Foley v. Holtry, 61 N.W. 120

Irvine, C.

An opinion was filed in this ease June 26, 1894 (41 Neb., 563). A shоrt statement of the ease will be found in that opinion. The judgment of the district court was then reversed upon the ground that the conduct of the plaintiff, subsequent to a time when the petition admitted he learned of the fraud, estopped him from rescinding tbie contract. A rehearing was allowed and the court is now convinced that in the former opinion an error was committed as to the effect which should be given to thе averment in the petition referred to. The language of this averment, in the original petition, is as follows: “As soon as plaintiff discovered that said representations were false, to-wit, on or about the 30th of April, 1890, and at several times since, plaintiff applied to defendant, and tendered to him said two hundred shares of the capital slock aforesaid.” In the amended petition, upon which the ease was .tried, the language is the same, except that in place of the word “ discovered ” the pleader uses the phrase “had reason to believe.” Upon the rehearing there has been considerable argument addressed to the question as to whether these phrases are or are not equivalent. We do not, however, think this question material. In the former opinion it was held that there was no such delay in bringing the action as would of itself bar the plaintiff from relief, and relief was denied solely because, with admitted knowledge of the facts, the plaintiff had permitted the defendant to incur large expense in improving the property taken by him in exchange for the stock, and had continued to deal with the stock as his own, and take partin the management of the corporation. . This was a matter of defense, and was not a fact which the plaintiff was called upon to anticipate and negative in his petition. Therefore, the averment in the petition that plaintiff had reason to believe that the representations were false on April 30, 1890, was not a necessary or even amaterial allegation in the petition; the time when plaintiff' learned, of the fraud only became material when the defendant by answer pleаded the facts constituting the estoppel. The defendant by answer pleaded the estoppel, and also-pleaded that the plaintiff had full knowledge of the standing and condition of the company at the time of his purchase. The reply meets this by averring that plaintiff had no actual knowledge of the facts constituting his cause of action until after the improvements were made and immediately prior tо the commencement of the action. Unless, therefore, the immaterial averment in the petition estops the plaintiff from afterwards asserting a contrary state of' facts, the time when he learned of the fraud was properly placed in issue and left for determination upon the evidence. In Lee v. Rogers, 1 Lev. [Eng.], 110, the plaintiff counted on a promise made May 1, 3 Car. I, for money lent. The defendant pleaded that thе writ was first brought February 4, 14 Car. II, and that he did not promise within six years before said 4th of February. The plaintiff replied that defendant assumed within six years before said 4th of February. It was moved in arrest of judgment that it appeared by the declaration that the cause of action arose more than six years before action brought, and that the replication was a departure; but it was held that the staiute of limitations must-be pleaded, and that, therefore, the replication was no departure, because the pleading of time in the declaration was immaterial. In Morgan v. Vaughan, T. Raym. [Eng.], 456, the plaintiff unnecessarily alleged his age at a particular time, and the defendant urged this as an estoppel from showing the fact; ‍‌‌​​​‌‌‌​​​‌‌‌‌​​​‌​‌‌‌‌‌​‌​‌‌​‌​​​​‌​‌​‌‌‌‌‌‌​​‍but it was held to-constitute no estoppel, because plaintiff’s infancy and not his precise age was the issue, and the averment was immaterial. In Gledstane v. Hewitt, 1 Tyr. [Eng.], 445, the action was detinue for a promissory note, the declaration counting on a general bailment. The defendant pleaded a special bailment and the replication confessed and avoided.. It was held that this was no departure because the averment of the general bailment in the declaration was immaterial. The pleader can hardly be held to a stricter accountability under the Code than at common law, and we have concluded that whatever might be the effect of the averment. in the amended petition, if offered as an admission, it was an averment not material in that stage of the pleadings, and that the plaintiff is not estopped thereby. This conclusion leads to an examination of the whole case.

