HARRIS v. EGGER, 226 F. 389

WARRINGTON, Circuit Judge, (after stating the facts as above). The recovery below, if at all rightful, was moderate; it was $1,750. No. special instructions to the jury were requested, and no exception was reserved to the general charge. The charge as a whole is not contained in the record; a portion of it is set out in the eighteenth assignment, but counsel frankly concede that this is not well taken because of the absence of exception.

It must therefore be assumed that the instructions to the jury were rightly conceived and given; and, in view of the allegations of the declaration and the tendency of the evidence, the judgment should stand, unless prejudicial error intervened under the rulings upon the demurrer or in the course of the trial. The question of leading importance is whether Egger condoned the fraud and deceit upon which his action is founded. This question -\yas presented upon the demurrer to the plea, and counsel for Harris insist that it inheres in the admitted facts and operates to defeat the action.

The theory of the second plea, as amended, is twofold: One feature is tlie delay and consequent acquiescence from 1910 to 1913, before instituting the suit; the other is the voluntary character of the delivery of the certificates of stock, independently of the delay. We are not impressed by the feature of delay. Assuming that it was competent for the parties to agree, and that it was agreed as stated in the plea, that Egger should promptly deliver the certificates, it is not perceived how the failure so to deliver operated to the prejudice of Harris.

The certificates simply represented the familiar rights and interests of a stockholder in the corporation and in respect of its property. It does not appear that Egger attempted actively to exercise any of the rights of a stockholder, such as to claim or receive dividends, or even to vote the shares represented by the certificates, between the dates of the sale mid delivery of the certificates. Harris was in official and practical control of the company and its property throughout that period.

It is not shown that Harris’ beneficial interest in the shares of stock would have been augmented by possession of the certificates, and in the end the ceriificates were turned over to him. The other phase of the plea presents die question whether the delivery oí the ceriificates was voluntary, in the sense that it was intended to operate as a waiver of the fraud? Staled in another way, was it open to Egger both to deliver the certificates and reserve his right of action for the fraud and deceit? It is'not necessary to state that fraud may be waived; this is an ancient doctrine.

Upon this record it must he conceded that Egger did not vitrnd to waive either the fraud or his right of action. The correspondence admitted in evidence, as well as that ruled out, proves this. 'I'he letter accompanying the delivery of the certificates, which was wriiien in behalf of Egger three days before commencement of the suit, notified Harris of the claim that he had made misrepresentations with respect to the purchase of the stock, and of the purpose of Egger to institute action against him. Harris nevertheless accepted and retained the (ertiiicates.

We have a case, then, where the seller received the purchase price in ignorance of the buyer’s fraud, and where the buyer accepted the certificates with notice of the seller’s discovery of the fraud and purpose to sue for the consequent damages. True, the seller’s delivery of the certificates was with knowledge of the fraud; but the buyer's acceptance was with knowledge of the purpose to 'hold him for the fraud. Why, in such circumstances, should the action rather than the defense be defeated by waiver?

Of course, the seller might seasonably have resorted to rescission of the contract with tender of the purchase price; but the buyer here might have rejected the certificates and demanded return of the purchase price. Probably either of such courses would have resulted in litigation. It is reasonably plain, however, that the seller would have been in a worse situation after rescission of rhe contract than the buyer would after rejection of the certificates.

The seller, as long as he might have held the si ock, would have been in the position of a small stockholder contending for his rights against the large stockholder, who was officially and practically in control of the company and its property. The buyer’s acceptance of the certificates, subject to notice of the proposed suit, was no doubt due to the favorable price at which he had succeeded in purchasing the stock; and if the defense of waiver is open to him, his own fraud and deceit cannot hut result to his advantage.

The case would present a totally different aspect, if it had been shown that Egger had delayed action with a view of therebjr gaining something to which he was not entitled at the time he was induced to give his assent to the sale. There is not even a pretense of this character either in testimony or claim. So, too, if Harris had meanwhile changed his position to his detriment with respect to this stock. It is not suggested that the stock declined in value, or that Harris suffered any material inconvenience, during the delay.

In short, if Harris had received the certificates at the time he delivered his check, there is nothing to show that his control of the company, or his enjoyment of the shares represented by the certificates, would have been changed in the slightest degree. If Egger had delivered his certificates at tire time he received the purchase price, Harris would have been defenseless as against an action such as this; for in that event the contract of purchase and sale would obviously have been completely performed before discovery of the imposition practiced.

