Alice N. Whitney vs. Edwin W. Lynch

Massachusetts Supreme Judicial Court1915-10-14

222 Mass. 112

Summary · law.co

Holding. The judgment is affirmed on the issue of liability for fraud, but the case is remanded for a new trial limited to the damages issue because the trial court incorrectly instructed the jury to apply a market value standard rather than an actual value standard in calculating damages.

Alice Whitney purchased five shares of preferred stock in the Worcester Amusement Company from Edwin Lynch, who made several false representations to induce the sale. Lynch claimed that prominent local businessmen were major investors, that the company was substantially financed, that stock was nearly sold out, and that preferred shareholders had a guaranteed first claim on assets with seven percent interest. In reality, the named investors had received their stock as gifts rather than purchasing it, the company had minimal financing with significant mortgages outstanding, unpaid contractor debts existed, and only fifty preferred shares had actually been sold for cash. The jury found Lynch, who served as president, treasurer, and director, knowingly made these false statements and that the stock had little or no value.

The trial court properly instructed the jury on the liability issues, and the evidence supported the plaintiff's fraud claim. However, the court erred in its damages instruction by directing the jury to calculate damages based on the difference between market values rather than actual values. The proper measure required comparing the actual value of the stock at purchase against what its actual value would have been if Lynch's representations had been true. While the trial evidence established the stock's actual worth as essentially nothing, it did not directly establish what the stock's value would have been under the false representations, making the application of a market value standard potentially problematic.

Summary generated by law.co from the public-domain opinion. The opinion text itself is public domain.

Key issues

Whether material misrepresentations about stock investments constituted actionable fraud
Proper measure of damages in fraud cases where plaintiff retains the stock
Whether actual value or market value should be the standard for calculating damages

Procedural posture

The case came before the appellate court on exceptions to the trial court's jury instructions and evidentiary rulings.

Authorities cited

No cited authorities resolved to law.co cases yet.

Opinion · public domain

majority opinion

De Courcy, J.

There was ample evidence that the plaintiff bought from the defendant five shares of preferred stock of the Worcester Amusement Company, and that she was induced to do so by certain material representations of fact made by the defendant. Among these was a statement that certain prominent Worcester business men, named by him, were heavy investors in the company, two of them having put in $5,000 each; an assertion that the company was practically financed and had substantially enough money to build the new theatre; that the stock was selling very rapidly, and there was little left to be sold; and an assurance that the preferred stock was a first claim upon the property, and that in case of failure or liquidation she would get her money back, with seven per cent guaranteed interest. As matter of fact the business men referred to never paid anything for their stock, but it was given to them by the defendant. Instead of the enterprise being “practically financed” at that time, October 18, 1910, the corporation had only a lease of the land with an option to purchase, there were mortgages on the property aggregating $125,000, and payment in full for the work done in September had not been made to the contractor, who later was obliged to take over the property. Of the $200,000 of preferred stock only fifty shares had been sold and paid for by the persons to whom the certificates were issued. It could be found that the defendant, who was the president, the treasurer and a director of the corporation, knew that these representations made by him were untrue; and the jury further could find that the stock for which the plaintiff paid $100 a share was of little or no value.

The foregoing disposes of the first ruling requested by the defendant. The fourth, fifth and sixth rulings singled out certain facts which the counsel requesting the rulings properly might emphasize in his argument to the jury, but which the judge rightly refused to embody in his impartial and accurate statement of the principles of law governing liability. The seventh ruling, as it appears in the record, is unintelligible and is apparently incomplete. The ninth was refused rightly. The tenth, so far as it relates to liability, and the eleventh were covered by the charge in a manner sufficiently favorable to the defendant.

On the issue of damages, however, the defendant was entitled to have the jury instructed in accordance with his eighth request; As the plaintiff retained her stock, the measure of her damages was the difference at the time of the purchase between the actual value of the stock and what its value would have been if the defendant’s representations were true. Thomson v. Pentecost, 210 Mass. 223. Goodwin v. Dick, 220 Mass. 556. The rule of damages laid down by the presiding judge was the difference in market values instead of the difference in actual values. It may be that, on the facts in evidence, the result would be the same whichever standard was adopted; and in the charge “actual value” and “actual market value” seem to have been used as equivalent terms. But, while there is evidence that the actual value of the stock was nothing, there is no direct evidence of what either the actual or the market value would have been if the defendant’s representations had been true, and it is wholly conjectural whether those values would be identical. At the close of the charge the attention of the judge was called to his statements regarding the market value, but no correction was made by him. We cannot say that this error did not injuriously affect the substantial rights of the defendant; and the exception taken by the defendant to the failure to give his eighth request must be sustained.

The exceptions relating to evidence may be disposed of briefly. What the defendant did as a stockholder in January, 1912, evidence of which was offered to show his “good faith all the way through the transaction,” plainly was immaterial to the issues in the case. The reputation of the defendant for honesty and fair dealing was inadmissible. Geary v. Stevenson, 169 Mass. 23. The printed circular issued by the defendant as president of the Worcester Amusement Company was admitted properly. Both the plaintiff and her husband testified that at their first interview the defendant left with them a copy of it, which they read; and that an unsuccessful search had been made for it before the trial. Smith v. Brown, 151 Mass. 338. The opinion of a witness that the defendant entered into the contract to build the theatre in good faith was excluded rightly.

The issue of liability was tried without error, and the plaintiff should not be compelled to retry that question. The only exception of the defendant that is sustained relates to damages, and a new trial must be had on that issue only. Thomson v. Pentecost, 206 Mass. 505.

So ordered.