Costello v. Sykes

• Decision Date: 20 June 1919
• Docket Number: No. 21227.,21227.
• Citation: 172 N.W. 907,143 Minn. 109
• Parties: COSTELLO v. SYKES et al.
• Court: Minnesota Supreme Court

143 Minn. 109

172 N.W. 907

COSTELLO

v.SYKES et al.

No. 21227.

Supreme Court of Minnesota.

June 20, 1919.

Appeal from District Court, Hennepin County; Rockwood, Judge.

Action by John P. Costello against Alice G. Sykes and another. From an order sustaining a demurrer to the complaint, plaintiff appeals. Order affirmed.

Hallam, J., dissenting.

Syllabus by the Court

A mistake relating merely to the attributes, quality, or value of the subject of a sale, or respecting a matter of inducement to the making of the contract, is not sufficient to authorize a court to rescind the contract at the suit of the aggrieved party, where the means of information were open alike to both parties, and there was no concealment of facts or imposition.

If the parties were mistaken only as to some point which did not affect the substance of the transaction between them, or go to the root of the matter involved, no case for rescission is presented.

A person buying bank stock has no greater right to rely on the accuracy of the books and reports of the bank than he would have to rely on those of any other corporation whose stock he was buying.

The books of a bank showed that its paid-in capital was intact and that it had a surplus and undivided profits. In fact, its capital had become seriously impaired, and it had no surplus or undivided profits. A stockholder sold part of his stock for a price equal to its book value. Both he and the purchaser believed that the books showed the true state of facts. There was no fraud or deception. Both parties were equally innocent in their mistaken belief.

Held, that the purchaser of the stock did not have the right to rescind the contract of sale on the ground that there had been a mutual mistake of fact. Daniel F. Foley, of Minneapolis, for appellant.

Lancaster & Simpson and James E. Dorsey, all of Minneapolis, for respondents.

LEES, C.

Appeal from order sustaining a demurrer to the complaint on the ground that it failed to state a cause of action. In substance the material allegations are as follows:

The Calhoun State Bank was a Minnesota banking corporation having, according to its books, a paid-in capital of $35,000, a surplus of $5,250, and undivided profits of $6,000. Respondents were stockholders. The par value of a share of stock was $100. If the bank's capital was unimpaired, and it had the surplus and undivided profits shown by its books, a share of stock was worth at least $136. Respondents sold 10 shares of stock to appellant for $1,360. At the time of the sale the parties to the transaction believed that the bank's capital had not been impaired, that its assets and liabilities were as set forth in its books, that it had the surplus and profits referred to; that its books were kept correctly, and that the book value of its stock was not less than $136 per share. In fact, it had neither surplus nor undivided profits. Its employés had kept its books so as to conceal defalcations of which they were guilty, and its assets had been depleted until its stock was worth but $60 per share. Such employés are insolvent, and there is no way of making good their defalcations. The parties to the sale were mutually mistaken as to the assets of the bank, the actual value and the book value of its stock, and the amount of its surplus and undivided profits. Upon discovering the truth, appellant tendered the stock to respondents and demanded repayment of the purchase price, and, his demand being refused, sues for a rescission of the contract of sale.

[2][3][4] The sole question presented is whether the mistake alleged is of such a character as to give rise to a right to rescind.

The subject-matter of the contract of sale was 10 shares of the capital stock of the bank. There was no mistake as to its identity or existence. A mistake relating merely to the attributes, quality, or value of the subject of a sale does not warrant a rescission. Neither does a mistake respecting something which was a matter of inducement to the making of the contract, where the means of information were open alike to both parties, and each was equally innocent, and there was no concealment of facts and no imposition. A leading case is Kennedy v. Panama, etc., Mail Co., L. R. 2 Q. B. Cas. 580. Like the one at bar, it involved a contract for the sale of corporate stock. The corporation owned and operated a line of steamships. Both parties bona fide believed that it had obtained a valuable contract to carry government mails, but it turned out that the contract was made without authority. The government refused to ratify it, and so the value of the stock was much less than the parties supposed. It was contended, as it is here, that there was a difference in substance between shares in a company with and shares in a company without such a contract, that this was a difference which went to the very root of the matter involved, and that, therefore, the purchaser was entitled to rescind. The contention did not meet with the court's approval, and it was held that the case was one of innocent misapprehension, that a rescission could not be had, and that there was not such a complete difference in substance between what was supposed to be and what was taken as would constitute a failure of consideration. The purchaser got the very shares he intended to buy and they were far from being of no value. Such are the facts in the case at bar, for appellant got the shares he intended to buy. His complaint is that they are worth but $60, instead of $136, each. The Kennedy Case has been widely and approvingly cited by courts of last resort in this country. The principles it lays down are those which have been approved in the following, among many other, decisions: Otis v. Cullum, 92 U. S. 447,23 L. Ed. 496;Dambmann v. Schulting, 75 N. Y. 55;Hecht v. Batcheller, 147 Mass. 335, 17 N. E. 651,9 Am. St. Rep. 708;Cavanagh v. Tyson, 227 Mass. 437, 116 N. E. 818; Sankey's Ex'r v. Bank, 78 Pa. 48;Wheat v. Cross, 31 Md. 99, 1 Am. Rep. 28;Sample v. Bridgforth, 72 Miss. 293,16 South. 876;Smith v. Tewalt, 9 Ind. App. 646, 37 N. E. 294;Wood v. Boynton, 64 Wis. 265, 25 N. W. 42,54 Am. Rep. 610;Moore v. Scott, 47 Neb. 346, 66 N. W. 441.

Appellant takes the position that there was a mistake as to the existence of the bank's supposed surplus and undivided profits. In this connection it is argued that since banks are under the supervision of public officials, whose duty it is to examine their books and obtain quarterly reports, which are published, he had the right to rely on such books and published reports, and, that respondents are blamable because they are not correct. It is therefore asserted that the parties to a sale of bank stock do not stand on the same footing as the parties to a sale of stock in other corporations. There are a number of statutory provisions which lend support to appellant's position, but we are not convinced that a mere stockholder in a bank is chargeable as a matter of law with responsibility for the manner in which its books are kept, or that greater reliance may be placed upon their accuracy than may be placed upon the accuracy of the books of any other corporation, by a purchaser of its stock.

Thwing v. Hall, 40 Minn. 184, 41 N. W. 815, and Cobb v. Cole, 44 Minn. 278, 46 N. W. 364, are cited as cases committing this court to a doctrine at variance with that generally adopted in other jurisdictions. Chapman v. Cole, 12 Gray (Mass.) 141, 71 Am. Dec. 739,Sherwood v. Walker, 66 Mich. 568, 33 N. W. 919,11 Am. St. Rep. 531,Hannah v. Steinman, 159 Cal. 142, 112 Pac. 1094, and cases of similar nature are also cited, and Prof. Williston's language at section 656 of his treatise on the subject of Sales is quoted to sustain appellant's contention.

Thwing v. Hall, supra, differs from the case at bar in that it was an action for the specific performance of an executory contract of sale, instead of one to rescind an executed contract, and especially in that there was a representation made by the seller to the buyer, relied on by the latter, as to a material fact which was untrue, although the seller believed it to be...