Wilson v. Hundley

• Decision Date: 16 June 1898
• Citation: 96 Va. 96,30 S.E. 492
• Parties: WILSON. v. HUNDLEY.
• Court: Virginia Supreme Court

30 S.E. 492

96 Va. 96

WILSON.

v.HUNDLEY.

Supreme Court of Appeals of Virginia.

June 16, 1898.

Contract Induced by Fraud —Rights of Parties—Affirmance—Subscription to Corporate Stock—Appeal—Decision.

1. A contract induced by fraud is voidable only, at the option of the party defrauded, and he may rescind the contract if he can restore what he has received in kind, and recover the consideration paid; or, if he has paid nothing, repudiate the contract, and plead the fraud as a complete defense to an action thereon; or he may retain what he has received under the contract, and recover damages for the deceit.

2. Defendant was induced to subscribe for stock in a corporation on the fraudulent representation that a certain syndicate had subscribed for a large amount of the stock, and, when informed that the greater part of such subscription was merely optional, he affirmed the contract. Held, that the fact that the subscription was merely optional was the substance of the fraud, and, having elected to affirm the agreement with knowledge of this fact, he was not thereafter entitled to disaffirm it on learning the terms of the option, since these are mere incidents of the same fraud.

3. It is not necessary that a party affirming a contract voidable for fraud should have knowledge of all the incidents of the fraud. It is sufficient to deprive him of his right of rescission that the affirmance is made with knowledge of the fact constituting the fraud.

4. That subscribers to corporate stock are subsequently allowed by the company to withdraw their subscription does not constitute such a fraud on other subscribers as would permit them to disaffirm their subscriptions.

5. Since subscriptions to corporate stock, made on a secret agreement that no liability should attach by reason thereof, will be upheld as valid and binding on such subscribers, others subscribing on the faith of such subscriptions are not defrauded thereby.

6. A stock subscription is not only a contract with the corporation, but also with all other subscribers; and one whose subscription was induced by fraud, having affirmed the contract with knowledge thereof, cannot maintain an action against the corporation, after insolvency, for damages caused by the deceit.

7. A writ of error must be decided according to the law as it was at the time the judgment was rendered, and, since a legislative act passed subsequently thereto can not affect it, it will not be considered.

Error to circuit court, Amelia county.

Action by William Wilson, trustee of the Rivermont Company for the benefit of creditors, against George J. Hundley, to recover unpaid stock subscriptions. From a judgment in favor of defendant, plaintiff appeals. Reversed.

B. B. Munford and S. S. Pattison, for appellant.

James Lyons, Geo. J. Hundley, and W. W. Henry, for appellee.

RIELY, J. In the summer of 1890, George J. Hundley, the defendant in error, subscribed for 500 shares of the capital stock of the Rivermont Company, of the par value of $10 per share, to be paid for in installments upon the call of the board of directors. On August 7, 1890, he made the first payment of $1,000, and on November 24, 1890, he made the second payment of $1,000 in pursuance of the second call of $2 per share, but made default in the payment of the three remaining calls of $1,000 each.

On June 2, 1893, the company made an assignment of all its assets, including unpaid subscriptions to its stock, to William V. Wilson, Jr., the plaintiff in error, in trust for the benefit of its creditors, who brought this suit to recover from the said Hundley the balance due on his subscription. Against its recovery he set up the defense of fraud In the procurement of the subscription.

The fraudulent representation mainly relied upon was that Warwick & Carson, the agents of the company through whom the subscription was made, represented that certain persons, called the "Roanoke Syndicate, " had subscribed to the stock of the company to the amount of $700,000, which was nearly one-half of the whole amount of its capital stock of $1,500, 000, which representation was not true; that the Roanoke syndicate only subscribed absolutely for $150,000 of the stock, and took merely an option on $550,000 more of the stock; and that the defendant did not learn of this misrepresentation until after he had paid the first and second calls on his subscription.

It appeared in evidence that the defendant, having heard that the Roanoke syndicate had not subscribed for $700,000 of the stock according to the representation of Warwick & Carson, wrote, on January 20, 1891, to Charles M. Blackford, the president of the Rivermont Company, stating what he had heard as to this matter, inquiring as to its truth, and making complaint, If it were true. The president replied to his letter the next day, and stated that the Roanoke syndicate subscribed absolutely for $150,000 of the stock, upon which they had paid as the calls were made, and had "an option on several hundred thousand more, " which had not yet expired. Upon the receipt of the letter of the president the defendant wrote, on January 22, 1891, to the general manager of the company as follows: "I wrote Maj. Blackford that I had heard a large subscriber to the stock here say that the Roanoke people only took an option on the stock, and some seemed disposed to kick on that account. Maj. Blackford responded that the Roanoke people had only taken $150,000. This leaves, I suppose, the stock taken only about $1,000, 000, and throws a heavier burden on us than we anticipated; but I don't know that It will eventually hurt us. I hold this position though: I am with you for good or evil, and I mean to stand by you to the best of my ability, and hold up your hands. I have the utmost confidence in you and Capt. Blackford. I have so far paid up my calls, hard as the time was when the last one was made. I have just received another, which I did not expect, and which Warwick & Carson say is earlier than it ought to have been for us who came in later. I shall do my best to meet it. If I don't, I am willing to pay Interest and secure it, if required. * * * It was intimated to us that this third call would probably not be made, and I had hoped It would not. But I am with you, and shall do my best. I have faith, too, in your ultimate success."

On January 26, 1891, the defendant, in reply to a letter of the 24th of January, received from the general manager, in which it was stated that "the amount of stock sold is $835,-900; the balance Is held In the treasury to meet contingencies, including the one referred to in your letter about R. syndicate, " —wrote the following: "* * * And I can assure you that your agents here, Warwick & Carson, assured us all that $700,000 had been taken by the Roanoke and Clarke & Co. syndicates, and their list shown us included that subscription, and It undoubtedly influenced me and others, as would naturally be the case. Now, you see, the difference itmakes Is this: If that stock had actually been taken, this third call would not, in all probability, have been precipitated upon us now, for you would have had money enough. * * * I merely mention these things to show you that I am not a mere grumbler, and I mean to do my very best to advance the interest of the Co., though I am surprised at these heavy calls rapidly made. * * *"

On January 29, 1891, he again wrote to the general manager, who had written to him on the 27th, and inclosed a statement showing how the moneys received had been disbursed, and what the company still owed, as follows: "Yours of 27th, with inclosed statement, rec'd, for which accept my thanks. I shall use it to explain matters to our Richmond friends. I think if you would send out a circular though, it would have a good effect. Of course, there are some who are scared, and some who are reckless in their assertions. As for myself, I have the utmost confidence in the ability and integrity of the management, and make this statement to all my friends; and, furthermore, if the enterprise does not make money for us, I shall lose confidence in my own judgment. * * *"

I have quoted thus fully from the letters of the defendant in error to show how unequivocally he elected, after he had acquired actual knowledge from official sources in the most direct and reliable way of the falsity of the alleged representation, to affirm his contract of subscription.

A contract induced by fraud is not void, but voidable at the option of the party injured by the fraud. Upon the discovery of the fraud, he has, as a general rule, the choice of two remedies: He may elect to rescind the contract, if he can restore what he has received in the same state or condition in which he received it, and sue for and recover back the consideration he has paid or given, or, if he has not paid or given anything, repudiate the contract, and rely, when sued, upon the fraud as a complete defense; or he may elect to retain what he has received under the contract, and bring an action to recover...