Opinion
Argued February term, 1936.
Decided April 24th, 1936.
1. The evidence examined and held, that the misrepresentations of fact alleged to have been made by the agent of the defendants in selling stock of the defendant corporation to the complainants, were in fact made and that the defendant who negotiated the sale was the agent of the other defendants.
2. The principal cannot escape responsibility for the misrepresentations of the agent of its agent if it accepts and retains the fruits of those misrepresentations. Mechanics Trust Co. v. Reid, 117 N.J. Eq. 472, followed.
3. Complainants had the right to rescind the contract of purchase of the defendant company's stock because of the fraudulent misrepresentations actually made by the agent (as has been herein determined) even though the agent had not been authorized to make them.
4. The defense that the complainant is estopped or precluded from setting up the fraudulent misrepresentations made by the agent because of the statement incorporated in the printed form of purchase agreement signed by the complainant to the effect that "the purchase of these shares is based solely on the information contained in the printed circular issued by you" (one of the defendants) "and dated January , 1933," is not maintainable in the law courts, and much less in a court of equity. It appears by the proofs that there was never any printed circular bearing any date in January and it is admitted by the agent who negotiated the sale of the defendant company's stock that he did not show, and in fact refused to show, to the complainants the circular which he did have in his possession.
5. Consideration of the proofs in this case clearly shows that the representation that all the money received by the defendant company from the sale of the common stock was to be used for the purchase of tax liens, except that after two hundred and seventy thousand shares were sold $243,900 of preferred stock was to be redeemed, was untrue and that the agent who actually negotiated the sale of the stock to the complainants was authorized to make the misrepresentation not only by the defendant Ramos who employed him, but by the defendant company itself who had engaged Ramos to sell the stock to the public.
6. The fact that a notation in the balance sheet of the company appearing upon the fourth page of a certain prospectus issued by it, was inconsistent with a representation clearly made on the first pages of the prospectus to the effect that the proceeds of the issue of common stock were to be used entirely and exclusively in financing the purchase of tax lien certificates and to retire outstanding preferred stock after the sale of two hundred and seventy thousand shares of the new issue of common stock, is entirely insufficient as a defense to the present suit for the following reasons: (1) the representations in the first pages of the prospectus were complete in themselves and an ordinary person without special training in legal or financial affairs would have been entirely justified in relying and acting upon the statements therein, without reading the balance sheet on the fourth page; (2) an ordinary person might read the entire circular without realizing that the notation on the fourth page of the prospectus was inconsistent with the apparent meaning of the statements on the first pages, and if the circular as a whole be deemed ambiguous the responsibility for such ambiguity and the results thereof, rests upon the defendant company; and (3) the complainants did not read or know of the notation on the fourth page of the prospectus.
7. The defenses that the complainants ratified the purchase of the stock after knowledge on their part of the fact of the misrepresentations, and that they failed to rescind within a reasonable time after discovery of the misrepresentations, are affirmative defenses and must be established by the weight of the evidence. Neither one is so established; the weight of the evidence is to the contrary.
8. Reasonable promptness in acting to rescind a contract of purchase after discovery of misrepresentations leading to the purchase, is a matter depending upon the circumstances of a particular case. Complainants acted with reasonable promptness in the instant case.
9. The argument that the agent of the defendants, before the actual purchase of the stock by the complainants, suggested to, or asked them, to go to the office of the defendant company to talk with the officers there, and that this was not done, is no defense to this suit brought to set aside the purchase of the defendant corporation's stock on the ground of misrepresentations.
10. Complainants having tendered back the stock, they are, under the facts of this case, entitled to a decree for rescission, i.e., to a decree for the purchase price of the stock, with interest, in exchange for the return of the stock and the dividends paid thereon, with interest, and the decree will carry costs and counsel fee.
11. Although the record shows no service of process on the defendant agent nor answer filed by him, it does show that he subsequently appeared in the cause by the same solicitors as the defendant company, which amounts to a general appearance, and that he testified fully as a witness and thereby fully presented any and all defenses on his own behalf.
