Chapter IV: Deceit (5)

ALDEN _v._ WRIGHT
SUPREME COURT, MINNESOTA, SEPTEMBER 30, 1891.
_Reported in 47 Minnesota Reports, 225._

Action for deceit in the exchange of real property for shares of corporate stock. Plaintiff alleged fraudulent representations on the part of defendants as to the value of the shares, whereby he was induced to make the exchange. Trial. Verdict for defendants. Plaintiff appealed from an order denying a new trial.[350]

COLLINS, J....

2. At defendants’ request the court charged the jury, in substance, that they must find for defendants, unless it appeared by a preponderance of testimony that the property conveyed by plaintiff in exchange for the shares of stock was worth more than the latter; and to this plaintiff excepted, on the ground that it prevented the jury from returning a verdict in his favor for nominal damages; that, even if the jury should fail to find that the property conveyed by plaintiff was of greater value than the shares of stock transferred to him,—passing on all other questions in his favor,—they might award him nominal damages at least; and that the possibility of such an award was excluded by the charge. But, at plaintiff’s request, the jury was instructed that, if they found for him, the amount he would be entitled to recover would be the amount of the difference between the actual value of the property which he conveyed and the actual value of the stock received by him. The rule as to the measure of damages in the case was stated in better form in plaintiff’s than in defendants’ request, but one was, in effect, a repetition of the other. The rule was correctly stated in each, and the same proposition of law was elsewhere in the charge laid down by the court in very concise and proper, but different, language. The essential elements which constitute a cause of action for deceit are well stated in Busterud _v._ Farrington, 36 Minn. 320 (31 N. W. Rep. 360), and one is that the party induced to act has been damaged. He must have acted on the faith of the false representations _to his damage_. A party cannot sustain an action of this character where no harm has come to him. Deceit and injury must concur,—Doran _v._ Eaton, 40 Minn. 35 (41 N. W. Rep. 244);—or, as it has frequently been put by the courts, fraud without damage or damage without fraud will not sustain the action for deceit. Taylor _v._ Guest, 58 N. Y. 262; Nye _v._ Merriam, 35 Vt. 438; Freeman _v._ McDaniel, 23 Ga. 354; Byard _v._ Holmes, 34 N. J. Law, 296; 3 Suth. Dam. 594; Cooley, Torts, 474; Bailey, Onus Probandi, 770. If, therefore, the shares of stock were worth what plaintiff gave for them, were of equal value with the property exchanged, the plaintiff was not damaged, and was not entitled to recover; for the proper measure of damages was the difference in value between the shares of stock and the property conveyed by plaintiff for them. Redding _v._ Godwin, 44 Minn. 355 (46 N. W. Rep. 563), and cases cited. The plaintiff, under such a rule, would not be permitted to recover nominal damages even without proof of loss or injury, and there is nothing said in Potter _v._ Mellen, 36 Minn. 122 (30 N. W. Rep. 438), as counsel has contended, indicating a contrary view. Damage is of the essence of the action of deceit; an essential element to the right of action, and not merely a consequence flowing from it.

_Order affirmed._[351]

FREEMAN _v._ VENNER
SUPREME JUDICIAL COURT, MASSACHUSETTS, JUNE 23, 1876.
_Reported in 120 Massachusetts Reports, 424._

Action of tort. Writ dated Dec. 22, 1873. Plaintiff held the
negotiable promissory note of J. W. and J. H. Cox, dated July 16,
1873, payable to plaintiff or order in two years from date; and he
also held a mortgage conditioned to secure the note. In consideration
of land to be conveyed to him by the defendant, plaintiff agreed to
assign to defendant the mortgage and note; but he did not agree to
make an unrestricted indorsement of the note, and the defendant was
not entitled to have the personal liability of the plaintiff as
indorser of the note. Plaintiff, through ignorance of the law, and by
reason of the false and fraudulent representations of defendant, on
Dec. 1, 1873, indorsed the note in blank without any qualification. As
soon as the plaintiff became aware of the obligation he had thus
assumed, and before defendant had negotiated the note or altered his
position in any way, plaintiff demanded to be allowed to qualify his
indorsement so that it should merely transfer the title according to
the agreement. Defendant refused to allow this. Thereupon plaintiff
forbade defendant to negotiate the note; but defendant,
notwithstanding, negotiated the note before maturity to one Tenney, a
_bona fide_ holder for value.

Upon a trial by a judge, without a jury, the foregoing facts were
found, substantially as alleged in the declaration.

It also appeared, that, before commencing his action, or at any time
before said trial, the plaintiff had made no payment on account or by
reason of the indorsement; that, before the commencement of this
action and before the maturity of the note, the makers thereof had
become bankrupts; that since the commencement a semi-annual instalment
of interest had become due; that Tenney had caused the real estate to
be sold by virtue of the power contained in the mortgage, had applied
a part of the proceeds of the sale in liquidation of that interest,
and, since the maturity of the note, had applied the balance of the
proceeds in part payment of the note, and had commenced an action
against the plaintiff to recover the balance of said note (due demand
having been made and notice given), which action is now pending.

