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Judson v. Peoples Bank and Trust Co.

Decided: September 23, 1957.


On cross-appeals from the Superior Court, Chancery Division.

For affirmance and modification -- Chief Justice Weintraub, and Justices Heher, Oliphant, Wachenfeld, Burling and Jacobs. Opposed -- None. The opinion of the court was delivered by Weintraub, C.J. Heher, J. (dissenting in part).


Plaintiffs charged they were induced by fraud to sell their shares of stock in Tuttle Bros., Inc. of Westfield, a New Jersey corporation, and sought to recover the difference between the price received and the actual value of the shares.

Plaintiffs accepted $2,500 in settlement from defendants, Peoples Bank and Trust Company of Westfield and the estate of Charles M. Smith, and consent judgments of dismissal were entered as to them. The remaining defendants, John C. Evans, the Sturdy Company, a New Jersey corporation (wholly owned by Evans), and Bankers Commercial Corporation, thereafter prevailed on a motion for summary judgment. This court reversed, Judson v. Peoples Bank and Trust Company of Westfield, 17 N.J. 67 (1954), and upon a plenary trial judgment was entered against these remaining defendants.

Plaintiffs appeal, asserting that the damages are inadequate and that the trial court erred in its application of the Joint Tortfeasors Contribution Law, N.J.S. 2 A:53 A -1 et seq. Bankers Commercial cross-appeals, questioning the finding of fraud and additionally the amount of damages. Neither Evans nor Sturdy appealed. We certified the matter on our motion prior to consideration by the Appellate Division.


The Tuttle company was engaged in the sale of lumber, mason materials, hardware and coal and did millwork. The business was started in 1897 and operated for some years as a partnership by William E. Tuttle, Jr. and his brother, Arthur D. Tuttle. The Tuttle corporation was formed sometime in the early 1920's. William died in 1923 and Arthur

in 1933. Their stock holdings ultimately devolved upon their nephews and nieces, the Judsons, who are parties plaintiff.

At the time of the events here involved, plaintiffs held 2,370 shares of common stock out of 2,578 shares outstanding. Evans, who came with the company as a bookkeeper in 1924, held 123 shares of common, virtually all of which he received by gift from Arthur D. Tuttle. Also outstanding were 883 1/2 shares of 7% cumulative preferred stock with a par value of $100, held by a number of shareholders, none of whom is a party to this suit.

When Arthur died in January 1933 the company's position was insecure. It was experiencing the impact of the depression. Its real estate was encumbered by a mortgage originally in the sum of $240,000 held jointly by the Peoples Bank and the Westfield Trust Company. The Westfield Trust Company encountered difficulties, and the Federal Deposit Insurance Corporation took over its one-half interest.

Upon Arthur's death the Peoples Bank asked that Smith, its vice-president and director, be employed by the Tuttle company, and he was, receiving a salary of $100 per week for a number of years and thereafter compensation based upon the amount of service rendered. It is perfectly clear that Smith called the turn with respect to all corporate matters. The Judsons acceded to his requests, partly because of great confidence in him and partly because the bank's position as mortgagee and general creditor gave them no alternative.

Upon Smith's suggestion, Thomas H. Judson, Jr. resigned as president in favor of Evans in 1942, and in 1943 the Judsons assigned 1,832 shares of common, which represented control, to the Peoples Bank and F.D.I.C., as additional security. Smith continued his friendly relations with the Judsons, but upon the basis of relative ability selected Evans for the leading role in the corporate affairs. Evans regarded the Judsons as a drag upon the business and eventually succeeded in easing them out of active participation.

Thus, when the crucial events incepted in late 1944, Smith and Evans were in effective control. Evans took account of his personal situation and concluded he had no future with the company. The corporate picture had brightened somewhat, largely because of temporary war work consisting of the manufacture of airplane packages, but he felt the beneficiaries of his labors could be only the creditors or the Judsons. He confided in Smith that he planned to quit. Smith urged him to stay and seek to acquire the company. A plan emerged.

The first step appears to have been to remove Thomas Judson from the active scene. In November 1944 Evans demanded that he resign from the offices of vice-president and director, saying that the Peoples Bank so ordered, and Judson complied. Evans, who was without financial means, contacted a friend, one Rager, who mustered a syndicate with $100,000 of which $20,000 would be loaned to Evans, who would receive 20% of the common stock. Funds thus being available, Smith went to work to obtain the Judson stock, and Evans, with Smith's guidance, tackled the holders of the preferred.

In January or February 1945 Smith met with Thomas Judson and stated that the corporation was on the brink of insolvency; that the real estate was worth but a fraction of the book value; that the receivables had no value beyond the debts for which they were pledged; that most of the lumber on hand was suitable only for airplane packaging, and since the war work was at an end, the inventory was worthless; that his bank had determined to close in unless additional working capital were brought into the company; that he, Smith, had interested a wealthy friend in New York to buy the stock for a son and to inject the required working capital; that unless the Judsons seized this opportunity they would be wiped out. He asked Judson to transmit this information to his family. Ultimately the Judsons agreed to sell at the figure Smith suggested, to wit, $15 a share, and executed options to Rager on March 24, 1945.

