Story Case

Floyd Huffcut, a stock and bond salesman, represented to Joseph Mechem that the Idaho Electric Company owned franchises to furnish light for ten towns. In reliance on this statement, Mechem purchased stock of the company, paying $100 a share. He learned, subsequently, that the company owned but three franchises and that its stock was worth but $30 a share. What can Mecham do?

Ruling Court Case. Belding Vs. Frankland, Volume 8 Lea (Tennessee) Reports, Page 67

Leomson & Brothers, merchants at Nashville, ordered goods, on November 3, from Belding Brothers at Cincinnati. The goods were shipped on November 4 and, on the 7th, Leomson Brothers made an assignment of their stock to J. Frankland, as trustee for the benefit of creditors. Belding Brothers maintain that Leomson Brothers committed fraud in making the purchase by asserting that they were solvent, when, as a matter of fact, they were insolvent; that, therefore, Belding Brothers could rescind the contract and take back their property.

Justice Cooper gave the opinion of the Court: "Silence is not fraud when there is no duty to speak. But when a purchaser is insolvent at the time of purchase, there is the duty on his part to state his financial circumstances, and concealment of insolvency is a misrepresentation of fact. Therefore, the vendor may rescind the contract, disaffirm the sale, and take back his goods." Judgment was in favor of Belding Brothers.

Ruling Law. Story Case Answer

When a person has been induced to enter into a contract by false representation, he has several remedies. He can affirm the contract, keep what he has received, and merely sue for the damage he has suffered; i.e. the difference between the value of what he has received, and the value of what he bargained for as represented to him. He may entirely rescind the contract and recover the money he has paid on the property he has given, in pursuance of the contract. He cannot, however, do this if the property has come into the hands of a bona fide purchaser for value, without notice of the fraud.

In the Story Case, Mechem can sue to recover the difference between the actual value of the stock and the amount he had paid. Or he can rescind the contract, offer to return the stock, and demand all his purchase money.