Defendant requested the judge to rule that, upon the foregoing facts
the plaintiff could not maintain his action, but, if he could, that he
was entitled to recover only nominal damages. The judge declined so to
rule, and held that defendant was liable for the conversion of the
note, and that the measure of the plaintiff’s damages was the amount
which the plaintiff was legally compellable to pay to the holder of
the note, namely, the face of the note and interest, less the amount
realized from the sale under the mortgage, treating the same as a
partial payment. Defendant excepted.[352]

COLT, J. [After deciding that there was no conversion of the note.]
The further objection is, that treating this as an action to recover
damages for an alleged fraud, the plaintiff shows no damages sustained
at the time his action was commenced. It was then uncertain and
contingent whether he would ever be called on to pay the note. It was
payable to the plaintiff or order in two years, and was dated in July,
1873, shortly before its transfer by his indorsement to the defendant.
The liability of the plaintiff depended on the failure of the makers
to pay and the giving of due notice to him as indorser. No payment has
in fact ever been made by him. If the holder receives his pay from the
makers through the mortgage security or otherwise, the plaintiff will
have suffered no actionable wrong. There will have been no concurrence
of damage with fraud, within the rule on which such actions are
founded. And as there has been no invasion of the plaintiff’s rights,
no breach of promise, and no interference with his property, there can
be no recovery of even nominal damages in this action. Pasley _v._
Freeman, 3 T. R. 51; 2 Smith Lead. Cas. (6th Am. ed.) 157, and notes.

_Exceptions sustained._[353]

LUETZKE _v._ ROBERTS
SUPREME COURT, WISCONSIN, DECEMBER 4, 1906.
_Reported in 130 Wisconsin Reports, 97, 106._

[Plaintiffs, by fraudulent representations of defendants, were induced
to execute promissory notes to defendants. Upon a proceeding to cancel
and annul the notes, it appeared that the notes had been transferred
to, and were then held by, _bona fide_ purchasers for value; and hence
could not be decreed to be cancelled. It was _held_, that the court
having jurisdiction of the defendants personally, had power to render
judgment for damages. The opinion then proceeds as follows:—][354]

SIEBECKER, J. It is urged that compensatory damages cannot be awarded
because they are not ascertainable under the facts found, and that
plaintiffs must wait until they have made actual payment of the notes.
This contention cannot be sustained. The court properly held that
these notes in the hands of _bona fide_ purchasers for value
established a liability according to their terms against these
plaintiffs, and that such liability was measured by the amount they
call for on their face with interest. We deem this the correct measure
of damages in the case, and within the principle of the case of Lyle
_v._ McCormick H. M. Co., 108 Wisc. 81, 84 N. W. 18.[355]

FOTTLER _v._ MOSELEY
SUPREME JUDICIAL COURT, MASSACHUSETTS, JUNE 18, 1901.
_Reported in 179 Massachusetts Reports, 295._

Tort for deceit, alleging that, relying upon the false and fraudulent
representations of the defendant, a broker, that certain sales of the
stock of the Franklin Park Land Improvement Company in the Boston
Stock Exchange from January 1, to March 27, 1893, were genuine
transactions, the plaintiff revoked an order for the sale of certain
shares of that stock held for him by the defendant, whereby the
plaintiff suffered loss. Writ dated February 17, 1896.[356]

At the trial in the Superior Court, Hopkins, J., at the close of the
evidence, directed the jury to return a verdict for the defendant. The
verdict was returned as directed; and the plaintiff alleged
exceptions. The findings warranted by the evidence are stated in the
opinion of the court.

* * * * *

HAMMOND, J. The parties to this action testified in flat contradiction
of each other on many of the material issues, but the evidence in
behalf of the plaintiff would warrant a finding by the jury, that on
March 25, 1893, the plaintiff, being then the owner of certain shares
of stock in the Franklin Park Land and Improvement Company, gave an
order to the defendant, a broker who was carrying the stock for him on
a margin, to sell it at a price not less than $28.50 per share; that
on March 27 the defendant, for the purpose of inducing the plaintiff
to withdraw the order and refrain from selling, represented to the
plaintiff that the sales which had been made of said stock in the
market had all been made in good faith and had been “actual true sales
throughout”; that these statements were made as of the personal
knowledge of the defendant, and that the plaintiff, believing them to
be true and relying upon them, was thereby induced to and did cancel
his oral order to the defendant to sell, and did refrain from selling;
and that the statements were not true, as to some of the sales in the
open market, of which the last was in December, 1892, and that the
defendant knew it at the time he made the representations. The
evidence would warrant a further finding that in continuous reliance
upon such representations the plaintiff kept his stock, when he
otherwise would have sold it, until the following July, when its
market value depreciated, and he thereby suffered loss. The defendant,
protesting that he made no such representation and that the jury would
not be justified in finding that he had, says that even upon such a
finding the plaintiff would have no case. He contends that the
representation was not material, that a false representation to be
material must not only induce action but must be adequate to induce it
by offering a motive sufficient to influence the conduct of a man of
average intelligence and prudence, and that in this case the
representation complained of, so far as it was false, was not adequate
to induce action because the fictitious sales were so few and distant
in time, and that therefore it was not material.

