Peters v. Lohman

' OPINION.

STURGIS, J.

Granting that there is evidence in this case sufficient to take to the jury the question of the statements made in the prospectus being untrue in fact, the finding of the jury on that question would be final and binding on this court, provided the instructions submitting the same are found to be proper. It is therefore apparent that the real question to be determined by this court is the correctness of the instructions given by the court at the instance of defendants in submitting that question to the jury and allowing the defense of good faith and absence of willful fraud.

The instructions of plaintiff were given as asked,' and there is no complaint as to refused instructions; but it is insisted in this court that the instructions given at the instance of defendants are not correct declarations of law as applied to the pleadings and facts in this case and are in conflict with the instructions given for the plaintiff.

On this phase of the case the theory of the defendants’ instructions' is that, in case the jury find the representations to be false, yet the defendants had a right to justify themselves in making or permitting such statements to be made on the ground that they had a right to rely on information received from reliable sources and on investigation and reports made by the experts as to the quantity and quality of the natural products owned or controlled by the corporation, provided defendants had a right to believe and did honestly believe in the correctness of such reports and representations.

On a preliminary question of pleading the defendants insist that the petition in this case counts only on the proposition that defendants had actual knowledge that the representations in question were not true, and that the court could only submit the case to the jury on this proposition and could not enlarge the issue by the instructions; that it would be a departure from the pleadings to submit the case to the jury on the proposition that the defendants made these representations recklessly and without any knowledge as to their truth or falsity and with a consciousness that they had no such knowledge. Perhaps it is a too narrow construction of the petition to hold that it counts on the actual knowledge of the representations being untrue, while the instructions are based on constructive knowledge of that fact. [Serrano v. Commission Co., 117 Mo. App. 185, 197, 200, 93 S. W. 810.]

"Waiving this question of pleading and granting that the allegations of the petition are broad enough to include the issue as to defendants recklessly making representations of which they had no knowledge and under the consciousness that they had no such knowledge, the question remains to be determined whether this issue can be met by proof that the defendants, being without personal knowledge qn the subject, relied on information furnished by persons in whom they relied and had a right to rely and made the representations honestly and in accordance with such information obtained from others.

In discussing this question this case must be distinguished from the class of cases where the representations are professedly made, not of personal knowledge, but from information obtained from others on which the utterer' relied. ' Even in this class of cases the utterer may be held liable for misrepresentations where he does not correctly set forth the information obtained by him, or where he knows or has reason to know that the information which he is giving is not correct. [20 Cyc. 31.]

It should be borne in mind also that this is an action at law for fraud and deceit in making these false representations. In this it differs from the case of Lynch v. Land & Timber Co., 135 Mo. App. 672, 679, 117 S. W. 624. It is said in Kountze v. Kennedy, 147 N. Y. 124, 29 L. R. A. 363: “The law affords remedies for the consequence of innocent misrepresentation. A contract induced thereby, may, in many cases, be avoided, and the equitable powers of courts are frequently interposed for the rescission of contracts or transactions based upon mistakes or innocent misrepresentation". While the common law action of deceit furnished a remedy for fraud which ought to be preserved, we think it should be kept within its ancient limits, and should not by construction be extended to embrace dealings, which, however unfortunate tliey may have proved to one of the parties, were not induced by actual intentional fraud on the part of the other.”

In Greene v. Worman, 83 Mo. App. 568, 574, which was a suit at law, the court said: “These facts show such fraud in equity as would authorize a court to cancel the trade and set aside the conveyance of defendant to plaintiffs on proper terms, but it is not sufficient to prove fraud in law; and to have done this, the defendant should have gone farther, and adduced evidence showing or tending to show that New-kirk knew that the representations he made as to the boundary lines and spring were false, or that he made the representations as of his own knowledge, but did not know whether they were true or false, and that plaintiff relied on them believing them to be true. The representations though false, if innocent and were made without any intention to defraud, and under the belief that they were true, furnish no support to the allegation of fraud and deceit. [Walsh v. Morse, 80 Mo. 568; Dulaney et al. v. Rogers et al., 64 Mo. l. c. 203; Joliffe v. Collins, 21 Mo. 338.] ” See also Adams v. Barber, 157 Mo. App. 370, 388, 130 S. W. 489.

