Standard Insurance Agency, Inc. v. Northeast Rapid Transit Company

• Decision Date: 02 July 1932
• Docket Number: Civil 3189
• Citation: 40 Ariz. 408,12 P.2d 777
• Parties: STANDARD INSURANCE AGENCY, INC., a Corporation, Appellant, v. NORTHEAST RAPID TRANSIT COMPANY, a Corporation, and C. M. MENDERSON, Appellees
• Court: Arizona Supreme Court

12 P.2d 777

40 Ariz. 408

STANDARD INSURANCE AGENCY, INC., a Corporation, Appellant, v. NORTHEAST RAPID TRANSIT COMPANY, a Corporation, and C. M. MENDERSON, Appellees

Civil No. 3189

Supreme Court of Arizona

July 2, 1932

APPEAL from a judgment of the Superior Court of the County of Maricopa. M. T. Phelps, Judge. Judgment reversed and case remanded, with instructions to grant a new trial.

Messrs Sloan, McKesson & Scott, for Appellant.

Messrs Baker & Whitney and Mr. Lawrence L. Howe, for Appellees.

OPINION

LOCKWOOD, J.

This is an action by Standard Insurance Agency, Inc., a corporation, hereinafter called plaintiff, against Northeast Rapid Transit Company, a corporation, hereinafter called the company, and C. M. Menderson, its president and general manager, to recover damages alleged to have been sustained by plaintiff as a result of the purchase from defendants of certain stock in the company, the allegation being that such purchase was induced by false representations of fact made by Menderson.

The case was tried to jury which returned a verdict in favor of defendants, and from the judgment rendered on the verdict and the order overruling the motion for new trial this appeal has been taken.

There are some ten assignments of error, but we think it unnecessary to consider specifically more than assignment No 6. This assignment is that the court erred in instructing the jury as follows:

"A person to whom a false or fraudulent representation is made has not the right for the purpose of predicating an action upon the statements of another to accept the statement of another and act upon it if he has the means of a reasonably prudent person and in the exercise of ordinary care to ascertain that such representations were false prior to the time that he acted upon them. A person, in other words, must exercise due care, such care as an ordinary prudent person would exercise, in ascertaining whether or not statements made to him to induce him to enter into any agreement are false or true, except in those cases where there has been developed a relationship of trust, and that is not involved in this case."

In order that this instruction and its effect may be understood, it is necessary that we refer in a more or less general manner to the pleadings, the theory upon which the case was tried, the evidence, and the other instructions of the court.

The complaint is quite voluminous, and we quote only the parts necessary for a determination of this appeal. It alleges that defendant Menderson, as president of the company and acting on behalf of it, for the purpose of inducing plaintiff to subscribe to certain stock in the company made certain false and fraudulent representations as follows:

"That said Northeast Rapid Transit Company was a going concern; that it owned and held in its name a certificate of convenience and necessity which had been issued by the Arizona Corporation Commission, which authorized said company to conduct a passenger bus business as a common carrier over three (3) routes and between certain termini in a territory northeast of the city of Phoenix and ending at the Arizona canal near the Biltmore Hotel, all in the County of Maricopa, State of Arizona, and that by reason of the issuance to it of said certificate of convenience and necessity, the said company possessed a property right of great value which would enable it to make substantial profits upon its capital investment; that at said time, to-wit, on said 5th day of July, 1929, the said company had already purchased sufficient bus equipment to conduct said transportation business under said certificate of convenience and necessity; that Lynn Lockhart, Rio Grande Oil Company and Dean Stanley, known to plaintiff as persons and corporations of standing in the community and of pecuniary responsibility had become and were the owners of both common and preferred stock in said company, and that said purchasers and stockholders were well satisfied with their investment in the stock of said company and regarded the business of said company as a profitable one; that Joseph Menderson and Jane Menderson had subscribed and paid for stock in said company to the amount of Twenty-five Hundred Dollars ($2,500) and that the company was adequately financed and did not need additional money or additional stockholders; that the sole reason the defendant company desired the plaintiff to become a stockholder therein was on account of the business connection it desired with plaintiff."

It then alleges that such representations were false to the knowledge of defendants and made with intent to deceive plaintiff, and that plaintiff believed them and relied thereon, and as a result of such reliance purchased twenty-five shares of common and twenty-five shares of preferred stock of the company, paying therefor the sum of $2,000, and that such stock was and is worthless. The defendants admitted the sale of the stock, but denied making any false and fraudulent representations as alleged by plaintiff, and set up as an affirmative defense that the real reason for the purchase of the stock by plaintiff was not any representations made by Mennderson, but the belief on the part of plaintiff that it thereby might secure certain insurance business from the company.

It was therefore the contention of plaintiff that defendants by false and fraudulent representations had induced it to purchase certain stock in the company, which was worthless, to its damage in the sum of $2,000, while it was the position of defendants: First, that no false or fraudulent representations of any nature were made; second, that the true reason for the purchase of the stock was the desire of plaintiff to secure certain insurance business from the company, and that it did not rely on any of the alleged statements of defendants even if they were made and were false; and, third, that admitting the statements set forth in the complaint were made by defendants and were false, that nevertheless plaintiff failed to exercise such care as an ordinarily prudent person should have used in ascertaining if these statements were false or true, and therefore under no theory could defendants be liable for damages in the present case.

The undisputed facts in the case, as shown by the record, may be stated as follows: Defendant Menderson had at some time previous to the purchase by plaintiff of the stock in question secured from the Arizona corporation commission a certificate of necessity and convenience authorizing him to engage in the business of transporting passengers for hire over three routes extending from near the Biltmore Hotel some miles northeast of Phoenix, to that city. This certificate was issued to Menderson personally and was always held by him as his personal property and not the property of the company. He had incorporated the Northeast Rapid Transit Company, his co-defendant herein, under the laws of the state of Arizon, and at all times after its incorporation he and his relatives had the complete control thereof. The company owned a certain number of passenger busses which it operated by virtue of the franchise owned by Menderson, and incident to such operation it found it necessary to take out a certain amount of liability insurance. Plaintiff desired to secure this business and after various negotiations purchased the stock referred to in its complaint from defendant company through Menderson; the par value being $2,500; $2,000 cash was paid therefor, plaintiff receiving a credit of $500 on the purchase price which was...