It may be assumed that the plaintiff desired to handle his stock in
the manner most advantageous to himself, and that the question whether
he would withdraw his order to sell was dependent, somewhat, at least,
upon his view of the present or future market value of the stock; and
upon that question a man of ordinary intelligence and prudence would
consider whether the reported sales in the market were “true sales
throughout” or were fictitious, and what was the extent of each. It is
true that a corporation may be of so long standing and of such a
nature, and the number of the shares so great and the daily sales of
the stock in the open market so many and heavy, that the knowledge
that a certain percentage of the sales reported are not actual
business transactions would have no effect upon the conduct of an
ordinary man. On the other hand a corporation may be so small and of
such a nature and have so slight a hold upon the public, and the
number of its shares may be so small and the buyers so few, that the
question whether certain reported sales are fictitious may have a very
important bearing upon the action of such a man. Upon the evidence in
this case, we cannot say, as matter of law, that the representation so
far as false was not material. This question is for the jury, who are
to consider it in the light of the nature of the corporation and its
standing in the market, and of other matters, including such as those
of which we have spoken.

It is further urged by the defendant that one of the fundamental
principles in a suit like this is that the representation should have
been acted upon by the complaining party and to his injury; that at
most the plaintiff simply refrained from action, and that “refraining
from action is not acting upon representation” within the meaning of
the rule; and further that it is not shown that the damages, if any,
suffered by the plaintiff are the direct result of the deceit.

Fraud is sometimes defined as the “deception practised in order to
induce another to part with property or to surrender some legal
right,” Cooley, Torts (2d ed.), 555, and sometimes as the deception
which leads “a man into damage by wilfully or recklessly causing him
to believe and act on a falsehood.” Pollock, Torts (Webb’s ed.), 348,
349. The second definition seems to be more comprehensive than the
first (see for instance Barley _v._ Walford, 9 Q. B. 197, and Butler
_v._ Watkins, 13 Wall. 456), and while the authorities establishing
what is a cause of action for deceit are to a large extent convertible
with those which define the right to rescind a contract for fraud or
misrepresentation and the two classes of cases are generally cited
without any express discrimination, still discrimination is sometimes
needful in the comparison of the two classes of cases. Pollock, Torts
(Webb’s ed.), 352.

It is true that it must appear that the fraud should have been acted
upon. It is a little difficult to see precisely what is meant by the
contention that “refraining from action is not acting upon
representation.” If by refraining from action it is meant simply that
the person defrauded makes no change but goes on as he has been going
and would go whether the fraud had been committed or not, then the
proposition is doubtless true. Such a person has been in no way
influenced, nor has his conduct been in any way changed by the fraud.
He has not acted in reliance upon it. If, however, it is meant to
include the case where the person defrauded does not do what he had
intended and started to do and would have done save for the fraud
practised upon him, the proposition cannot be true. So far as respects
the owner of property, his change of conduct between keeping the
property on the one hand and selling it on the other, is equally
great, whether the first intended action be to keep or to sell; and if
by reason of fraud practised upon him the plaintiff was induced to
recall his order to sell, and, being continuously under the influence
of this fraud, kept his stock when, save for such fraud, he would have
sold it, then with reference to this property he acted upon the
representation within the meaning of the rule as applicable to cases
like this. Barley _v._ Walford, 9 Q. B. 197; Butler _v._ Watkins, 13
Wall. 456.

The cases of Lamb _v._ Stone, 11 Pick. 527; Wellington _v._ Small, 3
Cush. 145; and Bradley _v._ Fuller, 118 Mass. 239, upon which the
defendant relies, are not authorities for the proposition that
“refraining from action is not acting upon representation.”

As to whether the loss suffered by the plaintiff is legally
attributable to the fraud, much can be said in favor of the defendant,
and a verdict in his favor on this as well as on other material points
might be the one most reasonably to be expected upon the evidence,
especially when it is considered that during the years 1892 and 1893
the plaintiff was a director in the company; but we cannot decide the
question as a matter of law. If the fraud operated on the plaintiff’s
mind continuously, up to the time of the depreciation of the stock in
June, 1893, so that he kept his stock when otherwise he would have
sold it, and such was the direct, natural and intended result, then we
think the causal relation between the fraud and the loss is
sufficiently made out. See Reeve _v._ Dennett, 145 Mass. 23, 29.

_Exceptions sustained._[357]

FOTTLER _v._ MOSELEY
SUPREME JUDICIAL COURT, MASSACHUSETTS, MAY 19, 1904.
_Reported in 185 Massachusetts Reports, 563._

Tort for deceit, alleging, that, relying upon the false and fraudulent
representations of the defendant, a broker, that certain sales of the
stock of the Franklin Park Land Improvement Company in the Boston
Stock Exchange from January 1 to March 27, 1893, were genuine
transactions, the plaintiff revoked an order for the sale of certain
shares of that stock held for him by the defendant, whereby the
plaintiff suffered loss. Writ dated February 17, 1896.

At the first trial of the case in the Superior Court a verdict was
ordered for the defendant, and the exceptions of the plaintiff were
sustained by this court in a decision reported in 179 Mass. 295. At
the new trial in the Superior Court before Sherman, J., it appeared
that one Moody Merrill, a director and officer of the Franklin Park
Land Improvement Company, absconded late in May or early in June of
1893, and that immediately upon his departure it was discovered that
he had embezzled nearly $100,000 of the funds of that company, the
result of which was that the market price of the stock immediately
fell and the stock could not be sold; that the plaintiff from the time
of the discovery of the defendant’s alleged fraud did his best to sell
his stock, but was unable to do so at more than $3 a share, at which
price he sold it after bringing this action.