The law governing the case is for the most part well sеttled, and the question presented is really not what principles of law control the case, but whether there was evidence-to which the law of rescission is applicable. The elements necessary to sustain such an action have been recently summarized by this court as follows: (1) It must be alleged and proved what representation was made; (2) that it was false; (3) that plaintiff believed the representatiоn to be true; (4) relied on and acted upon it; (5) and was thereby injijred. (Stetson v. Riggs, 37 Neb., 797.) To these requirements the courts formerly added another, to-wit, that defendant must have known that the representations were-false. A more accurate statement in view of the later decisions would be that the defendant must either know that the representations were false, or else they must be ‍‌‌​​​‌‌‌​​​‌‌‌‌​​​‌​‌‌‌‌‌​‌​‌‌​‌​​​​‌​‌​‌‌‌‌‌‌​​‍made without knowledge as positive statements of knоwn fact. The rule as thus formulated practically charges the defendant with notice of the truth in all cases where he makes positive representations of existing facts. We shall examine the evidence with reference to the foregoing propositions.

False representations, in order to make a case for relief,, must generally be positive statements in regard to existing facts and not mere еxpressions of opinion or promises as to future occurrences. The representations charged in the petition were that the elevator company stock was owned by well known, reliable business men of experience; that Mr. John Bratt was president of the company and had invested in the stock $2,500; that the corporation was solvent ; that it had earned for the preceding sis months two per cent per month on its paid-up capital stock, and that ■all of forty per cent of its capital stock was paid up. The evidence shows that the stock of the company was owned by the men who were represented to own it and that John Bratt was president. These representations may, therefore, be dismissed from further consideration. The evidence also shows that Mr. Bratt did hold capital stock to the amount of $2,500 par value, but that this was held under an agreement whereby Bratt had the option of retaining the stock or turning it in to Holtry and another stockholder and receiving therefor his investment back with ten per cent interest; an option which he finally exercised. It appears, however, by Foley’s own testimony, that he had sufficient information as to the nature of this agreement to put him upon inquiry as to Bratt’s investment, if he did not have complete knowledge of the fact. Nothing, therefore, can be counted on the falsity of this representation.

As to the representation in regard to the amount of capital ■stock paid up, Mr. Foley testified positively that Holtry represented to him that the capital stock was $75,000, and that forty per cent had been paid in; but he stated upon cross-examination that before the trade wаs consummated he learned that only thirty-seven and one-half per cent of the stock which he was buying had been paid, and he also testified when on the stand in rebuttal that he learned before the trade was made that all the stock had not been subscribed. Upon this point, therefore, the plaintiff can claim nothing.

As to the representation in regard to the solvency of the corporation, there is no proof of any direct representation -on the subject. It appears that a report of the secretary prepared ‍‌‌​​​‌‌‌​​​‌‌‌‌​​​‌​‌‌‌‌‌​‌​‌‌​‌​​​​‌​‌​‌‌‌‌‌‌​​‍shortly before the trade was made showed that the corporation was solvent, but Foley testifies that he did not see this report until after the trade was made, although statements had before been made to him in regard to a portion of its contents. If there was any representаtion as to solvency it must, therefore, be implied from the representations made as to the company’s earnings, and we are thus limited in our further inquiry to the allegations in regard to those representations. The specific representation claimed to have been made on the subject was that for a period of six months preceding the transaction the company had been earning a profit оf two per cent a month on its capital stock. The evidence is not' only ample to sustain the finding of the trial court upon this issue, but it is such that no other finding could be sustained. Mr. Eoley several times, and in the most positive terms, testifies to this representation, and Mr. Holtry himself says: “According to the last statement, as I told Mr. Foley, since Mr. Allum had gotten it out, did show a gain of pretty nearly two per cent per month. Of course the books wеre not closed up and we cannot tell exactly the amount.” Mr. Holtry repeats in two other places that he made this statement to Mr. Foley. The statement appears to have been made with reference to the secretary’s report, and it is inferable from all the evidence that Holtry was basing his statement upon the showing made by that report, and that Foley was so informed. The representatiоn, then, was not in regard to the profit as an independent fact, but as to a profit as shown by the secretary’s statement. The effect of this distinction it will be necessary to notice hereafter.