It would seem from these and other authorities that there is a distinction in this respect between suits at law for damages and suits in equity for rescission of the contract. The measure of damages in the two classes of cases would be different and the method of trial and the relief granted would also be different.. [Kendrick v. Ryus, 225 Mo. 150, 157, 123 S. W. 937, and cases cited.] In this case we are not called upon to say whether the evidence is such that, if plaintiff had brought his suit in equity to rescind the sale, the court might not have granted him some -relief, which in this case would have amounted to the return on proper terms of the purchase money.

The case of Serrano v. Commission Co., 117 Mo. App. 185, 93 S. W. 810, is cited and relied on by both parties and contains an able discussion of the principles applicable to a suit at law for damages. In this case, the court said, at the outset of the opinion (page 194), “That there must be scienter, either actual or constructive, in order to support an action at law for deceit, is beyond question.” “Scienter” in this connection evidently means guilty knowledge, or a guilty lack of knowledge, and implies moral turpitude. ■ The court discusses the three phases of scienter as applied to cases of this character; though in that case, as in this one, the court had to do with only two phases. The first phase of scienter is said to be: “A false representation made with the knowledge of its falsity by the utterer;” and “proof that the party made the false representation concerning a material fact with knowledge that the representation was false at the time it was made, satisfies the law in so far as scienter is concerned. ’ ’

The second phase of scienter is said to be (page 196): “When a party makes a representation of a material fact of his own knowledge when in truth he has no knowledge whatever on.the subject either of its truth or falsity.”

It is further said in.speaking of the first phase of scienter, where the parties have actual knowledge that the representation is untrue (page 200): “On this issue it was competent and proper for Mr. Teasdale to show in defense that he had sold the oranges as represented or that he had made such negotiations thereabout as to induce him to believe that he had sold the same and therefore made the representations to that effect in good faith.” It is also said (page 197): “It is competent and proper for the defendant to show, in resisting such charge, that he did not know the representation was false and to this end he is permitted to show that he acted in good faith on reasonable appearances and was honestly mistaken, having good reason to believe in the truth of the representation when made.” This case cites Dulaney v. Rogers, 64 Mo. 201, and many other cases upholding this view.

In determining what is guilty lack of knowledge under the second phase of scienter, where a party makes a representation as of his own knowledge when in truth he has no knowledge of the subject, the authorities all hold that it is necessary that the utterer have a consciousness that he has no knowledge o.n the subject; that is, there must be moral turpitude in making the misrepresentation. [Bank v. Hutton, 224 Mo. 42, 65 and 72, 123 S. W. 47.] As said in Serrano v. Commission Co., supra, 198, “Under this phase of the matter, the law being satisfied by proof of the party’s reckless or wanton conduct in asserting positively as of his own knowledge a fact concerning which he knew nothing of its truth or falsity, as stated above, raised up and supplies the scienter constructively from this reckless conduct on his part.”

In the case of Western Cattle Co. v. Gates, 190 Mo. 391, 395, 89 S. W. 382, from which plaintiff’s instructions were largely taken, it is said, in commenting on the instructions in that case, page 404: “The theory of the defendant’s instruction is that the defendant is not liable unless he actually knew the representations to be false, whereas the theory of the plaintiff’s instructions is that the defendant is liable if he made the representations actually knowing them to be false,, and also if he made the representations without knowing whether they were true or false, and while conscious that he had no knowledge of their truth but intended to convey the impression to the plaintiff that he had actual knowledge of their truth. One who makes representations which he does not know to be true, and conscious of the fact that he has no knowledge on the subject, to another whom he knows has no knowledge as to the truth or falsity of the representation, is as much guilty of fraud as if he had actual knowledge of the falsity of the statement.”

In Snyder v. Stemmons, 151 Mo. App. 156, 131 S. W. 724, it will be found that the finding of facts and declarations of law made by the court omitted the proposition “that defendant was conscious of the fact that he had no such knowledge,” and that was held to be error. [See also Paretti v. Rebenack, 81 Mo. App. 494.]