This, however, is not of present importance, except to illustrate the narrow difference between the case supposed and the case we in fact have. Further, it is not shown that after payment of the purchase price any rights of third persons respecting either the certificates or the stock intervened to disturb the legal relations between Egger and Harris or Harris and the company. .

It is to be observed, also, that while language is used in’ some cases which, when considered abstractly, would seem at first blush to warrant a decision of a case like this either way, yet, when the decisions are considered with reference to their facts respectively, we think it safe to say that the controlling principle which is intended to be applied in the determination of questions of waiver is, that the person seeking damages for fraud and deceit in respect of his own contract must, in order to succeed, not only prove the fraud, hut must himself, after discovery of the fraud, have been free from conduct which was calculated either to afford him advantage or to mislead the other party to his disadvantage under the contract.

Counsel for Egger rightly concede that the present action for fraud and deceit operated at once to- affirm and to rely on the contract. Nat. Bank & Loan Company v. Petrie, 189 U. S. 423, 425, 23 Sup. Ct. 512, 47 L. Ed. 879; Whiteside v. Brawley, 152 Mass. 133, 24 N. E. 1088; United States Trust Co. v. Chicago Terminal T. R. Co., 188 Fed. 292, 296, 110 C. C. A. 270 (C. C. A. 7th Cir.); Talcott, v. Friend, 179 Fed. 676, 103 C. C. A. 80, 43 L. R. A. (N. S.) 649 (C. C. A. 7th Cir.).

However, the theory of counsel is that the subject of the sale was the shares of stock; that the contract of sale was not simply executory, but was executed, when the agreement upon the price was reached and payment made; and that, since the certificates were merely evidence of the corporate interest or shares sold, the nondelivery of the certificates could not disturb the executed character of the transaction.

In short, as we understand the contention, it is that the essence of the thing sold was in purpose and intent placed by Egger in the- control of Harris, who, it must be remembered, was president and manager of the company, at the time tire .purchase price was I>aid and received, and that change of possession of the certificates could have operated only as further evidence of, and not as an essential step in, the consummation of the sale.

The basis of the contention is that the title to the shares passed to Harris at the time lie paid the purchase price; and reliance is placed, first, upon the rule that where ordinary personal property is distinctly identified and sold, and the purchase price paid, title will pass without delivery (Miller v. Roger, 9 Humph. [Tenn.] 231, 237; Mayberry v. Lilly Mill Co., 112 Tenn. 566, 568, 85 S. W. 401; Hardwick v. Can Co.; 113 Tenn. 659, 674, 676, 88 S. W. 797; State v. Kelly, 123 Tenn. 556, 562, 133 S. W. 1011, 36 L. R. A. [N. S.] 171; Hatch v. Oil Co., 100 U. S. 124, 131, 25 L. Ed. 554; Briggs v.

United States, 143 U. S. 346, 354, 12 Sup. Ct. 391, 36 L. Ed. 180; Sutherland v. Brace, 73 Fed. 624, 625, 19 C. C. A. 589 [C. C. A. 7th Cir.]), and, next, upon cases defining the evidential character and object of certificates of stock, and so pointing out the familiar distinction between the certificates and the stock itself (Jellenik v. Huron Copper Mining Co., 177 U. S. 1, 12, 20 Sup. Ct 559, 44 L. Ed. 647; McAllister v. Kuhn, 96 U. S. 87, 89, 24 L. Ed. 615; Merritt v. American Steel-Barge Co., 79 Fed. 228, 235, 24 C. C. A. 530 [C. C.

A. 8th Cir.]; Helliwell on Stock and Stockholders, § 109, p. 185; Van Zile on Bailments and Carriers, § 246). ft should be added that by statute of Tennessee it is provided: “The stocks in all private corporations are personal property, and subject to levy and sale as such, tile company in such case being required to make the proper entries in its stock or transfer book. * * * ” Shan. Code, § 200G. This statutory rule will be recognized, and where necessary enforced, by the federal courts. Jellenik v. Huron, Copper Mining Co., supra, 177 U. S. at page 13, 20 Sup. Ct. at page 563 (44 L.

