Savage v. Bartlett

Robinson, C. J., delivered the opinion of the Court. The Valley Land and Improvement Company was incorporated by an Act of the Legislature of the State of Virginia, approved January 29th, 1890, with a capital stock ol' $2,000,000. In April, 1891, within fifteen months after its incorporation, the company executed a deed of trust, conveying all its property, including its unpaid capital stock, to trustees for the benefit of its creditors. In August of the same year, upon a bill filed by the creditors in the Circuit Court of Page County, Virginia, the plaintiff was appointed sole trustee to execute the deed of trust in the place of the four trustees therein named, and was authorized and directed to collect all moneys due upon subscriptions to its capital stock.

This is an action at law brought by the plaintiff, as trustee, against the defendant, to recover the unpaid instalments due by him upon his subscription to the capital stock of the company. The defence is that the defendant was induced to become a shareholder upon the faith of certain representations set forth in ‘¿prospectus issued by the company, and that these representations were false and fraudulent, and that the defendant, within a reasonable time after the discovery of the fraud, and before the execution of the deed of trust, notified the president of' the company, that he repudiated the contract, and refused to make any further payments on account of his subscription. And the question is whether these facts, if found by the jury, constitute a valid defence to the action. As against the company itself it is well settled that a shareholder may rescind a contract of subscription procured through the fraud of the company, within a reasonable time after the discovery of the fraud. “Contracts of this description,” says Lord Romilly, “between an individual and a company, so far as misrepresentation or suppression of the truth is concerned, are to be treated like contracts be ⁵⁶⁶ tween any two individuals.

If one man makes a false statement, which misleads another, the way in which that is to be treated affords the example for the way in which a contract is to be treated where a" company makes a false statement which misleads an individual.” Venezuela Central Railway Company vs. Kisch, Law Rep., 2 Eng. & Irish Appeals, 99. And this well settled rule applies with even greater strictness in regard to representations set forth in a prospectus issued by a company for the purpose of inviting persons to join in the undertaking; and although some allowance must be made for the manner in which the advantages which are likely to be enjoyed by the subscribers are described, yet, as was said by the Lord Chancellor in the case to which we have just referred, “no misstatement or concealment of any material facts or circumstances ought tobe permitted.” And then be quotes with approval what was said by Vice-Chancellor Kindersley in the case of the New Brunswick and Canada Railway, &c. Company vs. Muggeridge, 1 Drew. & Sm., 381, “Those who issue a prospectus holding out to the public the great advantages which will accrue' to persons who will take shares in a proposed undertaking, and inviting them to take shares on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy, and not only to abstain from stating as a fact that which is not so, but to omit no one fact within their knowledge, the existence of which might in any degree affect the nature, or extent, or quality of the privileges and advantages which the prospectus holds out as inducements to take shares.” At the same time, contracts of subscription procured by fraud are not void, but voidable, at the election of the shareholder; for although deceived and misled, he has the right to abide by the contract. If, however, he means to rescind the contract, he must do so within a ⁵⁶⁷ reasonable time after the discovery of the fraud. “A man must not,” says LordBomilly, “play fast andloose, he must not say I will abide by the company if successful, and I will leave the company if it fails, and therefore, when a misrepresentation is made of which any one of the shareholders has notice and can take advantage to avoid his contract with the company, it is his duty to determine at once whether he will depart from the company or whether he will remain a member.” Ashley’s Case.

L. Rep., 9 JEq., 262. In the prospectus issued by the company in this case, it is stated: 1. That the company was the owner of the famous Luray Inn with all its furniture and equipments. 2. That it was the owner of the famous Luray Caverns. 3.

That it had acquired and owned 2500 acres of the choicest lands for building and manufacturing purposes, and in fact all the available land for these purposes in and around the hotel, caverns and town of Luray. 4. That it owned and controlled 8000 acres of the best mineral properties in Virginia, consisting of iron, manganese, and other valuable minerals. Instead of being the owner, the defendant proved that the company had merely the option to buy these properties at certain stipulated prices; that this option had been assigned to the company by 1"). E. ICagey and his associates, some of whom were prometers of the undertaking, and that in consideration of the assignment of said option, the company had issued certificates of stock to Kagey and his associates of the par value of 8400,000, and that the amount which would have been required on the 7th July, 1890, — the date of the defendant’s subscription,- — to enable the company even to avail itself of the options, exceeded the sum of $300,000 over and above the entire receipts of the company, up to that ⁵⁶⁸ time.

The defendant further proved, that a Mr. Leyburn had in fact procured the option for the purchase of 4000 acres' of the so-called valuable mineral land for $2 per acre, and that he had assigned said option to Kagey and Marshall for fifty shares of the stock of the company. The defendant then proved it was not until November, 1890, three months after his subscription, that he discovered the fraudulent character of the representations set forth in the prospectus, and that shortly after-wards, in January, 1891, and before the execution of the deed of trust he notified the president of the company of his repudiation of the contract, and of his refusal to make any further payments on account of the same. Here was evidence to go to the jury, not only to prove that the defendant’s subscription was obtained by fraud, but that he had also within a reasonable time after the-discovery of the fraud, rescinded the contract. And as there does not seem to be any question as to laches on his part, these facts, if found by the jury, would according to all the authorities have been a valid defence in an action brought by the company itself.

But whilst it is conceded that a defrauded shareholder may by a proper proceeding rescind the contract, the argument is that the act of rescission must be of such a nature as-to remove his name from the books of the company, and for the reason that persons dealing with the company are presumed to have given credit to the company upon the faith of his subscription. This may be considered the settled law in England, and, further, that the proceeding to remove his name-from the register must be instituted by the subscriber before the insolvency of the company. In the leading-case of Oakes vs. Twquand, decided in the House of Lords-in 186⁷, it was held that the application to remove the name of a member from the register on the ground that the subscription was procured through the fraud ⁵⁶⁹ of the company must be made before the commencement of winding-up proceedings. L. B., 2 H. .71, 325. “If a demand had been made upon Mr. Oakes for a call,” says Lord Colonsay, “while the company was a going concern, and he had resisted it on the ground of fraud, I think he might have been entitled to succeed in that resistance, and to have his name removed from the register.” And in the later case of The Reese River Silver Mining Co. vs. Smith, 4 Eng. & Irish Appeals, 64, it was decided that “where an application has been made by a defrauded shareholder for the rescission of the contract and the removal of his name from the register, his right to a rescission will not be affected by the fact that winding-up proceedings intervene before his suit for rescission has been determined.” These cases, however, are based upon the provisions of the English Companies Act of 1862, entitled “An Act for the Incorporation, Regulation and Winding-up of Trading Companies and other Associations.” By this Act, a public officer was appointed for keeping a register of, amongst other things, the name of the projected company; a statement of the nature of its intended