CURTISS '0. HURD.
CtmTISS '0. HURD.
(Oircuit Oourt, 8. D. New York. May 9,1887.)
Equity will rescind a purchase, upon the application of the purchaser, where the purchase was indu(:ed. by a material misrepresentation of the vendor, although the misrepresentation were innocently made by the vendor.
Such relief will not be granted. however, if the misrepresentation was of a trifling or immaterial thing,. or if it was vague and inconclusive in its nature, or if the complainant did not trust to it, ·or was not misled by it, or if it was upon matter of opinion, or was of a fact equally open to the knowledge of botbparties, and in regard to which neither could be presumed to trust the other,. . . UpOl1 apilrchase of shares of stock in an association, which was in legal effect merely a partnership, the vendor represented that the association was an incorporated company. Held, that such a representation, although un' true in fact, was not a misrepresentation of matters of substance, in the abo senceof any inquiries on the part of the purchaser concerning the character of the corporation, and was not a sufficient ground for decreeing a rescission of .. .' .
In Equity. . G. fubriskie, for complainapt. L. B. Bunnell, for defendant.
WALLACE, J. Complainant sues to obtain a rescission ofa purchase of 100 shares of stock in the Housatonic Rolling-Stock Company, bought by him in August, 1882, and for which he paid the sum of $4,250, leging that he was induced to make the purchase by the tions of the defendant, who was the president ofthe company. The bill alleges that various· misrepresentations were made to the complainant by' the defendant which were the inducing cause of the purchase of the stock. The proofs, however, are such that it is only necessary to sider whether there waS such a misrepresentation respecting the corporate organization of the Housatonic Rolling-Stock Company as entitles him to the relief sought. The Housatonic Company was not an incorporated company. It waS an association which was in legal effect a partnership, formed by the defendant and several others in October, 1881, for the purpose of buying, building, leasing, and running railroad cars under the name and style of the Housatonic Rolling-Stock Company. By the articles of association the legal title to the property was vested in a board of trustees (who were named) and their successors, who were to have the sole custody and management of the business and property of the association, with power to appoint its officers. The amount of capital to be contributed was not fixed by the articles of a..ClSociation, although the capital stock was divided into shares, and each
(Ill.) 7 N; E. Rep. 92.
Respecting the fraud for which equity will give relief, see Dillman v. Nadlehotfer,
associate subscribed for a specified number of shares.. The capital was represented by cars. From time t(} time the defendant delivered cars to the company, and thereupon scrip for shares, as an equivalent, was issued by the company. At thetimet)le complainant became a stockholder the company owned 1,644 cars, and had issued scrip for 27,440 shares, of the nominal valu.e of $1000 each. The articles of association made acceptance of a certificate of shares conclusive evidence of the assent of the 'holder to all the provisions of the articles... They provided for regular mlletings of the shareholders, but gave the shareholders no right to vote \vithout the consent of the trustees. In short, the company was an association of individuals organized in the form and with the ordinary IDal:Jhinery of a corporation; but it was not a corporation, because no atteinpt was made to comply with the laws of the state of Michigan, where the association was organized, in respect to the formation of corpomtiona. " The conditions oithe association made the trustees a selfappoin:ting body, gave them urilimitedpowers, and placed-the share",j, holders at their mercy . The proofs show that the complainant was led by the statements of one a friend ofnis, to supp6se that an investment in the stock of the company would be very remunerative, because other rolling-stock companies which had been organized and managed by the defendant had been so, and that handsome dividends could be expected upon stock which could be obtained for not far from 40 cents on the dollar. Soon afterwards complainant was taken by Trubee to the office of the defendant, and introduced by Trubee to the defendant as a person who wanted information abol,lt the company.· The defendant understood that the complainant become a purc)laser of some stock. At the interview which then took place, there was. c9Dsiderable conversation about rollingstock companies in general, and ho\\: they had paid large returns upon capital invested,and could do business with very little risk of loss. ing of the prei¥'nt company, the defeJtdant.stated it was ,well under way, and that m.ost. of the car§ were rented,j that the prospects of the company were goodj that a silpjlar company organized, by him previously had paid 70p<:lr cent. in three years; that he was the president of a number of rolling-stock companiesj that be thought this was really the best that he had anything to do with; that the stockholders of the other companies had always been satisfied; that he thought the stockpolders of this pne would be; and that the company had already earned dividends, one of which would be paid ina short time. The complainant asked the <iefendant how it was that the compan'y could put out its stock at 40 cents on the dollar, and the defendant said it could do so because it was organized under the laws of Michigan. A few days after this interview the complainarit wrote Trubee to ascertain the price at which the stock could be and l.'rubee informed him in reply that it could, bought for 42,1 cents on the Thereupon complainant instructed Trubee to buy 100 shares, and 'sent him his check for In fact, Trubeebought the stock of the defendant for 40 cents on the dollar, and kept $251)'0"f the proc('eds of complainant's
CURTISS V. HURD.