The plaintiff among other requests asked the judge to rule, “That it
is of no consequence so far as the defendant’s liability is concerned
that an outside intervening cause has been the sole or contributing
cause of the decline in price to which the plaintiff’s loss is due.”

The judge refused this and other rulings requested by the plaintiff,
and instructed the jury, among other things, as follows:—

“If you find the fair market value of that stock was always above what
it was fictitiously quoted, or equal to it, and that it was so on the
25th of March, 1893, and remained so and would have remained so,
except for the embezzlement and absconding of Moody Merrill, then the
plaintiff is not entitled to recover.

“If you find that Moody Merrill’s going away did destroy the value of
the stock, practically destroy its value, then the plaintiff is not
entitled to recover anything.

“You may take all the evidence on this subject, the fact of what Moody
Merrill did, and what effect it had upon the market value of this
stock, and if that destroyed the market value, then, as I have told
you, the plaintiff is not entitled to recover anything. If his going
away and embezzlement did not affect the market value of this stock,
then the plaintiff may recover the full value of it.”

The judge submitted to the jury the following questions, which the
jury answered as stated below:—

“1. Did the defendant make a representation to the plaintiff on or
about March 25, 1893, that the quotations in the Boston Stock Exchange
of Franklin Park Land and Improvement Company stock were quotations of
actual and true sales?” The jury answered “Yes.”

“2. Were such quotations at or about the same sum as the quotations of
actual sales and the sales at public auction?” The jury answered
“Yes.”

“3. What was the fair market value of said stock on or about March 25,
1893?” The jury answered “$28.50 per share.”

“4. What was the fair market value of said stock on the last day of
May, or immediately prior to June, 1893, the day before Moody
Merrill’s absconding?” The jury answered “$27.75 per share.”

The jury returned a verdict for the defendant; and the plaintiff
alleged exceptions.

KNOWLTON, C. J. The parties and the court seem to have assumed that
the evidence was such as to warrant a verdict for the plaintiff under
the law stated at the previous decision in this case, reported in 179
Mass. 295, if the diminution in the selling price of the stock came
from common causes. The defendant’s contention is that the
embezzlement of an officer of a corporation, being an unlawful act of
a third person, should be treated as a new and independent cause of
the loss, not contemplated by the defendant, for which he is not
liable.

To create a liability, it never is necessary that a wrong-doer should
contemplate the particulars of the injury from his wrongful act, nor
the precise way in which the damages will be inflicted. He need not
even expect that damage will result at all, if he does that which is
unlawful and which involves a risk of injury. An embezzler is
criminally liable, notwithstanding that he expects to return the money
appropriated after having used it. If the defendant fraudulently
induced the plaintiff to refrain from selling his stock when he was
about to sell it, he did him a wrong, and a natural consequence of the
wrong for which he was liable was the possibility of loss from
diminution in the value of the stock, from any one of numerous causes.
Most, if not all, of the causes which would be likely to affect the
value of the stock, would be acts of third persons, or at least
conditions for which neither the plaintiff nor the defendant would be
primarily responsible. Acts of the officers, honest or dishonest, in
the management of the corporation, would be among the most common
causes of a change in value. The defendant, if he fraudulently induced
the plaintiff to keep his stock, took the risk of all such changes.
The loss to the plaintiff from the fraud is as direct and proximate,
if he was induced to hold his stock until an embezzlement was
discovered, as if the value had been diminished by a fire which
destroyed a large part of the property of the corporation, or by the
unexpected bankruptcy of a debtor who owed the corporation a large
sum. Neither the plaintiff nor the defendant would be presumed to have
contemplated all the particulars of the risk of diminution in value
for which the defendant made himself liable by his fraudulent
representations. It would be unjust to the plaintiff in such a case,
and impracticable, to enter upon an inquiry as to the cause of the
fall in value, if the plaintiff suffered from the fall wholly by
reason of the defendant’s fraud. The risk of a fall, from whatever
cause, is presumed to have been contemplated by the defendant when he
falsely and fraudulently induced the plaintiff to retain his stock.

We do not intimate that these circumstances, as well as others, may
not properly be considered in determining whether the plaintiff was
acting under the inducement of the fraudulent representations in
continuing to hold the stock up to the time of the discovery of the
embezzlement. The false representations may or may not have ceased to
operate as an inducement as to the disposition of his stock before
that time. Of course there can be no recovery, except for the direct
results of the fraud. But if the case is so far established that the
plaintiff, immediately upon the discovery of the embezzlement, was
entitled to recover on the ground that he was then holding the stock
in reliance upon the fraudulent statements, and if the great
diminution in value came while he was holding it, the fact that this
diminution was brought about by the embezzlement of an officer leaves
the plaintiff’s right no less than if it had come from an ordinary
loss.

_Exceptions sustained._[358]

MORSE _v._ HUTCHINS
SUPREME JUDICIAL COURT, MASSACHUSETTS, OCTOBER TERM, 1869.
_Reported in 102 Massachusetts Reports, 439._

Tort for deceit in making false and fraudulent representations to the
plaintiff touching the business and profits of a firm of which the
defendant was a member, and thereby inducing the plaintiff to buy the
interest of the defendant in the stock and good will of the firm. A
count in contract for the same cause of action was joined. Answer, a
general denial and a plea of a discharge in bankruptcy.

