Savage v. Bartlett

• Decision Date: 05 February 1894
• Citation: 28 A. 414,78 Md. 561
• Parties: SAVAGE v. BARTLETT.
• Court: Maryland Court of Appeals

28 A. 414

78 Md. 561

SAVAGE v. BARTLETT.

Court of Appeals of Maryland

February 5, 1894

Appeal from Baltimore city court.

Action by J. Kemp Bartlett, Jr., as trustee of the Valley Land & Improvement Company, against Charles E. Savage, for unpaid subscriptions to the capital stock of the company. From a judgment for plaintiff, defendant appeals. Reversed.

Argued before ROBINSON, C.J., and BRYAN, McSHERRY, ROBERTS, and PAGE, JJ.

Wm. A Fisher, for appellant.

Ch Marshall and Jos. C. France, for appellee.

ROBINSON C.J.

The Valley Land & Improvement Company was incorporated by an act of the legislature of the state of Virginia approved January 29, 1890, with a capital stock of $2,000,000. In April, 1891 within 15 months after its incorporation, the company executed a deed of trust conveying all its property including its unpaid capital stock, to trustees for the benefit of its creditors. In August of the same year, upon a bill filed by the creditors in the circuit court of Page county, Va., the plaintiff was appointed sole trustee to execute the deed of trust, in the place of the four trustees therein named, and was authorized and directed to collect all moneys due upon subscriptions to its capital stock. This is an action at law brought by the plaintiff, as trustee, against the defendant, to recover the unpaid installments due by him upon his subscription to the capital stock of the company. The defense is that the defendant was induced to become a shareholder upon the faith of certain representations set forth in a prospectus issued by the company, and that these representations were false and fraudulent, and that the defendant, within a reasonable time after the discovery of the fraud, and before the execution of the deed of trust, notified the president of the company that he repudiated the contract, and refused to make any further payments on account of his subscription. And the question is whether these facts, if found by the jury, constitute a valid defense to the action. As against the company itself, it is well settled that a shareholder may rescind a contract of subscription procured through the fraud of the company, within a reasonable time after the discovery of the fraud. "Contracts of this description," says Lord Romilly, "between an individual and a company, so far as misrepresentation or suppression of the truth is concerned, are to be treated like contracts between any two individuals. If one man makes a false statement, which misleads another, the way in which that is to be treated affords the example for the way in which a contract is to be treated where a company makes a false statement which misleads an individual." Railroad Co. v. Kisch, 2 L. R. H. L. 99. And this well-settled rule applies with even greater strictness in regard to representations set forth in a prospectus issued by a company for the purpose of inviting persons to join in the undertaking; and although some allowances must be made for the manner in which the advantages which are likely to be enjoyed by the subscribers are described, yet, as was said by the lord chancellor in the case to which we have just referred, "no misstatement or concealment of any material facts or circumstances ought to be permitted." And then he quoted with approval what was said by Vice Chancellor Kindersley in the case of Land Co. v. Muggeridge, 1 Drew. & S. 381: "Those who issue a prospectus holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking, and inviting them to take shares on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy, and not only to abstain from stating as a fact that which is not so, but to omit no one fact within their knowledge, the existence of which might in any degree affect the nature or extent or quality of the privileges and advantages which the prospectus holds out as inducements to take shares. At the same time, contracts of subscription procured by fraud are not void, but voidable, at the election of the shareholder; for, although deceived and misled, he has the right to abide by the contract. If, however, he means to rescind the contract, he must do so within a reasonable time after the discovery of the fraud." "A man must not," says Lord Romilly, "play fast and loose. He must not say, 'I will abide by the company, if successful, and I will leave the company if it fails,' and therefore, when a misrepresentation is made, of which any one of the shareholders has notice, and can take advantage to avoid his contract with the company, it is his duty to determine at once whether he will depart from the company, or whether he will remain a member." Ashley's Case, L. R. 9 Eq. 262.

In the prospectus issued by the company in this case, it is stated (1) That the company was the owner of the famous Luray inn with all its furniture and equipments; (2) that the company was the owner of the famous Luray caverns; (3) that it had acquired and owned 2,500 acres of the choicest lands for building and manufacturing purposes, and in fact all the available land for these purposes in and around the hotel, caverns, and town of Luray; (4) that it owned and controlled 8,000 acres of the best mineral properties in Virginia, consisting of iron, manganese, and other valuable minerals. Instead of being the owner, the defendant proved that the company had merely the option to buy these properties at certain stipulated prices; that this option had been assigned to the company by D. F. Kagey and his associates, some of whom were promoters of the undertaking, and that in consideration of the assignment of said option the company had issued certificates of stock to Kagey and his associates, of the par value of $400,000; and that the amount which would have been required on the 7th July, 1890,--the date of the defendant's subscription, --to enable the company even to avail itself of the options, exceeded the sum of $300,000 over and above the entire receipts of the company up to that time. The defendant further proved that a Mr. Leyburn had in fact procured the option for the purchase of 4,000 acres of the so-called "valuable mineral land" for $2 per acre, and that he had assigned said option to Kagey and Marshall for 50 shares of the stock of the company. The defendant then proved that it was not until November, 1890, -- three months after his subscription,--that he discovered the fraudulent character of...