On appeal from a decree of the court of chancery advised by Vice-Chancellor Buchanan, who delivered the following opinion:
"This suit is brought to set aside a transaction whereby Raymond Tams sold certain securities owned by him and with the proceeds purchased stock of the defendant Paramount Investment Co. as the result (it is alleged) of misrepresentations of fact made to him by defendant Abrams as agent of the other defendants. The principal defenses are denials that some of the representations were made; denials that any of the representations made were untrue; denials of the alleged agency; and denials of responsibility for any of the misrepresentations made, notwithstanding the existence of agency.
"Proven or admitted facts are that defendant Paramount Co., a corporation engaged in the business of purchasing realty at tax sales, determined upon a new issue of 300,000 shares of common stock of $5.00 per share par value, and entered into a contract with one Ramos, (which was immediately taken over by defendant Ramos Co.), whereby Ramos was to sell the stock to the public, for Paramount, at par and to receive a commission therefor, of $1.00 per share, from Paramount, and was to employ salesmen to make such sales.
"As one of such salesmen Ramos employed defendant Abrams, who solicited Tams to purchase the stock, and succeeded in inducing him to sell certain securities which he then owned and invest the proceeds in the stock, — 3,801 shares thereof for $19,005. Tams at the time was, and had been for some two years previous, ill and confined to the house by a serious heart condition and unable to work; the sole income he had for the support of himself and his wife and daughter was the income from the securities he had.
"The misrepresentations alleged to have been made by Abrams are five:
"a. That all the money received by Paramount from the sale of this common stock was to be used for the purchase of tax liens, except that after 270,000 shares were sold $243,900 of preferred stock was to be redeemed.
"b. That Abrams' father had invested his life savings in this common stock.
"c. That Abrams' wife had purchased 600 shares, or $600 worth, thereof.
"d. That a bank cashier in Trenton had purchased 1,500 shares, or $1,500 worth, thereof.
"e. That this common stock was redeemable on demand at the office of Ramos.
"Concededly, none of these representations (if made) was true. The making of the representations and the reliance thereon leading to the purchase by Tams, is credibly testified to by Mrs. Tams and the daughter; Tams himself died during the pendency of the suit. Abrams denies, to a greater or less extent, — (some of his denials were simply that he could not recall having made such statements), — the making of any of these statements except the first; but the utter lack or credibility to be accorded his testimony is patent from his manner and appearance on the stand, the nature and character of his testimony as a whole, and his own nature and character as disclosed thereby. One of many instances may be mentioned as illustrative and illuminating. He denied telling the Tams' that his father had invested in the stock, and explained that what he did tell them was `if I would take my father's life savings I would feel perfectly safe in investing them in the Paramount stock;' it subsequently developed by his own admission that his father had no savings. The court is entirely satisfied that all the representations were made.
"Paramount contends that no liability or responsibility attaches to it by reason of these misrepresentations, because (it is argued) (1) Ramos was not an agent of Paramount; (2) Abrams was not an agent of Paramount; (3) even if Abrams was an agent of Paramount, he had no authority to make any of those representations. Taking up these contentions seriatim, — it is difficult to believe that contention (1) is seriously made. Apparently it is based on a provision of the contract between Paramount and Ramos, that Ramos `shall not in any way be considered an agent of' Paramount, but shall be simply a `medium of outlet to the public of the new stock.' A reading of the contract shows that in fact it is a contract of agency for the sale of this stock: if it is not that, it is nothing at all. The statement to the contrary in the agreement is of no avail as against the actual provisions of that agreement, — at any rate insofar as Tams is concerned. The transfer of the contract, from Ramos as an individual to the Ramos Co., was with the consent of Paramount; Ramos Co. took the place of Ramos as Paramount's selling agent.
"Contention (2) stands upon no sounder basis. The contract not only authorizes but requires Ramos to have at least ten salesmen engaged in the selling of this stock. Abrams was one of those engaged by Ramos in this behalf. There is not even any proof or intimation that Ramos should not have so engaged Abrams, or that Ramos had any reason to suppose that Abrams would make any unauthorized representations.
