Lambertson v. National Investment & Finance Co.

• Decision Date: 10 February 1925
• Docket Number: 36276
• Citation: 202 N.W. 119,200 Iowa 527
• Parties: J. C. LAMBERTSON, Appellee, v. NATIONAL INVESTMENT & FINANCE COMPANY, Appellant
• Court: Iowa Supreme Court

202 N.W. 119

200 Iowa 527

J. C. LAMBERTSON, Appellee, v. NATIONAL INVESTMENT & FINANCE COMPANY, Appellant

No. 36276

Supreme Court of Iowa, Des Moines

February 10, 1925

REHEARING DENIED SEPTEMBER 29, 1925.

Appeal from Clarke District Court.--HOMER A. FULLER, Judge.

ACTION at law, based upon a claim of fraud in the sale of corporate stock, to recover the purchase price. Verdict and judgment for plaintiff, and defendant appeals.

Affirmed.

Crist & Dyer and Dale & Harvison, for appellant.

O. M Slaymaker and R. E. Killmar, for appellee.

STEVENS J. FAVILLE, C. J., and DE GRAFF and VERMILION, JJ., concur.

OPINION

STEVENS, J.

I.

Appellee commenced this action in the court below to recover the sum of $ 20,000, with legal interest, which he alleged he was induced by the fraud of appellant to pay for shares of stock in the National Investment & Finance Company, now Burns Brothers Company. The fraud charged is the alleged false representations of appellant "that the said company was fully organized and in operation and was solvent, and that the said stock which he would receive was worth and was of the full value of $ 20,000." Written subscriptions for the stock were signed by appellee.

The answer to the petition denies the allegations thereof, and alleges that appellee, with knowledge of the facts, by his action and conduct ratified, confirmed, and approved all of the matters of which he complains, and is thereby estopped from maintaining the action.

The briefs and argument of counsel cover a wide field, but their final concessions reduce the controversy to little more than the question of appellee's right to rescind the contract by notifying appellant of his election to do so, and offering to place it in statu quo, before the commencement of an action at law to recover the sum paid.

It is the claim of appellant, and the argument of counsel proceeds upon the theory, that a party to a contract voidable on the ground of fraud in its inception has two remedies: one, to commence an action in equity for its cancellation and rescission; and the other, to prosecute an action at law for damages, the election of one necessarily precluding the other. It is the further contention of appellant that the measure of damages in an action at law is the difference in value between what was received under the contract and the price paid, except where nothing of value is received, in which case the sum paid is the measure of damages.

As opposed to the theory of appellant, appellee contends that a party to a contract voidable because of fraud practiced upon him in its procurement, may maintain an action at law to recover the sum paid or property parted with on account thereof, by giving notice to the other party of his election to rescind the contract and offering to restore the status quo.

It is elementary, except in those jurisdictions in which the reform procedure has been adopted, that jurisdiction of actions for the cancellation or rescission of contracts upon the grounds of fraud, mistake, or other recognized grounds for such relief, is exclusively in equity. The reasons for this rule are fundamental and obvious. It is likewise a familiar and well established rule, as stated by Pomeroy, that:

"The exclusive jurisdiction to grant purely equitable remedies, such as cancellation, will not be exercised, and the concurrent jurisdiction to grant pecuniary recoveries does not exist, in any case where the legal remedy, either affirmative or defensive, which the defrauded party might obtain, would be adequate, certain, and complete." Pomeroy on Equity Jurisprudence (4th Ed.), Section 914.