At the trial in the Superior Court, Brigham, C. J., ruled that the
discharge in bankruptcy was a defence to the second count, but not to
the first count; and the plaintiff relied on the first count only.

The judge instructed the jury that “the measure of damages would be
the difference between the actual value of the stock and good will
purchased at the time of the purchase and the value of the same had
the representation been true.”

The jury returned a verdict for the plaintiff, and the defendant
alleged exceptions.

GRAY, J. The objections that either the joinder of a count in contract
with the count in tort, or the certificate of discharge in bankruptcy,
would defeat the plaintiff’s right of action in tort for the
defendant’s false and fraudulent representations, were hardly relied
on at the argument, and are groundless. Gen. Sts. c. 129, § 2, cl. 5.
Crafts _v._ Belden, 99 Mass. 535. U. S. St. 1867, c. 176, § 33.

The rule of damages was rightly stated to the jury. It is now well
settled that, in actions for deceit or breach of warranty, the measure
of damages is the difference between the actual value of the property
at the time of the purchase and its value if the property had been
what it was represented or warranted to be. Stiles _v._ White, 11 Met.
356; Tuttle _v._ Brown, 4 Gray, 457; Whitemore _v._ South Boston Iron
Co., 2 Allen, 52; Fisk _v._ Hicks, 11 Foster, 535; Woodward _v._
Thacher, 21 Verm. 580; Muller _v._ Eno, 4 Kernan, 597; Sherwood _v._
Sutton, 5 Mason, 1; Loder _v._ Kekulé, 3 C. B. N. S. 128; Dingle _v._
Hare, 7 C. B. N. S. 145; Jones _v._ Just, Law Rep. 3 Q. B. 197. This
is the only rule which will give the purchaser adequate damages for
not having the thing which the defendant undertook to sell him. To
allow to the plaintiff (as the learned counsel for the defendant
argued in this case) only the difference between the real value of the
property and the price which he was induced to pay for it would be to
make any advantage lawfully secured to the innocent purchaser in the
original bargain inure to the benefit of the wrong-doer; and, in
proportion as the original price was low, would afford a protection to
the party who had broken, at the expense of the party who was ready to
abide by, the terms of the contract. The fact that the property sold
was of such a character as to make it difficult to ascertain with
exactness what its value would have been if it had conformed to the
contract affords no reason for exempting the defendant from any part
of the direct consequences of his fraud. And the value may be
estimated as easily in this action as in an action against him for an
entire refusal to perform his contract.

_Exceptions overruled._

SMITH _v._ BOLLES
SUPREME COURT OF THE UNITED STATES, NOVEMBER 11, 1889.
_Reported in 132 United States Reports, 125._

Error to the United States Circuit Court for the Northern District of
Ohio.

Action to recover damages for fraudulent representations in the sale
of shares of mining stock.

The amended petition alleged (_inter alia_) that plaintiff was induced
by defendant’s fraudulent representations to buy of defendant four
thousand shares of mining stock at $1.50 per share, amounting to
$6000; that “said stock and mining property was then, and still is,
wholly worthless; and that had the same been as represented by
defendant it would have been worth at least ten dollars per share; and
so plaintiff says that by reason of the premises he has sustained
damages to the amount of forty thousand dollars.”

Answer, denying plaintiff’s material allegations. Trial by jury. The
instructions given as to damages are stated in the opinion. Verdict
for plaintiff. Motion for new trial overruled. Judgment for plaintiff.
Defendant brought error.[359]

FULLER, C. J. The bill of exceptions states that the court charged the
jury “as to the law by which the jury were to be governed in the
assessment of damages under the issues made in the case,” that “the
measure of recovery is generally the difference between the contract
price and the reasonable market value, if the property had been as
represented to be, or in case the property or stock is entirely
worthless, then its value is what it would have been worth if it had
been as represented by the defendant, and as may be shown in the
evidence before you.”

In this there was error. The measure of damages was not the difference
between the contract price and the reasonable market value if the
property had been as represented to be, even if the stock had been
worth the price paid for it; nor if the stock were worthless, could
the plaintiff have recovered the value it would have had if the
property had been equal to the representations. What the plaintiff
might have gained is not the question, but what he had lost by being
deceived into the purchase. The suit was not brought for breach of
contract. The gist of the action was that the plaintiff was
fraudulently induced by the defendant to purchase stock upon the faith
of certain false and fraudulent representations, and so as to the
other persons on whose claims the plaintiff sought to recover. If the
jury believed from the evidence that the defendant was guilty of the
fraudulent and false representations alleged, and that the purchase of
stock had been made in reliance thereon, then the defendant was liable
to respond in such damages as naturally and proximately resulted from
the fraud. He was bound to make good the loss sustained, such as the
moneys the plaintiff had paid out and interest, and any other outlay
legitimately attributable to defendant’s fraudulent conduct; but this
liability did not include the expected fruits of an unrealized
speculation. The reasonable market value, if the property had been as
represented, afforded, therefore, no proper element of recovery.

