Case Name: Edward Kennedy et al. v. J. M. Bender
Court: Supreme Court of Texas
Jurisdiction: Texas
Decision Date: 1911-03-15
Citations: 104 Tex. 149
Docket Number: No. 2070
Parties: Edward Kennedy et al. v. J. M. Bender.
Judges: 
Reporter: Texas Reports
Volume: 104
Pages: 149–159

Head Matter:
Edward Kennedy et al. v. J. M. Bender.
No. 2070.
Decided March 15, 1911.
1. —Fraud—Condonation—Estoppel—Sale of Corporate Stock.
A transaction in the management of a corporation by which a stockholder, taking an active part therein, received benefit (a gratuitous increase in the amount of his stock accompanied by a surrender of shares by other stockholders) being a dealing between the corporation as such and i-ts members, was not such transaction between the stockholder personally and others (the persons so surrendering their shares) as to estop him, as matter of law, from maintaining an action against them for damages for fraudulent misrepresentations inducing him to purchase his original shares. Nor did it, unaccompanied by other evidence of an intention to condone the fraud, furnish evidence of such estoppel in fact. (Mr. Justice Ramsey dissents.) (Pp. 150-152.)
2. —Same—Case Stated.
Plaintiff was induced to purchase at par, shares in the stock of a corporation, by false representations by defendants, who held a majority of the stock for which they had paid nothing, that the same had been paid for in money. After learning of the fraud, the company being in difficulties, plaintiff assented to proceedings at a stockholders’ meeting by which the holders of such unpaid stock surrendered their shares to the company and same were offered for sale to the public at fifty percent of par value, plaintiff on motion offered by himself, receiving gratuitously extra shares to the amount already held by him, to equalize his holdings, proportionally to the amount paid, with such expected purchasers. Held:
(1) That such transaction did not estop him, as matter of law, from maintaining action personally for damages against those whose fraudulent representations had induced him to purchase his original stock.
(2) That his mere participation in the transactions had at the stockholders’ meeting could not be held to evidence an intention to condone the fraud of the individuals inducing his purchase of stock; but that his estoppel from maintaining the action might be established by proper evidence showing such transaction to be intended to condone and to waive his right of action, this being a question of intent and to be proven as a matter of fact. (Mr. Justice Ramsey dissents.) (Pp. 150-153.)
Questions certified from tbe Court of Civil Appeals, First District, in an appeal from Harris County.
S. Taliaferro and G. L. Teat, for appellants.
In an action for deceit by an alleged defrauded subscriber for stock against tbe agents of a corporation, for fraudulently inducing bim to subscribe for stock, he can not recover, where, after full knowledge of all fraud, he agreed with the corporation, at a stockholders’ meeting, to have his stock doubled free of charge, so as to compensate him for the depreciated value of the stock caused by existing conditions alleged to have been concealed from him at the time be entered into the original purchase. Kingman & Co. v. Stoddard, 29 C. C. A., 413, 85 Fed., 740; Simon v. Goodyear Metallic Rubber Shoe Co., 105 Fed., 573, 44 C. C. A., 612, 52 L. R. A., 745; McDonough v. Williams, 8 L. R. A. (N. S.), 452, and note; St. Johns v. Hendrickson, 81 Ind., 350; McLean v. Clapp, 141 U. S., 429; Minter v. Hawkins, 117 S. W., 172; Barber v. Morgan, 76 S. W., 319; Lear v. Paige, 42 S. W., 808 (Tenn.); Hunt v. Hardwick, 68 Ga., 100; Nonnan v. Sutter County Land Co., 81 Cal., 1; Thompson v. Libby, 36 Minn., 287; Western Electric Co. v. Hart, 103 Mich., 477; Lee v. McClellan, 120 Cal., 147; People v. Stephens, 71 N. Y., 527; Schmidt v. Mesmer, 116 Cal., 267; Doherty v. Bell, 55 Ind., 205; Veral v. Veral, 63 N. Y., 45; Upton v. Tribilcock, 91 U. S., 55; Fitzpatrick v. Flannagan, 106 U. S., 648; Grimes v. Sanders, 93 U. S., 55.
