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CHAPTER XIII.

OF DEFENSES TO SUITS BY INDIVIDUAL STOCKHOLDERS.

Section 244. Introductory.

245. Defense that no benefit accrued to promoter.

246. Defense that promoter urged cancellation of subscriptions. 247. Absence of fraudulent intent.

248. Enterprise doomed to failure in any event.

249. Prior recovery by corporation.

250. Defense that property in relation to which representations made, not sold to corporation at time of plaintiff's subscription.

251. Defense that plaintiff has disposed of his shares.

252. Defense of election to disaffirm.

253. Defense that plaintiff might readily have ascertained truth. 254. Defense that representations concerning credit of another

are not actionable unless in writing.

255. Defense of statute of limitations.

256. Defenses to suits for accounting.

257. Defenses to actions for rescission:-Election to affirm.

258. Acts constituting election.

259. Effect of election to affirm.

260. Defense of laches.

261. Delay as defense to action upon a rescission.

262. Rescission after insolvency of corporation.

263. Defense that oral representations were merged in subscription agreement.

§ 244. Introductory.

Questions relating to the defenses interposed by promoters to suits brought against them by, or on behalf of, the corporation have been considered in an earlier chapter. It is proposed in this chapter to discuss briefly some defenses which have, from time to

time, been interposed in suits brought against the promoters by subscribers for the company's shares.

$245. Defense that no benefit accrued to promoter.

An action for damages for fraud and deceit is based upon the injury done to the plaintiff, not upon the benefits received by the defendants. It is, therefore, immaterial that the promoters charged with inducing a purchase of shares by fraudulent representations were not themselves the owners of the shares sold, had no interest therein, and derived no benefit from the transaction.1

If the subscriber complains that shares were secretly and improperly appropriated to themselves by the promoters, it is no defense that such shares never had any value or ultimately became valueless, and that the promoters derived no profit, but, on the contrary, suffered loss from the transaction.2

§ 246. Defense that promoter urged cancellation of subscriptions.

It has been held that a promoter sued by the subscribers for

1. Cheney v. Dickinson, 172 Fed. Rep. 109, 96 C. C. A. 314, 28 L. R. A. N. S. 359; Hindman v. First Natl. Bk., 112 Fed. Rep. 931, 945, 50 C. C. A. 623, 57 L. R. A. 108; Hinkley v. Sac Oil & Pipe Line Co., 132 Iowa 396, 406, 107 N. W. 629, 633, 119 Am. St. R. 564; Mack v. Latta, 178 N. Y. 525, 529, 71 N. E. 97, 67 L. R. A. 126, and cases cited; Clarke v. Mercantile Trust Co., 110 N. Y. App. Div. 901, 904, 95 Supp. 1118, (dissenting opinion); Greene v. Mercantile Trust Co., 60 N. Y. Misc. 189, 111 Supp. 802, affirmed, 128 N. Y. App. Div. 914, 112 Supp. 1131; Cazeaux v. Mali, 25 Barb. (N. Y.)

578; Fenn v. Curtis, 23 Hun (N. Y.) 384; Cox v. National Coal & Oil Investment Co., 61 W. Va. 291, 312313, 56 S. E. 494, 503, and cases cited; but see Schanck v. Morris, 30 N. Y. Super. 658.

Note to Cottrill v. Krum, 18 Am. St. Rep. 549, 555, 14 Am. & Eng. Ency. (2nd. Ed.) 153, and see ante, § 175.

2. Hinkley v. Sac Oil & Pipe Line Co., 132 Iowa 396, 406, 107 N. W. 629, 632, 119 Am. St. R. 564. See also Torrey v. Toledo Portland Cement Co., 158 Mich. 348, 122 N. W. 614.

See ante, §§ 133, 165.

damages for fraud and deceit, cannot avoid liability by showing that he, at a time when the capital of the corporation was still intact, urged upon the directors the return to the shareholders of the amount of their subscriptions, for, it is said, a tort feasor cannot absolve himself from liability by showing that the consequences of his unlawful acts might have been avoided by persons over whom the plaintiff had no control.3

§ 247. Absence of fraudulent intent.

