Story Case

On January 4, 1915, the five directors of the Springfield First Trust Bank, including Herbert Keene, met in annual directors' meeting to consider the affairs of the bank, and to sign official reports. The president of the bank, Frank Jarman, had prepared a statement, showing the status of the bank. He requested the directors to sign this for the purpose of printing in a prospectus. It was their intention to circulate this among persons who were interested in buying the stock of the bank. Keene asked the president, Mr. Jarman, this question, "Well, Jarman, if this report is true, we will sign it without looking into it. We will take your word for it. Is it right?" Jarman answered that the report was true, and the directors signed it. The report was printed, and in reliance thereon, Emory Gray purchased a block of the stock. Subsequently, it was learned that the president, Jarman, was in default with the bank and that the report was not true. As a result, Gray lost his investment. He brought suit against the directors personally, on the ground that they had committed fraud in signing the statement. The directors put in defense that fraud did not exist on their part because they did not have knowledge of the false statement of facts. Is this a good defense?

Ruling Court Case. Helps Vs. Stimson, Volume 9 Colorado Reports. Page 33

William Stimson was the owner of mining land. He was applied to by Helps for a lease of this land. Stimson represented that the boundary lines of his mining claim extended to certain points. Helps, thereupon, agreed to take a lease of the land for a period of four years. He immediately set to work to put the land in readiness for mining. After he had worked for several weeks in a certain part of the claim, he was notified by the Marshall Coal Mining Company to cease work at that point, because he was on its land. Helps, thereupon, brought this action against Stimson for damages.

Stimson contended that he should not be held liable, since it was not shown that he knowingly made these misrepresentations.

Mr. Justice Elbert said in part:"The law holds a contracting party liable as for a fraud on his express representation concerning facts material to the trans-astion - the truth of which he assumes to know, and the truth of which is not known to the other contracting party - when the representations were false, and the other party relying upon them, has been misled to his injury".

It is not necessary, in order to constitute a fraud, that the party who makes a false representation should know it to be false. He who makes a representation as of his own knowledge, not knowing whether it is true or false and it is in fact untrue, is guilty of fraud as much as if he knew it to be untrue.

Judgment was given for Helps in this action.

Ruling Law. Story Case Answer

When a person makes a false representation, which he knows to be false, a basis for fraud is clearly constituted; this renders the consent of the other party to the contract, unreal. If a party makes a representation recklessly, in that he does not know whether it is true or false and does not care, such a statement likewise is fraudulent. Furthermore, if a person makes a false representation of a fact, which could be verified by investigation, it is fraudulent, although he honestly believed that it was true. The fraud here consists in making a false statement concerning his own knowledge. In the Story Case, the directors committed fraud. When the statement was issued, they affirmed the fact that they had looked into the affairs of the Trust Bank and found them as stated to their own knowledge and belief. It was not true that they had investigated or had any knowledge of their own. Therefore, their defense is not good.