Was this representation true? There is no doubt that on January 10 a statement was prepared purporting to show the business from July 10, 1889, to January 10, 1890, and that it disclosed a profit during that period of about two per cent a month. This reрort does not seem to have been presented to the directors until March 6, but it had been disclosed to individuals and its contents were known to Holtry and others-interested. A vigorous effort was made by the defendant to prove the substantial accuracy of this report. The question before us is not, however, whether there was evidence to sustain the report, but whether there was sufficient evidence impeaching it to sustain the finding of the trial judge. The evidence upon this subject is very voluminous, and we cannot refer to it in detail. An experienced book-keeper testified in regard toan examination off the books and business. The effect of his testimony is-that when the books are carefully examined and certain corrections in the method of book-keeping made, they disclose that there was no profit made during the periоd in question. The elevator company, besides its business at North Platte, its principal location, had agents at a number of other points engaged in the business of buying and selling grain. In the accounts with these agents the books, at the time the statement was made, failed in some instance§ to show proper credits, thus making the resources-of the company appear greater than they were in fact. Some of these items arc quite satisfactorily explained. It does not appear that in any case were the books fraudulently kept, but it does seem from a review of the testimony that the method pursued left the books in such a condition that the statement of January 10 exhibited too large a proportion of resources. There is also evidence tending to-show the omission from the books of several items of outstаnding indebtedness, and we think there was ample to warrant the court in finding that such a method had been pursued as to relegate some losses to the preceding six months, and postpone others until the following six months, both processes resulting in a fictitious showing of prosperity during the period in question.