check for himself. The defendant had a certificate. prepared for the complainant, and delivered it to Trubee. who sent it to the complainant. This certificate recited that complainant was entitled to·" one hundred shares, of $100 each, of full-paid stock, in the .association called the Rolling-Stock .company, transferable only on the books of the association. person or by attorney, in accordance with the articles, by-laiVsjand regulations." It contained also this recital: "The holder of each share, when transferred as above provided, is subject to all the liabilities and provisions, and is entitled to all the privileges, of a member, asfully'as if he had signed the original articles ofassociation." .The complainant first learned that the company was. not incorporated under the laws of Michigan in the fall of 1884. Soon thereafter he tendered to the defendant an assignment of the scrip,with the dividends he had received upon the stock, and brought this suit·. The proofs do not show any intent to deceive or defraud on the part of the defendant. He had some of the stock to dispbse of, and doubtlei:lspresented the prospects of the company in as attractive an aspect as he fairly could; but he did not hold out any special inducements the complainant to buy, and made 110 misrepresentation about the financial condition of the company. .He was not asked any question calling for specific information about the amount or value of the property, or about the expenses or income of the company; nor was he asked any question about the character of the organization, or the rights or liabilities of shareholders. The company Was upon a prosperous footing at the time, and there is nothing to show that the statements made by him about its condition and prospects were not warranted by the facts. When he transferred the stock he did not know that Trubee had represented to the complainant that the price was $4,250, nor did he know what price the complainant paid Trubee for it, although Trubee, to excuse his own conduct, t'ilStifies to the contrary. He knew that the stock was going to the complainant, but did not concern himself with any inquiry whether Trubee was buying it as agent for the complainant, or for himself as a vendor to the complainant. This view of the fl;tcts has not been influenced by the testimony of the defendant himself, which, so far from strengthening his own case, has only tended to prejudice it. . It is apparent from the complainant's own narrative that he was led buy the stock because he believed that rolling-stock companies generally had been profitable, and therefore that this one was likely to be, rather than because he relied upon any special facts respecting the company stated by the defendant. He is probably mistaken in asserting that the defendant told him that the capital stock of the company was $1,000,000, or anything to that effect. His impression upon this point is probably derived from the recital in his certificate of the amount of capital stock. He admits that about two months after he made the purchase he met the defendant, and was then informed by him that the company issued stock as ears were" put in," and that his stock represented cars put in at the time he bought it of defendant. About a year after the purchase he was again fully informed by the defendant of the manner in which
the trustees of the companY' were accustomed to issue stock for cars from time to time. He made no charge of misrepresentation when he received these explanations, and it is improbable that he would not have done so, or that he "Would have taken no steps to rescind his purchase, if what was thus stated had been a surprise to him. At the time of the purchase, he believed that the stock would yield dividends of '6 per cent., and consequently that an investment in it would return about 14 per cent. He was allured by his expectations into making an investment without any adequate investigation or inquiry respecting; the conditions and chances. But he undoubtedly did suppose that the company was an ordinary-corporation or joint-stock company, organized under the laws of Miehigan:· The name by which it was styled, and the conversation with the defendant about capital stock, shareholders, and dividends, naturally suggested.this. So did the certificate which be received. A more vicious scheme of association, or a more loose· and lawless system of administration, than was adopted by the promoters and managers of this company for administering its affairs, can hardly· be conceived. It is difficult to believe they could have induced any person outside their own circle, who was informed of the powersintrlUlted to them and of the business methods of the company, to invest his money in the shares. Slight evidence of corrupt administration would suffice to create the belief that the scheme was intended as a fraud at its inception. But the proofs are destitute of any 'evidence to show that the interests of the shareholders were subordinated totbose of the managers. On the contrary, the proofs show that the' affairs of the company were honestly managed, and, had it not been .for circumstances beyond the control of the Inanagers, there is no reason to doubt that the shareholders would have oontinued to receive large dividends upon their investments. A report of a committee of stockholders, made after an examination of the affairs of !the oompany in June, 1885, has been introduced in evidence by the complainant, which shows that the powers conferred by the articles of association upon the trustees had not been abused, and that the intermission,of dividends was mainlycaused by the failure to collect moneys d\le from the railroad companies which were suffering from the general depression of railroad business. These facts do not furnish an adequate basis for a rescission of the complainant's purchase. A purchaser cannot expect a court of equity to decree him a rescission merely because he is able to show that his purchase has not turned out to be what he supposed he was buying. He must rely upon proof of deceit or misrepresentation on the part of the vendor, or upon a case of mutual mistake going to the essence of the contract. Any right to relief in the present case must rest upon the ground that the complainant has been misled by the fraudulent suppression or the misrepresentation by the defendant of some matter of substance. As has been said, there was no intentto deceive or mislead on the part oftbe defendant. If there were any misrepresentation, it is to be found in his statements respecting the corporate character of the company,-vague and incidental statements, which are also contained in the certificate of shares
CURTISS 'V. HURD.
