold the stock to plaintiff, was closely associated with Vance and the various companies organized by him. In fact, Vance was one of the organizers and the president of the Mid-Continent Sales Company of which Sanmann was a former officer and the agent who sold the stock to plaintiff. We think the evidence was such that it was for the jury to appraise the whole situation and determine whether the alleged representations were made, whether or not they were true, whether the representations were relied on to plaintiff’s damage, the relationship of the parties to the whole transaction and the intent with which the acts complained of were done. These questions have been resolved favorably to the plaintiff and we think the evidence is ample to sustain the finding of the jury.

The defendant company contends that it is not chargeable with the independent conduct of its officers while engaged in a fraudulent scheme for private profit adverse to the best interests of the company. The fraud complained of, however, was that perpetrated by the company when it, through its agents, sold the stock to the plaintiff. The representations made by Sanmann and those contained in the prospectus were the ones which rendered the contract voidable for fraud. We think that the manner of operation Of the Mid-Continent Sales Company in having the same office, the same officers, and the same domination by Vance as the Mid-Continent Company, indicates that the Mid-Continent Sales Company was the agent of the Mid-Continent Company in the sale of its stock and that representations made by it through Sanmann, its stock salesman, were those of the Mid-Continent Company. Defendant contends that Sanmann was not authorized to make the representations regarding the financial standing and methods of operation of the company. We think he was. In Jacobson v. Skinner Packing Co., 118 Neb. 711, 226 N. W. 321, we said: “Defendant claims that there was no proof that the company had authorized its salesman to make the alleged misrepresentations and had no knowledge that they had been made, and therefore the defendant company is not liable in an action for deceit or fraud of the agent. The company had employed the salesman to solicit and receive subscriptions for stock. The natural inquiry of a proposed purchaser would be directed to the condition and situation of the company, its officers and promoters, the kind of business proposed to engage in, the profits, and like questions. To give such facts was necessarily incumbent on the salesman and was strictly in the line of his duties, and the company is responsible for any misrepresentations in an action for fraud and deceit.”

In Griffin v. Bankers Realty Investment Co., 105 Neb. 419, 181 N. W. 169, we also said: “We recognize the application of the law as laid down in Joyce & Co. v. Eifert, 56 Ind. App. 190, wherein it was held: ‘Whenever an agent of a corporation duly authorized to procure subscriptions to its capital stock, induces persons to subscribe to shares of such stock by fraudulent representations or concealments, any person so defrauded will be entitled to a rescission of the contract in the same manner and to the same extent as between two natural persons.’ ”

Clearly, if Sanmann was the agent of the Mid-Continent ' Company, as the jury found, he was authorized to make the representations as to its financial status and its methods of operation.

The defendant also contends that plaintiff failed to establish that he believed and relied upon the statements miade by Sanmann. The record contains many statements of the plaintiff that he believed the representations made and that he would not have purchased the stock otherwise. It is true, as alleged by the defendant, that plaintiff entered into a repurchase agreement whereby Sanmann agreed to repurchase the stock if plaintiff should need his money within twelve months and that plaintiff, on being asked on cross-examination if this repurchase agreement was not the sole and only inducing factor that caused him to purchase the stock, answered in the affirmative. If plaintiff in buying the stock relied solely upon the agreement of Sanmann to repurchase, as this one answer indicates, it would disprove his claim that he relied upon the representations made concerning the quality of the stock. The record shows, however, that this was an answer given during several hours of testifying. No particular point was made as to the use of the words “sole and only inducing factor.” It must be treated as an isolated statement which the jury were entitled to consider in connection with other evidence on the question of the reliance of the plaintiff on the representations made.

It is urged that the representations made were not actionable because they constituted mere sales talk and the agent’s opinion as to their value. Defendant cites Leichner v. First Trust Co., 133 Neb. 170, 274 N. W. 475, which holds as follows: “Under the circumstances shown in the record, one could not reasonably find that Suffa at the time of the sale of the bonds involved knew that the representations alleged, assuming that any or all of them were made, were false, or that such representations were made as positive statements without knowledge of whether or not they were true. To say that the bonds were as ‘good as gold’ and that the security for their payment was ‘good’ could not reasonably be construed in this case to amount to more than the expression of an opinion relating to value. Actionable fraud may not be predicated upon the expression of a mere opinion as to value honestly made, under circumstances that do not give another the right to rely thereon. * * * The evidence does not show that Suffa knew that any of said representations were untrue. He made no statement importing knowledge on his part. For aught that the record shows, he had full knowledge of all facts existing at the time the bonds were sold.”

But the situation recited in the Leichner case does not exist here. The agent Sanmann made positive representations concerning the quality of the stock. Among others, he represented that the officers of the company were men of experience in the oil royalty business, that the company had earned 10 per cent, dividends every year, that the expense of the corporation was limited in a manner attractive to stock purchasers and that a reserve had been established which would entitle plaintiff to sell his stock to the defendant company at any time after one year at its liquidating value, all of which proved to be untrue. We think these were positive representations of fact upon which plaintiff could rely and which were calculated to mislead and deceive the plaintiff. They do not constitute sales talk or puffing in the sense which the law implies.

It Is further urged that plaintiff has failed to prove that he has been damaged. The evidence heretofore recited was sufficient to take that question to the jury. The impairment of capital assets heretofore shown is sufficient to sustain a finding that the stock was not of the value represented at the time it was sold to the plaintiff.

Defendant complains of alleged errors in the instructions and of the court’s refusal to give certain instructions tendered by it. We have examined all of the alleged errors pertaining to the instructions and have concluded that they fairly presented all of the issues to the jury. As a whole, they correctly state the law and fairly present the issues. No error prejudicial to the defendant has been found.

Affirmed.

Rose and Eberly, JJ., not participating.