"As to contention (3), it may be assumed that Abrams had no authority to make any of the last four of the five representations. As will be shown later, he did have authority both from Ramos and Paramount to make the first representation. But passing that for the moment, — Paramount cannot escape responsibility for the misrepresentations if it accepts and retains the fruits of those misrepresentations. `When the company took the benefits of the fraud, it took with those benefits the responsibility for the fraud which procured them, at least to the extent of an obligation of restoration to the party defrauded.' `If it disavows the fraud, it has not done full equity until it restores to the injured party the benefits which it received by reason of the fraud.' Garrison v. Technic Electrical Works, 55 N.J. Eq. 708, at 720. To the same effect see Downs v. Jersey Central Power Light Co., 115 N.J. Eq. 348, at 354, affirmed 117 N.J. Eq. 138; Duralith Corp. v. Van Houten, 113 N.J. Law 374; Reitman v. Fiorillo, 76 N.J. Law 815, at 817; Dunston Lithograph Co. v. Borgo, 84 N.J. Law 623, at 625; Mick v. Corporation of Royal Exchange, 87 N.J. Law 607, at 614; Diamond Rubber Co. v. Feldstein, 112 N.J. Law 514, at 517.
"The last paragraph of the appellate opinion in the Downs Case is somewhat perplexing, but it is clear from the subsequent case of Mechanics' Trust Co. v. Reid, 117 N.J. Eq. 472, that it could not have been intended to contradict or overrule the well established principle set forth in the other opinions. The Mechanics' Trust Co. Case, in any event is the latest; is an express re-affirmance of that principle; and is particularly applicable to the instant case, since there, as here, the fraud was by an agent of the immediate agent.
"It seems clear, therefore, that complainants had the right to rescind the contracts of purchase, — (there were three separate written contracts, but all practically contemporaneous and all resting on the same basis), — because of the fraudulent misrepresentations actually made by the agent (as has been herein determined) even though the agent had not been authorized to make them.
"A further defense is interposed on this point, to wit, that complainant is estopped or precluded from setting up these fraudulent representations because of the statement incorporated in the printed form of purchase agreement signed by complainant, — `The purchase of these shares is based solely on the information contained in printed circular issued by you' (Ramos Co.) `and dated January —, 1933.' That such a defense is not maintainable even in the law courts, — (much less in a court of equity), — was unanimously determined by the appellate court in Duralith Corp. v. Van Houten, supra. Moreover it appears by the proofs that there never was any printed circular bearing any date in January; and it is admitted by Abrams that he did not show, — that he refused to show, — to the Tams' the circular which he did have (which was dated March 10th, 1933).
"Complainant's right to rescind however, rests not alone on the fraudulent misrepresentations made by the agent Abrams; it arises equally from misrepresentation actually made or authorized by Paramount itself.
"Referring back to the first of the alleged misrepresentations hereinbefore mentioned, — it seems clear not only that it was made, and that it was untrue, but also that Abrams was authorized, both by Ramos and by Paramount, to make it. That Abrams did make it, is not only testified to by Tams, widow and daughter, but is also admitted by Abrams himself, who says that he thought it was a wonderful selling point or argument and that he stressed it. The testimony for complainants also proves that the Tams' were impressed with the argument and that it was relied on as a very strong factor in the inducement to the sale; and of this there is no denial;
"The uncontradicted testimony is that Abrams said to the Tams' that the proceeds of sale of this new issue of stock was to be used for the purpose of purchasing tax lien certificates, except that after the sale of 270,000 shares, the outstanding 2,439 shares ($243,900 par value) of preferred stock was to be retired at par. Abrams himself testifies to this effect, on his direct examination on behalf of defendants. He testifies that he quoted and read to them the statements, word for word, from the letter or prospectus, (although he did not at that time give them the prospectus or let them read it for themselves).
"This letter or prospectus, — admittedly made up and authorized by Ramos and by Paramount, — says in respect to this new issue of stock which they were endeavoring to sell: `The proceeds of this issue will be used in the ordinary course of the corporation's business, which is strictly that of financing the purchase of tax liens, also to retire the present outstanding 8% Preferred Stock, and for other corporate purposes.' `The Corporation uses its funds entirely and exclusively to purchase tax lien certificates.' (Italics supplied.) On the same page is the statement, — `The entire outstanding issue of 8% Preferred Stock (2,439 shares of $100 par value each) is to be retired at par after the sale of 270,000 shares of the present (new) common stock," (italics supplied).