Nor had the contract price the bearing given to it by the court. What
the plaintiff paid for the stock was properly put in evidence, not as
the basis of the application of the rule in relation to the difference
between the contract price and the market or actual value, but as
establishing the loss he had sustained in that particular. If the
stock had a value in fact, that would necessarily be applied in
reduction of the damages. “The damage to be recovered must always be
the _natural and proximate consequence_ of the act complained of,”
says Mr. Greenleaf, vol. ii, § 256; and “the test is,” adds Chief
Justice Beasley in Crater _v._ Binninger, 33 N. J. Law (4 Vroom), 513,
518, “that those results are proximate which the wrong-doer from his
position must have contemplated as the probable consequence of his
fraud or breach of contract.” In that case, the plaintiff had been
induced by the deceit of the defendant to enter into an oil
speculation, and the defendant was held responsible for the moneys put
into the scheme by the plaintiff in the ordinary course of the
business, which moneys were lost, less the value of the interest which
the plaintiff retained in the property held by those associated in the
speculation.

[Remainder of opinion omitted.]

_Judgment reversed. Cause remanded with a direction to grant a new
trial._[360]

SCHWABACKER _v._ RIDDLE
SUPREME COURT, ILLINOIS, JUNE 20, 1891.
_Reported in 99 Illinois Reports, 343._

Action for deceit, brought by Riddle against Schwabacker _et als._, alleging that, in the purchase of property to be taken at the invoice price, Riddle was cheated out of the sum of $2677.09 by fraudulent representations made by defendants in regard to the amount the goods purchased inventoried. On trial there was a verdict for plaintiff. Some of the instructions are stated in the opinion. Judgment in favor of Riddle. Schwabacker _et als._ appealed.[361]

CRAIG, C. J.... Instruction No. 2 reads as follows:—

“If a party misrepresents a fact within his own knowledge, to the injury of a third party, an action will lie for damages, if any, for such misrepresentation.”

This instruction is liable to several serious objections. In the first place, a misrepresentation, to be actionable, must be a material one, or no action will lie. In the second place, in an action for deceit no recovery can be had unless the plaintiff himself exercised ordinary prudence to guard against the deception and fraud practised upon him, unless he has been thrown off his guard by the other party. These two principles were entirely ignored by the instruction, and the jury, under this direction of the court, was at liberty to find against the defendants if they misrepresented any immaterial fact, however remote, and the plaintiff exercised no precaution whatever to guard against imposition. This is not a sound rule to be adopted, and as the instruction was calculated to mislead the jury, it ought not to have been given.

* * * * *

Instruction No. 13, given for the plaintiff, reads as follows:—

“It is not necessary, in this case, that the plaintiff should show any prior conspiracy or combination between the defendants to defraud the plaintiff; it is enough if the evidence shows that a sale was made to Riddle, or Riddle and Fosbender, and that the agreed price was for the value of the property, as shown by a certain invoice, and that notes were to be taken for the amount, and that the defendants had notes drawn for $2677.09 more than the value of the property as shown by such invoice; and if the plaintiff, before signing the notes, asked if they were for the amount of the invoice, and Fosbender said they were, in the presence and hearing of the other defendants, and if Riddle relied upon such statement in signing the notes, which was known to the defendants, then such conduct and representations would amount to a fraud in the other defendants, if they resulted in damages to the plaintiff.”

[After stating an objection to this instruction.]

Again, under this instruction a recovery may be had although the plaintiff was deceived from a total want of reasonable care on his part. At the time the notes were signed, as we understand the evidence of plaintiff himself, the invoice, which showed the correct amount of the goods, was present, and in the hands of one of the defendants. If that be true, and it could have been obtained and inspected by the plaintiff, and he failed and neglected to do so, but relied upon a statement made by Fosbender at the time, it was for the jury to determine whether, under the evidence, he had exercised proper diligence to guard against deception, and if he did not, he could not recover. But this principle was ignored in this and other instructions given for the plaintiff. Indeed, this principle is not stated, but seems to be ignored in all of the instructions given for the plaintiff. This last instruction, in our judgment, was calculated to mislead the jury.

* * * * *

_Judgment reversed._[362]

FARGO GAS & COKE COMPANY _v._ FARGO GAS & ELECTRIC COMPANY
SUPREME COURT, NORTH DAKOTA, JULY 23, 1894.
_Reported in 4 North Dakota Reports, 219._

CORLISS, J.[363] The plaintiff has recovered judgment for the balance of the purchase price of a gas and electric plant located in the City of Fargo, N. D., sold by plaintiff to the defendant. A portion of the consideration was paid, and, upon being sued for the unpaid portion of the purchase price, defendant set up as a defence a partial failure of consideration from the non-delivery of some of the property purchased, and also a counterclaim for damages arising out of the alleged deceit of the plaintiff in making the sale. The view we take of the case renders a more particular reference to the defence of partial failure of consideration unnecessary. We will confine ourselves to the single question of fraud. The property purchased consisted of a gas plant, with mains and all the other classes of property which go to make up such a plant, and also an arc electric light plant, with poles, wires, and other fixtures distributed over different parts of the City of Fargo. These two plants were used by the plaintiff at the time of making the sale thereof to defendant, to light the public streets of the City of Fargo, its public buildings, stores, hotels, and dwelling houses, and had been so used for some time prior to such sale. The alleged fraudulent representations were of two classes,—one class relating to the physical condition of the plant, embracing statements as to the number of miles of wire, the number of poles, the gas mains, and as to the condition of the plant in other respects; and the other class related to the net earnings of the plant for the previous year, and the prices charged customers for gas and electric light. It appears that defendant relied chiefly upon the earning capacity of the plant in making the purchase, and was induced to believe that its net annual earnings would equal 10 per cent of the purchase price ($85,300), because of the statements of the plaintiff’s officers that its net earnings during the past year had been $8913. There was evidence tending to show that this statement was false, and that it must have been known to be false by plaintiff’s officers who negotiated the sale. Having in this brief manner set forth the general character of the property sold, and the general nature of the fraudulent representations upon which defendant’s counterclaim for deceit was founded, we can now intelligently turn to what we regard as a fatal error in the case.