Ed. 647). it is settled in Tennessee that the title to- stock passes and becomes complete in the purchaser upon the assignment of the certificate, without registration or transfer on the stock book of the corporation. Smith v. Railroad, 91 Tenn. 223, 238, 18 S. W. 546, and citations, per Lurton, J.; McClung v. Colwell, 107 Tenn. 592, 600, 64 S. W. 890, 89 Am. St. Rep. 961. It was held in Parker v. Bethel Hotel Co., 96 Tenn. 252, 283, 34 S. W. 209, 216, 31 L. R.

A. 706 (following the rule laid down by Judge Rowell in his work on Transfer of Stock, § 43): “A sale or transfer of stock, to be valid, need not be in writing. The cer-1 iiic; to need not, in fact, be delivered.

A transfer is perfectly good, although tile sello r of the stock never had a certificate at all, and although no certificate is issued to the transferee.” Turning again to the amended second plea, it states that upon the delivery of the check and as part of the contract “the plaintiff [Egger] assured the defendant that the certificates so purchased would be delivered promptly.” This in substance was also shown by one witness without contradiction, as pointed out in the statement; and while it was competent for the parties to make such a provision a condition of the contract, yet this was scarcely in the form of a condition, certainly it was not a condition precedent.

Since it is not shown what was contained in the court’s charge upon this subject, and the charge passed unchallenged, it is to> be presumed, as we have already said, that ap~ propriate instructions were given in this behalf. The witness whose statement was taken upon the subject testified under apparent embarrassment by reason of his relations then to Harris and of his former relations to tire company. Indeed, this was so obvious that, although the witness was called in behalf of Egger, counsel calling him was rightly permitted to exercise the privileges of a cross-examiner.

It is not improbable that the jury declined to believe the witness; at any rate, in such circumstances, we cannot ascribe prejudicial error to the ruling upon the plea: Presumably any error in that behalf was cured at the trial. This conclusion is the more satisfactory for still another reason.

While it must be conceded that, apart from the fraud, Egger’s consent to sell and his receipt of the purchase price involved an implied obligation on his part ultimately to deliver the certificates, it does not necessarily follow that the parties made such delivery a condition, as between themselves, to the consummation of the sale or to the immediate transfer of the equitable if not the legal ownership in the specific shares to Harris. Such a condition would have been opposed to' the only rational inference that payment and receipt of purchase price would naturally signify. Beardsley v. Beardsley, 138 U.

S. 262, 266, 11 S. Ct. 318, 34 L. Ed. 928. We therefore do not find any substantial foundation upon which the claim of waiver can be justly based. Every case of this character, like every case of fraud, must be considered and disposed of upon its own special facts. In determining such cases, it is hazardous either to formulate or to apply simply general rules; it might nearly as well be attempted to- state or to rely on specific

definitions of fraud. It is earnestly insisted, however, that the present case is ruled by the decision of this court in Simon v. Goodyear Metallic Rubber Shoe Co., 105 Fed. 573, 44 C. C. A. 612, 52 L. R. A. 745. That was an action to recover damages for fraud and deceit in the procurement of a contract to acquire and furnish 250 tons of rubber waste. The inducement to enter into the contract was a representation made to Simon, the plaintiff, that certain pre-existent competition in the trade would cease. This did not happen; the competition continued, and so caused an advánce in the price of such waste.

The plaintiff admitted that he learned of the appearance and activities of competitors in the market before he made his first delivery. The rubber waste was to’ be delivered in monthly installments by September 1, 1895; the contract being dated April 18th of that year. The plaintiff sought and obtained a concession in respect of deliveries until the following December 1st, and in fact failed to deliver the agreed quantity until two months later, though in that time completed his contract; he received for each monthly delivery payment at the contract price.

True, he had vainly sought for some concession in quantity or advance in price, and failing in this had notified defendant that he «would carry out his contract and hold it responsible in an action for the loss he would sustain. Recovery was denied. There are several differences between that case and this. There the contract was wholly executory when plaintiff obtained knowledge of tire fraud and made his first delivery.

