Karsun v. Kelley

• Decision Date: 10 March 1971
• Citation: 482 P.2d 533,258 Or. 155
• Parties: , Blue Sky L. Rep. P 70,906 Charles KARSUN, Appellant, v. Stanley E. KELLEY, Pacific Industrial Underwriters, Inc., an Oregon corporation, and Diagnostic Centers, Inc., an Oregon corporation, Respondents.
• Court: Oregon Supreme Court

Page 533

482 P.2d 533

258 Or. 155, Blue Sky L. Rep. P 70,906

Charles KARSUN, Appellant, v. Stanley E. KELLEY, Pacific Industrial Underwriters, Inc., an Oregon corporation, and Diagnostic Centers, Inc. an Oregon corporation, Respondents.

Supreme Court of Oregon, In Banc.

Argued and Submitted Feb. 4, 1971.

Decided March 10, 1971.

Marvin S. Nepom, Portland, argued the cause for appellant. With him on the brief was Leo Levenson, Portland.

David W. Harper and Alan L. Schneider, Portland, argued the cause for respondents Stanley E. Kelley and Pacific Industrial Underwriters, Inc. With them on the brief were Keane, Haessler, Harper & Pearlman, Portland, and Merlin Estep and Estep & Daniels, Salem.

TONGUE, Justice.

This is an action under the Oregon Blue Sky Law (ORS 59.115) by the purchaser of stock to recover the amount of the purchase price from the sellers of the stock. Plaintiff appeals from an order by the trial court setting aside a jury verdict of $3,750, plus $1,085 in attorney's fees, and granting a new trial.

The sole issue on appeal is whether the admission of evidence of other false representations, similar to those alleged to have been made to defendant, but made to two other purchasers of stock at about the same time, was error requiring the granting of a new trial. The pleadings and facts are of importance in deciding this question.

Plaintiff's complaint alleged that defendants sold 1,500 shares of stock of Diagnostic Centers, Inc. to him by means of untrue statements of material facts, including representations that 'the prospectus was out of date and should be disregarded' and that 'the initial offering of the stock would be closed that weekend.' Defendants' answer was a general denial.

Defendant Kelley was the owner of Pacific Industrial Underwriters, Inc., which handled 'new issues only.' On June 1, 1968, he made a business call upon plaintiff at his home. Plaintiff testified that Mr. Kelley told him about the operations of Diagnostic Centers, Inc., a new Oregon corporation, and represented to him that the prospectus for the corporation was not only out of date, but should be disregarded because the company 'had turned the corner and was operating in the black,' contrary to the prospectus. He also testified that Kelley represented that plaintiff was very fortunate to be able to get the stock because the offering of the stock was 'definitely being closed' that weekend, with the result that there would then be no more stock available. In reliance upon these and other representations plaintiff said that he purchased 600 shares of the stock at $2.50 per share, for a total of $1,500. Plaintiff also testified that five days later, on June 6th, defendant Kelley called him again and told him that there was still a limited amount of the stock available and that the company was then in the process of negotiations with a 'big chain' to install its products. In reliance on these representations plaintiff said that he purchased 900 additional shares, for $2,250.

Plaintiff also offered evidence that these representations were not true in that the corporation was not then operating at a profit and over 25% Of the stock was still unsold. Later the price of the stock went down to as low as 15cents per share.

In addition, plaintiff offered the testimony of two witnesses that at about the same time defendant Kelley made substantially the same representations to them. Defendants objected to such testimony as irrelevant to any issue in the case and as 'inherently prejudicial.' In support of that objection defendants contended that in an action under ORS 59.115 plaintiff was not required to prove knowledge by defendants that representations made by them were false. Defendants also contended that while such evidence might have been admissible if defendants had alleged as an affirmative defense that they had no knowledge that representations made by them were not true, as provided by ORS 59.115(1) (b), defendants had made no such allegations in their answer and made no such contention on trial. Instead, defendants simply denied that they made the alleged representations and contended that all statements made to plaintiff were true. As a result, defendants contended that 'scienter,' or knowledge, was not an issue in the case, so as to make such evidence admissible on that issue.