In the course of his charge to the jury, the learned trial judge instructed them as follows: “If the means were at the defendant’s hands to discover the truth or untruth of the plaintiff’s statements with regard to the amount and character of the property, defendant must be presumed to have had a knowledge of the actual facts.” This instruction must be considered in the light of the refusal of the court to charge the jury as follows, at the request of defendant’s counsel: “If you find that, during the negotiations, statements were made by the plaintiff as to the earnings of the plant, the defendant had a right to rely upon these statements; and if they were so relied on, and were false, and the defendant suffered injury thereby, the defendant would be entitled to recover the damages which it suffered in consequence thereof.” It is apparent from this refusal to charge, and from the charge as cited given, that the court told the jury that, as a matter of law, defendant did not have the right implicitly to rely upon the representations of the plaintiff touching the character of the plant, but must make inquiries concerning them, and must make investigation as to their truth or falsity. It is true that the word “investigate” is not used; but, when we consider the nature of the property and the character of the representations made, it is obvious that something more than a mere inspection of an object present before a purchaser was necessary in order to enable the purchaser in this case to “discover” the truth or falsity of plaintiff’s statements. Such an instruction to a jury might be appropriate in an action in which fraud in the sale of a horse was set up, the seller having represented the horse to be perfectly sound, and it appearing that the horse stood before the purchaser at the time the representation was made, and that the only defect consisted in the absence of a leg, easily discernible by the ordinary use of eyesight. But in the case at bar the means of discovering the truth or untruth of these false statements were not at hand in the sense that they must have been employed before the seller could be held responsible for his fraudulent representations; and, when this language was used, the jury must have drawn the inference from the fact that this plant was in the same city, and could be investigated with respect to its condition and its earnings, and the prices charged customers for gas and electric light, and with reference to the other features embraced in the statements made by plaintiff on the sale, that therefore the means were at hand, within the rule laid down by the court requiring the purchaser to discover at its peril the truth or falsity of the statements made. Such a rule of law would be unjust and intolerable. When parties deal at arm’s length, the doctrine of _caveat emptor_ applies; but the moment the vendor makes a false statement of fact, and its falsity is not palpable to the purchaser, he has an undoubted right implicitly to rely upon it. That would, indeed, be a strange rule of law which, when the seller had successfully entrapped his victim by false statements, and was called to account in a court of justice for his deceit, would permit him to escape by urging the folly of his dupe for not suspecting that he, the seller, was a knave. In the absence of such a suspicion, it is entirely reasonable for one to put faith in the deliberate representations of another. The jury must have understood that the means were at hand to discover the claim, because the defendant might have measured the wire, counted the poles, examined the gas mains, ascertained how much customers were paying for gas and electric light, and might have hired an expert to examine into the earnings and expenses of the plaintiff in running the plant, with a view to discovering whether a business man had told the truth. It should not have been left to the jury to determine whether the means were at hand to discover the falsity of the statements made, in view of the character of such statements and the nature of the property sold. The defendant, as a matter of law, had a right to rely implicitly upon the statements made by plaintiff touching the character of this plant. So long as defendant did not actually know the representations to be false, it was under no obligation to investigate to determine their truth or falsity. In Mead _v._ Bunn, 32 N. Y. 280, the court say: “Every contracting party has an absolute right to rely on the express statements of an existing fact, the truth of which is known to the opposite party and unknown to him, as a basis of mutual engagement, and he is under no obligation to investigate and verify statements, to the truth of which the other party to the contract, with full means of knowledge, has deliberately pledged his faith.” In Redding _v._ Wright, (Minn.) 51 N. W. 1056 (a case very much in point), the court say: “If the representations were fraudulently made with the intent to induce the plaintiff to rely upon the fact being as represented, and to act upon the belief thus induced, the wrong-doer who succeeds in such a purpose is not to be shielded from responsibility by the plea that the defrauded party would have discovered the falsity of the representation if he had pursued such means of information as were available to him.” While the rule has been in some cases stated in terms more favorable to plaintiff, yet no decision can be found which establishes a doctrine under which defendant would be bound, under the circumstances of this case, to make any investigation or inquiry touching the truth or falsity of the statements made in connection with the sale. There are many well considered cases which sustain our view that defendant had a right implicitly to rely upon the representations made by plaintiff with respect to the character of the property to be purchased by defendant. In addition to the cases already cited, we refer to Maxfield _v._ Schwartz, 45 Minn. 150, 47 N. W. 448; Gardner _v._ Trenary, 65 Iowa, 646, 22 N. W. 912; Schumaker _v._ Mather, 133 N. Y. 590, 30 N. E. 755; McClellan _v._ Scott, 24 Wis. 81; Caldwell _v._ Henry, 76 Mo. 254; Oswald _v._ McGehee, 28 Miss. 340; Cottrill _v._ Krum, 100 Mo. 397, 13 S. W. 753; Campbell _v._ Frankern, 65 Ind. 591; Kerr, Fraud & M. 77, 80, 81; Erickson _v._ Fisher, (Minn.) 53 N. W. 638; Alfred Shrimpton & Sons _v._ Philbrik, (Minn.) 55 N. W. 551; Barndt _v._ Frederick, (Wis.) 47 N. W. 6; Bigelow, Fraud, 522, 528. We are aware that cases can be found which exact from the buyer more care in ascertaining the truth or falsity of representations than the decisions just cited. These cases appear to us to have been rightfully decided, in view of the facts. In determining what the courts in such cases intended to hold, the language of each opinion must be read, in the light of the facts of the particular case. The unmistakable drift is towards the just doctrine that the wrong-doer cannot shield himself from liability by asking the law to condemn the credulity of his victim. The falsity of the statement may be apparent because the thing misrepresented is before the buyer, and the most casual look will suffice to discover the falsehood, no artifice being used to divert his attention; or the statement may carry its own refutation upon its face,—may be so absurd or monstrous that it is palpably false, as a statement by a person carrying on a business known to the purchaser to be very small that the receipts of the business are a million dollars a year. In these and other similar cases the law will not allow a person to assert that he was deceived. But the general rule is, and, upon principle, must be, that the question is one of reliance by the buyer upon the false statement of the seller. Whether it was wise for him to rely upon it, whether he was prudent in so doing, whether he is not chargeable with negligence in a certain sense in not investigating,—these inquiries are, in general, immaterial, provided the purchaser has in fact been deceived. The circumstances under which fraud is accomplished are so varied, the nature of the property and the character of the misrepresentations are so widely different, in different cases, that it is unwise to attempt to enunciate with precision a general rule by which all cases shall be governed. It is better to decide the cases as they arise, keeping in view the general principle that courts will not readily listen to the plea that the defrauded party was too easily deceived. For this error in the charge, the judgment will be reversed, and a new trial granted.