In Thompson on Liability of Directors, pages 401, 402, it is held that an action at law for damages, the gist of which is fraudulent intent, can only be maintained against one who has been guilty of a fraudulent intent. The representations must not only be false in fact but they must have been made with an intent to deceive. “This may be inferred from evidence showing that the party making them'knew of their falsity at the time, or at least professed knowledge of their truth, when, in point of fact, he was conscious he had none. But in either case falsehood uttered with intent to deceive is essential. We apprehend that it is not' necessary to show that the defendants knew that the representations were untrue, but that it will be sufficient if it be made to appear that they made them with a fraudulent mind and motive, intending thereby to deceive and defraud, and indifferent as to whether they were true or not.” This last statement” and quotation is taken from appellant’s brief.

When the court says, as they all do, that a party is guilty of actionable fraud when he makes “a representation of a material fact as of his own knowledge when in truth he has no knowledge whatever on the subject” (Serrano v. Commission Co., 117 Mo. App. 185, 196, 93 S. W. 810; Western Cattle Co. v. Gates, 190 Mo. 391, 405, 89 S. W. 382), the difficult is in determining what is meant by knowledge. Is the word “knowledge,” as here used, to be restricted to purely personal knowledge — what he acquired by the use of his own physical senses only — or is it to be extended so as to include information obtained from a reliable source! The plaintiff in tbis case insists tliat tlie word is used in its strictest sense of purely personal knowledge; tbe defendants insist that it should be understood in its broader sense and that a person has knowledge of a fact wlien lie obtains information from a trustworthy source. We think that the contention of defendants in this respect is correct. A man who has received information of a fact from a reliable source and which he has every reason to believe and does believe, cannot, when reporting such to be a fact, have a consciousness that he has no knowledge of the subject. [Bank v. Hutton, 224 Mo. 42, 67, 123 S. W. 47.]

In Dunn v. White, 63 Mo. 181, 185, it is said: “The now generally recognized doctrine is, that in order to support a personal action for fraudulent representations it is not sufficient to show that a party made statements which he did not know to be true, and which were false in fact; there must be fraud as distinguished from mere mistake.”

In the case of Lovelace v. Suter, 93 Mo. App. 429, 440, 67 S. W. 737, it is said in a learned opinion by Judge G-oode: “The real embarrassment in such disputes arises when the basis of the action is a statement or representation made by the defendant as true of his own knowledge, which he not only believed to be true, b%it believed with good reason he knew to be true; in other words an honest mistake not due to gross negligence. In our judgment, a representation of that kind though it may often make a good case to rescind a. sale or ex contractu on a warranty, cannot make out a case of deceit for lack of a scienter. [Collins v. Evans, 5 Q. B. 804, 13 L. J. Q. B. 180.] Infallible knowledge of facts is never attainable, and it is, or ought to be, enough that one has carefully endeavored to learn the truth from appropriate sources and believes he has learned it. Such conduct is very different morally, and we think legally, from recklessly asserting something to be true from a vague belief of its truth which the speaker has taken no pains to verify; for gross negligence is closely akin to fraud. [Western Bank of Scotland v. Addic, L. R. 1, H. L. 145.]”

The instructions given for the defendants, and which are criticised by plaintiff, we think will be found not subject to criticism and not in conflict with the instructions for plaintiff when rightfully understood and when the word “knowledge” is understood in its broader and legitimate sense. The instructions’mentioned do, and we think rightfully, so, exonerate the defendants of making representations, which ultimately turned out to be untrue, on the ground that such representations were in accord with and fairly represented the information obtained by the defendants from experts and other sources on which defendants had a right to rely, and that defendants honestly believed that such representations were correct. When the jury was required to find that these representations were based on and in accord with the information obtained from reliable sources and were honestly believed by the defendants this excludes, and requires the jury to find against, the idea that defendants were conscious that they had no knowledge of the subject.

As shown by Judge Goode in the case of Lovelace v. Suter, 93 Mo. App. 429, 67 S. W. 737, these views are not in conflict with the cases of Hamlin v. Abell, 120 Mo. 188, 25 S. W. 516; Dunn v. White, 63 Mo. 181; Dulaney v. Rogers, 64 Mo. 201. As there stated: “No such conclusion can be logically drawn from them; for the purpose of the court was not to dispense with the scienter, but to point out what may sometimes be sufficient proof of it, namely; an affirmation as of one’s own knowledge and not merely his information, opinion or belief, that something material to the business in hand is true, when he has no good reason to believe it is true, and is in fact false.”