Wilson & Cole, for appellee.

Opinion:
Mr. Chief Justice Brown
delivered the opinion of the court.
Certified Questions from the Court of Civil Appeals of the First Supreme Judicial District.
"The above case is now pending in this court on motion for rehearing and the questions here certified áre material to a disposition of such motion.
"The following is a statement of the matters material to a decision of such questions.
"J. M. Bender instituted this action in the District Court to recover $400.00 actual and $500.00 exemplary damages for willful fraud and deceit practiced upon him by defendants, Kennedy and McKallip, whereby he was induced to purchase four shares of stock in a corporation, of the par value of $400.00, for which he paid that amount in cash. The fraudulent representations consisted of statements that $78,000.00 of the capital stock of the corporation, capitalized at $100,000.00, had been paid in, in cash, and that the corporation was in a sound financial condition. Kennedy was one of the directors, and the other defendant, McKallip, was the president of the corporation each owning $25,000.00 of the stock, for which they had, in fact, paid nothing and the corporation being bankrupt at the time.
"Among other defenses pleaded by defendants it was alleged that after discovery by plaintiff of the fraud, and of the falsity of the representations of defendants whereby he had been induced to part with his money, he had ratified and affirmed the contract and had so condoned the fraud as to be estopped to set it up as a basis for this action. It was specially alleged that after the discovery by plaintiff of the falsity of the said representations there was a meeting of the stockholders at which Bender was present when the proceedings were had that are hereinafter set forth.
"Upon a trial with a jury there was a verdict for plaintiff for $400.00 actual and $250.00 exemplary damages, for which judgment was rendered. Defendants brought the case to this court on appeal and on hearing of the appeal it was held that the evidence as to the fraud and deceit was sufficient to entitle plaintiff to recover both exemplary and actual damages in the amounts adjudged, but that by reason of the following facts, which were found to have been established by the undisputed evidence, plaintiff had condoned the fraud and was estopped to set it up as a basis for this action. This can best be understood by the following quotation from the opinion:
" 'The only ground of ratification or condonation after knowledge of the fraud entitled to consideration, is that based upon the action of appellee at the stockholders' meeting of November 13, 1906, some weeks after, according to his own testimony, he had acquired full knowledge of the insolvent condition of the corporation and of the falsity of the representations that had been made to him as an inducement to purchase the stock. This is what occurred at that meeting of stockholders. Appellants McKallip and Kennedy and Frank Greenaway, in view of the financial condition of the corporation, then trembling, as was afterwards developed, on the verge of bankruptcy, offered to donate to the corporation certain shares of their stock, that is, Kennedy $24,000.00 worth, McKallip the same, and Greenaway $5,000.00 worth, with the understanding that the certificates therefor he cancelled and the stock, or so much thereof as might be necessary, be resold for the benefit of the company at such prices as might be determined by the Board of Directors, the donation being made for the purpose of relieving the financial condition of the company and putting it on its feet as a going concern. A resolution was offered to accept this proposition, the stock to be placed upon the market for sale at a minimum price of fifty cents on the dollar, the proceeds to be used to pay the debts and operating expenses of the concern, and any residue to be put in the treasury for the use of the company. This resolution having been read and seconded, the minutes show that appellee Bender offered an amendment in substance that inasmuch as certain stockholders, himself among the number, had bought and paid for their stock at par, the stock so held by them should be increased so as to give them two shares for each share so held, that is, to double their stock and make it really cost only fifty cents on the dollar of its face value. Appellee " testified that one Blair, another stockholder who had bought at par, offered this amendment and he seconded it, but that is immaterial. As amended the resolution was unanimously adopted, and it is clearly and undisputably shown that appellee was present and acted with the others in adopting the amended resolution.'