"The foregoing are the statements made on the first page, over the name of Ramos. The same statements are repeated in the later pages, over the name of (and authorized by) Paramount.
"Those statements are obviously tantamount to a representation that the proceeds of the sale of this new stock were to be used only for the purchasing of tax liens and the ordinary corporate expenditures, until after 270,000 shares of this new stock had been sold, and that then, and not until then, were any assets of the company to be used for the purpose of purchasing the outstanding preferred stock from the holders thereof. That is the meaning and understanding which would naturally and justifiably be gained from those statements by the average individual of ordinary intelligence, not especially and particularly skilled along legal or financial lines. It is the meaning and understanding which not only the Tams' naturally and justifiably gained from Abrams' reading of these statements to them; it is also, I am satisfied, the meaning which Abrams himself gained therefrom, and repeated and stressed to the Tams'. It is also clear from the proofs that it is the meaning which Ramos gained; and when Ramos found out that Paramount did not mean it in that way, Ramos took such steps as were open to cease making such representations further, and to notify those who had already bought the stock, of the actual situation.
"Paramount contends that the statements in the circular (a) do not in themselves constitute a representation that the preferred stock was not to be redeemed until after the sale of 270,000 shares of the new stock, and (b) in any event they do not constitute such a representation because they were meant to be read in connection with all the other portions of the circular, and on the last page of the circular is a `balance sheet' of the corporation wherein the preferred stock is itemized as a liability, with a parenthetical notation that it is `callable at par on any dividend date; redeemable at par on ninety days' notice;' that what Paramount meant, and what the circular as a whole really says, is that the company intended, after the sale of the 270,000 new shares, to retire or redeem all of the preferred stock which should then be still outstanding, — which had not already been redeemed by the holders under their right to demand such redemption on ninety days' notice.
"This court is quite willing to believe that that is what Paramount meant; this court is quite willing to believe that Paramount was not guilty of any intentional fraud; that it did not mean to make any misrepresentation; that it did not realize, at the time the circular was made up and sent out, that prospective customers would or might get therefrom any different understanding than that which Paramount understood and intended. Nevertheless Paramount's contention is utterly insufficient as a defense to the present suit, — for several reasons.
"In the first place, the natural meaning of the statements on the first two pages of the circular, — the meaning which would be understood by the ordinary person without special training in legal or financial matters, — is (as has already been said) that the preferred stock was not to be retired or redeemed by the company until after 270,000 shares of the new stock had been sold. In those statements there was not incorporated any mention that the holders of the preferred stock had the right to demand such redemption in ninety days; nor was there any reference to the notation in the balance sheet on the fourth page, — there is not even any reference to the balance sheet. The first three pages of representations are complete in themselves, and it is deemed that a prospective purchaser would have been entirely justified in relying and acting upon the statements therein, without reading the balance sheet on the fourth page.
"In the second place, the ordinary person might well read the entire circular without realizing that the parenthetical notation on the fourth page was inconsistent with the apparent meaning of the statements on the first two pages; and especially is this true in view of the fact that the balance sheet is dated as of December 31st, 1932, i.e., setting forth a state of affairs prior to the new financing and the circular or prospectus which bears date March 10th, 1933. Moreover, if the circular as a whole be deemed ambiguous, the responsibility for such ambiguity and the results thereof, rests upon Paramount. Cf. Fletcher v. Interstate Chemical Co., 94 N.J. Law 332; American Lithograph Co. v. Commercial Casualty Insurance Co., 81 N.J. Law 271.
"In the third place, — and of controlling importance here, — the Tams' did not read or know of the notation on the fourth page. Defendant's own witness Abrams admitted that he did not give the Tams' the circular until after Tams had purchased, and that he read to them and told them about only the statements in the first three pages.
"If Paramount now, — after it has been ascertained and determined that the Tams' purchase was the result of Abrams' intentional misrepresentations, or of its own ambiguous and unintentional misrepresentation, or of a combination of both, — continues to deny the right of rescission, and to endeavor to retain for itself the avails of those misrepresentations, it will put itself in the position of a participant in a fraud on the Tams'. It is difficult to believe that it will take such a position.
