Hunt v. Davis

• Decision Date: 27 February 1911
• Citation: 135 S.W. 458,98 Ark. 44
• Parties: HUNT v. DAVIS
• Court: Arkansas Supreme Court

135 S.W. 458

98 Ark. 44

HUNT v. DAVIS

Supreme Court of Arkansas

February 27, 1911

Appeal from Johnson Circuit Court; Hugh Basham, Judge; affirmed.

Decree affirmed.

McKennon and Sellers & Sellers, for apellants.

An officer of a corporation selling his individual stock acts solely in his private capacity, and is bound only by the rules applicable to vendors of personal property. Hence the inquiry in this case is whether there were false and fraudulent representations with reference to material matters affecting the value of the stock transferred, unaffected by appellant's official connection with the bank. 53 N.J.L 656; 53 L. R. A. 769.

There being no fiduciary relation between an officer of a corporation selling stock owned by him and the purchaser failure of the seller to disclose facts affecting the value of the stock does not constitute fraud, unless he makes false representations or induces the purchaser not to make inquiries. And, in case of false representation by the seller, in order to entitle the purchaser to rescind or recover damages, the representations must have been fraudulent in fact, and made with knowledge of its falsity or recklessly and without any knowledge of its truth or falsity; and they must have been relied upon so as to constitute an inducement for the purchase. Clark & Marshall Priv. Corp., § 616b; 15 Am. Rep. 245; 147 N.Y. 124; 49 Am. St. Rep. 651; 47 Ark. 165.

The plaintiff must not only show that he was misled by a false representation concerning a material fact, but also that defendant knew at the time that it was false, or that, being ignorant of its truth or falsity, he asserted that it was true, with intent to deceive. 71 Ark. 308; 31 Ark. 170; 38 Ark. 340.

Puffing on the part of the vendor, or giving an opinion as to future profits or dividends, does not constitute fraud. 6 Ark. 517; 1 Ark. 41. See also on the question of fraudulent representations, etc., 46 Ark. 250; 11 Ark. 66; 26 Ark. 30; 30 Ark. 686; 47 Ark. 164; 89 Ark. 315; 73 Ark. 572.

The burden is on the party alleging the fraud to establish all its elements by proof. 77 Ark. 355; 11 Ark. 378.

Webb Covington and T. D. Crawford, for appellee.

1. Appellee testified that Hunt told him that the bank had made 15 per cent. the year previous and would pay a like sum the year the sale was made, and that there was but one bad paper that he knew of, and he thought that would come all right. Appellee knew nothing of the condition of the bank, and relied on that statement. While appellant's testimony as to the transaction is somewhat different, the chancellor's finding is against him, and it can not be said that the preponderance is against appellee's testimony. It is clear from the testimony that the bank was insolvent for a year before Hunt parted with his stock.

2. Appellant, being an officer of the bank, was under the duty to exercise ordinary diligence to inform himself of its condition and business, and will be presumed to have known that which it was his duty to know. 97 Ky. 719; 79 Ia. 687. When he made assertions as to the bank's financial condition, appellee had a right to rely upon them.

3. The rule as to commendation or puffing applies only where the vendee has a full and fair opportunity to inspect the article to be sold and judge for himself. 45 Ark. 219. It has no application to this case. One may render himself liable for a false representation of the solvency of another, even though such representation was a mere expression of opinion, if the other elements of deceit are present. 1 Bigelow, Fraud, 481; 30 Ark. 362.

4. Appellee testifies that he was induced to enter into the contract by the representations of appellant; and, even if he was in part influenced by other causes, the law will afford a remedy. 30 Ark. 373.

OPINION

FRAUENTHAL, J.

This was an action instituted by R. S. Davis, the plaintiff below, to rescind a contract for the purchase and sale of certain shares of the capital stock of an incorporated bank into which it was alleged that he was induced to enter by reason of the fraud of defendant, W. R. Hunt. It was alleged in the complaint that on May 8, 1909, the defendant sold to plaintiff 124 shares of the capital stock of the Bank of Coal Hill, for which he paid to him shares of stock in an incorporated telephone company of the value of $ 2,050 and $ 125 in money; and that defendant induced him to purchase said bank stock by falsely and fraudulently representing that the bank had declared and paid a dividend of 15 per cent. the preceding year and would pay a like sum the current year, and that of its assets there was only one bad debt due the bank, thereby indicating that the bank was in a good financial condition, when as a matter of fact the bank was insolvent and the stock worthless. The plaintiff sought a cancellation of the sale of the stock and a recovery of the property he had paid therefor. The defendant denied that he had made any false or fraudulent representations, but claimed that he sold said bank stock honestly and in good faith. Upon the trial of the case the chancellor found that the contract of sale was entered into by reason of the false and fraudulent representations of the defendant, and made a detailed statement of his findings to that effect. He cancelled the contract of sale, and decreed in favor of plaintiff a recovery of the property which he had paid in consideration of the bank stock.

It is well settled that a court exercising equity jurisdiction has the power to annul a contract for the sale of property which has been procured by the false and fraudulent representations of the vendor and to restore to the vendee the consideration given by him therefor. Fraud vitiates such a contract, but the fraudulent acts and false representations complained of must be of such a nature as to constitute a fraud which is cognizable in law. Every false statement made by a vendor is not necessarily fraudulent in law, and the general rule is that the vendee must beware when he enters into a contract for the purchase of property. The law requires that each party to such a contract should act with care and diligence, and seek the means of information relative to the subject-matter of the sale that are open to both alike, for the law can not act as a guardian of either party and relieve him from the consequences of his own want of prudence. The principles on the subject of fraud which are applicable to contracts for the sale of property generally apply likewise to contracts for the sale of shares of stock. In order to charge the seller with fraud, it must be shown that he has made an active attempt to deceive the buyer relative to some matter material to the contract, either by statements which he knows to be false or by acts, conduct or representations which suppress the truth and induce in the buyer a false impression. Representations which are considered fraudulent in law must be of a nature that are material to the contract, and "must be made by one who either knows them to be false or else, not knowing, asserts them to be true, and made with the intent to have the other party act upon them to his injury, and such must be their effect." Louisiana Molasses Co., Ltd., v. Fort Smith Gro. Co., 73 Ark. 542, 84 S.W. 1047. If a representation is made by the seller which he knows to be false, it will constitute fraud, but a representation will also be fraudulent, even if he had no knowledge whatever, if it is made of a matter as truth of personal knowledge. Cooper v. Schlesinger, 111 U.S. 148, 28 L.Ed. 382, 4 S.Ct. 360; Kountze v. Kennedy, 147 N.Y. 124, 41 N.E. 414; Cole v. Cassidy, 138 Mass. 437.

Although a purchaser must act with prudence and diligence in seeking the available means of ascertaining the truth, yet if the seller, having peculiar knowledge of the matter, by any misrepresentation or artifice induces the buyer to rely on his false statement, then the seller will not be heard to say that the buyer could have ascertained the truth. The very representations relied upon may have caused the purchaser to forbear from making further inquiry. If the false representations are made with the intent to induce the other party to act thereon, ordinary prudence does not require the party to test the truth of such representations where they are within the knowledge of the party making them or where they are made to induce the other party to refrain from seeking further information. Gammill v. Johnson, 47 Ark. 335, 1 S.W. 610; Graham v. Thompson, 55 Ark. 296, 18 S.W. 58; Stewart v. Fleming, 96 Ark. 371, 131 S.W. 955; Evatt v. Hudson, 97 Ark. 265, 133 S.W....