A.B. Leach & Co. v. Kinnear, 203 A.D. 5 (1922)

A purchaser may rescind a contract based on a material, even innocent, misrepresentation by the seller, provided the purchaser acts promptly to rescind upon discovering the misrepresentation.

Summary

The plaintiff, Kinnear, bought securities from A.B. Leach & Co., relying on their agent’s representation that an application would be made to list the securities on the New York Stock Exchange. Kinnear had specified that he wanted listed securities. After the company went into receivership, Kinnear discovered no such application was ever intended. Kinnear immediately rescinded the sale, offering to return the securities and demanding his money back. The trial court dismissed the complaint, and the appellate division affirmed. The Court of Appeals reversed, holding that Kinnear had presented a prima facie case for rescission based on material misrepresentation, even if the misrepresentation was not intentionally fraudulent.

Facts

Kinnear, representing his company, informed A.B. Leach & Co.’s salesman, Bates, that they were only interested in purchasing listed securities due to liquidity needs. Bates recommended notes of the Island Oil and Transport Corporation, stating that application would be made to list these securities. A letter and circular from A.B. Leach & Co. reinforced this representation. Kinnear, relying on these representations, purchased the notes. Later, the company went into receivership, and Kinnear learned that no application to list the securities had ever been made, nor was it ever intended. Kinnear immediately offered to return the securities and demanded his purchase price back.

Procedural History

The trial court dismissed the complaint at the end of the plaintiff’s case. The Appellate Division affirmed the dismissal. The Court of Appeals reversed the lower courts’ decisions, finding that the plaintiff had established a prima facie case for rescission.

Issue(s)

1. Whether the representation that application would be made to list the securities was a material misrepresentation that would justify rescission of the contract.
2. Whether an innocent (non-fraudulent) misrepresentation is sufficient to justify rescission of a contract in an action at law.

Holding

1. Yes, because the parties themselves made the representations material by Kinnear telling Bates that they only desired to purchase listed securities or those which were to be listed, and because listing on the stock exchange was shown to be a favorable factor from the standpoint of a purchaser.
2. Yes, because innocent misrepresentation is sufficient to justify rescission in an action at law, just as it is in an action for rescission in equity.

Court’s Reasoning

The court reasoned that the representation regarding the listing of the securities was material because Kinnear explicitly stated his preference for listed securities, and evidence indicated that listing on the New York Stock Exchange adds value and credibility to a security. The court emphasized that “the parties themselves made the representations material because Kinn told Bates that they only desired to purchase listed securities or those which were to be listed.” The court found that the materiality of the misrepresentation was a question for the jury.

Regarding the remedy, the court clarified that an action at law for rescission is appropriate when the plaintiff seeks only the return of money and requires no equitable relief. Importantly, the court held that “It is not necessary in order that a contract may be rescinded for fraud or misrepresentation that the party making the misrepresentation should have known that it was false. Innocent misrepresentation is sufficient, and this rule applies to actions at law based upon rescission as well as to actions for rescission in equity.” The court distinguished between actions for rescission (where innocent misrepresentation suffices) and actions for damages based on fraud and deceit (where willful and fraudulent misrepresentation must be proven). The court noted that the plaintiff had presented sufficient evidence to warrant a trial on the merits, even though they did not definitively prove their case. The court stated: “We do not say that the plaintiff proved its case, entitling it to payment; we do say that a prima facie case had been made out requiring a determination of the issues and of the facts.”