On the contrary, plaintiff contended on trial that such testimony was relevant and admissible on several grounds, including the following: (1) As evidence that the representations were made by defendants with knowledge that they were false, for the reason that even if the 'real issue' was whether the representations were made and whether they were false, the jury was 'entitled to know' whether defendants Knew that they were false; (2) As evidence that such statements were made as a part of a plan, design or scheme to promote the sale of the stock; and (3) As evidence that the alleged statements were representations of material facts, as alleged by plaintiff, but denied by defendants.

After considering these opposing contentions the trial judge overruled defendants' objections, but wice cautioned the jury that the testimony of these witnesses that similar representations had been made to them by defendant Kelley was not to be considered as proof that any representations made by Kelley to plaintiff were untrue, but only upon the limited question, whether, if false representations were made to plaintiff, they were made by Kelley with knowledge of their falsity. Later, however, the trial judge granted defendants' motion for new trial upon the ground that such evidence was improperly admitted and was highly prejudicial despite such 'limiting' instructions to the jury.

1. Evidence of Other Representations Was Not Admissible to Prove Knowledge Because That Issue Has Been Removed From the Case.

In considering plaintiff's contention that the trial court erred in granting a new trial on this ground we start with the well-recognized general rule that evidence that a person performed a certain act at a particular time is not ordinarily admissible to prove that the performed a similar act at some other time. Carpenter v. Kraninger, 225 Or. 594, 601, 358 P.2d 263 (1961). Thus, it is generally held that in an action for fraud evidence of misrepresentations made by defendant to other persons is not ordinarily admissible as evidence that misrepresentations were made by defendant to plaintiff. Boord v. Kaylor, 100 Or. 366, 377, 197 P. 296 (1921).

It has been held by this court, however, that in an action for fraud similar fraudulent representations to other persons may be admissible upon the issue of defendants' intent, motive or 'scienter'; i.e., knowledge that the representations were false. Carpenter v. Kraninger, Supra, 225 Or. at 601, 358 P.2d 263, and cases cited therein. This brings us to the question whether 'scienter,' or knowledge, is a proper issue in an action under ORS 59.115 and, if so, whether it was an issue in this case.

In 1967 the Oregon Blue Sky Law was amended by ORS 59.115(1)(b) to adopt substantially the same terms as set forth in the Federal Security Act of 1933, 15 U.S.C.A. § 77l(2). Thus, the legislative history of that act, as well as decisions construing its provisions, are of significant interest. ¹

Although the purpose of the federal act was to 'broaden' the law of deceit, Congress did not go so far as to provide, as in a suit for rescission, that the purchaser of securities can demand the return of the purchase price upon proof of any material misrepresentation, regardless of intent, motive, or 'scienter.' Instead, and as a concession to the sellers of securities, it was provided in § 77l(2), and also in ORS 59.115(1)(b), that a seller of securities who makes a false representation to a purchaser is not liable for return of the purchase price if he can 'sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the untruth' of the representation. ²

Thus, knowledge that a misrepresentation was or was not false may still be an issue in an action under ORS 59.115 and in such an action evidence of false statements by the defendants to other persons may be admissible on that issue. In this case, however, defendants not only did not plead lack of such knowledge as an affirmative defense, but before evidence of similar misrepresentations to the two other witnesses was offered in evidence, defendants made it clear upon the record that they made no contention that if any misrepresentations were made by defendant Kelley he did not know of their falsity, but that defendants' sole contention was that they made no false representations to plaintiff.

This, in our view, completely removed from the case the possible issue of 'scienter' or knowledge of the falsity of the alleged misrepresentations and, as a result, also removed that ground as a basis for the admissibility of the testimony of these two witnesses. It follows that it was error to receive such testimony unless it was properly admissible on some other basis.

2. Evidence of Representations to Other Persons May Be Admissible To Show A Larger or Continuing Plan or Design.

Defendants acknowledge that evidence of other acts or representations may be admissible to show a continuing plan or scheme, as an exception to the general rule excluding such evidence. Defendants contend, however, that this exception 'is applicable only to cases of fraud' in which 'the pleadings allege a plan or scheme to defraud,' citing Union Central Life Insurance Co. v. Kerron, 128 Or. 70, 79--80, 264 P. 453, 457 (1928), and McCormick on Evidence § 164(2). Defendant also contends that, in any event, this exception 'does not permit the introduction of evidence of similar representations for the purpose of showing that other representations were in fact made,' but only to show intent, motive or knowledge, which was not in issue in ...