"The trial court refused to submit this issue to the jury.
"Upon the facts above stated this court reversed the judgment and rendered judgment for appellants. As will be noticed from the opinion, Associate Justice Beese dissented from this conclusion. The jurisdiction of this court is final and such dissent does not require that the point of difference be certified, but inasmuch as the parties have no right of appeal and the majority are in doubt as to the correctness of their conclusion, and in view of the general importance of the question, we respectfully certify to your Honors the following questions:
"First Question. Do the foregoing facts with regard to the action of the plaintiff Bender at the stockholders' meeting, of themselves, as matter of law, operate as an estoppel upon plaintiff and bar him of his right to recover in this action?
"If this question be answered in the negative, we certify this.
"Second Question. Upon the facts stated, which were established by the undisputed evidence, should this issue of estoppel, through con-donation of the fraud, have been submitted to the jury?"
To the first question we answer, ¡No. When Bender purchased the stock of the corporation under the fraudulent representations of the appellants he acquired title to the stock and became obligated to pay for it according to his contract. He had no contract with the appellants, therefore, as to them, he had not the right of rescission. His only remedy was an action against the appellants for damages caused by the fraudulent representations whereby they induced him to purchase the stock. Hence nothing that Bender did in the exercise of his rights as a stockholder in the corporation can be looked to as in any way affecting his claim for damages against appellants, unless it be shown by the evidence that his purpose in so acting "was to waive his right against them, or that in someway he acquired something of value from the appellants, with the purpose and intent of waiving his right of action for damages. 20 Cyc. p. 93; Schmidt v. Mesmer, 116 Cal., 271. "The question of waiver, however, is largely one of intent. Hence acts done in affirmance of the contract can amount to a waiver of the fraud only where they are done with full knowledge of the fraud and of all material facts, and with the intention clearly manifested of biding by the contract and waiving all right to recover for the deception. Acts which, although in affirmance of the contract, do not indicate any intention to waive the fraud, can not be held to operate as a waiver." (20 Cyc. p. 93.)
The statement submitted to this court does not show that the additional stock was actually issued to Bender, but for the purposes of this opinion we will assume that it was issued and delivered. When the stock was donated by the three stockholders it was for the purpose of relieving the financial condition of the company, and shows no purpose to compensate Bender for his .damages. That purpose did not exist either on the part of the donors, or on the part of the corporation, or on the part of Bender. The resolution which was offered in the stockholders' meeting had reference to the disposition of the stock, that is, that it should be sold at not less than fifty cents on the dollar and the proceeds applied, as stated in the resolution, to the purposes of the corporation. The amendment which was offered and which Bender either offered or seconded had reference also to the disposition of the stock, that is, that an amount of it equal to that which was held by certain of the stockholders should be given to them in order to make their stock equal to that of other stockholders. In making the donation appellants had no purpose, as we have "before said, to repair Bender's loss, neither had the corporation in view anything with reference to Bender's right for damages and Bender was without any intention to waive his claim for damages. How can it be said then that by his acceptance of the stock from the corporation he waived a claim for damages against individuals ? Upon what principle can an estoppel be invoked in favor of appellants when their action had no reference to their" transaction with Bender, or against the latter, who manifested no purpose of surrendering any right that he. had against appellants. We are unable to see in the facts stated by the Court of Civil Appeals wherein Bender in any way evinced a purpose to surrender his claim for damages against appellants and accept the stock from the corporation.
To the second question we answer, that the facts stated by the court do not raise any issue as to Bender's waiver of his right of action for damages against appellants, therefore, we see no reason why the court should have submitted such an issue. However, it may be that circumstances existed which were in testimony before the jury and not certified that would have justified a jury in coming to the conclusion that Bender's real purpose of making this transaction was to save himself from the damages which had accured to him through the fraud of the appellants and that he intended thereby to relinquish his claim against said appellants, and, if there be any testimony which would justify such conclusion, then the issue should have been submitted to the jury.