When he accepted an extension of time for performance, lie in effect renewed the contract for a longer period with knowledge of the deceit, and thereafter through expenditure and labor continued to perforin everything he had undertaken to do; he speculated upon the die nee of overcoming the only cause for his dissatisfaction — the competition. This was the equivalent of having originally entered into the contract with knowledge of the competition. Fitzpatrick v. Plannagai, 106 U. S. 648, 660, 1 Sup. Ct. 369, 27 L. Ed. 211; E. H. Taylor, Jr., & Sons v. First Nat. Bank of Aurora, Ind., 212 Fed. 898, 902, 129 C. C.

A. 418 (C. C. A. 6th Cir.). If we are right .in our

interpretation of the record in the instant case, Egger must be treated as having sold and so passed title to specific shares of stock to Harris for an agreed purchase price received before discovery of the deceit.

Tlie paramount distinction, then, between the cases, is that Simon began and completed performance of an executory contract with knowledge of Ihe deceit, while Egger parted with his property, certainly with the only feature of value it possessed, and received the price in ignorance of the deceit; the one was an executory and the other an executed, certainly a substantially executed, transaction when discovery of the fraud was made; and enough appears in the record of (lie present case to show that it was such a distinction as this that coni rolled Judge McCall in the court below.

Another decision upon which counsel for Id arris especially rely is that of Kingman & Co. v. Stoddard, 85 Fed. 740, 745, 29 C. C. A. 413, 419 (C. C. A. 7th Cir.). The decision in that case was approved and in effect followed in the Simon Case, and we think the facts of tlie ca.se are so far similar to those of the Simon Case that the one as well as the other is fairly distinguishable from the instant case.

One example given by Judge Jenkins in the Kingman Case states the principle underlying the distinction which we think should be applied here: “For example, if one by tlie imposition of fraudulent practices has been induced to purchase goods, and after their receipt discovers the fraud, he may rescind, or may affirm and have his action for the deceit.

But if, before deliv-ei-y of the goods, he has discovered the fraud, he may not then accept the goods, and still have an action for deceit.” No sound distinction can be slated between the effect of receiving purchased goods and that of receiving purchase price, before discovery of ihe fraud; and when, as here, the purchase price is so received, and the diing sold is at the same time practically parted with, the case is stronger than the one stated in the first of the twO' examples just quoted.

Counsel are not in dispute concerning the rule, as under the welt settled trend of decision they could not be, that where a contract induced by fraud has been executed before discovery, the defrauded parly has the right of election either to rescind or affirm; and that where lie elects to, affirm lie loses his right of rescission because of inconsistency of the two remedies (Mudsill Min. Co. v. Walrous, 61 Fed. 163, 186, 9 C. C. A. 415 [C. C. A. 6th Cir.]; Alger v. Keith, 105 Fed. 105, 118, 44 C. C. A. 371 [C. C.

A. 6th Cir.]), though he may retain the thing lie has received and also maintain an action for the fraud and deceit (Benjamin on Sales [7th Ed.] p. 486, and citations). If then the sale now under consideration should upon this record be regarded as having been an executed transaction at the time the fraud was discovered, and we are disposed to, 'believe it should, further discussion of the main question would seem unnecessary; however, we need not rest the decision wholly upon that view of the transaction.

We think the transaction was at the time of discovery at least so far completed as to relieve Egger of tire charge o,f waiver, upon turning over the certificates with notice of his purpose to sue for the fraud. At most, such act was but partial and formal evidence of the sale that had practically been completed before, and the notice was in contradiction of an intent thereby to condone the fraud. In Cain v. Dickenson, 60 N. H. 371, 372, which was an action for deceit in the purchase of hay, a note had been received in payment and subsequent demand made thereon.

Upon receiving partial payment, the seller stated that he would not take it if it should prevent his arresting defendant for obtaining the hay under false representations. It was held: “The part payment of the note did not condone the fraud; it only mitigated the damages to the extent of the payment. But if part payment might under any circumstances have that effect, it could not here, for the plaintiff at the time stated that he did not waive his right to damages for the fraud.” The right so to, avoid waiver is recognized in People v. Stephens, 71 N. Y. 527, 554.

Furthermore, and apart from the effect of Egger’s notice, the right of election of remedies before mentioned is not in all instances dependent upon whether the contract has been fully executed or performed. The rule extends to instances of partial execution or performance. As Judge Mitchell, who was an unusually safe interpreter of the law, said in Thompson v. Libby, 36 Minn. 287, 289, 31 N.