An honest belief on the part of the promoter in the truth of the representations made by him is, if such representations were in fact false, no defense to an action for the rescission of the subscription or purchase induced thereby. The vendor of the shares, whether the corporation or the promoter himself, cannot excuse the making of the false representations by showing that the representations were, when made, believed to be true, and at the same time obtain the full benefit of the misrepresentations by holding the party deceived to the performance of the purchase induced thereby.*

The sufficiency, as a defense to an action for fraud and deceit, of a bona fide belief in the truth of one's representations, presents a question of some difficulty which is considered at length in an earlier chapter.5

§ 248. Enterprise doomed to failure in any event.

If the purchase of the plaintiff's shares was induced by a misrepresentation of a material fact, it is no defense to his suit that the company subsequently collapsed by reason of facts in no way related to the representation of which he complains. Though the event proved that the company would have been doomed to failure even had everything been in fact just as represented to the plaintiff, it does not follow that the matters misrepresented were imma

3. Twycross v. Grant, L. R. 2 C. P. D. 469, 490.

4. See ante, § 209.
5. See ante, §§ 207-208.

terial, nor that the plaintiff was not damaged by the misrepresentation. The basis of his complaint is that he was induced by a misrepresentation to purchase the shares and that loss resulted from his purchase; that had the actual facts been presented to him he would not have purchased the shares, and that whatever loss he suffered by reason of his investment was caused by the misrepresentation which induced him to make the purchase.

§ 249. Prior recovery by corporation.

Complaint is frequently made by subscribers that their subscriptions were induced by the promoter's concealment of, or false representations in relation to, some secret advantage taken of the corporation. It is clear on principle that the circumstance that the corporation had upon learning the facts brought suit and recovered judgment against the promoter because of the secret advantage taken of it, does not affect the right of a subscriber to recover his personal damages from the promoter, except in so far as a recovery by the corporation increases the value of his shares and thereby reduces his damages. A recovery by the corporation would not affect the amount of the subscriber's damages if he had, before the corporation recovered its judgment, parted with his shares.7

$ 250. Defense that property in relation to which representations were made, had not been sold to the corporation at time of plaintiff's subscription.

A question has been raised whether an action for fraud and de

6. Peek v. Derry, L. R. 37 Ch. Div. 541, 577, reversed on another point, sub nom. Derry v. Peek, L. R. 14 App. Cas. 337. See Twycross v. Grant, L. R. 2 C. P. D. 469, 504; cf. McConnell v. Wright, 1903, 1 Ch. Div. 546.

A different view might perhaps

be taken in some jurisdictions. See post, § 277, and see Doran V. Eaton, 40 Minn. 35, 41 N. W. 244, but compare the other Minnesota cases cited under § 277, post.

7. Alexandra Oil & Dev. Co. v. Cook, 10 Ont. W. R. 781, 785, affirmed, 11 Ont. W. R. 1054.

8

ceit will lie at the hands of a subscriber who made his subscription before the property to which the false representations related had been acquired by the company. The argument made is that no injury was done to the plaintiff at the time of his subscription, and that the injury at the time of the subsequent sale was an injury to the corporation and not to the existing subscribers. It seems clear on principle that if a person is induced to subscribe for shares of a corporation by fraudulent representations in regard to property to be acquired by it, his subscription is induced by the false representation of an existing fact, and he has an action for damages against the guilty parties. This would be so though the directors on discovering the truth refused to complete the purchase.9

It has been held that if the plaintiff was induced to subscribe for shares by the fraudulent representations of the promoters and by the concealment of the fact that the promoters were themselves the owners and vendors of the property which the corporation was organized to purchase, the plaintiff has an action for fraud and deceit, and the fact that the scheme of selling the promoters' property to the corporation was ultimately abandoned is no defense, for the gist of the action is that the plaintiff was induced by fraud to subscribe and pay for his shares.10

§ 251. Defense that plaintiff has disposed of his shares.

It is obviously no defense to an action for damages for fraud and deceit that the plaintiff had sold his shares before the commencement of his action. The injury was done and the cause of action accrued when the shares were subscribed for, and the right of action remains with the subscriber, and is not affected by the transfer of his shares.11

8. Dunnett v. Mitchell, Session Cases, 12 Rettie 400.

9. Smith v. Reese River Co., L. R. 2 Eq. 264.

10. Paddock v. Fletcher, 42 Vt. 389, 393-394.

11. Teachout v. VanHoesen, 76 Iowa 113, 121, 40 N. W. 96, 100, 1

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