Court Opinion

ID: 9607089
Source: CourtListenerOpinion
Date Created: 2023-08-22 02:55:26.178547+00
Date Added: 2024-06-11T12:31:39.990381
License: Public Domain

Judge Baley
dissenting.
The majority opinion holds that defendants’ “Third Defense” does not state a claim for relief and that the trial court properly granted judgment on the pleadings. I believe that the “Third Defense” does state a claim for relief, both on the ground of actual fraud and on the ground of constructive fraud, and therefore I dissent.
The courts of North Carolina have often held that fraud' may be committed by concealing the truth as well as by making a false statement. In Isler v. Brown, 196 N.C. 685, 146 S.E. 803, fraud was found to exist when defendant sold an automobile to plaintiff without disclosing that it was subject to a chattel mortgage. The Supreme Court stated:
“ ‘It is a rule of equity, as well as of law, that a stuppressio veri is equivalent to a suggestio falsi; and where either the suppression of the truth or the suggestion of what is false can be proved, in a fact material to the contract, the party injured may have relief against the contract.’ ”
Id. at 686, 146 S.E. at 804. In Brooks v. Construction Co., 253 N.C. 214, 116 S.E. 2d 454, defendant dug a large hole in the ground, filled it with debris, covered the debris with soil, and built a house where the hole had been. He sold the house to plaintiffs without informing them that the house did not have a solid foundation. The court allowed plaintiffs to recover damages for fraud, stating:
“Where material facts are accessible to the vendor only, and he knows them not to be within the reach of the diligent attention, observation and judgment of the purchaser, *518the vendor is bound to disclose such facts, and make them known to the purchaser.”
Id. at 217, 116 S.E. 2d at 457. Other cases in which the Supreme Court has granted relief for nondisclosure of material facts, or held that such relief would be available in appropriate circumstances, include Setzer v. Insurance Co., 257 N.C. 396, 126 S.E. 2d 135; Manufacturing Co. v. Taylor, 230 N.C. 680, 55 S.E. 2d 311; Lunn v. Shermer, 93 N.C. 164; and Brown v. Gray, 51 N.C. 103. In addition, see Prosser, Torts, 4th, § 106, at 697. Courts of other states have held that a buyer or seller of stock may be guilty of actual fraud when he fails to disclose material facts affecting the value of the stock. Neuman v. Corn Exch. Nat’l Bank & Trust Co., 356 Pa. 442, 51 A. 2d 759 (1947) ; Chandler v. Butler, 284 S.W. 2d 388 (Tex. Civ. App. 1955).
In the present case, if the allegations of defendants’ “Third Defense” are taken as true, plaintiff knew that the financial condition of Onslow Livestock Corporation had deteriorated rapidly since he became president. Obviously this fact materially affected the value of the corporation’s stock. Defendants were not aware of the corporation’s poor financial condition, because plaintiff concealed it from them and failed to hold directors’ meetings. When defendants purchased stock in the corporation from plaintiff, plaintiff did not inform them that the corporation was- in financial difficulties, but instead told two of the defendants “that the business was a ‘gold mine.’ ” In my judgment these allegations are sufficient to state a claim for relief on the ground of actual fraud.
In addition, defendants’ “Third Defense,” when construed in its best light for defendants, states a claim for relief on the ground of constructive fraud. When a corporate officer buys or sells stock in his corporation, while having knowledge of special facts which materially affect the value of the stock, he has a duty to disclose these special facts to the person with whom he is trading. When an officer realizes that a financial crisis is on the horizon, he may not use his position of trust for personal gain by selling his stock to an outsider for more than it is worth. While his position is not technically that of a fiduciary, he nevertheless stands in a special relation to his corporation and its stockholders, and he is required to be open and candid in his dealings with them. The violation of this duty is constructive fraud. Strong v. Repide, 213 U.S. 419 (1909) ; Mansfield Hardwood Lumber Co. v. Johnson, 263 F. *5192d 748 (5th Cir.), cert. denied, 361 U.S. 885 (1959) ; Oliver v. Oliver, 118 Ga. 362, 45 S.E. 232 (1903) ; Jacobson v. Yaschik, 249 S.C. 577, 155 S.E. 2d 601 (1967) ; Nichol v. Sensenbrenner, 220 Wis. 165, 263 N.W. 650 (1936) ; Lattin, Corporations 2d, § 81, at 296-98; Robinson, N. C. Corp. Law, § 95. While Rule 10b-5 of the Securities and Exchange Commission is not applicable to the present case, it is based on the same principle. See SEC v. Texas Gulf Sulphur Co., 401 F. 2d 833 (1968), cert. denied, 394 U.S. 976 (1969) ; Speed v. Transamerica Corp., 99 F. Supp. 808 (D. Del. 1951).
I am of the opinion that there were issues of fact for determination and that the Superior Court should not have granted judgment on the pleadings.