In Bank of Atchison v. Byers, 139 Mo. 627, 652, 41 S. W. 325, it is said that one of the essential elements of fraud in an action at law for damages based thereon is “knowledge by the person who made it of its falsity.” Having consciousness of the falsity of his assertion by one who asserts as a fact a thing which he has no knowledge of is equivalent to having knowledge of its falsity. One or the other, however, must he proved in every case, and the jury must find that it exists in order to make the party liable. [Snyder v. Stemmons, 151 Mo. App. 156, 166, 131 S. W. 724, 20 Cyc. 24, 27.]

What is here said with reference to the representations in the prospectus applies also to the alleged oral representations made' by defendant Schiffer-decker. Like instructions were given as to these oral representations; and the same criticism is leveled at both, which as we have seen is untenable.

What we hold in this case is this; that when the directors of a corporation consent to the issuance of a prospectus, stating as facts certain representations therein as to its property which are in accordance with the facts obtained from trustworthy sources on proper investigation and inquiry, and which they honestly believe to be true, then it cannot be said either that they are making a statement as true about which they have no knowledge, or that they are making such statement with a consciousness that they have no knowledge concerning it.

Special mention might be made of the representations in the prospectus concerning the company’s holding perpetual leases on two thousand acres of natural gas and coal lands lying immediately adjacent to the raw material property. The defense to this representation, as to all the others, is that such representation was true, and that, if it was found not to be true, it was made so far as defendants are concerned in good faith from information obtained from reliable sources and under the honest belief that the same was true. The burden of proof rests upon the plaintiff to show that neither of these defenses exists. The evidence is not very satisfactory as to what leases the company did have on gas and coal lands. Several of the plaintiff’s witnesses stated that the company held several such leases. It is not shown, however, how much land was covered by these leases or the location of same or the length of time -the leases had to run. None of the leases themselv'es were put in evidence. We think the evidence fails to show that this representation was not true.

It is true that when defendant Schifferdecker testified at the trial that the company had some leases, it was shown by way of impeaching him that in a previous deposition he had stated that the company had no leases; but it was also shown that this witness, when such deposition was first transcribed, spoke to one of the attorneys for plaintiff claiming that this was a mistake and was advised that same should be corrected. For some cause the deposition was not corrected though it is conceded that the witness promptly noted and advised the opposite party of the mistake. We do not believe that thé inadvertent admission of the witness put in evidence only for the purpose of contradiction and impeachment of his positive evidence to the contrary can be taken as supplying the positive proof, required of plaintiff that the company had no 'leases in order to make a case for him.

Complaint is also made that the representation in the prospectus that the stock was fully paid and nonassessable is such a misrepresentation as ought to have been submitted to the jury. We think the court was right in not submitting the question of the truth or falsity of this representation to the jury. This representation clearly refers to the character of the stock and the liability of the stockholders to the corporation. The evidence shows that the stock, when issued and paid for by the stockholders, is of the kind properly denominated fully paid and nonassessable'. It does not mean and cannot be construed to be a representation that any stockholder has paid full par value for the same; and this is the only complaint made by the plaintiff. This statement applies to both the common and preferred stock. The plaintiff knew that he was not paying par value for his stock, as it is admitted that the common stock was* being given as a- bonus to the purchasers of the preferred stock. He was not deceived by this representation. It was properly taken by the court and by plaintiff and defendants alike, that when the purchasers paid whatever price was agreed upon in the purchase of the stock, then the stock would be as between him and the company “fully paid and nonassessable.”

There are some other errors complained of in the brief, which we have examined and find do not affect the merits of the ease. As the case was tried in accordance with the views herein expressed, and the instructions given submitted the facts to the jury on the proper theory, and the jury has resolved the facts against the plaintiff, the judgment should be and is affirmed.

Farrington, J., concurs. Robertson, P. J., concurs,

except he expresses no opinion as to the next to the last paragraph, relating to the representation of the stock being fully paid and nonassessable, other than that plaintiff was not deceived thereby.

Case Details

Case Name: Peters v. Lohman

Court Name: Missouri Court of Appeals

Date Published: May 16, 1913

Citation: 156 S.W. 783

Court Abbreviation: Mo. Ct. App.