Howard v. Turner

• Decision Date: 22 May 1893
• Docket Number: 176
• Citation: 155 Pa. 349,26 A. 753
• Parties: Howard, Receiver, Appellant, v. Turner
• Court: Pennsylvania Supreme Court

26 A. 753

155 Pa. 349

Howard, Receiver, Appellant, v. Turner

No. 176

Supreme Court of Pennsylvania

May 22, 1893

Argued February 7, 1893

Appeal, No. 176, July T., 1892, by plaintiff, J. E. Howard receiver of the Newton National Bank, from judgment of C.P Chester Co., Aug. T., 1891, No. 51, on verdict for defendant, John H. Turner.

Assumpsit on promissory note given for subscription to stock of bank.

The facts as they appeared before WADDELL, P.J., are stated in the opinion of the Supreme Court.

Plaintiff's points were among others as follows:

"2. The defendant cannot allege by way of defence to this suit that the subscription for stock in the bank, for which his note was given, was induced by fraudulent representations, even if such fraudulent representations were made and had induced the subscription, for the reason that since the said subscription was made, and before this suit was commenced, the bank has failed, and the rights of creditors and other innocent third parties have intervened. Answer: I cannot affirm that point in the language in which it is put. I would say to you that if the rights of creditors and innocent third parties have intervened since the note in suit was given and before the defendant gave notice of his intention to rescind his contract, then he cannot resist the payment of the note on account of the alleged false representations." [3]

"3. The defendant was bound immediately, upon learning of the alleged fraud, to elect whether he would rescind the contract or waive the fraud, and his delay until after the commencement of this suit to make such election is fatal to his defence, by reason of laches. Answer: I must qualify that point also, gentlemen, and my answer would be as follows: 'The defendant was bound to elect, within a reasonable time after learning of the alleged fraud, to elect whether he would rescind the contract, or waive the fraud,' provided third party's interests had in the meantime intervened, but we cannot say 'his delay until after the commencement of this suit to make such election is fatal to his defence by reason of laches.' We do say, 'if he delayed electing until other rights intervened, such delay would prove fatal to his rescission.'" [4]

"4. The defendant having taken no steps to repudiate his contract of subscription, nor denied his liability until after suit was brought, but having expressed his willingness to join with his fellow shareholders in their efforts to reorganize the bank, and having thus induced them to take upon themselves the burden of such reorganization and the assumption of the old indebtedness, and new subscribers to the stock in the reorganized bank having come in, relying upon this note as an asset towards payment of such indebtedness, and the creditors having, in view of such reorganization, abated their claims, and contracted to accept the balance thereof by installments, the defendant is estopped from denying his liability on this note. Answer: We cannot affirm this point as drawn. We say to you, if the defendant took no steps to repudiate his contract, nor deny his liability, but, on the other hand, by his conduct or declarations, induced the stockholders of the bank to assume liabilities, or induced strangers to become stockholders in the bank, then he is estopped from denying his liability on the note." [5]

"6. Upon all the evidence in the cause the verdict should be for the plaintiff. Answer: We cannot say that to you, gentlemen. We must leave that as a fact for your determination. That would require us to say that the plaintiff, under all the circumstances of the case, is entitled to recover. We have felt that we were called upon to leave certain questions in the case for you to determine, and as you will determine them you will determine whether the plaintiff or defendant is entitled to the verdict. I must, therefore, refuse this point." [6]

Defendant's points were, among others, as follows:

"7. If the jury find that Charles R. McLain was in fact the agent of the Newton National Bank, and by false and fraudulent statements induced the defendant to sign the note in suit, or the note of which the note in suit was a renewal, the plaintiff cannot recover in this action. Answer: As you will see, this is a statement of the principles of law as I have already given them to you in my charge in chief, and I therefore affirm that point." [7]

"8. If the jury find that C. R. McLain was the agent of said Newton National Bank to sell its increase of capital stock, and shall find further that he represented to the defendant that said bank was in a sound and solvent condition, and that all its loans and discounts were good and the paper it held was first-class commercial paper, and shall find further that the defendant relied upon said representations when he agreed to take the stock of said bank for his wife, and shall find further that the said bank was at the time said representations were made not sound and solvent, and that all its loans and discounts were not good or on first class commercial paper, and said C. R. McLain knew that the said statements were false when he made them, the bank cannot recover in this suit. Answer: I affirm that point, with the addition of what I have already said in my general charge, unless the defendant has waived that right by what may have transpired since he discovered the falsity of these representations." [8]

Verdict and judgment for defendant. Plaintiff appealed.

