Bank of Valley City v. Lee

• Decision Date: 20 October 1919
• Citation: 175 N.W. 575,43 N.D. 503
• Court: North Dakota Supreme Court

175 N.W. 575

43 N.D. 503

BANK OF VALLEY CITY, a Corporation, Respondent, v. HENRY T. LEE, Appellant

Supreme Court of North Dakota

October 20, 1919

Rehearing denied December 9, 1919.

Appeal from District Court, Barnes County, Coffey, J.

Judgment affirmed.

Affirmed.

M. J Englert, for appellant.

It is elementary that a non-negotiable instrument is subject to all defenses in the hands of an assignee that could have been interposed by the party bound as against the original payee. Clow v. Sweeney (N.D.) 172 N.W. 66.

And contracts to take stock in a corporation stand upon the same footing as all other conventional obligations. If induced by fraud, that create no obligation, and the injured party has a right to have them abrogated. The rule is universal, whatever fraud creates, justice will destroy. Citing authorities; Raich v. Lindebeck, 36 N.D. 133, 161 N.W. 1026.

Manifestly there is no consideration for the stock subscriptions, and the law will not enforce a promise to pay good money for nothing. 13 C. J. 368; Shellburg v. Wilton Bank, 167 N.W. 723; Virginia Land Co. v. Haut, 90 Va. 533, 44 Am. St. Rep. 939; Zang v. Adams, 23 Colo. 408, 58 Am. St. Rep. 249, 48 P. 509; 10 Cyc. 427 (2) and authorities there cited.

The stock being absolutely worthless, though delivered constituted no consideration; and the project having failed, a failure of consideration resulted. 10 Cyc. 394 (e) and authorities there cited; Taft v. Myerscough (Ill.) 64 N.E. 711; State Bank v. Cook (Iowa) 100 N.W. 72; Zang v. Adams, 23 Colo. 408, 58 Am. St. Rep. 249, 48 P. 509.

The consideration need not be returned or tendered when it is of no value. Freeman v. Reagan, 26 Ark. 373; Adams v. Reed, 11 Utah 480, 40 P. 720; Thurston v. Blanchard, 22 Pick. 18; Cook v. Gilman, 34 N.H. 556; Frost v. Lowry, 15 Ohio 200; Duval v. Mowry, 6 R. I. 479.

There is a distinction between an action brought for the benefit of creditors generally and one brought by the corporation itself, or its assignee, for its or their personal benefit, and where no equities in favor of creditors are involved. Marion Trust Co. v. Blish (Ind.) 84 N.E. 814, 18 L.R.A.(N.S.) 347, and valuable note; Gress v. Knight (Ga.) 68 S.E. 834, 31 L.R.A.(N.S.) 900; Raich v. Lindebeck, 36 N.D. 133, 161 N.W. 1026; Pence v. Langdon, 25 L.Ed. (U. S.) 420.

The fact that the defendant was elected a director, and was present at the meeting at which he was elected director and took some part therein, in no way effects an estoppel, or otherwise prevents him from setting up the defense of fraud or failure of consideration in this case. Maine v. Midland Invest. Co. (Iowa) 109 N.W. 801; Fargo Gas & Coke Co. v. Fargo Gas & E. Co. 4 N.D. 219, 37 L.R.A. 593, 59 N.W. 1066; Guild v. More, 32 N.D. 432, 155 N.W. 55; Tacoma v. Tacoma Light & Water Co. 17 Wash. 471, 50 P. 55; Roberts v. Holliday, 10 S.D. 581, 74 N.W. 1034; Speed v. Hollingsworth, 54 Kan. 440, 38 P. 496.

Winterer, Combs, & Ritchie, for plaintiff.

A mere prophesy, an expressed opinion or belief concerning future events or conditions furnished no ground of defense on the theory of fraudulent representation. Farwell v. Colonial Trust Co. 147 F. 480.

To sustain an action for deceit based on fraud, there must not only have been false representations, but, contrary to the rule in suits for rescission, they must have been made fraudulently and intentionally. Pittsburgh Life & T. Co. v. Northern Cent. L. Ins. Co. 140 F. 888; Bell v. Morely, 223 F. 628; Hedin v. M. M. & S. Inst. 35 L.R.A. 417 and note; Heyrock v. Surerus, 9 N.D. 28, 81 N.W. 36.

In case of alleged fraud or misrepresentation in procuring a subscription to stock, the subscriber may be estopped to rescind because of his own conduct since making the subscription, and an act done after discovery of the fraud, inconsistent with its disaffirmance, will be held to be a waiver of it, at least in favor of the rights of creditors. 10 R. C. L. § 50. See note to Franklin Glass Co. v. Alexander, 9 Am. Dec. 102, under Estoppel, also case note found in 33 L.R.A. 722.

It is elementary that it is incumbent upon the party offering such proof to first show, by competent evidence, the official character and authority of the officer charged with having made admissions or statements claimed to be admissible as evidence in the controversy involved. Browning v. Hinckle, 48 Minn. 544, 51 N.W. 605; Bangs Mill. Co. v. Burns, 152 Mo. 350, 53 S.W. 923.

Admissions or declarations, in order to be received as evidence, must not relate to past events; they must have been made in the course of the transaction so as to constitute a part of the res gestae. 3 Enc. Ev. 643; Jackson v. Mutual Ben. L. Ins. Co. 79 Minn. 43, 81 N.W. 545.

The power of a president of a corporation to make admissions or declarations which will be binding on the corporation, as to past events, cannot be inferred as incidental to the duties of an officer superintending the current dealings and business of the corporation. Smith v. North Carolina R. R. Co. 68 N.C. 107.

BIRDZELL, J. CHRISTIANSON, Ch. J., and BRONSON, J., concur. GRACE, J., ROBINSON, J., dissenting.

OPINION

BIRDZELL, J.

This is an appeal from a judgment entered upon a verdict which the court directed in favor of the plaintiff. The action was brought to recover upon a note for $ 1,000, which the defendant gave for stock in the Valley City Brick & Tile Company. The note was delivered on October 14, 1913, bearing interest at 8 per cent per annum. It is non-negotiable for the lack of words of negotiability; and at the time it was given the stock was delivered to the maker. The note became the property of the plaintiff bank by assignment. It appears that the Valley City Brick & Tile Company was a corporation organized for the purpose of manufacturing brick and tile, and that it was financed through the sale of stock to various persons in the community. Some work was done preparatory to carrying out the corporate purposes. This consisted of laying foundations for a plant building, erecting or partially erecting the superstructure, and building a spur track connecting with the tracks of the railway company. After considerable work had been done and money expended, the project was either deemed not to be feasible or lacked sufficient financial support. At any rate it was abandoned. It appears that at the time the defendant gave the note in question the construction work above referred to had been begun. As defense to the note the defendant has pleaded: (1) Fraud in the inception consisting of alleged false and fraudulent representations inducing the execution; (2) failure of consideration, in that the corporation became defunct and the project abandoned; and (3) that the note, being non-negotiable, is subject to all defenses. This is admitted.

In support of the defense of fraud the defendant testified that one S. L. Davidson, the president of the Valley City Brick & Tile Company, came to his place and delivered verbally a glowing prospectus of the company, stating, among other things, that the leading business men in Valley City and a few farmers had taken stock, and naming some of the former. He also exhibited samples of brick supposed to have been made from the clay which it was proposed to use. On cross-examination the defendant Lee admitted that so far as he knew Davidson had told him the truth concerning the men in Valley City who were stockholders in the company. No evidence whatever was adduced to establish the falsity of the claim that the bricks were not made from the clay the company proposed to use for...