[Omitting opinion on another point.]

_Judgment reversed. New trial ordered._[364]

STARKWEATHER _v._ BENJAMIN
SUPREME COURT, MICHIGAN, JUNE TERM, 1875.
_Reported in 32 Michigan Reports, 305._

Error to Macomb Circuit.

CAMPBELL, J. This action was brought to recover damages arising from
alleged misrepresentations made by Starkweather to Benjamin concerning
the quantity of land in a parcel purchased from Starkweather and
others, for whom he acted, and which was bought by the acre.

The defence rested mainly on the ground that the purchaser saw the
land, and was as able to judge of its size as Starkweather.

We do not think the doctrine that where both parties have equal means
of judging there is no fraud applies to such a case. The maxim is
equally valid, that one who dissuades another from inquiry and
deceives him to his prejudice is responsible. It cannot be generally
true that persons can judge of the contents of a parcel of land by the
eye. When any approach to accuracy is needed, there must be
measurement. When a positive assurance of the area of a parcel of land
is made by the vendor to the vendee with the design of making the
vendee believe it, that assurance is very material, and equivalent to
an assurance of measurement. In this case the testimony goes very far,
and shows that the assertions and representations, which the jury must
have found to be true, were of such a nature that if believed, as they
were, a re-survey must have been an idle ceremony. They were
calculated to deceive, and as the jury have found, they did deceive
Benjamin, and he had a clear right of action for the fraud.

[Omitting remainder of opinion.]

_Judgment affirmed._[365]

MABARDY _v._ McHUGH
SUPREME JUDICIAL COURT, MASSACHUSETTS, MAY 21, 1909.
_Reported in 202 Massachusetts Reports, 148._

Tort for deceit in the sale of land. Writ in the Superior Court for
the county of Middlesex dated January 18, 1906.

The case was tried before Stevens, J. The facts are stated in the
opinion. The jury found for the defendants; and the plaintiffs alleged
exceptions.

RUGG, J. This is an action of tort sounding in deceit. There was
evidence tending to show that the plaintiffs went upon a certain
irregularly shaped tract of land (for false representations inducing
the purchase of which this action was brought) with one of the
defendants, who pointed out the true boundaries and fraudulently
stated that the tract contained sixty-five acres, when in fact it
contained forty and three-fourths acres. Upon this aspect of the
evidence, the trial judge instructed the jury that “if the
plaintiffs ... were taken over the farm by the defendants ... or [and]
were shown the bounds so that the plaintiffs knew where the farm was
and what was comprised within the bounds, it would not be of any
consequence that representations may have been made by the defendant
in relation to the acreage.” The evidence being conflicting as to
whether the boundaries were shown, the jury were further instructed
that if the defendant, who talked with the plaintiffs, “knew that
there were not sixty-five or nearly sixty-five acres, or if he did not
know anything about it and stated it as a fact within his personal
knowledge, then it would be a false representation for which he would
be liable provided” the other elements essential to a recovery were
found to exist.