Case Name: DOYLE, Respondent, v. UNION BANK & TRUST CO., Appellant
Court: Montana Supreme Court
Jurisdiction: Montana
Decision Date: 1936-03-04
Citations: 102 Mont. 563
Docket Number: No. 7,488
Parties: DOYLE, Respondent, v. UNION BANK & TRUST CO., Appellant.
Judges: ASSOCIATE JUSTICES Matthews, Stewart and MORRIS concur.
Reporter: Montana Reports
Volume: 102
Pages: 563–591

Head Matter:
DOYLE, Respondent, v. UNION BANK & TRUST CO., Appellant.
(No. 7,488.)
(Submitted February 10, 1936.
Decided March 4, 1936.)
[59 Pac. (2d) 1171.]
Messrs. Gunn, BascU, Hall & Gunn, for Appellant, submitted a brief; Mr. M. 8. Gunn argued the cause orally.
Mr. Wellington T>. Rankin and Mr. Arthur P. Acker, for Respondent, submitted a brief and argued the cause orally.

Opinion:
MR. JUSTICE ANDERSON
delivered the opinion of the court.
This was an action to recover damages which the plaintiff alleges she suffered by reason of the purchase of a $1,000 debenture bond from the defendant early in the month of November, 1929.
The complaint was in two counts. The first count was on the theory of fraud and deceit; the second was on the theory of breach of warranty in the sale of personal property. The facts alleged in the two counts were identical, with the exception of such allegations as were necessary to develop the particular theory of liability therein alleged. The answer denied all of the allegations of the complaint, aside from those which were introductory in character.
The cause was tried before the court sitting with a jury. At the close of the evidence defendant moved for a directed verdict on the ground, in effect, that plaintiff had failed to prove any damage. The motion was denied. The cause was submitted to the jury and a verdict was returned for the sum of $910, the price paid by plaintiff for the bond. A judgment was entered on the verdict, and the appeal is from the judgment. By appropriate specifications of error defendant seeks a review of the ruling of the trial court denying its motion for a directed verdict.
Early in the month of November, 1929, plaintiff purchased from the defendant a certain Insull Utilities Investment Company debenture, Series A, of a par value of $1,000, bearing interest at 5 per cent., payable semi-annually on February 1st and August 1st, dated January 1, 1929, and due January 1, 1949, for the sum of $910. Her allegations as to the false ana fraudulent representations and warranties were as follows: "That the aforesaid security was a secured bond; that it was just as good as a $1,000 bill; that the holder thereof had a first mortgage on the property of all of the utility and power companies in Chicago, Illinois; that the security thereof was the same as if the holder thereof had a first mortgage upon all of the property of the Montana Power Company; that said bond was secured by property of a value of four or five times the value of the bonds outstanding; that said debenture was a safe investment."
Evidence was produced in support of these allegations on behalf of the plaintiff, and on behalf of the defendant denying the truth of the same. It is conceded that the verdict of the jury is conclusive on the question of the fraudulent representations. It was stipulated on the trial that the Insull Utilities Investments, Inc., was incorporated in the state of Illinois to carry on an investment business and to acquire, hold, sell and underwrite securities of all kinds; that the debenture was not at any time secured by a mortgage; that the company covenanted not to mortgage or pledge any of its assets without equally and ratably securing this debenture with other obligations secured, or to be secured, by such mortgage or pledge, except that the company could mortgage or pledge its assets for the purpose of securing loans in the usual course of business for a period not exceeding one year. The corporation went into receivership in the federal court in the state of Illinois in April, 1932, and failed to pay interest maturing on August 1, 1932. The debenture was in default as to subsequent payments of interest. The undisputed evidence in the record is that the debenture, at the time plaintiff purchased it, had a market value equivalent to the amount she paid for it, and continued to have such market value for some time after its purchase. It was testified that at the time of the trial the market value of this debenture was from $17.50 to $20, and that on January 1, 1929, the company had total assets in excess of $29,000,000 and outstanding debentures to the amount of $6,000,000. The next statement published by the company as of December 31, 1929, showed total assets of $161,000,000, and liabilities of $55,000,000. It further appeared in the testimony that the assets and liabilities in the month of November, 1929, were approximately the same as of the date of December 31, 1929. The issue of the debentures of which the one involved in this ease was a part, amounted to $6,000,000 originally, but at the time of the purchase the amount outstanding was $2,489,000. The gross earnings of the company, as reported for the year 1929, were $12,387,974, and the actual interest payments were $769,228. Eeports disclose that in 1932 the total assets of the company were $27,000,000, and the total liabilities $148,000,000.
It was testified by persons who qualified as experts that in the month of November, 1929, at the time the bond was sold to plaintiff in this case, in their opinion the price paid was the fair value for it at that time. It appears from the record that plaintiff purchased the bond for investment and not for purposes of speculation, and that she did not discover the falsity of the representations until some time in the year 1934.
Defendant argues that the proof of plaintiff is lacking in two particulars, namely, that she failed to prove the actual value of the debenture at the time of the sale, and likewise the value which the debenture would have had if it had been as represented.