W. 52, 53, while denying recovery for deceit in respect of a contract of sale where the transaction was wholly executory when the fraud was discovered: “If the contract be executed in whole or in part before the fraud is discovered, it is well settled that the purchaser need not rescind, but may retain the property and also bring his action for damages on account of the deceit.” We understand this rule to be recognized and stated in the opinion in the Kingman Case, supra, 85 Fed. 745, 29 C. C. A. 420. See, also, Mallory v. Leach, 35 Vt. 156, 168, 169, 82 Am. Dec. 625; Pryor v. Foster, 130 N.

Y. 171, 175, 177, 29 N. E. 123, reviewing a number of decisions; Dennison v. Grove, 52 N. J. Daw, 144, 146, 147, 19 Atl. 186; Peck v. Brewer, 48 Ill. 54, 62; Haven v. Neal, 43 Minn. 315, 317, 45 N. W. 612; Gilchrist v. Manning, 54 Mich. 210, 211, 212, 19 N. W. 959; City Deposit Bank v. Green, 138 Iowa, 156, 164, 115 N. W. 893; May v. Loomis, 140 N. C. 350, 353, 359, 52 S. E. 728; Nysewauder v. Lowman, 124 lud. 584, 588, 24 N. E. 355; Huber Mfg. Co. v. Hunter, 99 Mo. App. 46, 55, 56, 72 S. W. 484, and citations; Guffey v. Clever, 146 Pa. St. 548, 559, 560, 23 Atl. 161.

We are the more content to apply the rule o£ partial execution here, because of the relations of the parties and of the consequent disadvantage to which Egger would have been subjected if he had chosen to rescind the contract. We have alluded to this before, and the facts are too plain to require elaboration of this feature of the case. It is said that the court is in died asked to make a new,contract for the parties. The case, however, is not different in this respect from wliat it would have been if the certificates had been delivered simultaneously with the receipt of payment.

In that event, as we have already stated, there could have been no question of the right of recovery. To sanction recovery for fraud and deceit certainly is not to make a contract. It is urged that the court erred in allowing amendment to the declaration by adding a second count. The object of the amendment was to conform the declaration to the proofs, hut we do not see that it materially enlarged the scope of the original count. The order was plainly within the discretion of the court. Southern Ry. Co. v. Gadd, 207 Fed. 277, 279, 125 C. C. A. 21 (C. C. A. 6th Cir.).

Further, it is claimed that the exclusion of certain letters before alluded to and which passed between the parties to the suit was error. Such as were written by Egger do not appear to be in contradiction of his testimony. It is to be said of those of B arris that the statements they contain were either self-serving or immaterial. Surely error is not predicable of the rulings excluding such letters as these. Some of the assignments are practically withdrawn, and our consideration of those not expressly passed upon fails to disclose reversible error.

The judgment must he affirmed, with costs, We are confirmed in this by the comments appearing later in the opinion (85 Fed. at pages 747 to 749, 29 C. C. A. 420 to 422), upon People v. Stephens, 71 N. Y. 527, Parker v. Marquis, 64 Mo. 38, and Whitney v. Allaire, 4 Denio, 554; for the effort was to show that in Parker v. Marquis the subject of the sale had been delivered to and received by the defendant in ignorance of the fraud', saying further: “We need not stop to inquire whether that case was rightly decided, for it is not the case of one receiving property with knowledge of fraud;” and that in Whitney v.

Allaire, the lessee took possession of the leasehold premises with knowledge of the false representation — that is, at a time when the contract was wholly executory. The two cases, therefore, point the distinction between a partially executed contract and a purely executory contract before discovery of the fraud.

We have seen that the Kingman C ase, like the Simon Case, possessed distinct elements of affirmance during the course of performance, which were designed to benefit the defrauded party, but nothing of this sort occurred in the instant case; and, further, it is not to be forgotten that in the Simon Case the discovery occurred while the contract was entirely executory. We therefore need not concern ourselves with the criticisms before alluded to of Parker v. Marquis or Whitney v.

Allaire, further iban to say that both cases received approval later in the courts of last resort of the states in which they were decided. Nauman v. Oberle, 90 Mo. at pages 669, OTO, 8 S. W. at page 381; Pryor v. Foster, supra, 130 N. Y. at page 178, 29 N. E. at page 124.