Errors assigned were (3-8) instructions, quoting them.

Judgment reversed and a venire facias de novo awarded.

Thomas B. Taylor, Thomas W. Pierce with him, for appellant. -- The fraud in obtaining the subscription would render the contract voidable but not void. After the rights of others had accrued, as those of creditors, upon the insolvency, the right to rescind the contract of subscription was gone, and the remedy of defendant would be against the person who had defrauded him.

The reorganizers have the same rights as the receiver, into whose shoes they have stepped. The receiver does not represent the corporation merely, but is adopted for the benefit of all parties who may establish rights in the case: Booth v. Clark, 17 How. 331.

If a corporation is insolvent, a shareholder, whose contract of subscription was obtained by fraud of the company's agents, cannot diminish the security of bona fide creditors by rescinding his contract to contribute the amount of capital subscribed by him: Morawetz, Corp. 839; Oakes v. Turquand, L.R. 2 H.L. 325; Stone v. Bank, L.R. 3 C.P. Div. 307; McNiell's Case, L.R. 10 Eq. 503; Henderson v. Royal British Bank, 7 E. & B. 356; Wright's Case, L.R. 12 Eq. 349; Upton v. Englehart, 3 Dillon, 496; Upton v. Tribilcock, 91 U.S. 55; Webster v. Upton, 91 U.S. 65; Sanger v. Upton, 91 U.S. 56; Ogilvie v. Knox Ins. Co., 22 How. 380; Chubb v. Upton, 95 U.S. 665; Saffold v. Barnes, 39 Miss. 400; Ruggles v. Brock, 6 Hun, 164; Michener v. Payson, Assignee of the Republic Ins. Co., 13 Nat. Bank Reg. 49; Litchfield Bank v. Church, 29 Conn. 137; Dettra, Receiver, v. Kestner, 147 Pa. 566.

It is clear that no effort to have Mrs. Turner relieved from her liability as a stockholder was made prior to the insolvency of the bank. If plaintiff's contention is not correct, that that fact took away from her the right to relief as such stockholder, then it is urged that there was no evidence in the case showing any movement on either her or her husband's part to rescind the contract for these shares.

A party who would otherwise be entitled to set aside a contract on the ground of fraud cannot do so, if, after discovering the fraud, he has acted in a manner inconsistent with the repudiation of the contract: Briggs's Case, L.R. 1 Eq. 483; Scholey v. Central Ry., L.R. 9 Eq. 266; Ashley's Case, L.R. 9 Eq. 263; London & Staffordshire Fire Ins. Co., 24 Ch. Div. 149; Bank of Macon v. Bartlett, 71 Ga. 807; Ogilvie v. Knox Ins. Co., 22 How. 387.

Before a rescission can be had, equity requires that the shares should be returned: Pearsoll v. Chapin, 44 Pa. 9; Beetem's Admrs. v. Burkholder, 69 Pa. 249; Francis v. R.R., 108 N.Y. 93; Gates v. Bliss, 43 Vt. 299.

Alfred P. Reid, R. E. Monaghan and George B. Johnson with him, for appellee. -- The Newton National Bank was the real plaintiff in this suit, and was liable for the fraud of its agent in procuring the subscription to its increase of capital.

Whether the defendant had waived the fraud or not was a question of fact for the jury to determine, and it was so submitted.

There was no evidence that Turner took any step there which would waive his right. He never united with the other stockholders in the reorganization scheme. All the correspondence subsequent to this date was with Mr. Ives personally, who eventually furnished the money required to complete the reorganization upon the expectation that Mrs. Turner would pay the assessment. In all this there was nothing that could be construed into a waiver of the right to set up this defence as against the bank. When this suit was brought the shares of Mrs. Turner were forfeited and liable to sale at auction, and Mr. Ives took the shares she might have had a title to, and her certificate was of no value and there was no occasion to offer to return it.

Before PAXSON, C.J., STERRETT, McCOLLUM, MITCHELL and DEAN, JJ.

OPINION

MR. STERRETT, CHIEF JUSTICE

This suit is on a note admitted to have been made and delivered by defendant to the Newton National Bank in part renewal of his note for $990 at ninety days from August 9, 1890, with interest, etc. The consideration of this last mentioned note was nine shares of the increased capital stock of said bank taken by defendant in the name of his wife, Louisa E. Turner under the following...