Under some authorities, the measure of damages under each of the causes of action set forth in.the complaint is the same. This court, in the ease of Healy v. Ginoff, 69 Mont. 116, 220 Pac. 539, said that the measure of damages for fraud inducing the purchase of property is "the difference between the actual value of the property at- the date of sale and the contract price." In the case of Richards v. Aultman & Taylor Machinery Co., 64 Mont. 394, 210 Pac. 82, it was said that the measure of damages for breach of a warranty in the sale of personal property was the difference between the value of the thing sold if it had been as warranted, and its actual value at the time of the sale. The trial court instructed the jury that the measure of damages was the difference between the value of the debenture which plaintiff obtained and the value that debenture would have been had it been as represented.
Plaintiff contends that the evidence was sufficient to go to the jury, in that the market value at the time of the purchase was some evidence of what the value of the debenture would have been had it been as represented; that since she bought the debenture for purposes of investment and not speculation, the jury was entitled to consider subsequent developments, and that these developments sufficiently proved that the debenture was worthless at the time of its purchase.
The price paid for property is generally held to be strong, but not conclusive, evidence of what the value of the property would have been if as represented. (12 R. C. L. 453; Reeser v. Hammond, 122 Kan. 695, 253 Pac. 233; Divani v. Donovan, 214 Cal. 447, 6 Pac. (2d) 247.) We think that the evidence of the market value was sufficient to take the case to the jury upon the question of what the value would have been if the debenture had been as represented.
The decided cases are in conflict on the question of what is the measure of damages in cases of fraud and deceit in the case of corporate stocks and bonds. Many of them adhere to the rule as announced by this court in Healy v. Ginoff, supra; many others, as applied to this particular type of case, have adopted the rule as announced in Rickards v. Aultman & Taylor Machinery Co., supra. They are collected in the note to 57 A. L. R. 1142. It will be noted that under either rule the formula for the computation of the damages uses an identical subtrahend, namely, the actual value of the thing sold at the time of the sale. We direct our attention to this situation, as we shall presently cite cases from jurisdictions adopting either one or the other of these rules on the question of the sufficiency of the proof to establish the actual value of the debenture at the time of the sale.
Some courts hold that the market value of the stock at or about the time of sale is evidence bearing on the question of its real value, although .not necessarily conclusive. (Warner v. Benjamin, 89 Wis. 290, 62 N. W. 179, and Ford v. H. W. Dubiskie & Co., 105 Conn. 572, 136 Atl. 560.) If we adopt this rule and consider only the testimony as to the market value, plaintiff suffered no damage, for it was undisputed that she purchased the debenture at the market value.
Plaintiff contends that in cases such as is here presented, where a bond, debenture or corporate stock is bought for purposes of investment and not speculation, the actual value of the corporate security controls the market value, and that the jury were at liberty to take subsequent events into account in arriving at the actual value of the debenture. Thus far many decided cases support this contention, among which are the following: Whiting v. Price, 172 Mass. 240, 51 N. E. 1084, 1085, 70 Am. St. Rep. 262; Hindman v. First National Bank, (C. C. A.) 112 Fed. 931, 57 L. R. A. 108; Morrow v. Franklin, 289 Mo. 549, 233 S. W. 224; Paul v. Cameron, 127 Neb. 510, 256 N. W. 11; Hotaling v. A. B. Leach & Co., 247 N. Y. 84, 159 N. E. 870, 871, 57 A. L. R. 1136; Cramer v. Overfield, 115 Kan. 580, 223 Pac. 1100; Davis v. Coshnear, 129 Me. 334, 151 Atl. 725. The reason for this rule is that, as said in the case of Whiting v. Price, supra, "the market value of the bond at the time of the sale may have been illusory, because the public also may have been deceived." To the same effect is the case of Hindman v. First National Bank, supra, and Shwab v. Walters, 147 Tenn. 638, 251 S. W. 42. An additional reason is that of the manipulation of stock and bond transactions on the market which sometimes affect the market price. (Otis & Co. v. Grimes, 97 Colo. 219, 48 Pac. (2d) 788.) If the market value at the time of the sale is an unsafe guide as to the actual value of corporate security, it must logically follow that the market value some three years or more later is likewise no evidence of the actual value at the time of the sale. If an optomistic market value is unsound, then a depressed market value is no better.