"It is, however, further argued on behalf of defendants that complainants waived the right to rescind, by acts inconsistent with, and contradictory of, the exercise of such right, — by acts amounting to a ratification of the purchase, after knowledge on their part of the fact of the misrepresentations; and by failure to rescind within a reasonable time after discovery of the misrepresentations.
"It is of course true that either of these defenses would be sufficient, if the proofs showed it to be true in fact; but the proofs do not so show. Both are affirmative defenses and must be established by the weight of the evidence. Neither one is so established; the weight of evidence is to the contrary.
"One issue of fact is involved in both of these defenses: — the time when complainants acquired the knowledge, — became aware of the misrepresentations. According to defendants, this was some time in April, 1933, when Abrams finally gave the Tams' a copy of the circular or prospectus; according to complainants it was not until some time in June, 1933, when Ramos called upon them and gave them a copy of his letter to Paramount dated June 5th. The weight of evidence is with complainant, and the fact is found accordingly. (This is as to the misrepresentation relating to the redemption of the preferred stock; as to some of the other misrepresentations, it would seem they were not discovered until even later, and defendants offer no proof as to when they were discovered). The mere receipt of the prospectus, — nor even an actual reading by complainants of the whole thereof, — is not proof of discovery of the fraud. As heretofore shown herein, the ordinary person would read the entire prospectus without being aware that the representations on the first three pages were limited or contradicted by anything appearing on the fourth page.
"This disposes of the contention that complainants ratified the purchase by the execution of proxies for the voting of the stock, on May 25th, 1933. The execution of these proxies was prior to their discovery of the misrepresentation. It also disposes of the contention that the election to rescind was not made with reasonable promptness after such discovery. At the time of that discovery, in June, Tams was ill. His wife and daughter took the matter up with their Philadelphia attorney who made investigation, took the matter up with Paramount the latter part of June or early July, received from them at first the intimation that they would return the money, finally consulted New Jersey counsel resulting in the preparation and filing of the bill and affidavits herein which obviously required some considerable time in preparation, and were filed August 25th. Reasonable promptness is a matter depending on the circumstances of the particular case. It is concluded that complainants acted with reasonable promptness in the instant case. At the very least defendants have not established the contrary; and the burden was upon them.
"One other argument is advanced by defendants: — that Abrams, before the actual purchase, suggested to, or asked, the Tams' to go to the office of Paramount and talk with Paramount, and that this was not done. This is no defense. Sabatino v. D'Aloise, 107 N.J. Eq. 426.
"Complainants have tendered back the stock. They are entitled to decree for rescission, — to decree for the $19,005 purchase price, with interest, in exchange for the return of the stock and the dividends paid thereon, with interest, and the decree will carry costs and counsel fee.
"The decree will be against all three defendants. All three participated in the misrepresentation as to the preferred stock redemption; the securities of Tams were delivered to Ramos to sell and convert into Paramount stock; Paramount received the full $19,005 and paid over $3,801 thereof to Ramos, who in turn paid over at least $1,900 to Abrams; Abrams also made the additional false representations. It is impossible to determine the particular part played by the respective misrepresentations in inducing the purchase. Since in the view of the court, neither Paramount nor Ramos was guilty of intentional fraud, it would seem equitable that, as between themselves, those two should respectively bear the burden of repayment of the amounts respectively received by them, — and that the decree therefore may so provide.
"It perhaps should be added that although the record shows no service of process on Abrams, nor answer filed by him, it does show that he subsequently appeared in the cause by the same solicitors as Paramount (joining in stipulation), which amounts to a general appearance, and that he testified fully as a witness and thereby fully presented any and all defense on his own behalf."
Messrs. Schotland Schotland, for the defendant-appellant Paramount Investment Corporation.
Messrs. Osborne, Cornish Scheck and Mr. Ervin S. Fulop, for the complainant-respondent.
The pleadings and proofs in this case have been carefully examined. The conclusions of the vice-chancellor are abundantly supported by the evidence adduced.
The decree is affirmed.
For affirmance — THE CHIEF-JUSTICE, LLOYD, CASE, BODINE, DONGES, HEHER, PERSKIE, HETFIELD, DEAR, WELLS, WOLFSKEIL, RAFFERTY, JJ. 12.
For reversal — None.