Evans again reviewed his situation and concluded the

Rager deal was not promising, for under it he would hold a minority interest of 20%. He so informed Smith, who agreed. Evans then went to Bankers Commercial, which for years had financed receivables and inventory for the Tuttle Company. He laid his problem before Langhans, a vice-president, who proposed that Bankers Commercial lend the required funds under a plan by which it would purchase the common and preferred and resell to the Tuttle Company via a corporate shell, the Sturdy Company. Langhans pointed out that the Rager options had to be eliminated, and Evans blandly paid Rager $5,000 of the Tuttle Company's funds to have him step aside. Smith obtained new options running to himself upon a representation that the renewals were for the benefit of the same prospect, and then assigned the options to Bankers Commercial to carry out the plan just described.

That the representations made to the Judsons were flagrantly fraudulent cannot be disputed. With the connivance of Smith, Evans transmitted a false picture of imminent doom, and while representing that the structure would fall unless fresh working capital were obtained, he schemed in fact to eliminate their holdings with the funds of the company itself. The Judsons parted with their shares at the option price of $15, for a total of $35,550. The holders of preferred accepted $48,850 for shares having a par value of $88,350 and unpaid dividends of $84,003.18. One thorn remained. A holder of 25 shares of common was impervious to sundry pressures, and since his shares would swell in value if all but his and Evans' 123 shares were retired, the adamant shareholder came out with $1,500. Rager had obtained $5,000; Smith received a like sum; and Bankers Commercial a "fee" in the same amount in addition to interest on its advance. All of these payments were made out of corporate funds. Not a penny came from Evans who, when the transactions closed, held the corporate equity.

Bankers Commercial challenges the sufficiency of the proof of fraud as to Evans and Smith. It first disputes the existence of a confidential relationship between Smith

and Thomas Judson. That Judson trusted Smith and valued his opinions is clear. Whether a confidential relationship in its technical sense existed between them is here of no moment. The fraud consisted of affirmative misrepresentations, and hence the nature of the relationship between the men is merely a circumstance bearing upon the issue of justifiable reliance upon the representations made.

Nor is there substance to the contention that the representations were solely matters of opinion. They included a statement that the bank planned to close in unless fresh working capital were injected, whereas the plan in fact contemplated a depletion of working capital. And with respect to the opinions expressed by Smith as to the value of the assets and the business prospects, they too will support a charge of fraud. Smith did not purport to be an arms-length party to a purchase, but rather pretended to be a friend of the Judsons, bent upon advancing their interests. Although ordinarily expressions of opinions may not be relied upon, the rule is otherwise where the opinion is given by one who has succeeded in securing the confidence of the victim, or holds himself out as having special knowledge of the matter, or purports to be disinterested. 3 Restatement, Torts (1938), secs. 542, 543; Prosser, Law of Torts (2 d ed. 1955), sec. 90, p. 561 et seq.; cf. Plimpton v. Friedberg, 110 N.J.L. 427 (E. & A. 1933).

Bankers Commercial further contends that the Judsons could not rely upon the misrepresentations because they had full information with respect to the corporate affairs as of the year-end statement of December 31, 1944, and could readily have obtained whatever data was desired. As will presently appear, the corporate balance sheet was not too helpful because of the problem of valuation and yield in a distress liquidation. And with respect to access to information, it may be noted that at least during the months in 1945 when the negotiations were under way, Evans made false penciled footings with respect to cash disbursements, resulting in a substantial understatement of the cash balance; and the inference is inescapable that Evans pursued that

course in anticipation of a possible inquiry by stockholders. At any rate, one who perpetrates a fraud may not urge that his victim should have been more circumspect or astute. Peter W. Kero, Inc., v. Terminal Construction Corp., 6 N.J. 361, 369 (1951); Schoharie County Cooperative Dairies, Inc., v. Eisenstein, 22 N.J. Super. 503 (App. Div. 1952). The true question is whether there in fact was reliance. If reliance is found, as it is here, false representations which accomplish an intended fraud will suffice to support judicial relief.

Lastly, it urged that since only Thomas and William Judson testified to reliance, recovery must be confined to them. Ordinarily, direct evidence is furnished but reliance may be found by fair inference. 24 Am. Jur., Fraud and Deceit, sec. 288, p. 134; cf. Flanigan v. McFeely, 20 N.J. 414, 419 (1956). Here Smith urged Thomas to transmit the representations to the family, and he did. None of the Judsons was seeking to sell. The transaction was prompted by the bleak story which Smith intended to reach them. In these circumstances, the inference is warranted that the misrepresentations hit the mark.

This brings us to the more difficult question whether Bankers Commercial participated in the scheme. It says that from where it stood it knew only that Evans had a good bargain. Such knowledge alone would not sustain a claim of conspiratorial participation; this court so indicated upon the first appeal. Judson v. Peoples Bank and Trust Company of Westfield, supra (17 N.J., at page 84).

There is no evidence that Bankers Commercial knew of the specific conversations between Smith and Judson. The record permits, and we think requires, findings that Bankers Commercial knew that Evans (1) was president and director and indeed the only stockholder active in management of the company; (2) sought to acquire the beneficial interest in the company by use of its funds; and (3) sought so to do without the knowledge of plaintiffs. The first finding ...

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