The right of the jury to consider the subsequent developments in arriving at the actual value of the thing sold was held to be proper in the cases cited, supra, but in none of them, with possibly one exception, was the question of the sufficiency of the evidence to go to the jury on the question of the actual value of the property solely upon subsequent developments, standing alone, considered by the courts. In the Whiting v. Price and Hindman v. First National Bank Cases, supra, the question considered was the propriety of instructions informing the jury that, in determining the actual value of the thing sold at the time of the sale, they might take into account what had happened since the purchase. In the cases of Morrow v. Franklin and Paul v. Cameron, supra, it was held that the testimony of subsequent developments was admissible for the consideration of the jury. In Cramer v. Overfield and Davis v. Coshnear, supra, other evidence as to the actual value was before the jury for consideration in addition to that of subsequent developments. In Hotaling v. A. B. Leach & Co., cited supra, it was said: "The defendants should not be held liable for any part of plaintiff's loss caused by subsequent events not connected with such fraud." After this statement, the court said: "The loss proximately caused by the defendant's fraud is the difference between the price he paid and the value of what he received when put to the use contemplated by the parties. In this case that value must be determined in the light of subsequent events. As long as the fraud continued to operate and to induce the continued holding of the bond, all loss flowing naturally from that fraud may be regarded as its proximate result." However, the facts in that case are distinguishable from those under consideration here. There the plaintiff had purchased a corporate bond secured by a mortgage. The mortgage had been foreclosed, the property sold and every conceivable asset of the corporation to which the plaintiff might have looked for payment of the bond had been exhausted. In the light of those facts and circumstances, the New York court made the pronouncement quoted supra. Here, so far as the record is concerned, plaintiff has filed her claim with the receiver; as to what she will ultimately realize is pure speculation. The only proof of subsequent developments relates to the following facts: The appointment of a receiver in 1932, the default in the payment of interest in August, 1932, the unexplained decline in the assets, and the increase in the liabilities of the company in its statement of 1932, as compared to that of December 31, 1929, and the testimony as to market value heretofore discussed.
We have found no case which holds directly that proof of subsequent developments, standing alone, is sufficient to prove the actual value of the thing sold at the time of the sale, unless it is the New York case which we have already discussed.
In the case of Davidter v. Ash, 264 Mich. 353, 249 N. W. 866, the court in its opinion said: "Plaintiff has appealed from judgment on verdict directed in an action for damages for fraud in the sale of securities. The measure of damages in such ease is the difference at time of sale in value of the securities as they were represented and as they were. On this matter plaintiff was put to proof and failed; the only evidence worthy of note being that some months later a receiver was appointed for the corporation issuing the securities. This was insufficient to support an assessment of damages, as the trial court correctly held."
In Dyer v. Hunter, 133 Cal. App. 267, 23 Pac. (2d) 1049, 1050, the court said: "It follows that there were no pleadings, evidence, or findings before the trial court upon which to base a finding or conclusion that any damage had been suffered by plaintiff at the time of her purchase of the stock. Nor will the evidence that the stock subsequently became valueless supply this defect. It is elemental that proof of damage is necessary to establish a cause of action for fraud."
In the case of Heidegger v. Burg, 137 Minn. 53, 162 N. W. 889, 890, it is written: "But there was another issue in the case, that of whether plaintiff was damaged, and, if so, to what extent. This issue necessarily involved an inquiry as to the value of the stock at the time of the trade. It fairly enough appeared that some fifteen months afterwards the Furniture Company went out of business, and the Peck Company went into liquidation, and that the stock of both corporations was then worth less than par, if it was worth anything, but we search the record in vain for any competent evidence that the stock was not worth par at the time it was sold to plaintiff, or, if not, how much less than par it was worth. Plaintiff failed to compel the production of the books of the corporations, and the evidence of the witnesses called to testify to the value of assets, the liabilities and the value of the stock, if competent at all, was so wanting in probative force and so unsatisfactory that we cannot permit a verdict based on such testimony to stand. We need hardly say that the condition of the corporations a year and more after the transaction, not shown to have existed at that time, or to be due to causes then existing, was not evidence that had any tendency to prove the value of the stock at the time of the transaction." In fact, it is generally held that proof of subsequent events or developments tending to establish that a corporate stock or bond is valueless is insufficient to prove that the thing sold was worthless at the time of the previous sale, particularly where the corporation at the time of the sale had property. (Kinnear v. Prows, 81 Utah, 135, 16 Pac. (2d) 1094; Kuehl v. Parinenter, 195 Iowa, 497, 192 N. W. 429; North American etc. Assn. v. Phillips, 94 Colo. 554, 31 Pac. (2d) 492; Morrell v. Wiley, 119 Conn. 578, 178 Atl. 121; Duffy v. McKenna, 82 N. J. L. 62, 81 Atl. 1101; Gunderson v. Havana-Clyde Min. Co., 22 N. D. 329, 133 N. W. 554.)
As we view the situation here, there was no proof before the court as to what the actual value of the debenture might have been at the time of the sale.
It is argued on behalf of the plaintiff that to compel her to offer some proof as to the actual value of the thing sold at the time of the sale is tantamount to denying to her the right of recovery. The question of the actual value of the debenture was something on which expert witnesses could have expressed an opinion. However, plaintiff's remedy by way of an action for damages was not the only remedy available to plaintiff, if she was defrauded. On discovering the alleged fraud, by offering to restore the property purchased, she would have been entitled, if she could have maintained her allegations as to fraud, to a return of the consideration for the purchase, without any proof as to the actual value of the debenture at the time of the sale; however, she elected to retain the debenture and sue for damages.
No evidence being present in the record as to the actual value of the debenture at the time of the sale, the trial court was in error in denying defendant's motion for a directed verdict. The judgment is reversed and the cause remanded to the district court with direction to enter a judgment of dismissal.
ASSOCIATE JUSTICES Matthews, Stewart and MORRIS concur.