Kennedy v. Bender

Decision Date15 March 1911
PartiesKENNEDY et al. v. BENDER.
CourtTexas Supreme Court

Action by J. M. Bender against Edward Kennedy and another. From a judgment for plaintiff, defendants appealed to the Court of Civil Appeals of the First Supreme Judicial District, and it reversed the judgment, and certified questions to the Supreme Court. Questions answered.

S. Taliaferro and G. L. Teat, for appellants. Wilson & Cole, for appellee.

BROWN, C. J.

Certified questions from the Court of Civil Appeals of the First Supreme Judicial District:

"The above case is now pending in this court on motion for rehearing, and the questions here certified are material to a disposition of such motion. The following is a statement of the matters material to a decision of such questions:

"J. M. Bender instituted this action in the district court to recover $400 actual and $500 exemplary damages for willful fraud and deceit practiced upon him by defendants, Kennedy and McKallip, whereby he was induced to purchase four shares of stock in a corporation, of the par value of $400, for which he paid that amount in cash. The fraudulent representations consisted of statements that $78,000 of the capital stock of the corporation, capitalized at $100,000, had been paid in, in cash, and that the corporation was in a sound financial condition. Kennedy was one of the directors, and the other defendant, McKallip, was the president of the corporation, each owning $25,000 of the stock, for which they had in fact paid nothing; the corporation being bankrupt at the time.

"Among other defenses pleaded by defendants it was alleged that after discovery by plaintiff of the fraud, and of the falsity of the representations of defendants, whereby he had been induced to part with his money, he had ratified and affirmed the contract, and had so condoned the fraud as to be estopped to set it up as a basis for this action. It was specially alleged that, after the discovery by plaintiff of the falsity of the said representations, there was a meeting of the stockholders, at which Bender was present, when the proceedings were had that are hereinafter set forth.

"Upon a trial with a jury there was a verdict for plaintiff for $400 actual and $250 exemplary damages, for which judgment was rendered. Defendants brought the case to this court on appeal, and on hearing of the appeal it was held that the evidence as to the fraud and deceit was sufficient to entitle plaintiff to recover both exemplary and actual damages in the amounts adjudged, but that by reason of the following facts, which were found to have been established by the undisputed evidence, plaintiff had condoned the fraud and was estopped to set it up as a basis for this action. This can best be understood by the following quotation from the opinion:

"The only ground of ratification or condonation after knowledge of the fraud, entitled to consideration, is that based upon the action of appellee at the stockholders' meeting of November 13, 1906, some weeks after, according to his own testimony, he had acquired full knowledge of the insolvent condition of the corporation, and of the falsity of the representations that had been made to him as an inducement to purchase the stock. This is what occurred at that meeting of stockholders: Appellants McKallip and Kennedy and Frank Greenaway, in view of the financial condition of the corporation, then trembling, as was afterwards developed, on the verge of bankruptcy, offered to donate to the corporation certain shares of their stock —that is, Kennedy $24,000 worth, McKallip the same, and Greenaway $5,000 worth— with the understanding that the certificates therefor be canceled and the stock, or so much thereof as might be necessary, be resold for the benefit of the company at such prices as might be determined by the board of directors; the donation being made for the purpose of relieving the financial condition of the company and putting it on its feet as a going concern. A resolution was offered to accept this proposition, the stock to be placed upon the market for sale at a minimum price of 50 cents on the dollar, the proceeds to be used to pay the debts and operating expenses of the concern, and any residue to be put in the treasury for the use of the company. This resolution having been read and seconded, the minutes show that appellee, Bender, offered an amendment in substance that inasmuch as certain stockholders, himself among the number, had bought and paid for their stock at par, the stock so held by them should be increased, so as to give them two shares for each share so held; that is, to double their stock, and make it really cost only 50 cents on the dollar of its face value. Appellee testified that one Blair, another stockholder who had bought at par, offered this amendment, and he seconded it; but that is immaterial. As amended, the resolution was unanimously adopted, and it is clearly and undisputably shown that appellee was present and acted with the others in adopting the amended resolution. The trial court refused to submit this issue to the jury.

"Upon the facts above stated this court reversed the judgment and rendered judgment for appellants. As will be noticed from the opinion, Associate Justice Reese dissented from this conclusion. The jurisdiction of this court is final, and such dissent does not require that the point of difference be certified; but inasmuch as the parties have no right of appeal, and the majority are in doubt as to the correctness of their conclusion, and in view of the general importance of the question, we respectfully certify to your honors the following questions:

"First Question. Do the foregoing facts with regard to the action of the plaintiff, Bender, at the stockholders' meeting, of themselves, as matter of law, operate as an estoppel upon plaintiff, and bar him of his right to recover in this action?

"If this question be answered in the negative, we certify this—

"Second Question. Upon the facts stated, which were established by the undisputed evidence, should this issue of estoppel, through condonation of the fraud, have been submitted to the jury?"

To the first question we answer, "No." When Bender purchased the stock of the corporation under the fraudulent representations of the appellants, he acquired title to the stock and became obligated to pay for it according to his contract. He had no contract with the appellants. Therefore, as to them, he had not the right of rescission. His only remedy was an action against the appellants for damages caused by the fraudulent representations whereby they induced him to purchase the stock. Hence nothing that Bender did in the exercise of his rights as a stockholder in the corporation can be looked to as in any way affecting his claim for damages against appellants, unless it be shown by the evidence that his purpose in so acting was to waive his right against them, or that in some way he acquired something of value from the appellants, with the purpose and intent of waiving his right of action for damages. 20 Cyc. p. 93; Schmidt v. Mesmer, 116 Cal. 271, 48 Pac. 54. "The question of waiver, however, is largely one of intent. Hence acts done in affirmance of the contract can amount to a waiver of the fraud only where they are done with full knowledge of the fraud and of all material facts, and with the intention, clearly manifested, of abiding by the contract and waiving all right to recover for the deception. Acts which, although in affirmance of the contract, do not indicate any intention to waive the fraud, cannot be held to operate as a waiver." 20 Cyc. p. 93.

The statement submitted to this court does not show that the additional stock was actually issued to Bender; but for the purposes of this opinion we will assume that it was issued and delivered. When the stock was donated by the three stockholders, it was for the purpose of relieving the financial condition of the company, and shows no purpose to compensate Bender for his damages. That purpose did not exist, either on the part of the donors, or on the part of the corporation, or on the part of Bender. The resolution which was offered in the stockholders' meeting had reference to the disposition of the stock; that is, that it should be sold at not less than 50 cents on the dollar, and the proceeds applied, as stated in the resolution, to the purposes of the corporation. The amendment which was offered, and which Bender either offered or seconded, had reference also to the disposition of the stock; that is, that an amount of it equal to that which was held by certain of the stockholders should be given to them, in order to make their stock equal to that of other stockholders. In making the donation, appellants had no purpose, as we have before said, to repair Bender's loss; neither had the corporation in view anything with reference to Bender's right for damages, and Bender was without any intention to waive his claim for damages. How can it be said, then, that by his acceptance of the stock from the corporation he waived a claim for damages against individuals? Upon what principle can an estoppel be invoked in favor of appellants, when their action had no reference to their transaction with Bender, or against the latter, who manifested no purpose of surrendering any right that he had against appellants. We are unable to see in the facts stated by the Court of Civil Appeals wherein Bender in any way evinced a purpose to surrender his claim for damages against appellants and accept the stock from the corporation.

To the second question we answer that the facts stated by the court do not raise any issue as to Bender's waiver of his right of action for damages against appellants. Therefore we see no reason why the court should have submitted such an issue. However, it may be that circumstances existed, which were in...

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