See, also, Watson v. Bartholomew, 106 Iowa 576, 76 N.W. 858; County of Ada v. Bullen Bridge Co., 5 Idaho 79 (47 P. 818); Buck v. Ward, 97 Va. 209 (33 S.E. 513); Big Huff Coal Co. v. Thomas, 76 W.Va. 161 (85 S.E. 171); Krueger v. Armitage, 58 N.J.Eq. 357 (44 A. 167); Haydon v. St. Louis & S. F. R. Co., 222 Mo. 126 (121 S.W. 15); Seymour Water Co. v. City of Seymour, 163 Ind. 120 (70 N.E. 514); Miller v. Kettenbach, 18 Idaho 253 (109 P. 505); Cable v. United States Life Ins. Co., 191 U.S. 288 (48 L.Ed. 188, 24 S.Ct. 74).

Precedent to the commencement of this action, appellee offered to return the shares of stock purchased, and demanded the return of the purchase price. The case was tried by appellee and submitted by the court to the jury in the court below upon the theory that a disaffirmance of the contract was thereby effected, and appellee was permitted to recover the full sum paid. The evidence tended to show that the stock was not only not worthless, but that it had value. Manifestly, this is not an action for the rescission of the contract, and the discussion by counsel of the subject of election of remedies need be given no consideration. Unless appellee is entitled to recover upon his theory of the law, a reversal must necessarily follow. It seems to us that the question is not an open one in this state, as well as in other jurisdictions.

Pomeroy divides equitable remedies into three classes, and on the question before us he says:

"Those which the legal procedure recognizes, but does not directly confer, and the beneficial results of which it obtains in an indirect manner. A familiar example is the relief of rescission or cancellation. A court of equity entertains a suit for the express purpose of procuring a contract or conveyance to be canceled, and renders a decree conferring in terms that exact relief. A court of law entertains an action for the recovery of the possession of chattels, or, under some circumstances, for the recovery of land, or for the recovery of land, or for the recovery of damages; and although nothing is said concerning it, either in the pleadings or in the judgment, a contract or a conveyance, as the case may be, is virtually rescinded; the recovery is based upon the fact of such rescission, and could not have been granted unless the rescission had taken place. Here, the remedy of cancellation is not expressly asked for, nor granted by the court of law; but all its effects are indirectly obtained in the legal action."

Proceeding further, in a note to the portion of the section quoted, he says:

"It would perhaps be more correct to say that the legal judgment proceeded upon the assumption that one of the parties had himself rescinded the contract or conveyance prior to the suit, and that he was justified in so doing; but this explanation does not alter the result or modify the statement of the text. In either theory, the legal procedure recognizes the rescission as a fact, and its benefits are secured indirectly by the judgment; as in actions by defrauded vendors to recover the goods or their value." Pomeroy on Equity Jurisprudence (4th Ed.), Section 110.

The rule thus stated was specifically recognized by this court in Olson v. Brison, 129 Iowa 604, 106 N.W. 14, as follows:

"Ordinarily, before commencing an action at law to recover the price paid, the vendee must give notice to the vendor of his election to rescind, and offer to return the thing purchased. This is for the reason that the suit is for the consequences of rescinding, and is based on the ground that it has been effected. Technically, plaintiff's right to recover must be perfect when the suit is begun. But for the necessity of a tender, the commencement of the action for the consideration paid would be a sufficiently definite disaffirmance of the contract, and an election to rescind."

In Watson v. Bartholomew, supra, we said:

"If plaintiff had given some specific property for the lot, and, on a rescission, desired to have it reconveyed to him, equity would have been the proper forum; but that is not this case. If plaintiff desires to rescind, and has grounds for so doing, he needs only to tender back a deed for the lot, and he then has a right of action at law. And where, as in this case, he asks only a money judgment against defendants, his action can be at law only."

To the same effect are Rose v. Eggers, 148 Iowa 306, 127 N.W. 196; Cox v. Cline, 139 Iowa 128, 117 N.W. 48; Clapp v. Greenlee, 100 Iowa 586, 69 N.W. 1049; Kuehl v. Parmenter, 195 Iowa 497, 192 N.W. 429. The same rule prevails in other jurisdictions: Union Nat Bank v. Mailloux, 27 S.D. 543 (132 N.W. 168); Hacker...