received liy the complainant. If these statements furnish adequate ground for a rescission, every purchaser of stock in the company who may have bought without making inquiry, or without special informa,.tion about the terms and 'conditions of the articles of association, may also insist upon a rescission. Hthe defendant has made a material misrepresentation, the complainant is not to be precluded from relief merely because the defendant did not intend to defraud. , In' such cases courts of equity will relieve the purchaser, although the misrepresentations -were innocently made by the vendor. Smith v. Reese River OJ., L. R. 2 Eq. 264; Kennedy v. Panama Co., L. R. 2 Q. B. 580; Peek v. Gurney, L. R. 13 Eq. 79,113. A vendor cannot be heard to say that he knew nothing of the truth or falsehood of that whicbhe has represented, and claim to retain any benefit derived from the sale when the representations turn out to be untrue. TuRNER, L. J., in RawTtins v. Wickham, 3 De Gex & J. 304, 317. On the other hand, if the misrepresentation was of a trifling or immaterial thing, or if it was vague and inconclusive in its nature, or if the complainant did not trust to it, or was not misled by it, or if it was upon matter of opinion, or of a fact equally open to the inquiries of both parties, and in regard to which neither could be presumed to trust the other, a court of will not interfere. Looking at the case in the most favorable aspect possible for the complainant, and treating.it as one where he was induced to purchase the stock upon the defendant's representation that the company was an incorporated ,company organi7.ed .under the laws of Michigan, it must be held that the complainant is without rehledy. Such a representation, without more, is not of a matter of substar.\ce. It is too colorless and ind,efinite to be the foundation of a canse of action. The fact that a business concern is incorpprated is of little mom,ent, unless the charler or the organic law confers some valuable privileges or immunities upon the members. A trading association may be but a mere partnership; or it may have corporate pow.ers to a small extent, and sub modo; or it mtty be invested with corporate functions to a considerable and yet limited extent; or it may exist with all the incidental functions and peculiar privileges which a grantof unconditional corporate power confers. There are and have been many joint-stock associations of different kinds, including banking companies, which have never been legally incorporated, and which are mere partnerships as to every person except their own stockholders. One, if not the principal, inducement which leads such companies to seek corporate organization is to limit the risk of the partners, and tt> render definite the extent of their hazard. But there are many corporations in which, by the organic law, the members are liable for the debts to the same extent as the members of an ordinary partnership. In some there is a limited joint and several liability to the extent of the par value of the stock of each shareholder, and in others a personal liability for such sum as the proportion of each to the whole outstanding stock bears to the outstanding debts of the corporation. See Thon:p. Liab. Stockh.§ 4p. Where there is not a limited liability
'of the' metiIbers, or unless the corporation is 'one which is 'invested by the state with special privileges, incorporation is only valuable as a mode of organization which may conduce to the convenienoe of business management. Such are the facilities afforded by the laws of most of our states that the privileges of corporate organization are within the reach of almost any business 'Mncern,and can be obtained as a matter of course for a trifling outlay: It follows that a representation that an association is incorporated, without more, is no more than saying that it has been authorized by l'egislative authority to do what it could do practically, and what an mfinite variety of associations are doing without such authority. It is true that, as·a general rule,the shareholder of a corporation is not held to'the'liabilities of a member of an ordinary partnership for the debts of the concern, and a purchasei' of shares does not expect to incur such a liability as a consequence of' his purchase. But it cannot be affirmed that a purchaser of shares'w:ho buys without inquiry as to the character of the corporation of whichhe1proposes to become a member, or as to the nature of the liability of the stockholders, has any legal right to complain, if he finds, after he has purchased, that the stockholders are liable for all the debts of the concern. No authority for such a proposition has been cited by counsel. If it can be maintained, it can only be done by importing an implied warranty against such a liability into every sale of shares ina corporation. No such exception to,the rule of caveat emptor is known to the law. Having reached the conclusion that there is no ground for the relief sought by the complainant, because there was no deceit or misrepresentation as to ll.ny matter of substance by which he was induced to purchase the stock, it is not necessary to consider whether he acted with sufficient promptitude in attempting to rescind, or whether upon other grounds his case such as to preclude belief. The bill ia dismissed.
SMITH V. CITY OF PORTLAND.
(Oircuit Oourt, D. Oregon. April 7, 1881.)
DEDICATION-EVIDENCE OF-PLAT ALTERATION.
Upon an issue as to whether College street, in the city of Portland, extends through block No. 138. by virtue of a dedication made by the original owner of the premises. who platted a tract, including the block, as a part of the city, held that, although the record of the plat shows that, at some time, a line, since erased, was drawn across block 138, thus representing College street as running through the block, yet the testimony of witnesses, and the appearance of the record itself, satisfactorily demonstrate that the line was drawn by mistake in recording the. plat, and was erased at the time, and that the erasure was not the result of a fraudulent alteration, made since. 1
J Respecting the dedication of a strl*'t to' public use by makinll:and recording a plat on which it is designated, see Fulton v.rI'own of D9ver, (Del.) 6 At!. Rep. 633 i Donohoo v. Murray, (Wis.) 22. N. W. Rep. 167; Quinn v. Anderson, (Cal.) 11 Pac. Rep. 747, and note; San Leandro v. Le Breton, (Cal.) 13'Pac. Rep. 405.