The representation by Holtry having been as to what this statement showed and not directly and positively as to what the profit aсtually had been, the next question which arises ‍‌‌​​​‌‌‌​​​‌‌‌‌​​​‌​‌‌‌‌‌​‌​‌‌​‌​​​​‌​‌​‌‌‌‌‌‌​​‍is whether under the circumstances he is responsible. If Holtry possessed and claimed to possess no knowledge-except that derived from the statement, we would not hesitate to say that he could not be held responsible. In other words, if his representation amounted to this, that he did not know of his own knowledge the condition of the company, but that the secretary’s report showed a certain profit, then, the report showing such profit, the falsity of the representation would not be established. But while it is clear that in his conversation with Eoley he based his representation upon the showing made in the report, he coupled this statement with a distinct representation that the mill was a good paying investment. It is probable that this would have to be taken as a statement of fact within his own knоwledge, but it is not necessary to so decide. We think that if as a matter of fact Holtry knew that the report was false and that the mill had not been earning a profit, then he cannot protect himself by falling back upon the contents of the report. If he knew the report was false and based his representation upon its contents, by so doing he adopted the report as his own representation and must be held responsible for its falsity. Upon this subject the evidence is that Holtry was at the time, and had from the start been, general manager of the company, with his place of business in the mill, and, therefoie, presumably had some familiarity with the business. There is also evidence tending to show that he made entries upon some of the books. He presumably had access to the books. These facts in themselves are only circumstances showing the opportunity of knowledge upon his part, but do not directly show his knowledge. Mr. Carter, who is a stockholder, testifies that after the report was made known, and before the trade between Holtry and Foley, Carter went to Holtry and said: “Everything looks pretty well now. It seems as if everything was turning, and we are making money. I presume I can use — I suppose some call it ‘ dividend ’ — what the profit would be for my share for interest upon my notes. I says, ‘ They have been talking about it, and I would turn that over.’” To this he testifies that Holtry responded, “ Mr. Carter, we are not making money.” Carter then said, “Mr. Allnm said so yesterday in the meeting; he reported it.” Holtry then said: “We are not making anything. We are running behind all the time. We have to say something to satisfy them — something that will content them.” He further testifies that Holtry added, “We have to do something or else they will shut us up.” Carter said, “ That is a queer way of making a report if we are not making anything.” Holtry responded, “Well, we are not making anything, and the stiller we keep the better it will be.” Severe comments are made in argument upon Carter’s credibility; but this was a question for the trial judge and he evidently believed his testimony. If we accept it we must conclude that Holtry knew that the report was false; that he knew the company had not earned any profit and that when hе referred to the report as showing a profit, it was done with the deliberate intention of inducing Mr. Foley to believe a state of affairs very material to the value of the stock and which Holtry knew did not exist. There is ample direct testimony by Foley that he believed the representations made to him. The defendant called several witnesses, by whom he proved that shortly after the trade Foley slated to them that the mill had been earning two per cent a month. While this testimony was introduced for another purpose,, it tends to show that Foley at the time did believe the representations to be true. Equally positive is Foley’s testimony that he relied on this representation and acted upon it. It does appear that he made inquiry of others and that to a certain extent he also relied upon their statements, but it is not necessаry in such a case that the plaintiff should have relied entirely upon the representations made to him. It is sufficient if they formed a material inducement to the trade. That they did so in this case, appears not only from Foley’s testimony, but is inferable from all the circumstances. It is urged that Foley had no right to rely upon this statement, but that he should have made inquiry from other sources. We have little sympathy with the theory always advanced in such cases that the defendant should be protected from the consequences of false statements made by him for the purpose of inducing the plaintiff to act, because the plaintiff had sufficient confidence in the defendant to believe the statement and not proceed upon the assumption that he was dealing with a man unworthy of belief. There are some cases where the fact liеs so open . before the plaintiff that he is unwarranted in closing his eyes to its existence and depending upon a statement made to him by the other party. We do not think that this principle applies to any case where an absolute statement of fact is made and where an investigation elsewhere would be necessary to disclose its falsity. (2 Pomeroy,- Equity Jurisprudence, 891.) In such case the plaintiff may, if he chоose, rely upon the representation made to him, and if he do so, the defendant cannot complain. It is true that Mr. Foley made ‍‌‌​​​‌‌‌​​​‌‌‌‌​​​‌​‌‌‌‌‌​‌​‌‌​‌​​​​‌​‌​‌‌‌‌‌‌​​‍inquiries of Mr. Patterson, another stockholder, before he made his trade, and that Mr. Patterson made a similar statement as to the secretary’s report. Mr. Patterson was apparently deceived thereby also, and it all comes back to the falsity of this report. Its falsity being known by thе defendant, the report was nevertheless used by him to induce the trade. That the representation operated to plaintiff’s injury is too clear to require discussion. The plaintiff, therefore, was entitled to the relief awarded him by the decree of the district court, unless -he*ui fact knew of the falsity of the representations before the defendant made the improvements upon the property by him receivеd. On this issue the decree contains no direct finding. Our attention is called to certain testimony of the plaintiff which it is claimed establishes the fact of such knowledge. In one place, on cross-examination, the plaintiff states, being examined as to the allegation as to knowledge on the 30th of April, that he had reason then to believe that the representations were false, but we think the clear prepоnderance of the evidence is that he was not in possession of actual knowledge of the fact until a much later time. That in fact when he first consulted an attorney his belief was not based on evidence sufficient then to justify legal proceedings. We do not think that he was compelled to begin his action, or even to notify defendant of his election to rescind the moment his suspicions were aroused. It was suffiсient if, after being put upon inquiry, he proceeded with reasonable promptness to ascertain the facts. Our attention is also called to a point in his testimony where he states that in February he learned from the statement that there had been a loss, but this testimony, when taken with its context, refers back to the testimony of Mr. Patterson, and from that it appears that the loss referred to, as shown by the statement, was a loss shown to have occurred prior to the period to which the representations related. There are other circumstances tending to show knowledge or means of knowledge prior to the defendant’s making the improvements. The questions thus presented are wholly questions of fact, and we do not feel warranted in expanding this opinion by a review of the evidence on the subject. We think that when the evidence is taken together, it shows that while the plaintiff was in possession of information prior to the time of the making of the improvements sufficient to arouse his suspicions, and sufficient even to impose upon him the duty of investigating and ascertaining the facts, h*e did not learn facts sufficient .to demand of him action until after the improvements were completed, and that the delay in ascertaining the facts was satisfactorily ■explained and cannot be attributed to plaintiff’s negligence.

Judgment afpiemed.

Case Details

Case Name: Foley v. Holtry

Court Name: Nebraska Supreme Court

Date Published: Dec 5, 1894

Citations: 61 N.W. 120; 43 Neb. 133; 1894 Neb. LEXIS 539; No. 5446

Docket Number: No. 5446

Court Abbreviation: Neb.